FINRA Proposes Change In Reporting Sales Practice Violations

The Financial Industry Regulatory Authority (FINRA) has proposed rule amendments that would require registered firms 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.

FINRA’s proposed amendments are designed to eliminate the inconsistency in reporting of alleged sales practice violations by brokers, FINRA said. That would enable the information to be available to regulators and the public.

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.

Currently, 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. Therefore, 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.

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 the public.

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 said it will be accepting public comments on the proposals for 30 days, or until May 27.