LAW REVIEW: Liar, Liar?

Form u-4 and form u-5 are two of the most oppressive and abused securities  industry documents. recent changes were approved without a single comment from the industry.

The SEC‘s Bad Form

By Mark J. Astarita, Esq.

On July 5, 1996, the Securities and Exchange Commission (SEC) announced it had approved changes to Form U-4 and Form U-5 proposed by the National Association of Securities Dealers (NASD). Incredibly, the SEC received no comments during the two-month period in which the proposal was pending.

On July 12, 1996, the SEC announced that it had approved changes to Form BD and Form BDW. Those changes, which were pending for six months, received only two comments.

Why are these items noteworthy? Because Form U-4 and Form U-5 are two of the most oppressive and abused securities industry documents. Financial professionals have been seeking to overhaul these forms for years. These changes, made in connection with an entire revamp of the NASD’s Central Registration Depository (CRD) system, represented an opportunity to revise the disclosure information on the forms. Changes were approved without a single comment from the industry.

Anyone who is registered with the NASD is aware of the problems with Form U-4. I cannot think of any other industry in the world in which an oral customer complaint that does not result in a trial, hearing or other resolution is publicly reported and disclosed, never to be removed from the registrant’s record. Nor can I think of another industry in which a baseless arbitration claim remains on the registrant’s public record, even after a trier of fact finds no wrongdoing by the registrant.

Many brokers have been the subject of a customer complaint and have had their complaint completely dismissed by an arbitration panel. Despite total vindication, that complaint remains on the broker’s record. I know of even more brokers who have had oral complaints made or letters sent to their firms. Although these complaints were never resolved, or were resolved for insignificant amounts of money, they remain on brokers’ records for the rest of their careers.

Those brokers have a permanent “Yes” answer on their U-4s, as well as delays upon registering in new jurisdictions and when changing firms. They are subjected to this regulatory problem when, in fact, they did nothing wrong. With the NASD continuing to expand the public’s access to brokers’ CRD filings, the concerns are increasing. Did the amendments correct this outrage? Unfortunately not.

The new forms will require all written customer complaints alleging a sales practice violation and requesting compensatory damages of $5,000 to be reported. Although oral complaints no longer have to be reported, the SEC and the NASD have lowered the dollar threshold for the reporting of a complaint from $10,000 to $5,000. While any dollar amount is somewhat arbitrary, the decrease in the dollar amount will increase the reporting of written complaints. With 6,000 arbitration claims filed a year, one can only guess how many letters have been written by customers to brokerage firms.

There is another small victory in the changes — complaints that do not go into arbitration, settlement or a court case will be deleted from the CRD system two years after the complaint is reported to the CRD.

That minor victory is overshadowed by another change — all arbitrations and court cases will be reported regardless of the dollar amount of the claim. Again, because the old disclosure requirement was limited to arbitrations in which the damages were in excess of $10,000, this will result in disclosure of more arbitrations, not less. There is an additional change in that the dollar limit that triggers the reporting requirement for settlement of arbitrations and customer complaints has been increased to $10,000.

For brokers, this represents little to no change, and complaints for which there is no finding of wrongdoing will still be reported. Those who are interested in the details of the changes can review the SEC’s release at its Web site ( rules/final/34-37431.txt).

Although the changes to Forms BD and Form BDW provide additional reporting requirements, they also reorganize the forms themselves.

The reason for the changes has little to do with a sense of fairness in disclosure. Instead, it has to do with a massive overhaul of the CRD system. The NASD and the SEC are moving toward electronic filing and dissemination of information. In fact, there have been numerous stories and comments regarding the NASD’s plan to make brokers’ disciplinary histories available on the Internet and by other electronic methods.

The recent amendments to Forms U-4, U-5, BD and BDW are part of a CRD system redesign to facilitate electronic filing and, ultimately, dissemination of that information to the general public. In announcing both sets of changes, the SEC made note of the move to wholly electronic filings.

Electronic filings will be a giant step forward for broker/dealers as well as regulators — probably as large a step as occurred when the states adopted the CRD system as their own registration depository. Firms and regulators will soon have a timely, cost-effective system in place.

However, there is little benefit to the broker and the investing public. In a perfect world, increased and timely disclosure of complaints and regulatory findings against brokers would be a welcome addition to the financial community. Such a system would allow investors to make more informed choices in the selection of their brokers, as well as provide regulators with a more efficient tool with which to review registration applications.

But the CRD disclosure system is far from perfect. Although the NASD and the SEC have not stated what information is going to be disclosed to the general public, the system is so overly inclusive that it makes the most honest broker appear dishonest. The system could certainly make potential customers shy away from using brokers who have anything on their permanent record.

The regulators’ answer to these concerns is that brokers themselves can attach explanations, and CRD reports clearly state when complaints are resolved in brokers’ favor. However, such a simplistic approach to this serious problem overlooks the obvious: Innocent brokers subjected to a handful of unfounded customer complaints start to look like rogue brokers. While reading all the disclosures in a report will establish a broker’s honesty, most potential customers and employers will not go to all that trouble. They will simply see that there are three or four items reported and look no further.

Having oral and unpursued customer complaints removed from CRDs is a welcome relief. Still, we would have hoped that arbitrations that are resolved in a broker’s favor would have been automatically removed from the CRD system. Brokers will still be subjected to the continued inclusion of unfounded complaints, as well as complaints settled due to litigation costs. These disclosure requirements are oppressive, and they have been the outrage of the industry since CRD reporting came into existence.

Accurate reporting, timely filings and less paperwork are all welcome additions to the regulatory environment. Can a sense of fairness be that hard to accomplish?

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Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.