[Federal Register Volume 74, Number 58 (Friday, March 27, 2009)]
[Notices]
[Pages 13491-13498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-6830]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-59616; File No. SR-FINRA-2009-008]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to
Proposed Changes to Forms U4 and U5
March 20, 2009.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 6, 2009, Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by FINRA. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend the Uniform Application for Securities
Industry Registration or Transfer (``Form U4'') and the Uniform
Termination Notice for Securities Industry Registration (``Form U5'')
as well as FINRA Rule 8312 (FINRA BrokerCheck Disclosure).
The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Representatives of broker-dealers and investment advisers must use
Form U4 to become registered in the appropriate jurisdictions and/or
with appropriate self-regulatory organizations (``SROs''). Broker-
dealers and investment advisers must use Form U5 to terminate
registration of an individual in the various SROs and jurisdictions.
(Forms U4 and U5 are together referred to as the ``Forms'').
As discussed in greater detail below, the proposed rule change
would:
Revise questions on the Forms to enable FINRA and other
regulators to identify more readily individuals and firms (collectively
referred to as ``persons'') subject to statutory disqualification
pursuant to Section 15(b)(4)(D) or (E) of the Exchange Act (referred to
as ``willful violations'').\3\
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\3\ A person is subject to statutory disqualification under
Section 15(b)(4)(D) of the Exchange Act if the person has:
* * * willfully violated any provision of the Securities Act of
1933, the Investment Advisers Act of 1940, the Investment Company
Act of 1940, the Commodity Exchange Act, [the Exchange Act], the
rules or regulations under any of such statutes, or the rules of the
Municipal Securities Rulemaking Board, or is unable to comply with
any such provision.
A person is subject to statutory disqualification under Section
15(b)(4)(E) of the Exchange Act if the person has:
* * * willfully aided, abetted, counseled, commanded, induced,
or procured the violation by any person of any provision of the
Securities Act of 1933, the Investment Advisers Act of 1940, the
Investment Company Act of 1940, the Commodity Exchange Act, [the
Exchange Act], the rules or regulations under any of such statutes,
or the rules of the Municipal Securities Rulemaking Board, or has
failed reasonably to supervise, with a view to preventing violations
of the provisions of such statutes, rules, and regulations, another
person who commits such a violation, if such other person is subject
to his supervision. For the purposes of this subparagraph (E), no
person shall be deemed to have failed reasonably to supervise any
other person, if:
(i) There have been established procedures, and a system for
applying such procedures, which would reasonably be expected to
prevent and detect, insofar as practicable, any such violation by
such other person, and
(ii) Such person has reasonably discharged the duties and
obligations incumbent upon him by reason of such procedures and
system without reasonable cause to believe that such procedures and
system were not being complied with.
15 U.S.C. 78o(b)(4)(D) and (E).
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[[Page 13492]]
Revise questions on the Forms regarding disclosure of
arbitrations or civil litigation to elicit reporting of allegations of
sales practice violations made against a registered person in
arbitration or litigation in which that person is not named as a party.
Revise questions on the Forms regarding customer
complaints, arbitrations or civil litigation to clarify the manner in
which individuals and firms must report sales practice violations
alleged against registered persons.
Raise the monetary threshold for reporting of settlements
of customer complaints, arbitrations or civil litigation on the Forms
from $10,000 to $15,000, and make a conforming change to reflect this
revised monetary threshold in the description of ``Historic
Complaints'' in FINRA Rule 8312.
Revise the definition of ``Date of Termination'' in Form
U5, and enable firms to amend the ``Date of Termination'' and ``Reason
for Termination'' sections of the Form U5, subject to certain
conditions and notifications.
Make certain technical and conforming changes to the Forms
intended to clarify the information being elicited by regulators and to
facilitate accurate reporting by firms on the Forms.
Proposed Revisions Regarding Willful Violations
The proposed rule change would revise the Forms to enable FINRA and
other regulators \4\ to identify more readily persons subject to
statutory disqualification as a result of willful violations.\5\ The
current Forms elicit information that assists regulators in identifying
persons subject to statutory disqualification based on findings by, or
sanctions imposed by, the SEC, the Commodity Futures Trading Commission
(``CFTC''), or an SRO as defined in the Forms,\6\ but the relevant
questions do not specifically inquire as to willful violations and do
not capture all of the enumerated types of willful violations. For
example, Questions 14C and 14E on the Form U4 and the corresponding
Regulatory Action disclosure reporting page (``DRP'') elicit
information regarding regulatory or disciplinary action taken by the
SEC, the CFTC, or an SRO, but currently do not elicit information on
whether a violation was willful and do not specifically address SRO
findings of willful violations of the securities laws or the Commodity
Exchange Act. Similarly, Question 7D on Form U5 asks whether the
individual was involved in a disciplinary action by a domestic or
foreign governmental body or SRO; however, neither the question nor the
corresponding Form U5 Regulatory Action DRP elicits details on whether
the action involved a willful violation. Accordingly, as described
below, the proposed rule change would modify these Forms to enable
FINRA and other regulators to query the CRD system to identify persons
who are subject to disqualification as a result of a willful violation.
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\4\ In addition to FINRA, regulators that use the Forms include
other SROs and securities regulators of states and other
jurisdictions.
\5\ In connection with the consolidation of the member firm
regulatory functions of NASD and NYSE Regulation, Inc. and the
formation of FINRA, FINRA adopted a revised definition of
disqualification to conform to the definition of statutory
disqualification under Section 3(a)(39) of the Exchange Act.
