April 14, 2009
Ladies and Gentlemen:
This is to comment on rule changes proposed by FINRA regarding changes to Form U4 and U5 reporting. I have practiced in the securities area for more than 35 years during which time I have represented, among others, brokers, registered representatives, and customers. My first SRO arbitration was in 1976.
The cornerstone of our securities regulation is full and fair disclosure. That necessarily includes full and fair disclosure by persons who hold themselves out as securities professionals. FINRA registrants should be required to disclose available information regarding customer complaints, court actions, and arbitrations which make allegations against them. For this reason, I support the changes to Forms U4 and U5 to include questions that would enable FINRA to identify findings of wilful violations of laws or regulations which are a basis for statutory disqualification of an associated person. I also support the proposed rule change that requires reporting of arbitration cases in which a registered person is not named as a party respondent, but in which a registered persons conduct is the basis for a claimants misconduct allegations against a member firm.
These proposals will provide valuable protections for investors while promoting full and fair disclosure.
1. Disclosure which would permit FINRA to identify findings of wilful violations helps weed out misconduct and persons who have damaged investors. It also carries out the explicit requirements of the Securities Exchange Act of 1934. FINRAs role of identifying and disqualifying all persons found to have committed wilful violations will be facilitated by the disclosure. Any consequent disqualification only can help and ultimately protect investors.
2. Reporting of arbitration claims alleging sales-practice misconduct by a registered person will fill a hole which presently exists the CRD system. The accuracy and integrity of that system are necessary to protect public investors as the CRD system is the foundation upon which FINRAs Broker Check system is built. Unfortunately, that foundation has been undermined (a) by firms failure to report and (b) by a rule that requires reporting of a sales-practice complaint made to a FINRA member but does not require reporting if the same allegations are made in an arbitration claim. The proposed rule will fill the latter hole.
As a matter of practice, I recommend to aggrieved customers that, in the vast majority of cases, they name only the firm in an arbitration proceeding since the firm is legally responsible for the conduct of its agents. My recommendation generally is based upon strategic concerns relating to the current list selection system and the costs of managing a case. Multiple respondents mean more defense strikes in arbitrator selection, more attorneys on the defense, more discovery requests, and more overall complexity. But, if another attorney handled the case and named the associated person, reporting would be required. In both cases, the firm knows who the associated person is, but its reporting requirement depends on a strategic decision by the claimants attorney.
Consequently, an associated person with a number of alleged sales-practice claims may have a clean CRD. This in turn jeopardizes the rights of investors by keeping important information from them. On its website, FINRA gives the following advice to potential customers:
"Before you hire an investment professional, there are some steps you should take. First, you'll want to identify your financial needs so that you'll know what kind of help to get. Next, learn about the different types of investment professionals that are available and what they offer. Then, you'll search for possible candidates and check their work background and disciplinary history. Before coming to any decision, you'll ideally want to interview your candidates face-to-face and ask them about the fees they charge. Finally, make sure you read and understand any paperwork you are asked to fill out or sign."
This advice from FINRA demonstrates the importance of full and fair disclosure to investors and the customers of FINRA members. How can a potential investor make an informed decision when material information may be withheld? How can a potential investor rely on the third step of FINRAs guidance when the system keeps information out of his or her hands?
Clearly, full and fair disclosure should be the goal in all dealings with investors and customers. That goal is the basis of my support as set forth above. As to other matters in the proposed rule change, I am in agreement with the positions taken by PIABA in its comment letter. Thank you.
William P. Torngren