Broker-dealers must comply by November 14, 2009, with the changes to the Uniform Application for Securities Industry Registration orTransfer (Form U4) and Uniform Termination Notice for Securities Industry Registration (Form U5) that went into effect on May 18, 2009, as part of the ongoing effort to encourage transparency in the financial services market while balancing the rights of the registered representatives.
These changes create greater reporting requirements for registered representatives and their firms for whom the Forms U4 and U5 are the passport to employment and developing clients. In response to growing concerns about the practice in arbitrations of naming only the broker-dealer and not the registered representative who engaged in the alleged sales practice violation, the U.S. Securities and Exchange Commission (SEC) proposed changes to the reporting requirements of the Form U4 in March 2009. Prior to the rule changes, a registered representative needed only to disclose on his or her Form U4 those arbitrations or civil lawsuits that the registered representative was named as a party to and that alleged a sales practice violation in excess of, or had settled for, $10,000 or more. Under the new rules, a registered person must report an arbitration or civil lawsuit on his or her Form U4, regardless of being named as a party, if the registered person would reasonably be identified from the body of the arbitration claim or civil complaint as the registered person who was involved in one or more of the alleged sales practice violations.
The SEC also proposed rules to identify registered persons who have engaged in "willful violations" of industry regulations. The Form U4 will now include questions that relate to the SEC, CFTC or SRO ever finding the registered representative to have willfully violated or willfully aided, abetted, counseled, commanded, induced or procured the violation by any person of, any provision of the federal or commodities acts, any rule or regulation under any of such law, any Municipal Securities Rulemaking Board rule, or have failed reasonably to supervise another person subject to the registered representative's supervision, with a view to preventing the violation of any provision of such law, rule or regulation.
The SEC also approved a FINRA Rule amendment to the definition of "date of termination" from the "effective date of termination of the registration, or, in cases where registration has not yet been made effective, the date of the withdrawal of the application for registration" to "the date that the firm terminated the individual's association with the firm in a capacity for which registration is required."The new Rule allows for amendments to be made to the "Reason for Termination" section of the Form U5 without the need of a court order.
In sum, while the majority of the rule changes have clarified and streamlined the regulatory process for firms and registered persons, the new rules for reporting arbitrations and civil litigations, in particular, have created several gray areas in need of further guidance and careful navigation. Fox Rothschild LLP attorneys will remain ready to assist firms and registered persons in making these decisions.
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