Consequently, FINRA's revised definition of disqualification
incorporates certain additional categories of disqualification,
including willful violations. FINRA has filed a proposed rule change
to establish procedures applicable to persons subject to the
additional categories of disqualification. See Securities Exchange
Act Release No. 59208 (January 6, 2009), 74 FR 1738 (January 13,
2009) (Notice of Filing of SR-FINRA-2008-045).
\6\ The Forms define SRO to include any national securities or
commodities exchange, as well as any national securities association
or any registered clearing agency. Accordingly, the proposed rule
change would delete as redundant certain specific references to
commodities exchanges in individual questions that already inquire
as to SRO actions.
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With respect to the Form U4, FINRA proposes to add questions to
existing Questions 14C and 14E. Question 14C inquires about SEC and
CFTC regulatory actions. The proposed rule change would add new
Questions 14C(6), (7) and (8) to elicit from persons whether the SEC or
the CFTC ever:
(6) found you to have willfully violated any provision of the
Securities Act of 1933, the Securities Exchange Act of 1934, the
Investment Advisers Act of 1940, the Investment Company Act of 1940,
the Commodity Exchange Act, or any rule or regulation under any of
such Acts, or any of the rules of the Municipal Securities
Rulemaking Board, or found you to have been unable to comply with
any provision of such Act, rule or regulation?
(7) found you to have willfully aided, abetted, counseled,
commanded, induced, or procured the violation by any person of any
provision of the Securities Act of 1933, the Securities Exchange Act
of 1934, the Investment Advisers Act of 1940, the Investment Company
Act of 1940, the Commodity Exchange Act, or any rule or regulation
under any of such Acts, or any of the rules of the Municipal
Securities Rulemaking Board?
(8) found you to have failed reasonably to supervise another
person subject to your supervision, with a view to preventing the
violation of any provision of the Securities Act of 1933, the
Securities Exchange Act of 1934, the Investment Advisers Act of
1940, the Investment Company Act of 1940, the Commodity Exchange
Act, or any rule or regulation under any of such Acts, or any of the
rules of the Municipal Securities Rulemaking Board?
The proposed rule change would add identical questions to Question
14E of the Form U4 (to be numbered as Questions 14E(5), (6) and (7)) in
the context of findings by any SRO.\7\ FINRA is not proposing any new
questions addressing willful violations on the Form U4 Regulatory
Action DRP, which will continue to elicit specific information
regarding the status of the events reported in response to Questions
14C and 14E.\8\
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\7\ See Exhibit 3a. The Commission notes that there are
references throughout this notice to exhibits. However, there are no
exhibits attached to this notice. The exhibits are part of the
proposed rule change.
\8\ See Exhibit 3b. FINRA is proposing to add a question to the
Form U4 Regulatory Action DRP to elicit additional information about
regulatory actions reported in Question 14D(2)(b) of Form U4
(actions that result in a final order based on violations of any
laws or regulations that prohibit fraudulent, manipulative, or
deceptive conduct).
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With respect to the proposed new Questions 14C(6), (7) and (8), and
14E(5), (6) and (7) on the Form U4, firms will need to determine
promptly whether any of their registered persons have been subject to
an action that requires reporting. Firms then will be required to amend
Forms U4 to respond to these new questions the first time they file a
Form U4 amendment after the effective date of the proposed rule change,
but no later than 120 days following the effective date of the proposed
rule change. If a firm has determined that the registered person must
answer ``yes'' to any part of
[[Page 13493]]
Questions 14C(6), (7) or (8), or Questions 14E(5), (6) or (7), the
amendment filings must include completed DRP(s) covering the
proceedings or action reported.\9\
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\9\ Under the proposal, the CRD system will process Form U4
filings as follows: answers to current Questions 14C(1) through (5)
and Questions 14E(1) through (4) will be transferred without change
to proposed new Questions 14C and 14E, respectively. In addition,
all registered persons will have ``null'' values in the newly added
Questions 14C(6), (7), and (8), and 14E(5), (6), and (7). In other
words, answers to these new questions will be blank (i.e., not
populated with either a ``yes'' or ``no'' answer). Firms must
affirmatively answer these newly added questions (Questions 14C(6),
(7), and (8) and 14E(5), (6), and (7)) by clicking the appropriate
``yes'' or ``no'' radio buttons the first time they file a Form U4
amendment after the effective date of the proposed rule change, but
no later than 120 days following the effective date of the proposed
rule change. If a firm does not affirmatively answer the new
questions for registered persons, the filing of any amendments to
the Form will fail the CRD-system completeness check.
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FINRA appreciates that adding new disclosure questions to Form U4
will require firms to amend (or refile) such forms for their registered
persons, and that this requirement may place an administrative burden
on firms. Accordingly, FINRA is providing firms with up to 120 days
from the effective date of the proposed rule change to amend their
registered persons' Forms U4 to answer the new Questions 14C(6), (7)
and (8) and 14E(5), (6) and (7), rather than the 30 days provided under
Article V, Section 2 of the FINRA By-Laws for the filing of such
amendments. FINRA emphasizes that complete and accurate reporting on
Forms U4 is the joint responsibility of the registered person and the
firm.
With respect to the Form U5, FINRA proposes to leave unchanged
Question 7D (Regulatory Action Disclosure),\10\ and to add a new
question, Question 12C, to the Form U5 Regulatory Action DRP. After
implementation, firms that answer ``yes'' to Question 7D on Form U5
will be required to provide more detailed information about the
regulatory action in Question 12C on the DRP. For regulatory actions in
which the SEC, CFTC or an SRO is the regulator involved, Question 12C
will require firms to answer questions eliciting whether the action
involves a willful violation. These questions correspond to those
questions proposed to be added to the Form U4.\11\ A firm will not be
required to amend Forms U5 to answer Question 12C on the DRP and/or add
information to a Form U5 Regulatory Action DRP that was filed
previously unless it is updating a regulatory action that it reported
as pending on the current DRP.
