FAILING TO DISCLOSE MATTERS IN RESPONSE TO THE DISCIPLINARY QUESTIONS MAY RESULT IN THE DENIAL OR REVOCATION OF AN SD'S OR MSP'S REGISTRATION!!!
READ THE INSTRUCTIONS, DEFINITIONS AND QUESTIONS CAREFULLY.
IF YOU HAVE ANY QUESTIONS ABOUT HOW TO ANSWER ANY DISCIPLINARY QUESTION, CALL NFA. DO NOT RELY ON ANYONE ELSE'S ADVICE.
1. WHAT ARE THE DISCIPLINARY INFORMATION QUESTIONS?
The Disciplinary Information questions ask whether certain events have occurred concerning criminal, regulatory, financial and employment matters. The questions in the Form 7-R relate to matters involving SDs and MSPs, and the questions in the Form 8-R relate to matters involving the individuals who are principals of SDs or MSPs.
2. WHAT ARE MATTER PAGES?
If a Disciplinary Information question is answered "Yes" on the Form 7-R or Form 8-R, a Matter Page must be completed and submitted as part of the application for each matter that caused the "Yes" answer. For example, if an individual has been convicted of two felonies and answers "Yes" to the Disciplinary Information questions about criminal felony convictions, a separate Matter Page for each of the felony convictions must be completed and submitted.
3. WHAT CAN HAPPEN IF THE DISCIPLINARY INFORMATION QUESTIONS ARE ANSWERED INCORRECTLY OR MATTER PAGES ARE NOT SUBMITTED?
The failure to correctly answer the question or complete a Matter Page is called a failure to disclose disciplinary information. A "willful" failure to disclose disciplinary information is a disqualification from registration and the SD's or MSP's registration application can be denied based on either its own failure to disclose or the failure to disclose by any of its principals who are individuals.
The SD's or MSP's failure to answer "Yes" when a "Yes" answer is required or not completing Matter Pages for each matter could result in the SD's or MSP's registration being denied or revoked.
An SD's or MSP's principal's failure to answer "Yes" when a "Yes" answer is required or not completing Matter Pages for each matter could also result in the SD's or MSP's registration being denied or revoked.
In the CFTC's view, even if the matter would not prevent an SD's or MSP's registration application from being granted if it had been disclosed, e.g., a pending criminal matter that could result in a felony conviction or a suspension imposed by FINRA that has already been served, the SD's, or MSP's, or individual principal's failure to disclose the matter could independently result in the SD's or MSP's registration being denied or revoked.
4. WHAT IS A WILLFUL FAILURE TO DISCLOSE?
It is not necessary that the applicant or registrant intentionally fails to disclose the information to be disqualified from registration under the Commodity Exchange Act. Practically speaking, an SD, MSP or individual principal who knows about the information that is required to be disclosed but fails to disclose that information has willfully failed to disclose material information, absent credible evidence that shows otherwise.
In the CFTC's view, essentially any failure to disclose known information is willful, whether or not it is intentional or simply careless or inadvertent.
5. WHAT ARE SOME COMMON TYPES OF FAILURES TO DISCLOSE?
Criminal matters resulting in dismissal after completion of probation
Many states have a procedure to handle certain criminal offenses that do not ultimately result in a conviction. These are commonly known as "diversion programs." Often, the offender pleads guilty and the judge "withholds adjudication," which means the judge does not find the offender guilty. Instead, the offender is sentenced to supervision, probation or something similar. If the offender satisfactorily completes the supervision or probation, the guilty plea is vacated and the case is dismissed. Often, the judge, the prosecutor or the offender's lawyer tells the offender that the criminal case doesn't need to be disclosed in any kind of application. Sometimes, the case is ordered to be expunged from all official records.
However, the CFTC still requires a "Yes" answer to the Criminal Information questions even if:
Regulatory matters reported to another regulatory or self-regulatory authority
Regulatory matters, particularly in the securities industry, are often reported to the FINRA Web CRD database by either an employer, the agency that took the action or the person subject to the action.
The regulatory action must still be disclosed by answering "Yes" to the pertinent regulatory Disciplinary Information question and a Matter Page completed. The fact that the matter was disclosed to the FINRA Web CRD will not be considered evidence that the failure to disclose was not willful.
The individual principal told the SD or MSP about a disclosable matter, but the matter is not disclosed on the Form 8-R.
SDs and MSPs must electronically file Form 8-Rs on behalf of their principals. Generally, someone at the firm completes the Form 8-R, including answering the Disciplinary Information questions, based on the information that the principal provides. Sometimes, the firm does not answer the Disciplinary Information questions correctly, answering "No," when the answer should be "Yes" or not completing a Matter Page for each matter.
Each individual principal must electronically review the Form 8-R after the SD or MSP files it and electronically verify that the information contained in the Form 8-R is accurate and complete. If the individual principal verifies the information without thoroughly reviewing it or relies on the SD or MSP to have accurately completed the Form, the CFTC considers the failure to include the disclosable matter as willful. A principal should never electronically verify that an application containing incorrect information is accurate. The principal should let the SD or MSP know about the inaccuracy and verify the application's accuracy only after the SD or MSP corrects the information.
The individual principal's registration or license was subject to special conditions
Some regulatory bodies, including various states, and self-regulatory authorities allow individuals to act in a registered licensed capacity but only if they and/or their employer comply with certain conditions. Commonly these include special supervisory or reporting requirements or restrictions on the type of activities the individual can engage in or the type of customers the individuals may do business with.
These special conditions or restrictions must be disclosed in response to the Form 8-R regulatory Disciplinary Information Questions even if the conditions or restrictions are no longer in place. If they are in place, they must also be disclosed. Additionally, conditions or restrictions that are included in an agreement with the regulatory or self-regulatory body (these types of agreements are generally not reported to the FINRA Web CRD) rather than an order issued by the regulatory or self-regulatory body must also be disclosed.
6. WHAT CAN BE DONE TO AVOID A FAILURE TO DISCLOSE?
Read the Instructions and Questions Carefully
To avoid being disqualified from registration, it is critical to carefully read the instructions and the questions on the application. A question that is answered incorrectly because it was misunderstood or misread can result in severe consequences, including denial or revocation of registration.
Rely Only on Advice from NFA Staff
If a question in the Disciplinary Information Section requires disclosure of a matter, a "Yes" answer to the question is required no matter what other advice has been received from a lawyer, employer, judge or anyone other than a member of NFA's Registration, Compliance, Legal or Information Center ("RCLI") departments. If there is any question about whether particular information must be provided, whether a particular matter must be disclosed or whether a particular question requires a "Yes" answer, call NFA's Information Center at (312) 781-1410. Representatives are available from 8:00 a.m. to 5:00 p.m., Central Time, Monday through Friday.
If the advice of NFA's RCLI staff is sought, a written record containing the date of the conversation, the name of the NFA staff person giving the advice and a description of the advice should be made during the conversation and kept in the event an issue concerning disclosure of the matter arises later.
Update the Information on the Application
If any information provided by the SD, MSP or principal on the application changes or a matter that requires disclosure on the application occurs after the application is filed or registration is granted, the new information must be promptly disclosed to NFA. Principals should advise the SD or MSP of the new information, and the SD or MSP must file the update on their behalf.
The failure to promptly update information can also result in the SD's or MSP's registration being denied or revoked.
NFA Members can file many of their required documents electronically.