NASD expands broker, firm disciplinary information

IRVINE, Calif. — NASD is expanding the disciplinary information it discloses about brokers and firms.
The changes, implemented in March, are part of a revamped Broker- Check reporting system that delivers reports online in real time.
Previously, users had to wait for delivery via e-mail.
“It’s certainly faster than the old system,” said Alan Foxman, a partner and attorney at Finkelstein Feil & Foxman LLC in Boca Raton, Fla., which also is based in Bay Shore, N.Y.
The changes are the latest in a trend of increasing the amount of regulatory information disclosed to investors.
“There’s absolutely no doubt that increased disclosure is beneficial to investors,” said Jill Gross, director of advocacy at the Pace Investor Rights Project and associate professor at the Pace University School of Law in White Plains, N.Y.
In one of the more controversial changes, Washington-based NASD will disclose extra disciplinary information about “bad boy” brokers. For reps with three or more transgressions that hadn’t historically been disclosed, their entire rap sheets will be made public.
That covers undisclosed items such as unproven complaints that are more than two years old and settlements of less than $10,000.
The “bad boy” disclosures will apply only to disciplinary events that occur after the March 19 effective date of the new NASD rules.
Originally, NASD had proposed disclosing all existing undisclosed items for reps who met the threshold. But after the industry complained that changing the rules was unfair, NASD limited the extra disclosures to incidents that occur after the rule went into effect (InvestmentNews, July 17).
Differences exist between what NASD and state regulators provide, said Mr. Foxman, who represents both investors and brokers against brokerage firms. Some states, Florida among them, provide the entire disclosure database, he said.
Nevertheless, NASD reports sometimes show arbitrations that aren’t on state-provided records, Mr. Foxman said.
“I get both copies. You never know what one [disclosure report] is going to show that the other might not,” Mr. Foxman said.
In another change begun in March, NASD began disclosing some data from U-5 termination forms.
These forms are filed by brokerage firms whenever a registered representative changes dealers or leaves the industry.
NASD won’t disclose U-5 information about an alleged internal review a rep may be subject to or the reason for a termination, but all other details on the U-5 will be disclosed. When reps leave a firm, NASD won’t release their U-5 for 15 days so they have a chance to add their comments.
Previously, certain U-5 information was disclosed only when a rep included the disclosures on a new
U-4 — the industry’s application form — when registering with a new firm.
States historically have provided U-5s under open-records laws, Mr. Foxman said.
Additionally, NASD now provides brokers who have left the industry a chance to explain any disclosure information. These individuals must sign and notarize their version of events and submit it to NASD.
Currently, registered individuals can submit comments via a section on the U-4 form.
Securities firms and individual reps generally don’t like the fact that Wall Street is the only industry that discloses unproven complaints against its professionals.
The redesigned BrokerCheck system now tells users to “please keep in mind that [the disciplinary reports] may include items that involve pending actions or allegations that may be contested and have not been resolved or proven.”
NASD also said in its notice about its new reporting rules that a compilation of information on
broker-dealers, compiled from the Form BD, now will be provided upon written request and the execution of a licensing agreement.
It is unclear what additional information about a firm will be provided.
Regulatory actions and arbitrations against firms already are provided via BrokerCheck.