Firms can settle customer complaints, report the settlement on a broker's record, and even come after a rep's assets to pay for it--all without the broker's consent.
What's more, although states disclose customer settlements of more than $5,000, settlements are never reported on firms' records even when firms are named in a complaint.
Critics say this reporting policy creates an incentive for firms to settle frivolous cases and litter brokers' records.
"A broker has to fall back on the good faith of the firm" to guide the settlement process, says Ieuan Mahony, a Boston attorney who's represented brokers in disputes over how firms have handled settlements.
The NYSE and the NASDR didn't return numerous calls for confirmation of their reporting policies or of SRO rules, if any, regarding brokers' rights in the settlement process.
But it's clear brokers can end up on the hook for deals of which they had no part. In an NASDR arbitration last November, Kathy Keljik, a former A.G. Edwards broker, claimed that the firm settled a customer complaint without her knowledge after assuring her it would fight the complaint. The firm then allegedly seized $47,680 of Keljik's assets to pay the full amount of the settlement. It also reported the details of the settlement on Keljik's U-5, including an allegation that she'd admitted to unauthorized discretion in the account, Keljik claimed. A.G. Edwards contended it could seize Keljik's assets because she was obligated to pay any settlements under the terms of her employment contract.
The arbitration panel told A.G. Edwards to repay Keljik $24,000 and clean up her U-5.
The wording of most employment agreements in the brokerage industry takes away any protection a broker might have in the settlement process, Mahony contends. "Most agreements contain an indemnification clause where the broker agrees to pay if found liable in a customer complaint," he says. "But the broker has no control over how the complaint is litigated. That's not the case in other industries."
The process would be improved if firms agreed to settle customer cases only with the broker's "reasonable consent," Mahony says. "There are no rules [at the NYSE or the NASDR] that I know of" to guide how firms reach settlement decisions, he adds.
It may become less attractive for firms to push for settlements. The NASD has had a proposal before the SEC for nearly a year that would lift the ban on disclosing settlements on firms' records, and also allow the NASDR to disclose settlements on reps' records. The settlement-reporting threshold would be raised to $10,000. If approved, the new disclosure would be effective when the new CRD system is completed and revised reporting forms are in use. Completion is expected sometime in 1999.