The Financial Industry Regulatory Authority (FINRA) has proposed revisions that would require that allegations of sales practice violations made in arbitration claims and civil lawsuits against registered persons who are not named as parties in those proceedings be reported as customer complaints. Current reporting requirements do not require a report to the Form U4 (Uniform Application for Securities Industry Registration or Transfer) or Form U5 (Uniform Termination Notice for Securities Industry Registration) of allegations of a sales practice violation against a registered person contained in the body of the lawsuit or arbitration claim unless the registered person is specifically named as a defendant or respondent in the lawsuit or arbitration claim.
In considering these proposed revisions, it is helpful to understand the relationship between the parties involved in the registration and disclosure systems. The Investment Adviser Registration Depository (IARD) is an electronic filing system for Investment Advisers that is sponsored by the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association (NASAA). FINRA does not have regulatory authority over Investment Advisers; however, FINRA serves as the developer and operator of the IARD system. The IARD system collects and maintains the registration and disclosure information for Investment Advisers and their associated persons. The SEC has mandated that its Investment Adviser registrants use the IARD system. The IARD system also accommodates registration requirements for state-regulated Investment Advisers. The IARD Program provides for the registration of Investment Advisor Representatives using the Individual Form Filing Functionality in Web CRD. Web CRD enables firms to register their Investment Adviser Representatives online via the Web CRD system. This Representative Registration component of the IARD system uses the Uniform Forms U4 and U5.
If a registered person is identified in a written complaint as the person responsible for alleged sales practice violation(s), the matter is required to be reported on that persons Form U4 or U5. However, the regulatory interpretation has been that even if a registered person is identified in the body of an arbitration claim or lawsuit as the person responsible for the alleged sales practice violation(s), the matter is not required to be reported on that persons Form U4 or U5 if he or she was not named as a respondent or defendant in the arbitration or litigation. This interpretation has resulted in arbitration and litigation claims– a form of “customer complaint”-which allege sales practice violations against a registered person not being reported via the Forms U4 and U5. The proposed revision is intended to address this inconsistent treatment regarding the reporting of alleged sales practice violations. The proposed revision would require alleged sales practice violations made by a customer against registered persons identified in the body of a complaint, litigation or arbitration claim to be reported even when the registered persons are not named as parties in the litigation or arbitration.
As a matter of procedure, before becoming effective, FINRA’s proposed rule change must be authorized for filing with the SEC by the FINRA Board and then must additionally be approved by the SEC after publication for public comment in the Federal Register.
RIA Compliance Consultants, Inc. can help your registered investment adviser prepare and submit Form U4 and U5 or other IARD registration and disclosure filings. Please contact us at 877-345-4034 if you are interested in discussing such services.
