Recent SEC Regulatory Changes: Content of Forms U4 and U5

January 1, 0001


The SEC recently issued approvals that are of interest to member firms subject to regulation by the Financial Industry Regulatory Authority (“FINRA”). The approvals concern the content of the Form U4 (Uniform Application for Securities Industry Registration or Transfer) and the Form U5 (Uniform Termination Notice for Securities Industry Registration), as well as interference with account transfers in connection with departing registered representatives.

Revised Forms U4 and U5

On May 13, 2009, the SEC approved amendments to Form U4 and Form U5. With certain exceptions, the effective date was May 18, 2009, and the revised forms are currently implemented in the Central Registration Depository System (“CRD System”).

Revisions Regarding Reporting of Allegations of Sales Practice Violations Against a Registered Person When the Registered Person Is Not a Named Party

Previously, Forms U4 and U5 required member firms to report allegations of sales practice violations that were made against a registered person in a civil lawsuit or arbitration only when the registered person was actually a named party. If, for example, the member firm was named as a respondent and the registered representative was only identified in the body of the Statement of Claim, no reporting was required. State securities regulators in particular were concerned that large settlements were occurring without identifying the individuals who were responsible for the alleged misconduct. The recent amendments adopt this line of reasoning and now require the reporting of such allegations – even if the registered person is not named anywhere in the civil lawsuit or Statement of Claim – if the individual can be “reasonably identified” from the text of the civil complaint or claim. These amendments effectively shift the standard from an objective one, to a subjective, judgment-based standard that must be applied on a case by case basis.

The new questions (Questions 14I(4 & 5) on the U4 and Questions 7E(4 & 5) on the U-5) apply to civil actions or arbitrations filed on or after May 18, 2009. Member firms must report such matters no later than 30 days after receipt by the firm, and registered persons will be able to comment on reported matters through the Broker Comment function of the FINRA BrokerCheck system.

Importantly, the amendments also raise the monetary threshold that triggers mandatory reporting of the settlement of civil litigation, arbitration, or customer complaints on or after May 18, 2009, from $10,000 to $15,000. Confirming changes have been made to the definition of “Historic Complaints” for the purposes of settlements that occur on or after May 18, 2009. The old threshold of $10,000 and the old definition of “Historic Complaints” will continue to apply to settlements that occurred prior to May 18, 2009. Note that it is the settlement date, and not the date the complaint, litigation, or arbitration was initiated, that determines which standard and definition applies.

Other Revisions: Willful Violations; “Date of Termination”

The amendments also revise the questions on both Form U4 and Form U5 regarding persons subject to disqualification based upon a finding of a willful violation. Specifically, Questions 14C(6-8) and 14E(5-7) have been added to the Form U4, and Question 12C has been added to the Form U5. These amendments were an attempt to conform FINRA filings with the statutory disqualification definitions contained in section 3(a)(39) of the Securities Exchange Act of 1934.

With respect to Form U4, firms have until November 14, 2009, to amend the forms for all their registered persons. Firms must verify with all registered employees the accuracy and completeness of their U4s in light of the new disclosure questions. In order to facilitate filing negative responses to all of the new disclosure questions, firms will be able to upload a “batch” file of Form U4 amendments for all of their registered persons onto the CRD System. Certain other accommodations to assist in updating Forms U4, such as “provisional no answers” and allowing a member firm to update disclosures without the registered individual’s manual signature, have also been adopted or proposed (see the links below providing additional information). A firm will not be required to amend Forms U5 that previously were filed to answer the new Question 12C.

Lastly, the recent amendments explain that the date to be provided by a firm as the “Date of Termination” on a Form U5 is the “date that the firm terminated the individual’s association with the firm in a capacity for which registration is required.” Further, as of May 18, 2009, a firm may amend the “Date of Termination” and “Reason for Termination” fields on a Form U5 that was previously filed, but the firm must provide a reason for each such amendment. Regulators and the broker-dealer with which the individual is currently associated (if any) will be informed of any such amendments.

Customer Account Transfers

The SEC recently also approved a proposed FINRA rule regarding customer account transfers in the context of disputes with departing brokers. FINRA Rule 2140, which is effective June 15, 2009, states that a member firm or person associated therewith may not interfere with a customer’s request to transfer his or her account when that request occurs in connection with a change in the employment of the customer’s registered representative. The rule provides for a limited exception in circumstances where the account is subject to a lien for monies owed by the customer or other bona fide claims. The rule states that prohibited interferences include, though are not limited to, attempts to obtain a judicial order barring submission, delivery, or acceptance of a customer request to transfer.

The text of this rule was adopted from NASD Interpretive Material 2110-7. Although this principle is not new, the new rule is nonetheless worth mentioning given the recently heightened employee turnover in certain segments of the industry. Former registered representatives often use allegations of interference with account transfers as a leverage tool in negotiations over promissory note repayment, demand letters regarding misappropriation of confidential information, and the like. This new rule will likely aid in such efforts, and underlines the importance of ensuring smooth transitions of customer accounts.

We hope that this information is helpful for our clients. If you have any questions, you can direct them to partner Jeff Kohn in our New York office (212-326-2067 - jkohn@omm.com), partner Fram Virjee in our Los Angeles office (213-430-6045 - fvirjee@omm.com), counsel Adam KohSweeney in our San Francisco office (415-984-8912 - akohsweeney@omm.com), or any O’Melveny labor and employment attorney with whom you regularly speak.

Broker-Dealer Regulation and Compliance Group: Barbara Stettner (202-383-5283 - bstettner@omm.com), Chris Salter (202-383-5371 - csalter@omm.com), and David DeMuro (212-326-2892 - ddemuro@omm.com).

For additional information, you may also wish to check the following resources: