U-5 Reporting - Termination Reasons With a Distinction
I was recently retained to represent a client who was both an insurance agent and a registered representative with a related entity. The client was terminated by the insurance company and the broker-dealer. The U-5 that was filed became a problem.
The broker-dealer disclosed on the U-5 that there were two customer complaints from insurance customers regarding fixed insurance products. While this was true that there were two complaints, I felt (actually, I knew but I was being modest) that the disclosure was improper. I wrote to the company and told them to change things.
The company's lawyer wrote back and advised that he felt that the disclosure was proper under U-5 question question 7E(3)(a), which references U-4 question 14I(3)(A). This is essentially a question about the existence of yet-unreported customer complaints. The insurance company/broker-dealer felt that fixed (as opposed to variable) insurance complaints were reportable. I knew they were not.
The FINRA website held the key. FINRA advises that only complaints concerning a security, variable contract that is subject to regulation under the federal securities laws, or commodity exchange product are reportable . Other complaints are not.
There is one caveat, however. If the complaint relates to fixed insurance and alleges forgery, theft, or misappropriation or conversion of funds or securities, then it is reportable on a U-5. This is a slight, but important, difference.
After being educated in their wayward ways, the broker-dealer agreed to arrange to remove the improper disclosures.
That's the view from The Law Planet, Jupiter, Florida.