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\10\ See Exhibit 3c.
\11\ See Exhibit 3d.
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Proposed Revisions To Elicit Reporting of Allegations of Sales Practice
Violations Against Registered Persons Made in Arbitrations or
Litigation in Which the Registered Person Is Not a Named Party
The proposed rule change would revise the Forms to require the
reporting of allegations of sales practice violations made against
registered persons in a civil lawsuit or arbitration in which the
registered person is not a named party. Under the current reporting
structure, a firm is not required to report on a registered person's
Form U4 that a customer has alleged a sales practice violation against
such person in the body of a lawsuit or arbitration claim, unless the
registered person also has been named as a defendant/respondent. A firm
also is not required to report on Form BD (Uniform Application for
Broker-Dealer Registration) that it has been named as a respondent in a
consumer-initiated arbitration or to report that a sales practices
violation was alleged against one of its registered persons under these
circumstances. As a result, this form of ``customer complaint'' against
a registered person or firm is currently unreported via the Forms and,
therefore, unavailable to regulators or prospective broker-dealer
employers of the registered person via CRD or to the public through
BrokerCheck.
Specifically, current Question 14I(1) on Form U4 requires an
applicant for registration to answer ``yes'' only if he or she has ever
been named as a respondent or defendant in an investment-related,
consumer-initiated arbitration or civil litigation that alleged that he
or she was involved in one or more sales practice violations \12\ and
which: (1) Is still pending; (2) resulted in an arbitration award or
civil judgment against the person, regardless of amount; or (3) was
settled for an amount of $10,000 or more.\13\ Question 7E(1) on Form U5
is similarly worded.
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\12\ The ``Explanation of Terms'' in Form U4 defines ``sales
practice violations'' to include ``any conduct directed at or
involving a customer which would constitute a violation of any rules
for which a person could be disciplined by any self-regulatory
organization * * *'' See Exhibit 3a.
\13\ This proposed rule change proposes to raise from $10,000 to
$15,000 the monetary threshold for reporting of settlements of
customer complaints, arbitrations or litigations on the Forms, as
discussed in more detail infra.
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Regulators have interpreted Question 14I(1) on Form U4 and Question
7E(1) on Form U5 to mean that, even if a registered person is
identified in the body of an arbitration claim or lawsuit as the person
responsible for the alleged sales practice violation(s), the event is
not required to be reported on the person's Form U4 or U5 because he or
she was not specifically named as a respondent/defendant in the
arbitration or civil litigation.\14\ In other words, a ``yes'' answer
to Question 14I(1) on Form U4 and Question 7E(1) on Form U5 is
currently required only when the customer has sued a registered person
or filed an arbitration claim naming the registered person as a
respondent.
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\14\ See Question 4 under the 14I(1) set of questions on Forms
U4/U5 Interpretive Guidance, which is available on FINRA's Web site
at http://www.finra.org/RegulatorySystems/CRD/FilingGuidance/p005243.
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Similarly, if the customer has sued or filed an arbitration claim
against the firm only and not the registered person, the registered
person is not required to answer ``yes'' to these questions, even if
the customer has identified a registered person in the body of the
lawsuit or arbitration as the person responsible for the alleged sales
practice violation(s).\15\ If, however, a customer files a written
complaint with a firm alleging that a registered person is responsible
for the same sales practice violation(s), the firm and the registered
person are responsible for reporting that customer complaint on the
person's Form U4 (Question 14I(3)) or Form U5 (Question 7E(3)),
provided the complaint meets the threshold reporting requirements.
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\15\ Moreover, in addition to not being reportable on Forms U4
or U5, such a matter is not reportable on Form BD because Form BD
does not require the reporting of any customer-initiated complaints,
arbitrations or civil litigations. FINRA notes, however, that
certain summary information about arbitration awards rendered in
claims brought by customers against firms may be obtained through
BrokerCheck.
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Settlements of customer disputes are similarly treated. If a
customer complaint against a registered person is settled (either by
the person or the person's firm) for $10,000 or more,\16\ the event is
reported on the registered person's Form U4 or U5 under Questions
14I(2) or 7E(2), respectively. However, if the firm settles an
arbitration or civil lawsuit for $10,000 or more,\17\ and the person
described in the complaint or claim as the person responsible for the
alleged sales practice violation(s) is not a named respondent/
defendant, the matter is not reported on any of the Forms and is thus
unavailable to the public through BrokerCheck, and is also unavailable
to regulators or prospective broker-dealer employers of the person
through the CRD system.
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\16\ See supra note 12.
\17\ Id.
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The inconsistent treatment regarding the reporting of alleged sales
practice
[[Page 13494]]
violations is difficult to reconcile on principle; whether or not the
person responsible for the alleged sales practice violation is a named
respondent or defendant, a sales practice violation has been alleged.
Moreover, this reporting inconsistency raises practical concerns
because naming a firm as the sole respondent in an arbitration claim is
becoming more prevalent in circumstances where the allegations involve
sales practice violation(s) against a registered person.
