The not-so-new u-4 and U-5 filing requirement.

Posted by on Mar 29, 2010 in Uncategorized | Comments(0)

I remember the U-4 and U-5 when it was short. I remember when defamation cases relating to U-4s and U-5s were few and far between. Now the U-5, when it is printed, is many pages long, but most of the time it is completed online using the WebCRD system.

But here’s the changes that drove people nuts. In the “old” days, the U-4 was required to be amended when the registered representative was the “subject of ” a consumer-initiated, investment-related complaint in excess of a specified dollar amount (which, by the way, was not adjusted for inflation). Then, for reasons that escaped me (and no one asked), the rule required that the stockbroker be a named respondent in an arbitration or named in a written customer complaint. So there was this big loophole for brokers who were not named in an arbitration or the subject of a verbal complaint.

The loophole was changed in May 2009 but it appears that it is taking some time for firms to catch up. The new rule, which is almost a year old, has reverted to the old rule. A broker who caused the complaint, but is not named, will still see the complaint on a U-4 or U-5 amendment. A verbal complaint will now be treated the same as a written complaint.

Why does this matter? Product cases are one example. Let’s say a broker sold a whole lot of Auction Rate Securities. Prior to the change, an arbitration claim that stated that the client was told by the broker that the product was “safe” would not result in an amendment to the U-4 or U-5. That would be because the customer’s lawyer did not name the broker as a respondent.

Now the same allegation will result in an amendment. This makes the broker unhappy, because the broker does not like amendments, particularly in product cases. This makes the claimant’s lawyer unhappy, because an unhappy broker is usually an uncooperative one.

I’m not sure why the rule was amended during the intervening years. It did not make sense to me. And while the “new” rule will result in more reporting, it seems to make sense to me. And very few things do…

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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