IRVINE, Calif. — The Wealth Advisor Institute is calling for reform of the broker-termination-reporting process.
Last month, the Washington-based industry group called on NASD (now part of the New York- and Washington-based
Financial Industry Regulatory Authority Inc.) to make changes in how U-5 termination forms are filed. The forms are used to report details about why a broker left a firm. A registered representative must provide a copy of their U-5 to a new employer.
The WAI was spurred to action by a March decision from New York’s highest court which granted absolute legal immunity for what firms report on the U-5 forms, said Drew McCoy, chairman of the WAI Advisor Council and a Los Angeles-based rep affiliated with Wachovia Securities Financial Network LLC in Richmond, Va.
“We were just appalled,” he said of the decision by the New York State Court of Appeals (InvestmentNews, April 9).
The ruling means that in U-5 defamation cases covered under New York law, brokers cannot recover monetary damages. A California appeals court in 2005 also ruled that an absolute privilege applies to U-5 forms.
“There’s this ‘guilty until proven innocent’ approach” with the filings, Mr. McCoy said. “Advisers can end up getting sold out” by their firms, he said.
In a position paper issued late last month, the WAI outlined five changes it wants in the U-5 reporting process:
• Issuance of a FINRA notice to members “which clearly establishes reporting standards by [firms] in order to ensure ... accuracy of filings.”
• A requirement that brokers be notified of any proposed U-5 language, the basis for the language and a way for reps to challenge the wording.
• Establishment of an impartial review board to review and resolve disputes over U-5 filings.
• Establishment of a “fast track” expungement process to clean up false records.
• Automatic fines for employers that make inaccurate and misleading filings, and reimbursement of legal fees to affected reps.
Herb Perone, spokesman at FINRA, said the WAI’s position paper contains “numerous” inaccuracies.
“It totally overlooks the fact that it is not within [FINRA’s] authority to judge business and employment disputes between registered representatives and their firms; that’s the responsibility of the courts and arbitration panels,” he said.
Mr. Perone added that FINRA reviews broker complaints alleging false or derogatory U-5 filings and also conducts analysis to determine whether particular firms have a history of making false filings. But critics such as Mr. McCoy say that firms are not held accountable for what they report — except by individual brokers who file arbitration claims.
Without accountability, the regulatory goal of providing accurate information is undermined, he said.
Taking on a controversial issue such as U-5 filings is an unusual role for the WAI. The group describes itself as a multidisciplinary organization for a variety of professionals who give financial advice.
Its activities since being formed last summer have focused on professional improvement and strategic alliances with other adviser groups — but not lobbying.
Keith Gregg, its chairman, insists that the WAI is not a lobbying group. “Our two key efforts are advocacy and education,” he said. “When something comes out where the adviser is affected ... we want the view of the adviser to get out.”
The U-5 position paper is “a big step in that [advocacy] direction,” said Mr. Gregg, a principal at Dunham & Associates Investment Counsel Inc. in San Diego.
The WAI also spoke out about the illegal late trading of mutual fund shares, he said. It made it clear that the activity is a firm-level problem, Mr. Gregg said. He acknowledged that the WAI’s position in opposing absolute immunity for regulatory filings is in conflict with other industry groups and some of the organization’s own corporate sponsors.
“We tell [sponsors that] if they’re going to look for us to always be in their camp, don’t give us money,” Mr. Gregg said.
