Suppose that an unhappy investor didn't specifically name you in a lawsuit or arbitration when he complained about your investing advice. You'd think that would get you off the regulatory disclosure hook, right? Think again.

According to the Financial Industry Regulatory Authority's rules, you could still be required to file a disclosure report even if your name is omitted from the caption of respondents (in arbitrations) or defendants (in court proceedings) — and even if you're not identified by name in the complaint.

FINRA requires your member firm to make a good faith determination about whether you were the responsible “unnamed” registered person. If your firm reads between the lines and figures out that it's you, you will likely wind up with a report on your Central Registration Depository (“CRD”) or Form U4.

Consider how one broker recently dealt with this dilemma.

Not in Name Only

In a FINRA arbitration claim filed in July 2009, two customers were unhappy about a recommendation to purchase Fannie Mae preferred stock, and they alleged some five figures in damages against UBS Financial Services. UBS generally denied the allegations. (In the Matter of the Arbitration Between King Credit Shelter Trust, Edwin King, Trustee; Bypass Trust of the Allderdice 1990 Living Trust DTD 9/5/01, Charlene Allderdice, Trustee, Claimants versus UBS Financial Services, Inc., Respondent; FINRA Arbitration 09-04009, Feb. 22, 2011).

On Dec. 21, 2010, the parties settled. All of which brings us to the end of the arbitration but the beginning of a saga for an unnamed registered party, UBS stockbroker Daryl R. Faris, who had to disclose the entire mess to FINRA and CRD. (Faris left UBS for another FINRA member firm in January 2010.)

In December 2010, UBS requested the expungement of the 2009 FINRA arbitration from Faris's record. A three-member FINRA arbitration panel conducted hearings on that request in January 2011. The clients who brought the complaint did not attend the expungement hearings and did not oppose the request.

The hearing ended well for Faris. The majority of the three-member FINRA arbitration panel found that Faris acted properly with his clients, Edwin King and Charlene Allderdice, and they recommended the expungement. Although the clients claimed to be unsophisticated investors, the majority believed this to be inaccurate, in part because UBS documentation indicated that King had 25 years of investment experience.

Similarly, the majority believed Faris's testimony that he recommended against the Fannie Mae preferred purchase because he deemed it risky and overly aggressive. Faris's explanation was supported by the fact that he rarely placed other clients in the Fannie Mae preferred.

Finally, the arbitrators noted that Faris was not named in the arbitration, and the clients chose not to participate in the expungement hearings.

A “Reasonable” Dissent?

By one vote, the case could have gone the other way for the broker. The sole dissenting arbitrator found that Faris had presented himself at the in-person hearing as a competent broker and testified with candor. Nevertheless, the dissenter found himself unable to conclude that the clients' allegations were false. In order to reach that conclusion, the dissenter apparently believed that there could be no other reasonable explanations that would support the customers' complaints. For this lone arbitrator, it all came down to yes, but — “yes,” there were many valid points made in Faris's favor, “but” there were many unrefuted alternative explanations that could have raised legitimate questions about the broker's conduct.

Frequently, a client's strategy in omitting the name of a registered person from a complaint caption is to pave the way for a quicker settlement with a deep-pocketed brokerage firm. The theory is that by removing from the equation the individual registered person (who may take things personally), you can expedite settlement. Moreover, the omission may be used as a bargaining chip whereby the client's attorney not-so-subtly reminds the brokerage firm of the value in protecting its unnamed stockbroker's reputation (keeping in mind that the initial complaint can often be amended at later dates to add respondents).


Bill Singer is the publisher of and