One of my clients filed an arbitration claim against me. I feel that the client's loss is really due to the horrible market correction from September and October of 2008. I believe the investments were suitable for my client and that I gave the client all the relevant information concerning these investments. I thought I did everything right and I'm still getting sued. Is there simply no way for registered reps to protect ourselves from being sued these days?

— C.T., Illinois

In recent months I've received numerous questions like this. As is always the case when there's a major meltdown in the market, there's an increase in arbitration claims. Unfortunately, these days you have practice "defensive advising." What I mean by that is that if you really have provided your clients with all the relevant facts concerning an investment, you simply cannot rely on clients' ability to remember that you told them about the risks when they're facing catastrophic losses. It's important, therefore, to document your conversations regarding suitability and risks. Frankly, I think brokerage firms should do more to ensure that such conversations are not only conducted, but fully documented as well. While so-called "broker's notes" can be subject to allegations of falsification, one way to counter such allegations is by using software that places an automatic date stamp on each note so there is evidence to show the note was made contemporaneously with the conversation. Even better would be a memo or letter (or even an e-mail) to the client detailing the subject of the conversation. Additionally, so-called "fact sheets" and other risk disclosure statements and portfolio analyses/recommendations should provide a space for the customer's signature. One problem I note is the use of overly optimistic projections or other marketing material that shows clients hypothetical returns but which fail to show, specifically, what might happen during a sustained downturn or major market correction. While it may be accurate to say that an investment had an "average" return of 5% (for example) over a 10-year period, the fact remains that people panic during sustained bear markets and they need to know (before they purchase) that the investment could drop in value for a substantial period of time. Even with all the disclaimers about "past performance not guaranteeing future returns" many people are shocked when an investment they believed would "always" rise in value suddenly drops substantially and the industry should do a better job of showing that possibility to investors.

A client of mine filed an arbitration action against my firm but did not name me as a respondent although I'm mentioned as the claimant's broker in the complaint. My branch manager said I have to report this and says he'll have to file an Amended U4. Is he right?

— M.F., Florida

I answered an almost identical question to this back in November 2008. At that time, I reported that FINRA had proposed revisions to question 14I(1) on the Form U4 and to question 7e on Form U5 that would require reporting allegations of sales practice violations made against registered persons in a civil lawsuit or arbitration where the registered person was not a named party. As of May 18, 2009 the SEC approved the proposed change to the U4 and U5 forms. The approval was noted in Notice to Members 09-23. Consequently, firms are now required to report on a registered person's Form U4 or U5 that a customer has alleged a sales practice violation against such person in the body of a lawsuit or arbitration claim. The new questions apply only to arbitration claims or civil litigation filed on or after May 18, 2009. Brokers and firms are not required to answer Questions 14I(4) or (5) on Form U4 or Questions 7E(4) or (5) on Form U5 with respect to arbitration claims or civil litigation filed before May 18, 2009.

Alan J. Foxman, ESQ., is an attorney with Fred Chikovsky & Assoc. in Boca Raton, Fla. His comments are not intended to be legal advice.