To address this inconsistent treatment, the proposed rule change
would amend Question 14I on Form U4 and Question 7E on Form U5 to
require the reporting of alleged sales practice violations made by a
customer against persons identified in the body of a civil litigation
complaint or an arbitration claim, even when those persons are not
named as parties. Specifically, the proposed rule change would add
Questions 14I(4) and (5) to Form U4 and Questions 7E(4) and (5) to Form
U5. These questions would in most respects reflect the language of the
corresponding questions regarding alleged sales practice violations of
persons identified in consumer complaints (i.e., Questions 14I(2) and
(3) in Form U4 and Questions 7E(2) and (3) in Form U5).\18\ The
proposed new questions would apply only to arbitration claims or civil
litigation filed on or after the effective date of the proposed rule
change; applicants and firms would not be required to answer Questions
14I(4) or (5) on Form U4 or Questions 7E(4) or (5) on Form U5 with
respect to arbitration claims or civil litigation filed before the
effective date of the proposed rule change.
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\18\ For text of the proposed rule changes to Forms U4 and U5,
see Exhibits 3a and 3c, respectively.
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A ``yes'' answer to newly proposed Questions 14I(4) or 14I(5) in
Form U4 or Questions 7E(4) or 7E(5) in Form U5 would indicate that the
applicant or registered person, though not named as a respondent/
defendant in a customer-initiated arbitration or civil lawsuit, was
either named in or could be reasonably identified from the body of the
arbitration claim or civil litigation as a registered person who was
involved in one or more of the alleged sales practice violations. A
firm would be required to report a ``yes'' answer only after it has
made a good faith determination after a reasonable investigation that
the alleged sales practice violation(s) involved the registered
person.\19\
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\19\ In this regard, the proposed rule change also would amend
the Instructions to the Forms, noting that the revised questions
should be answered ``yes'' if the individual was not named as a
respondent/defendant but (1) the Statement of Claim or Complaint
specifically mentions the individual by name and alleges the
individual was involved in one or more sales practice violations or
(2) the Statement of Claim or Complaint does not mention the
individual by name but the firm has made a good faith determination
that the sales practice violation(s) alleged involves one or more
particular individuals.
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As a result of the proposed rule change, alleged sales practice
violations made by a customer against persons identified in the body of
a civil litigation complaint or arbitration claim (as described above)
would be treated the same way that customer complaints are currently
treated in the Uniform Forms.\20\ For example, such matters would be
required to be reported no later than 30 days after receipt by the
firm. In addition, as is currently the practice with respect to
customer complaints reported to the CRD system, registered persons
would have an opportunity to provide context on the reported matter on
Form U4; persons not currently registered with a FINRA member firm, but
who were registered within the previous two years, would be afforded an
opportunity to provide context on the reported matter through a Broker
Comment.\21\ Such matters would be disclosed through BrokerCheck
consistent with FINRA Rule 8312. To the extent such a matter becomes
non-reportable (if, for example, the arbitration or litigation is
dismissed and the dismissal is not part of a settlement, or it is
settled for less than the monetary threshold designated on Form U4), it
would, like other customer complaints that become non-reportable, be
eligible for disclosure through BrokerCheck as a ``Historic
Complaint,'' provided it meets certain criteria.\22\ FINRA will
consider whether, as a result of the proposed rule change,
corresponding changes to the reporting requirements currently found in
NASD Rule 3070 and Incorporated NYSE Rule 351 would be warranted.\23\
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\20\ The proposed rule change would make corresponding changes
to Customer Complaint/Arbitration/Civil Litigation DRPs to reflect
the changes discussed above. See Exhibit 3b. These changes would
include, e.g., eliciting specifically whether, in the case of an
arbitration or litigation, the individual was named as a respondent
or defendant. Furthermore, the DRPs would require the alleged
damages and disposition for matters in which sales practice
violations are alleged against an individual who was not named in an
arbitration or litigation.
\21\ Individuals who currently are registered with FINRA, are
associated with a member firm, and who wish to provide an update or
context to information that is disclosed through BrokerCheck are
required to file an amended Form U4. Individuals who are no longer
registered with FINRA, but who have been FINRA-registered within the
last two years (and thus about whom information is available through
BrokerCheck pursuant to Rule 8312) may not provide an update or
context to an event via the Form U4. Instead, such individuals may
submit a Broker Comment to provide an update or context to
information that is disclosed through BrokerCheck.
\22\ See FINRA Rule 8312(b)(7), and proposed conforming
revisions discussed infra in this rule filing.
\23\ FINRA has proposed replacing NASD Rule 3070 and
Incorporated NYSE Rule 351 with a single rule, proposed FINRA Rule
4530, in the Consolidated FINRA Rulebook. See Regulatory Notice 08-
71 (November 2008).
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Proposed Revisions To Clarify the Manner in Which Individuals and Firms
Must Report Sales Practice Violations Alleged Against Registered
Persons
The proposed rule change would make additional revisions to
Questions 14I on Form U4 and 7E on Form U5 to further clarify the
manner in which individuals and firms must report allegations of sales
practice violations against registered persons made through arbitration
or civil litigation or through consumer-initiated complaints.
Question 14I on Form U4 currently elicits information about
allegations of sales practice violations for individuals who were named
in arbitration or civil litigation (in Question 14I(1)) and for
individuals who were the subject of consumer-initiated complaints (in
Questions 14I(2) and (3)). Questions 14I(2) and (3) elicit information
for consumer-initiated complaints ``not otherwise reported under
Question 14I(1).'' \24\ Similarly, Question 7E on Form U5 currently
elicits information about allegations of sales practice violations for
individuals who were named in arbitration or civil litigation (in
Question 7E(1)) and for individuals who were the subject of consumer-
initiated complaints ``not otherwise reported under Question 7(E)(1)''
(in Questions 7(E)(2) and (3)).\25\ To clarify the methods of reporting
allegations of sales practice violations, the rule proposal would
eliminate as unnecessary the references to Question 14I(1) in Questions
14I(2) and (3) on Form U4 and the references to Question 7E(1) in
Questions 7(E)(2) and (3).\26\
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\24\ See Exhibit 3a.
