NASD tackles thorny broker issue

Seeks details on firms' complaint disclosures

Feb 2, 2004 @ 12:01 am

By Bruce Kelly

NASD regulators have been digging deeper and deeper into one of the brokerage industry's most sensitive issues: how a firm discloses customer complaints about its brokers.

Over the past couple of years, NASD has created an exclusive group to look at how broker-dealers file certain disclosure documents, known in the industry as 3070s. That is shorthand for NASD Rule 3070, which requires firms to file reports for a range of specific disclosure events.

Last September, the Washington-based self-regulatory organization put an unknown number of its broker-dealer members on notice for not properly filing some of the disclosure documents. That came after NASD had conducted a seven-month review of members that focused on firms' filing of customer complaints and whether firms had made required amendments to a broker's public record, called Forms U4 and U5.

The nature of customer complaints is one of the touchiest issues in the brokerage industry, particularly following the market's three-year meltdown, which began in 2000. Since then, many brokerage executives and brokers themselves have lived in fear of their permanent records' being tattooed with customer complaints, both legitimate and frivolous.

Securities attorneys and brokerage compliance executives say that NASD regulators are focusing on one key issue: the connection between a firm's initial 3070 filing and the later public record of those complaints.

A potential outcome of NASD's effort to track the complaints could be to "broaden the scope of disclosure information that the NASD makes public," said Terry L. Lister, an attorney in Kansas City, Mo., with Chicago-based Sonnenschein Nath & Rosenthal LLP.

"The 3070 system tracks, basically, any written customer complaint, while the U4 has fairly strict perquisites to what's reported," he said. "You capture a lot of things on a 3070 you wouldn't capture on a U4."

NASD set up the 3070 filing system in 1995 to track the nature of customer complaints about brokers. Brok

er-dealers must report complaints about their registered representatives within two time frames: quarterly, or 10 days for serious "disclosure events" such as an alleged theft.

Mr. Lister, a former NASD attorney, said that disclosure of customer complaints could be moving similarly to that of mutual fund fees, with regulators pushing to make the financial services industry more transparent.

Incorrect information

"Everything is being pushed so fast," he added. "Three years down the road, you don't want to say, `This was a bad idea."'

Compliance executives and securities lawyers say that broker-dealers face two issues concerning the disclosure: Some firms simply don't have adequate systems in place to track the complaints, and compliance executives and senior management often are at odds about when a potential complaint about a broker should be reported.

Some attorneys and brokerage executives complain that the system is outdated and difficult to use.

After last year's NASD review, which ran from January through July, David R. Troutner, the organization's associate director, member regulation, sent some broker-dealer members a letter detailing three instances of concern regarding firms' reporting customer complaints. Many firms hadn't been reporting the correct information, according to the letter.

NASD found that "certain firms failed to file corresponding updates to Forms U4 or U5 in connection with customer complaints alleging sales practice violations and compensatory damages of $5,000 or greater."

Next, the association stated that "it was unable to determine whether certain firms properly filed corresponding updates to forms U4 or U5 in connection with customer complaints alleging sales practice violations, since no dollar amount was reported with the Rule 3070 filing."

Finally, NASD said that "certain firms failed to file corresponding updates to Forms U4 or U5 in connection with arbitration statements of claim alleging sales practice v

iolations that were first served by NASD Dispute Resolution."

No dollar amount

The notified firms had until the end of last September to respond to NASD's concerns.

A spokesman for the association declined to comment about its recent examinations of member firms.

Compliance executives say that one difficulty with the system is that in many initial customer complaints, the clients often don't include a dollar amount.

Some brokerage executives say it is clearly not unreasonable for NASD to match up the U4, which a broker fills out, and the U5, which the firm completes, with the initial customer complaints on the 3070 filing.

Still, the executives complain about the often "ambiguous" nature of customer complaints. Customers often aren't clear as to exactly what they are alleging, the compliance executives say.

In the end, that can lead to confusion. With NASD, "there's a huge amount of misunderstanding of what should and should not go on" the 3070 filing, said one brokerage executive, who asked not to be named.


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