FINRA PROPOSES U4/U5 REPORTING IF UNNAMED BROKER IS INVOLVED IN SUITS AND ARBITRATIONS
FINRA has proposed rule amendments requiring the reporting on Forms U4 and U5 of sales practice violations involving an individual broker’s alleged misconduct in an arbitration claim or civil lawsuit even if the broker is not named in the complaint. Reporting would be required if the broker is specifically identified in the complaint or if the broker should have been identified after a “reasonable investigation” by the firm. FINRA says that it intends to make reporting consistent with the obligations to report customer complaints, so that violative conduct does not go unreported simply because a plaintiff did not seek damages directly from an individual broker.
Our take: Although brokers will not like the proposed changes, FINRA is closing a loophole that allows misconduct to go unreported simply because a plaintiff named the deep-pocket firm rather than the responsible individual as a defendant/respondent. If a customer complaint is reportable, conduct resulting in litigation should also be reportable. It could also indirectly help firms who otherwise take the fall for a one bad actor’s misconduct.