Friday, February 4, 2005

U-5s in the Spotlight Again

Those of us who spend our days representing securities brokers and firms are aware of the recent, and concerning, drive for viligence in U-5 filings. NASD and NYSE audits have been focusing on CRD reporting for well over a year, and a number of firms have been fined for failing to timely update CRD records of their brokers.

Perhaps the most glaring, or public, example of the failure to file issue came last year, when the NASD suspended the ability of three of the country's largest firms from hiring new brokers because of their CRD failure. And to make sure they got everyone's attention, the NASD slapped the three firms with in excess of $4 million in fines.

And they cited and fined another 27 firms $7 million for similar violations.

This apparent widespread failure to update CRD records is obviously a serious issue, and one wonders how so many firms could have gotten it so wrong.

But it now appears that some firms are using the stepped up enforcement efforts, and their own failings, to their advantage. They are using the fines and enforcement efforts to mark up the licenses of departing brokers, claiming that the NASD and the NYSE are forcing them to do so.

On Wall Street magazine has taken up the issue, and in a lengthly analysis of the problem has disclosed an apparently widespread practice by firms to mark up a departing broker's license, using these failure to report complaints as the justification.

The article notes that brokers are fighting back, and confirms that there is a remedy for a false U-5 filing, detailing instances where brokers have recovered damages, and reformation of their U-5s from their firms.

Firms and compliance departments are certainly between a rock and a hard place, risking NASD sanctions if they don't report, and broker arbitrations when they do. Firms need to be viligent and to devote the time to insure that their viligent filings are accurate, and brokers need to know that there is a remedy for the conduct of a "rogue firm."
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