WealthManagement Magazine

NASDR Seeks Approval for Interim U-4 Forms, Release of More Information

The NASDR has asked the SEC to approve interim U-4 forms that contain new reporting requirements. As of November, the rule proposal was expected to go into effect this month. Here is a summary of some of the proposed changes.* The new Question 22G asks if "within the past twenty-four (24) months" brokers have been the subject of an investment-related, consumer-initiated, written complaint.Previously,

The NASDR has asked the SEC to approve interim U-4 forms that contain new reporting requirements. As of November, the rule proposal was expected to go into effect this month. Here is a summary of some of the proposed changes.

* The new Question 22G asks if "within the past twenty-four (24) months" brokers have been the subject of an investment-related, consumer-initiated, written complaint.

Previously, reps have been asked to report whether they'd ever been the subject of any complaint, investigation, or proceeding regardless of how many years had elapsed, whether or not the complaint was in writing, or whether it was found to have any merit.

Assuming SEC approval, the dropping of pending customer complaints from the Central Registration Depository (CRD) after two years represents a hard-fought battle for the industry and brokers.

The interim form also changes the dollar thresholds for reporting complaints and settled matters.

* Question 22G(1) asks brokers to report if they were the subject of a written customer complaint or proceeding that alleged one or more sales practice violations and contained a claim for compensatory damages of $5,000 or more. The current threshold for reporting is $10,000 or allegations of fraud. The industry agreed to lower the dollar threshold in exchange for dropping the broad fraud category that permitted reporting of nearly every customer complaint, it argued. The rules will now define a laundry list of sales practice violations.

* Question 22H(c) asks brokers to report if they've ever been involved in a complaint or arbitration that was settled for $10,000 or more. The current threshold is $5,000.

* Question 22A no longer asks brokers to report conviction or guilty pleas to gambling.

* Question 22f now offers an exception stating that reported violations must be "other than a violation designated as a 'minor rule violation' under a plan approved by the U.S. Securities and Exchange Commission."

These changes to the U-4 would be an interim step toward overhauling the CRD system, and come more than 18 months after the SEC approved a new form U-4. Reporting changes have been stalled by technological difficulties in CRD redevelopment. Last January, the NASD ditched a plan to develop CRD software for electronic filing, in favor of creating an Internet-based CRD. The finished project is expected before the year 2000, according to the NASDR rule proposal, filed with the SEC in October.

Instead of implementing the new U-4 form, which had been approved by the SEC in July '96, the NASDR took the substance of those changes and created an interim form that will work with the current CRD format. The new U-4 form eventually will contain 43 question boxes instead of the 31 on the old and interim U-4.

"The interim form is a reconfigured-version of the new U-4 questions," that matches the current CRD categories, says O. Ray Vass, former director of regulatory policy for Merrill Lynch who served as head of the Securities Industry Association's ad hoc committee working out CRD reporting revisions.

The NASDR is also going forward with plans to release more disciplinary background through its Public Disclosure Program and 800 number hot line. The NASDR had previously filed a rule proposal in November '96 with the SEC to allow release of more of brokers' history. That proposal was linked to the new form U-4 and was stalled at the SEC for more than a year.

Under the interim U-4 form, however, the NASD has proposed to release the same information detailed in its previous proposal, including:

* all pending arbitrations and civil proceedings that relate to securities or commodities transactions;

* pending written customer complaints alleging sales practice violations and compensatory damages of $5,000 or more;

* settlements of $10,000 or more of arbitrations, civil suits and customer complaints involving securities or commodities transactions;

* current investigations involving criminal or regulatory matters;

* terminations of employment after allegations involving violations of investment-related statutes or rules, fraud, theft, or failure to supervise investment-related activities;

* bankruptcies less than 10 years old and outstanding liens or judgments;

* bonding company denials, payouts, or revocations; and

* any suspension or revocation to act as an attorney, accountant, or federal contractor.

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