April 17, 2009
I am an attorney who has represented public customers, brokers and broker-dealers. I write in support of the proposed rule relating to changes in Forms U4 and U5.
At present, the CRD system is basically a fraud. It is represented to the public to be a system where a customer can check on a broker before doing business. But, because the CRD system, does not include arbitration claims involving a broker who is not named as a respondent, the CRD system in inaccurate, and gives customer a false sense that the broker they are considering doing business with has a good record, when the truth may be 180 degrees opposite.
At present, if an individual stockbroker is not named as a respondent in a statement of claim FINRA mistakenly interprets the rule to not require the employing broker-dealer to report the brokers involvement to the CRD system. This is so even though the broker is identified by name and CRD number in the body of a statement of claim and even though the statement of claim focuses on sales practice violations by the broker. Given that there are significant strategic reasons why the decision not to name a broker in an arbitration claim is made (having nothing to do with culpability), the current system provides cover for employing firms who prefer to keep the investing public in the dark.
In contrast, if a letter making the same claims is sent to the brokerage firm, the present rule is interpreted by FINRA to require that the brokers involvement be reported on Forms U4 and U5. In effect, the new rule will close a significant loophole in reporting requirements and cure the mistaken interpretation used by FINRA that works to the detriment of retail investors.
The adoption of this proposal is long overdue.