A customer of mine filed an arbitration action against my firm. Although I wasn't a party to the lawsuit, I now have to report it on my U4 because my name was mentioned in the complaint. The customer wound up losing the case, and I'd like to get this removed from my record. I've been told that since I wasn't technically a party to the lawsuit, there's no way to get this off my record. Can you help?

— T.W., New York

In May 2009, the SEC approved revisions to the Form U4, which now requires reporting allegations of sales practices violations against registered persons even where the registered person is not a named party. (See FINRA Notice to Members 09-23). Formerly, firms were not required to report an alleged sales practice violation against a broker unless he or she had also been named as a defendant or respondent in the lawsuit or arbitration (as opposed to merely being named in the body of the complaint). As you've learned, the problem with this is that, unless your brokerage firm wants to continue fighting on your behalf, there is no way for you to intercede and seek judicial or arbitral relief. Only the actual parties to a case can ask for relief from the arbitrators or judge. However, last April FINRA requested comment on some proposed new expungement procedures for reps in your situation. It's anticipated that FINRA will finalize these procedures soon and provide some mechanism for reps in your situation to get some relief. (See FINRA Notice to Members 12-18.)


In addition to having my Series 7, I also have an insurance license. Awhile back, I recommended that a client of mine purchase some life insurance. He originally told me that he didn't have any life insurance. As it turns out, he did have a rather substantial policy through his employer as part of his retirement package. My client sold a significant part of his securities portfolio, unbeknownst to me, to pay for the insurance I recommended. Had he asked me, I would not have recommended he sell his investments to fund the insurance, especially if I'd known he already had a policy. He's now making noises about my "unsuitable recommendations." What do you think my exposure is?

— H.B., Illinois

In November 2010, the SEC approved the new FINRA suitability rule, Rule 2111, which became effective on July 9, 2012. In December 2012, FINRA issued Notice to Members 12-55, which provided additional guidance on the rule. More specifically, NTM 12-55 says that the new suitability rule covers recommendations of investment strategies involving both securities and nonsecurity investments. However, when your recommendation does not refer to a security, the suitability rule is not applicable. NTM 12-55 says that the "rule would not apply, for instance, if a registered representative recommends a nonsecurity investment as part of an outside business activity and the customer separately decides on his or her own to liquidate securities positions and apply the proceeds toward the recommended nonsecurity investment." Essentially, FINRA is saying that if you recommend a nonsecurity insurance product, you have no suitability obligation to the client. But if the client asks you what securities to sell to fund the purchase, then you do have a suitability obligation, but only as to the recommendations regarding the sales of the securities. While in this particular instance I come down squarely on your side, since the client didn't tell you about the other policy he had, I don't think the typical client in these situations can be expected to split hairs the way that FINRA does. I think these sorts of circumstances argue in favor of a fiduciary standard applicable to broker-dealers and registered reps.

Alan J. Foxman is an attorney with the law offices of Rita G. Dew, P.A.
and a senior consultant with National Compliance Services, Inc.
in Delray Beach, Fla. He can be contacted at: 
this email address.