The Financial Industry Regulatory Authority yesterday asked for public comments on a proposed rule change that would require registered firms to report all allegations of sales practice violations against individual brokers made in arbitration claims or civil lawsuits, even if the individuals are not named in these disputes.
The proposal would require firms to report the customer allegations in the same way as customer complaints are now reported - within 30 days via the Central Registration Depository, or CRD.
The FINRA proposal comes as the self-regulator has launched an informal inquiry into how broker-dealers pitched auction rate securities to customers. However, a FINRA spokesman said the proposal was not prompted by that inquiry.
Currently, firms are required to report customer allegations against a broker in an arbitration claim or a civil complaint only if the specific broker is named as a respondent in the legal dispute. In addition, settlements or rulings resolving alleged sales practice violations do not need to be reported if the broker is not named in them. Increasingly, customers who bring charges have been naming only the firm in arbitration proceedings and lawsuits to bolster their ability to settle the disputes early, FINRA said.
"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," FINRA said in a statement. "Consequently, that important information is unavailable to regulators, to prospective broker-dealer employers, and to the investing public" through FINRA's Web site.
But if an investor were to make the same allegations against a broker in a written complaint to the firm, rather than through lawsuit or arbitration proceedings, 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 such inconsistencies, the agency said in a statement.
The proposed rules would also raise to $15,000 from $10,000 the threshold for which customer complaints and settlements are reportable to CRD, "a threshold that has been in place for years without being adjusted for inflation," the statement said.
Meanwhile, FINRA is also proposing changes to its Form U5, a notice of termination of security industry registration, that would allow firms to more easily change the form's "reason for termination" and "date of termination" sections that are filed when a broker separates from a firm.
Currently, those sections cannot be changed absent a court order or arbitration award, but a FINRA 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.
Under the new form, firms would still have to provide a reason for changing information in those 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.
