New CRD Tool Offers Potential for Broker-Bashing

"Registration Comment" section allows firms to write and view private notes about reps. A new comment function added to the NASDR's Web CRD system in May is raising concerns about possible abuse. It lets firms post nonpublic information regarding a broker.NASDR guidelines for using the tool explain it as "a mechanism [to] clarify or explain certain unusual circumstances in an individual's registration

"Registration Comment" section allows firms to write and view private notes about reps. A new comment function added to the NASDR's Web CRD system in May is raising concerns about possible abuse. It lets firms post nonpublic information regarding a broker.

NASDR guidelines for using the tool explain it as "a mechanism [to] clarify or explain certain unusual circumstances in an individual's registration history," including inadvertent errors or an "irregularity" in a broker's record.

Even the regulators who created the tool, officially called the "Registration Comment" function, are worried.

"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," says Karen O'Brien, general counsel at the North American Securities Administrators Association (NASAA) in Washington, D.C., which represents state regulators.

The NASDR and NASAA jointly run the CRD.

Firms requested the comment tool. It is considered a temporary measure until disclosure forms such as the U-4 and U-5 can be amended to include an explanatory mechanism.

In the meantime, brokerage firms can post comments about current or former brokers at their discretion and delete them at will, according to the guidelines. All comments are available to all brokerage firm officials who use the Web CRD system, but they are not available to investors, the public or to brokers themselves (unless they ask a firm official for access), says Nancy Condon, an NASDR spokesperson.

It is conceivable that a firm could use the comment tool to secretly communicate details about a broker's termination, for example, and then later delete the information.

In its guidelines, the NASDR warns that the Registration Comment area should not contain "disclosure-related information" that should be on a U-4 or U-5, such as reasons for a broker's termination or a pending investigation. The SRO warns firms about posting "offensive or potentially defamatory language," and says it may revoke a firm's access to the comment area if abused.

Condon refuses to say whether any firms have had their privileges taken away. "We're not going to make that public," she says. O'Brien says she has not seen any signs of abuse among firms. Marie Montagnino, president of the Association of Registration Management, also says she has not witnessed any problems.

"It's a worrisome thing that has so far turned out well," Montagnino says.

While the NASDR says it does not consider the comments part of the broker's permanent file, some state regulators disagree. "When you enter a record into the CRD, that is the state's record," O'Brien says. This fact has raised concerns about states making registration decisions based on the comments firms include about brokers.

Although the NASDR's Web site calls the comment tool "transitional," it will be available until the SRO comes up with an alternative, Condon says. "We're still talking about a permanent change to the form filing. This will be around for a while."

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