\25\ See Exhibit 3c.
\26\ Question 14I(2) in Form U4 and Question 7E(2) in Form U5
would also add the words ``written or oral'' to describe an
investment-related, consumer-initiated complaint, to reflect FINRA's
longstanding interpretation that, for purposes of this question, a
consumer-initiated complaint can be in either written or oral
format. In addition, the Customer Complaint/Arbitration/Civil
Litigation DRPs would elicit whether a complaint is oral or written.
The references in Question 14I(3) of Form U4 and Question 7E(2) of
Form U5 to ``written complaint'' would remain unchanged.
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[[Page 13495]]
Proposed Revisions To Raise the Monetary Threshold for Reporting
Customer Complaints, Arbitrations or Litigation From $10,000 to $15,000
on the Forms and Conforming Change to FINRA Rule 8312
Currently, Question 14I(1)(c) on the Form U4 and Question 7E(1)(c)
on the Form U5 require consumer-initiated arbitration or litigation to
be reported only when they have been settled for $10,000 or more.
Similarly, Question 14I(2) on Form U4 and Question 7E(2) on Form U5
require customer complaints to be reported only when they have been
settled for $10,000 or more. Recognizing that the monetary threshold
for settlements of customer complaints, arbitrations or litigation was
set in 1998 \27\ and has never been adjusted for inflation, the
proposed rule change would raise the existing settlement amount to
$15,000 to reflect more accurately the business criteria (including the
cost of litigation) firms consider when deciding to settle claims. This
change would be reflected in the Forms, including in Question 14I on
Form U4 and Question 7E on Form U5 as discussed supra.
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\27\ See, e.g., Securities Exchange Act Release No. 39562
(January 20, 1998), 63 FR 3942 (January 27, 1998); Special NASD
Notice to Members 98-27, ``Interim Forms U-4 and U-5 Go Into Effect;
Interim Form BD Also Approved'' (March 1998).
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In addition, the proposed rule change would amend the description
of ``Historic Complaints'' in FINRA Rule 8312 to conform to the revised
monetary threshold for reporting of settlements of customer complaints,
arbitrations or litigation in the Forms. Currently, Historic Complaints
refer to the information last reported on registration forms relating
to customer complaints that are more than two years old and that have
not been settled or adjudicated, and customer complaints, arbitrations
or litigation settled for an amount less than $10,000 and are no longer
reported on a registration form. Under FINRA Rule 8312, FINRA will
release Historic Complaints under BrokerCheck where: (1) Any such
matter became a Historic Complaint on or after March 19, 2007; (2) the
most recent Historic Complaint or currently reported customer
complaint, arbitration or litigation is less than ten years old; and
(3) the person has a total of three or more currently disclosable
regulatory actions, currently reported customer complaints,
arbitrations or litigation, or Historic Complaints (subject to the
limitation that they became a Historic Complaint on or after March 19,
2007), or any combination thereof.
In light of the proposed amendment to raise the monetary threshold
for reporting customer complaints, arbitrations or litigation on the
Forms from $10,000 to $15,000, the proposed rule change would make a
conforming amendment to FINRA Rule 8312 such that Historic Complaints
would include customer complaints, arbitrations or litigation that have
been settled for less than $10,000 prior to the effective date of the
proposed rule change (subject to the limitation that they became a
Historic Complaint on or after March 19, 2007), or settled for less
than $15,000 on or after the effective date of the proposed rule
change. As a result, FINRA would continue to release through
BrokerCheck those customer complaints, arbitrations or litigation
settled for more than $10,000 but less than $15,000 prior to the
effective date of the proposed rule change. Customer complaints,
arbitrations or litigation settled for less than $15,000 on or after
the effective date of the proposed rule change would be considered
Historic Complaints for purposes of BrokerCheck.
Proposed Revisions To Clarify the Definition of ``Date of Termination''
in Form U5 and To Allow Firms To Amend the ``Date of Termination'' and
``Reason for Termination''
FINRA proposes clarifying revisions to the definition of ``date
terminated'' in Form U5. The current definition provides that the date
terminated means the ``effective date of the 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.'' However, as stated in Article V, Section 3(a) of the
FINRA By-Laws, the authority to declare the effective date of
termination for purposes of FINRA registration resides with FINRA.\28\
As a result, the proposed amendments to Form U5 would clarify that the
date to be provided by a firm in the ``Date of Termination'' field is
the ``date that the firm terminated the individual's association with
the firm in a capacity for which registration is required.'' The
proposed amendments further would clarify that, in the case of full
terminations, the ``Date of Termination'' provided by the firm will
continue to be used by FINRA and other SROs and jurisdictions to
determine whether an individual is required to requalify by examination
or obtain an appropriate waiver upon reassociating with a firm.\29\
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\28\ Similarly, other SROs and jurisdictions generally determine
the effective date of termination of registration for their
purposes.
\29\ FINRA also proposes to clarify that, for partial
terminations, a firm is only required to provide a ``Date of
Termination'' when submitting post-dated termination requests during
the renewal period (i.e., to effect a termination of registration at
year-end). For all other partial terminations, the ``Date of
Termination'' will be an optional field for firms to complete.
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With respect to the ``effective date'' of terminations, the
proposed amendments to the Form U5 would clarify that the SRO/
jurisdiction determines the effective date of termination of
registration. In general, for purposes of retention of jurisdiction by
FINRA,\30\ FINRA considers the effective date of termination to be the
date that the Form U5 is received by CRD (generally the date of filing
of the Form U5 with CRD).\31\
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\30\ Article 5, Section 4 of the FINRA By-Laws provides that
FINRA generally retains initial jurisdiction over a person whose
association with a member has been terminated for purposes of a
complaint under FINRA's rules based upon conduct that commenced
prior to termination for a period of two years after the effective
date of termination of registration.
\31\ FINRA notes that Article 5, Section 3(a) states that
termination of registration shall not take effect so long as any
complaint or action under FINRA's rules is pending against a member
and to which complaint or action such associated person is also a
respondent or so long as any complaint or action is pending against
such person individually under FINRA's rules. See also In re Donald
M. Bickerstaff, 52 S.E.C. 232, 233 (April 17, 1995) (noting that,
absent a pending complaint or an examination in process, termination
of registration became effective upon receipt of the Form U5
termination notice). FINRA further notes that in the case of post-
dated requests for full termination during the renewal period, for
purposes of retention of jurisdiction by FINRA, the effective date
of termination generally will be the (post-dated) date of
termination provided by the firm and not the date that CRD received
the form.
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Currently, firms are explicitly precluded from changing the ``Date
of Termination'' and ``Reason for Termination'' sections of Form U5
absent a court order or an arbitration award that meets certain
criteria. Since 2000, firms have had the ability to add a Registration
Comment (essentially, a note on the terminated person's CRD record) to
report an error in connection with the filing of either the reason for,
or date of, termination. The Registration Comment explains the reason
for the change, but does not amend the original reason for, or date of,
termination.
After reviewing the Registration Comments reported by firms since
2000, FINRA believes that it would be beneficial for firms and
regulators to permit firms to amend the date of, or reason for,
termination because (1) the majority of requests to change a date of,
or reason for, termination are a result of clerical errors made by a
firm; and (2) the inaccurate information originally
[[Page 13496]]
reported currently remains on a person's CRD record unless the person
is able to obtain an arbitration award or a court order directing that
the original entry be expunged or changed.
As a result, the proposed rule change would permit a firm to amend
the ``Date of Termination'' and ``Reason for Termination'' fields in a
Form U5 it previously submitted, but would require the firm to provide
a reason for each amendment. To monitor such amendments, including
those reporting terminations for cause, FINRA would notify other
regulators and the broker-dealer with which the person is currently
associated (if the person is associated with another firm) when a date
of termination or reason for termination has been amended. As proposed,
the original date of termination or reason for termination would remain
in the CRD system in form filing history. Importantly, any changes to
the ``Date of Termination'' filed by firms would not affect the manner
in which FINRA determines whether an individual is required to
requalify by examination or obtain an appropriate waiver upon
reassociating with another firm or whether FINRA has retained
jurisdiction over the individual. Rather, FINRA would continue to
determine such periods based on the original ``Date of Termination''
provided by the firm and/or the date that the original filing was
processed by CRD, respectively, as further described above.\32\
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\32\ With respect to the requalification period, FINRA is not
proposing to allow an amended date of termination to systematically
reset the two-year window in CRD. Instead, should an individual be
notified that he or she is required to requalify by examination as a
result of an erroneous date of termination that was subsequently
amended by a firm, the individual would be required to submit a
request for a waiver, and FINRA would consider the amended date of
termination in connection with its review of the request. FINRA does
not expect this situation to occur often; moreover, FINRA would
expect to review such requests in an expeditious manner.
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Proposed Technical and Conforming Changes to the Forms
The proposed rule change would make various technical and
conforming changes to the Forms. These changes are generally intended
to clarify the information elicited by regulators and to facilitate
reporting by firms and regulators. The proposed rule change would
convert certain ``free text'' fields to discrete fields on the DRPs of
Forms U4 and U5. These revisions to the DRPs generally would not change
the information currently elicited, but would change the presentation
of the DRPs.\33\ For example, the DRPs would enable filers to provide
more specific information utilizing pre-established picklists for the
following types of information:
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\33\ As discussed supra, proposed Form U5 Regulatory Action DRP
would add Question 12C that corresponds to proposed Form U4
Questions 14C(6-8) and 14E(5-7). The Forms U4 and U5 Regulatory
Action DRPs would be expanded to ask details with respect to fines
and penalties, including whether the money has been paid, is subject
to a payment plan, or has been waived.
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Product type;
Sanction/disposition; and
Status of the sanction (i.e., whether the sanction remains
in effect at the time of filing).
FINRA anticipates this format would elicit additional details from
respondents at the initial filing stage. This format change would have
attendant benefits. For example, a completeness check would prevent a
firm from submitting a filing without having provided information in
response to the allegations and disposition detail questions which, in
turn, should reduce the need for additional communications between
FINRA staff and firms that occur when DRP filings are incomplete, and
generally should make the filing process more efficient.
The proposed rule change also would add to Section 7 of Form U5
(Disclosure Questions) an optional ``Disclosure Certification
Checkbox'' that would enable firms to affirmatively represent that all
required disclosure for a terminated person has been reported and the
record is current at the time of termination. Checking the checkbox
would allow the firm to bypass the process of re-reviewing a person's
entire disclosure history for purposes of filing Form U5 in situations
in which disclosure is up to date at the time of the person's
termination.
The proposed change would make additional technical changes to the
Forms. For example, it would incorporate the definition of ``found''
from the Form U4 Instructions into the Form U5 instructions. In
addition, it would provide more detailed instructions regarding the
reporting of an internal review (conducted by the firm) to clarify that
employment-related disputes between a registered person and the firm
should not be reported in Question 7B. It would also clarify how an
individual may file comments to an Internal Review DRP (via ``Part II''
of that DRP) to emphasize that the individual's signature is required
(in Section 8 of that DRP).
FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice. FINRA anticipates including the proposed
changes in a software release to the CRD system in the second quarter
of 2009.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\34\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that the proposed rule change is
designed to accomplish these ends by making changes to the Forms that
will address regulatory concerns and to ease, clarify or facilitate
industry reporting requirements. The proposed rule change, among other
things, would enable FINRA and other regulators to identify more
readily those persons subject to a statutory disqualification based on
willful violations. It also would require firms to report allegations
of sales practice violations made in arbitration claims and civil
lawsuits against registered persons who are not named as parties in
those proceedings, thereby eliminating existing inconsistencies
regarding the reporting of alleged sales practice violations by
registered persons.
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\34\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
In April 2008, FINRA staff published Regulatory Notice 08-20
requesting comment on certain of the proposed changes to the Forms.\35\
A copy of the Regulatory Notice is attached as Exhibit 2a. The comment
period ended on May 27, 2008. FINRA received 36 comments
[[Page 13497]]
in response to the Regulatory Notice.\36\ A list of the commenters in
response to the Regulatory Notice is attached as Exhibit 2b, and copies
of the comment letters received in response to the Regulatory Notice
are attached as Exhibit 2c. Commenters generally supported the proposed
changes to the Forms. A summary of the comments relevant to the issues
addressed by the proposed rule change is provided below.
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\35\ Regulatory Notice 08-20 requested comment on revisions to
the Forms regarding reporting of allegations of sale practice
violations against registered persons made in litigations or
arbitrations in which the registered person is not a named party;
raising the monetary threshold for reporting of settlements of
customer complaints, arbitrations and litigations; enabling firms to
amend the date of and reason for termination on the Form U5; and
certain of the technical and conforming changes. It did not request
comment on the proposed rule change regarding willful violations,
nor to the proposed conforming change to FINRA Rule 8312. See
Exhibit 2a.
\36\ See Exhibits 2b and 2c.
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(a) Proposed Revisions To Elicit Reporting of Allegations of Sales
Practice Violations Against Registered Persons Made in Arbitrations or
Litigation in Which the Registered Person Is Not a Named Party
Thirty-four commenters commented on the proposal regarding
eliciting reporting of allegations of sales practice violations against
registered persons made in litigation or arbitrations in which the
registered person is not named as a party.\37\ The majority of
commenters (26) supported or did not oppose this proposed change; \38\
a minority (7) opposed it.\39\ One commenter supported the part of the
proposal that would require firms to report allegations made in an
arbitration claim where a registered person is identified by name (in
the Statement of Claim text) but did not support such reporting where
the registered person is not identified by name.\40\ Generally,
commenters supporting the proposal stated that allegations of sales
practice violations made in arbitration claims were no different than
those made in written customer complaints, and therefore should be
treated the same for reporting purposes.\41\ Many of the same
commenters viewed the proposal as ``closing a loophole,'' and noted
that investors would benefit by having this type of information
publicly available.\42\
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\37\ Aidikoff; ARM; Bakhtiari; Brecek & Young; Brown & Brown;
Cantella; Caruso; FMSBonds; FSI; Greene/Woodforest; Gross/Pace;
Harrison; Jacobson/Cornell; Lazaro/St. John's; Lipner/Baruch;
MassMutual; MWA; NASAA; Nationwide; Nelson; NPB; NPH; Penson; PIABA;
ProEquities; RND; Sadler; SIFMA; Steiner; Stephens; R. Long/
Wachovia; P. Spitzer/Wachovia; Williams/Woodforest; WSA. The
Commission notes that Cambridge also commented on this section.
\38\ Aidikoff; Bakhtiari; Brecek & Young; Cantella; Caruso;
Gross/Pace; Harrison; Jacobson/Cornell; Lazaro/St. John's; Lipner/
Baruch; Mass Mutual; NASAA; Nationwide; NPB; NPH; Penson; PIABA;
RND; Sadler; SIFMA; Stephens; Steiner; P. Spitzer/Wachovia; WSA.
\39\ Brown & Brown; FMSBonds; FSI; MWA; Nelson; ProEquities; R.
Long/Wachovia.
\40\ ARM.
\41\ Aidikoff; Bakhtiari; Caruso; Gross/Pace; Harrison;
Jacobson/Cornell; Lazaro/St. John's; Lipner/Baruch; Sadler; Steiner;
Stephens.
\42\ Aidikoff; Bakhtiari; Caruso; Gross/Pace; Harrison;
Jacobson/Cornell; Lazaro/St. John's; Lipner/Baruch; PIABA; Steiner.
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The commenters opposing the proposed changes generally raised
concerns about fairness to registered persons regarding potential
damage to their reputations from the reporting of unadjudicated
allegations, and possible lack of a meaningful opportunity to respond
to such allegations.\43\ While FINRA appreciates the concerns raised
regarding the potential harm to a registered person's reputation based
on allegations of sales practice violations made in an arbitration
claim, FINRA believes that such allegations, which are made in writing
and filed in a formal proceeding, are not appreciably different than
those made in written customer complaints, and may have even more
substance. Accordingly, such allegations should be treated in the same
manner that customer complaints are currently treated in the Uniform
Forms.
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\43\ Brown & Brown; FSI; Greene/Woodforest; MWA; Nelson;
ProEquities; R. Long/Wachovia; Williams/Woodforest.
