Notable FINRA Rule Changes

June 2009



There have been several recent amendments to current FINRA rules, which impact broker-dealers and associated persons in the securities industry.  Some amendments are favorable, such as the increase in the threshold for customer complaint reporting, whereas the amendment requiring Form U-4 disclosure for all arbitrations and civil actions, even when the broker has not been named will negatively impact brokers.  Regardless of its impact, the following rule changes are important and our clients should be aware of them.


Changes to Forms U-4 and U-5


The Securities and Exchange Commission (SEC) recently approved amendments proposed by the Financial Industry Regulatory Authority (FINRA) to Forms U-4 and U-5 (the Forms) that went into effect on May 18, 2009.


A Form U-4 (Uniform Application for Securities Industry Registration or Transfer) is used by representatives of broker-dealers and investment advisors to register with state securities departments and with self-regulatory organizations, such as FINRA.  A Form U-5 (Uniform Termination Notice for Securities Industry Registration) must be filed by an employer/broker-dealer with FINRA within thirty days of the registered representative's termination.


The recent amendments make significant changes to disclosure questions required by both of these forms and add new questions regarding certain regulatory actions.  The most prevalent changes are explained below.


Willful violations


Effective May 18, 2009, FINRA added questions to the Forms that enable FINRA and other regulators to query the Central Registration Depository (CRD) system to identify people who are subject to disqualification as a result of a finding of willful violation in a SEC or Commodity Futures Trading Commission regulatory action or by a self-regulatory organization.  Currently, everyone needs to respond to these additional questions and FINRA will allow firms to file provisional "no" answers to the new questions during the 180-day period (May 18, 2009 - November 14, 2009).


If a firm is required to answer "yes" to any part of the new regulatory action disclosure questions, the amended filings must include completed Disclosure Reporting Pages covering the proceedings or action reported.  On November 14, 2009, all answers filed with respect to the new disclosure questions will be finalized.


Arbitrations and civil litigation


Previously, the Forms only required the disclosure of allegations of sales practice violations made against registered persons named in a civil lawsuit or arbitration.  The Forms have now been revised to require firms to report allegations of sales practice violations made against registered persons, even if they are not formally named in a civil lawsuit or arbitration.  Reporting would be required if a registered representative was named in or could reasonably be identified from the body of the arbitration claim or civil litigation as a registered person who was involved in one or more of the alleged sales practice violations.  This rule applies to all arbitrations and lawsuits filed on or after May 18, 2009.


Monetary threshold for reporting complaints


Previously, the monetary threshold for the required disclosure of settlements of customer complaints, arbitrations or litigation was $10,000.00.  Effective May 18, 2009, only settlements in excess of $15,000 must be reported.


Date of and reason for termination


The amendments provide for two changes with respect to the "date of termination" and "reason for termination" fields of the Form U-5.  First, the "date of termination" has been more clearly defined as the "date that the firm terminated the individual's association with the firm in a capacity for which registration is required."  Second, firms may now make amendments to the "date of termination" and "reason for termination" fields in a Form U-5 previously submitted, however, such amendments must be accompanied by explanations for the changes and the original entries will be saved in the CRD system in form filing history.


Explained arbitration decisions


Effective April 13, 2009, FINRA will now require arbitrators to provide an explained decision at the parties' joint request.  An explained decision is a fact-based award stating the general reasons for the arbitrator's decision.  Parties will be required to submit any joint request for an explained decision at least 20 days before the first scheduled hearing date.


Threshold for single arbitrator case


Effective March 30, 2009, the threshold for appointing a single chair-qualified arbitrator in a FINRA proceeding has been raised from $25,000 to $100,000.  Thus, if a claim is between $25,000 and $100,000, a single arbitrator is appointed unless the parties agree in writing to three arbitrators.  Any claim exceeding $100,000 will be heard by a panel of three arbitrators unless the parties agree in writing to one arbitrator.  This change is expected to streamline the dispute resolution process and decrease costs for users of the forum.


Motion to dismiss and eligibility rules


FINRA has adopted two new rules to govern motions to dismiss and also amended the dismissal provisions of Rules 12206 and 13206 which previously governed the time limits on submissions of motions to dismiss.  Although Rules 12206 and 13206 will still be applied to other motions filed in arbitration, they will no longer apply to motions to dismiss.


Under new Rules 12504 and 13504, motions filed before a hearing on the merits, or motions filed during the hearing on the merits but before a party has concluded its case-in-chief, will be referred to as Rule 12504(a) motions.  Motions filed after a party has concluded its case-in-chief will be referred to as Rule 12504(b) motions.  New Rule 12206(b) will govern motions to dismiss based on eligibility grounds and will be referred to as eligibility motions.  These new rules establish procedures that specifically address motions to dismiss such as when and how these motions may be filed, who will decide the motions and what fees and sanctions may be awarded under certain circumstances.  These amendments became effective on February 23, 2009 and apply to motions to dismiss filed on or after this date.


Arbitration submission agreement


Any claim filed after February 9, 2009 will now be subjected to recently approved changes to the Submission Agreement and related rules of the Code of Arbitration Procedure for Customer and Industry Disputes.  Among other changes, FINRA has amended section 2 of the Submission Agreement to permit parties to certify that they or their representatives read the relevant procedures and rules, and that the parties agree to be bound by them.




In an ever changing industry, the SEC has either approved or proposed several amendments to FINRA rules. The above are some of the notable ones, but there are many others.  If you require further information regarding recent rule changes or proposed rule changes, please do not hesitate to contact us.


View more Insights