I received customer letters, written after a nasty falling-out, that my firm said would appear on my internal U4, but not my public statement.
The clients had a very bad separation from my team. They all wrote the same letter, over two years ago, addressed to me. The complaints died, but the letters did appear on my public U4.
My question is this: Am I forever marked up, or can I get the letters, which never amounted to anything and were clearly written by angry people, off my record?
Customer complaint letters that don't turn into something worse will disappear from public disclosure on BrokerCheck after two years. BrokerCheck shows nothing adverse on you at this time.
Maintaining accurate Central Registration Depository (CRD) records is a shared responsibility between reps and their firms, but you bear full liability for errors. Above your signature on Form U4, you promised “to update this form by causing an amendment to be filed on a timely basis whenever changes occur to answers previously reported.” In reviewing Frank R. Rubba, Release 34-40238 (1998), the SEC wrote “the responsibility for maintaining the accuracy of the Form U4 lies with the registered representative.”
Of course, the broker/dealer shares that duty. In November 2004, the NASD fined 29 firms $9.2 million for over 8,000 instances of late reporting about their reps. But you place your license in jeopardy if you rely blindly on the firm to act for you.
NASD bylaws require U4 amendments “not later than 30 days after learning of the facts or circumstances.” Most states impose similar requirements. You can lose your state registration for failing to update timely, even if the NASD takes no action.
U4 Question 14I(1) requires disclosure if a client named you as a respondent in a formal proceeding (court or arbitration) concerning sales practice violations. If you weren't named but you were the subject of a complaint that settled for more than $10,000, 14I(2) requires a ‘Yes’.
If you were the subject of an investment-related written customer complaint alleging forgery, theft or damages of $5,000 or more that was not reported in 14I(1) or 14I(2), you have to report it in the catch-all of 14I(3). The customer complaint letters in your case could fit here. Disclosures on the first two questions are permanent, but ‘Yes’ answers to 14I(3) are reported through BrokerCheck for only 24 months.
Some firms systematically fail to report customer arbitration claims when the rep is not named as a respondent but is the subject of the complaint. That is clearly contrary to the U4's plain language and the NASD's Q&A on U4 updating. At a minimum, such complaints must be reported on 14I(3). The result is a deliberate distortion of the public record. Some good brokers get tarred by onetime customer kvetch letters, but bad brokers with serious complaints resulting in arbitration awards skate with a clean record.
Since you bear the ultimate burden of what goes on your CRD, you should have the right to write your comments on any report. Some firms have abused their reps' trust by submitting updates that the rep believes are inaccurate or defamatory. You should work closely with your legal/compliance dept to ensure that your CRD reporting is both timely and accurate.
C. Thomas Mason III, Esq.,
It is not clear what your firm meant when it said that the complaint would appear on your internal Form U4 but not your public statement. There is no such distinction. Further, the firm's obligation to report customer complaints is not contingent on the outcome of the complaint.
The NASD strictly regulates the expungement of customer complaint information from its CRD. For customer complaints filed before April 12, 2004, you must secure an expungement directive in either a court order or an arbitration award. If the expungement directive is contained in an arbitration award, the award must then be confirmed by a court of competent jurisdiction. (NASD Notice to Members 99-09). If the customer is cooperative and will agree to a Stipulated Award, you can commence an arbitration against the customer, request that the arbitration panel execute the Stipulated Award, and then have the award confirmed by a court. If the court confirms the award, the NASD will expunge the complaint information. If, however, the customer is not cooperative, initiating an arbitration is quite risky because the customer may seize the opportunity to file a claim against you in the arbitration based on the underlying complaint.
For claims filed on or after April 12, 2004, the expungement process becomes more difficult. Under NASD Rule 2130, the party petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name the NASD as an additional party. The NASD may waive the obligation to name it as a party if it determines that that expungement relief is based on affirmative judicial or arbitration panel findings that the claim is factually impossible or clearly erroneous, the registered person was not involved in the alleged sales practice violation or the claim is false.
If the expungement relief is based on findings other than those just described, the NASD, in its sole discretion and under extraordinary circumstances, may also waive the obligation to name it as a party if it determines that the expungement relief and accompanying findings on which it is based are meritorious and the expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.
If the NASD determines that the expungement was not based on one or more of these standards, it will not waive the requirement that it be named as a party in the confirmation process and it will oppose the expungement request.
Steven M. Malina, Esq.
Morgan Lewis & Bockius
Ethical Rep is a monthly feature in which more than 30 prominent securities attorneys, experts and law school professors help Rep. readers deal with work-related ethical quandaries. Have you encountered a situation at work that makes you uncomfortable? Are you confused about how your responsibilities to clients might change as regulations continue to evolve? Drop a line to Rep.'s contributing editor, Ann Therese Palmer, and our group of experts will help you work through the problem.
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