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Debunking Arbitration Rules

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I've always thought that brokerage firms were required to report arbitrations filed against them. However, when I looked up my prior employer to see if it had reported a large case that it recently settled, I didn't see it. Can you clarify?

— N.B., Florida

The notion that brokerage firms must report arbitration actions is an urban legend. In reality, brokerage firms must report arbitrations on the U4 or U5 forms of individual representatives if they are named in an arbitration claim or are merely "the subject of" one. But the Form BD contains no such question.

Brokerage firms are required to report civil litigation proceedings (that is, court actions), but the only way an arbitration is "reported" on a firm's CRD report is via the link between FINRA's arbitration department and the CRD database. In fact, brokerage firms' CRD reports specifically say that they "are not required to report arbitration claims filed against them by customers; however, BrokerCheck provides summary information regarding FINRA arbitration awards involving securities and commodities disputes between public customers and FINRA-registered firms.... The full text of arbitration awards issued by FINRA is available at www.finra.org/awardsonline."

So the only arbitration information that will show up on a firm's CRD report is final arbitration awards. Settlements or complaints that haven't gone to a final decision won't appear on the firm's report, although they will show up on the individual representatives' reports.

We lease space in an executive office suite in another city in case we need to meet with a client there. We do this as a convenience for clients so they won't have to travel nearly an hour to meet at our main office. We use this office to meet with only one or two clients once or twice during the year. Do we need to list it as a branch office?

— K.P., Wisconsin

Wisconsin defines a "branch office" as synonymous with "place of business." "Place of business" is defined as an office where you "regularly provide brokerage or investment advice or solicit, meet with, or otherwise communicate with clients" or any other location that is "held out to the general public" as such a place.

While there is no definition in the statute of the word "regularly," the real question is one of grammatical construction. This is where nonlawyers tend to get frustrated with lawyers. The question is: Does the word "regularly" modify the entire construction or just the first part? In other words, could a regulator say that any meeting with clients at that location makes it a branch, or would it be classified as such only if you "regularly" meet with clients or communicate with them from that location?

My concern would be that a regulator could take the position that "regularly" modifies only the first part of the sentence and that the second part of the phrase ("meets with, or otherwise communicates with clients") stands alone. If one were to take that position, could a meeting in, say, a coffee shop make that coffee shop a "branch"? Common sense would seem to say no, but what if you "regularly" meet with clients at that coffee shop? Viewed in that light, the word "regularly" would be seen as modifying the entire phrase.

But that brings us back to what is meant by "regularly" in the first place. How often would the meetings have to be, and how many clients would you have to meet, for those meetings to be called "regular"? One client once a month? Ten clients every quarter? The safe bet would be to report the office as a branch, but if you choose not to, make sure you can defend your position if an examiner disagrees.

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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.

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