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Several commenters supported the proposed change, but expressed
concerns about the burden on firms to identify the ``subject of'' the
allegations and whether, and under what circumstances, registered
persons would be afforded an opportunity to remove such matters from
the CRD.\44\ Several commenters expressed concerns about the ability of
firms to discern whether reporting as to a particular person was
required based on the allegations in a claim.\45\ One commenter
supported the reporting of such matters only after there was an
adjudication or settlement in favor of the claimant, but opposed
requiring the reporting of any such matter while it was pending.\46\
The commenter also expressed concerns about a firm's ability to report
the allegations within the 30-day reporting period.\47\ Several
commenters raised questions about other fact-specific scenarios, and
requested that FINRA provide interpretive guidance to assist firms in
determining reporting practices should the proposed questions be
adopted.\48\ In addition, one commenter recommended that, in
conjunction with the proposal, FINRA should consider adopting
reasonable measures to promote responsible pleading.\49\ Specifically,
the commenter suggested that FINRA apprise customer claimants and their
counsel of the significant consequences of making allegations against a
registered person and consider requiring that claimants and their
attorneys attest that, at the time an arbitration claim is filed, there
is a good faith basis for the claims and allegations therein.
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\44\ ARM; Brecek & Young; Mann; MassMutual; NPH; Penson; RND;
SIFMA; R. Long/Wachovia; WSA.
\45\ ARM; Brecek & Young; Cantella; RND; SIFMA; R. Long/
Wachovia; WSA.
\46\ ARM.
\47\ ARM.
\48\ ARM; Brecek & Young; Cantella; MassMutual; NPH; Penson;
ProEquities; RND; SIFMA; R. Long/Wachovia; WSA.
\49\ SIFMA.
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In response to these comments, FINRA has included instructions
regarding reporting, and staff is prepared to develop additional
guidance, if necessary, to assist firms in determining when reporting
is required under the proposed questions. FINRA further notes that
there is an existing process for requesting expungement relief under
NASD Rule 2130. Moreover, while FINRA believes that the existing 30-day
timeframe for reporting is sufficient, FINRA staff intends to work with
firms that may need additional time because of extraordinary
circumstances on a case-by-case basis. With respect to the comment that
FINRA apprise customers and their representatives of the consequences
of making allegations against a registered person, FINRA appreciates
the commenters' concerns but must consider that suggestion in the
context of the potential chilling effect such an action may have on the
filing of legitimate customer claims.\50\ Accordingly, FINRA believes
that it would not be appropriate to implement the suggestion at this
time.
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\50\ SIFMA.
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(b) Proposed Revisions To Raise the Monetary Threshold for Reporting
Customer Complaints, Arbitrations or Litigation From $10,000 to $15,000
on the Forms and Conforming Change to FINRA Rule 8312
Thirteen commenters responded to the proposal to raise the
threshold for reporting of settlements. Nine of the commenters
supported raising the threshold from $10,000 to $15,000 to account for
increased business costs (legal and economic), and to align the
threshold with the reporting requirements in NASD Rule 3070 (Reporting
Requirements).\51\ Of the four commenters who did not support this
proposal, three suggested raising the
[[Page 13498]]
threshold to a higher amount,\52\ and one suggested requiring the
reporting of all settlements regardless of dollar amount.\53\
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\51\ Cambridge; FSI; Gross/Pace; Jacobson/Cornell; Lazaro/St.
John's; NASAA; Nationwide; NPH; ProEquities.
\52\ ARM; R. Long/Wachovia; Williams/Woodforest.
\53\ PIABA.
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FINRA believes that a dollar threshold within the questions is
appropriate to address those instances where matters are settled for a
nuisance value; at the same time, FINRA is not persuaded by the
comments suggesting that an increase to greater than $15,000 is
warranted at this time.
(c) Proposed Revisions to Form U5 To Allow Firms To Amend the ``Reason
for Termination'' and the ``Date of Termination''
Eight commenters responded to the proposal to allow firms to amend
the ``Reason for Termination'' and ``Date of Termination.'' \54\ Six
commenters affirmatively supported this proposal on the basis that it
would result in more accurate information being reported to regulators
and recorded in the CRD system.\55\ Of the two commenters that
generally opposed this proposal, one opposed allowing firms to amend
the Reason for Termination or Date of Termination except in cases of
clerical error.\56\ The other commenter supported allowing changes to
the Date of Termination, but opposed allowing changes to the Reason for
Termination based on a concern about the potential for abuse by
firms.\57\
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\54\ ARM; FSI; Gross/Pace; Jacobson/Cornell; NASAA; Nationwide;
PIABA; ProEquities.
\55\ ARM; FSI; Gross/Pace; NASAA; Nationwide; ProEquities.
\56\ Jacobson/Cornell.
\57\ PIABA.
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FINRA believes that a firm should have the ability to correct
inaccurate information that it filed on a Form U5 regarding
terminations through an amendment to that original Form filing. FINRA
also believes that limiting such changes to clerical errors is
unnecessary in light of: (1) the attendant requirement that firms
provide a reason for the Form U5 amendment; and (2) the monitoring of
such amendments by FINRA and other regulators. FINRA believes that such
monitoring, in particular, will protect against any potential misuse by
firms.
(d) Proposed Technical and Conforming Changes to the Forms
No commenters opposed the proposed technical and conforming changes
to the Forms, and four commenters affirmatively supported them.\58\
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\58\ FSI; Gross/Pace; NASAA; Nationwide.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-FINRA-2009-008 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2009-008. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of the
filing also will be available for inspection and copying at the
principal office of FINRA. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make available publicly. All submissions should refer to File Number
SR-FINRA-2009-008 and should be submitted on or before April 17, 2009.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
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\59\ 17 CFR 200.30-3(a)(12).
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Florence E Harmon,
Deputy Secretary.
[FR Doc. E9-6830 Filed 3-26-09; 8:45 am]
BILLING CODE 8010-01-P