FINRA Proposes Rule Change to Require Reporting of Customer Allegations of Sales Practice Violations Against Brokers in All Arbitrations, Civil Lawsuits - Even When Broker Is Not an Official Party to the Dispute
Washington, DC — The Financial Industry Regulatory Authority (FINRA) is seeking comment on proposed rule amendments that would require registered firms - for the first time - to report allegations of sales practice violations against an individual broker made in arbitration claims or civil lawsuits that do not name the broker as a respondent or defendant.
As detailed in Regulatory Notice 08-20, such allegations would be reported in the same way as customer complaints are now reported - to the Central Registration Depository (CRD), within 30 days, on Forms U4 and U5.
Under current practice, firms are required to report customer allegations against a broker in an arbitration claim or civil litigation complaint only if the legal document specifically names the broker as a respondent. A settlement or ruling resolving the allegations also need not be reported if the broker is not named as a respondent. Increasingly in recent years, claimants and their lawyers have been naming only the firm in arbitrations and lawsuits to bolster their ability to settle their disputes more easily prior to hearing or to litigate if they do not settle. As a result, neither the allegations of sales practice violations made against the unnamed brokers nor the dispositions of those proceedings are reported to CRD; consequently, that important information is unavailable to regulators, to prospective broker-dealer employers and to the investing public through FINRA BrokerCheck.
However, if an investor were to make the same allegations against a broker in a written complaint to the firm, the firm and the broker are required under FINRA rules to report the complaint and its contents to CRD within 30 days - and the information would be available to regulators and to the public. FINRA's proposed rule amendments are aimed at eliminating the inconsistency regarding the reporting of alleged sales practice violations by brokers.
Currently, customer complaints and settlements involving an amount of $10,000 or more are reportable to CRD, a threshold that has been in place for years without being adjusted for inflation. FINRA is proposing raising that threshold to $15,000 to more accurately reflect today's business conditions.
FINRA is also proposing a rule amendment that would allow firms to change the Reason for Termination and Date of Termination sections of the Form U5, which is filed when a broker separates from a firm. Currently, those sections cannot be changed absent a court order or arbitration award. A staff review has determined that the majority of firm requests to make changes to those sections are to correct clerical errors in the original filing. Firms would still have to provide a reason for changing information in those Form U5 sections and FINRA would notify other regulators and the broker's current employer when a Reason for Termination or Date of Termination has been changed.
FINRA will be accepting public comments on the proposals for 30 days, or until May 27.
FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. Created in 2007 through the consolidation of NASD and NYSE Member Regulation, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business-from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.finra.org.