Who Regulates the Regulators?

Badges? We ain't got no badges. We don't need no badges. I don't have to show you any stinking badges. So go the famous lines from The Treasure of the Sierra Madre, the 1948 Humphrey Bogart movie. This might as well be a quote from the NASD these days. In the securities industry, brokers are expected to follow the rules. If you don't, you will be held accountable by the NASD. But what do you do if

Badges? We ain't got no badges. We don't need no badges. I don't have to show you any stinking badges.” So go the famous lines from The Treasure of the Sierra Madre, the 1948 Humphrey Bogart movie. This might as well be a quote from the NASD these days.

In the securities industry, brokers are expected to follow the rules. If you don't, you will be held accountable by the NASD. But what do you do if the NASD doesn't follow the law?

If you are subject to NASD administrative sanctions, such as a suspension or fine, and you feel the NASD has been out of line, you can appeal to the SEC, and from there to the federal Courts of Appeal. Ultimately, some higher authority will decide whether the NASD has acted properly. This review process, while far from perfect, has resulted in an NASD enforcement procedure that does a pretty good job of providing due process to registered persons.

When it comes to the Central Registration Depository system, however, there is no higher authority than the NASD.

The CRD system, as you know, is the broker database maintained by the NASD. Though a limited amount of information is available to the public on the NASD Web site through the NASD Public Disclosure Program, far more extensive information is available to regulators and member firms. Your entire educational, work, regulatory and disciplinary life story is available to member firms at the touch of a button. Prospective employers typically have you sign an authorization for them to pull your CRD before they will get very far in discussions with you. They don't want to waste a lot of effort on a bad apple.

What happens, however, if the information in the CRD system is wrong, causing you to lose a job opportunity or to get a state license delayed or denied? According to the NASD, tough luck.

In litigation brought by brokers seeking compensation for inaccuracies in the CRD system, the NASD takes the position that it has absolute immunity regarding anything concerning the CRD system. That's right, absolute immunity.

The NASD's legal theory is that by maintaining the CRD system, it is fulfilling its regulatory responsibility under the Securities Exchange Act of 1934 and SEC rules. As such, the NASD maintains it is cloaked with the same immunity from a private suit for damages as is the government.

Unfortunately for you, the courts generally have agreed with the NASD. They routinely dismiss suits brought against the NASD based on errors in CRD reporting. When it comes to the CRD system, the NASD doesn't need to show you any stinking badges.

The NASD, of course, is not like the bandits in the movie. The NASD tries to keep CRD data accurate. It is, however, a daunting task. Every year, millions of pieces of information are reported about tens of thousands of registered persons. Even if the percentage of mistakes is low, it's little consolation if you lose a job opportunity because of it.

What does this mean to you? Don't wait until it is too late to verify the accuracy of your CRD. Get a copy of your CRD file and review it carefully. If there are errors, push the NASD to make corrections. If need be, get legal counsel involved. The NASD is responsive if you show that there is a clear error in your CRD.

If your file contains information that is not in error but is damaging, you may be able to seek expungement. An example would be a malicious U-5 submitted by your former firm. As long as the NASD accurately reports what is reported to it, the NASD does not consider the information to be an “error.” So to get such defamatory CRD information expunged, you need to commence an arbitration against the firm and obtain an arbitrator order directing the NASD to expunge the entry. But before the NASD will do so, you need to confirm that arbitration order with a court.

The NASD recently promulgated new rules for expungement of customer dispute information, such as customer complaints. The new rules limit the acceptable grounds for expungement and require that the NASD be notified of any court proceeding seeking expungement. The idea is to prevent customer complaints from being expunged as a routine part of settlements, and thereby allow rogue brokers to keep a clean CRD.

The CRD system can ruin your career. It is up to you to police your own CRD.

Writer's BIO:
William A. Jacobson is an attorney in Providence, R.I., and represents securities industry employees in employment disputes.
wjacobson.com

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