In order to make more information available to the public and regulators, the Financial Industry Regulatory Authority (FINRA) recently proposed a rule amendment that would require securities brokerage firms to report brokers who allegedly engaged in a sales practice violation but are not named as parties in an arbitration proceedings or a civil lawsuit.
The proposed rule, released April 24, would require reporting of an unnamed broker if his or her identity can be deduced from the arbitration or court filings. The firm employing the unnamed broker would have 30 days to make the disclosure to the Central Registration Depository (CRD) on forms U4 and U5, the standard securities industry registration forms.
Philip M. Aidikoff, an attorney with Aidikoff, Uhl & Bakhtiari in Beverly Hills, CA, said the rule proposal would close a “huge loophole” that should “provide more transparency in the dispute resolution process” for investors and regulators.
According to Aidikoff, his firm and many others tend to name only the securities firm as the party because it has a duty to supervise. Also, not naming the broker can expedite reaching settlements, he said.
Steven B. Caruso, an attorney with Maddox, Hargett & Caruso in New York, explained that his firm does not name the broker to avoid having to face additional lawyers and because it is more efficient for the arbitration process.
The rule proposal should give investors and regulators a “much more complete picture,” Caruso said.
FINRA said it was hard to reconcile requiring named brokers to be reported but not unnamed brokers whose identity could be ascertained because, in both situations, a sales practice violation is at the heart of the complaint.
“[T]his reporting inconsistency, FINRA said, “raises practical concerns because the practice of making a firm the sole respondent in an arbitration claim is becoming more prevalent in circumstances where the allegations involve sales practice violation(s) against a registered person.”
FINRA is seeking comment on the proposed rule change. The comment period is open until May 27.