WealthManagement Magazine

Double Secret Probation

No doubt many of you have seen the movie "Animal House." It was a cult classic in the 1980s, especially for college-age people. There was a funny scene in the movie in which the dean of the college and the mayor of the town were conspiring on how to rid themselves of the "Animal House" fraternity.To the best of my recollection, the concerned mayor asked the dean, "How are we going to get rid of these

No doubt many of you have seen the movie "Animal House." It was a cult classic in the 1980s, especially for college-age people. There was a funny scene in the movie in which the dean of the college and the mayor of the town were conspiring on how to rid themselves of the "Animal House" fraternity.

To the best of my recollection, the concerned mayor asked the dean, "How are we going to get rid of these animals?" The dean replied, "Don't worry, I'm putting this fraternity on double secret probation." When John Belushi and the boys found out about the probation, their solution, of course, was to put on the infamous toga party.

What does this scene have to do with brokers? Well, like the frat boys, you all have the potential to be put on "double secret probation." How so? You probably read in this publication that a new comment function was added to the NASDR's Web Central Registration Depository (CRD) system. If you didn't see the article, here's the skinny: Broker/ dealers can now post comments about you on the CRD at their discretion, and can also delete them at will - according to their guidelines.

The trouble is most brokers don't know the "double secret" system even exists. Theoretically, the comments could be deleted as the broker submits his or her request to see them. Concerned? You should be.

Karen O'Brien, general counsel at the North American Securities Administrators Association, was quoted in the same article. She said, "If you're going to allow brokerage firms to enter comments in a system but they're not going to be checked or vetted, you could have very disparaging things going in there."

Attorney Alan Foxman, chair of the National Association of Investment Professionals' (NAIP) Government Relations Committee, expressed our concern to Mary Schapiro, president of NASDR, on behalf of all registered people in the industry. The following are two key points from Foxman's letter:

- Brokers should have the right to view the comments just as they have the right to view all other information included on their Forms U-4 and U-5. The NASDR says these comments are not part of the broker's record. But the NASDR itself admits some states may consider the comments part of the public CRD record.

- Because firms can delete the comments at will, the risk of potential abuse is great. The NASDR has admonished firms not to abuse this system, but we have too often seen the current system abused with little or no repercussions from regulatory agencies. How will the NASDR monitor the system for abuse? How is a broker to learn of such abuse and prove it?

Indeed, the new comment function represents a form of "double secret probation." While such a system was amusing in the context of a comedy movie, the NAIP's membership does not consider this a laughing matter. Take a look at the other points in Foxman's letter on the NAIP's Web site at www.naip.com.

The NASDR's "double secret probation" for brokers will continue unless investment professionals fight it. The alternative is to have a toga party - something my waistline just will no longer allow.

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