When we were kids, our teachers would attempt to keep us in line by threatening, “Behave, or this will go on your permanent record.” I used to think there was no such thing — then I started defending registered reps.
All of us have heard horror stories about the National Association of Securities Dealers and its Central Registration Depository (CRD) system, the Web-based log where complaints by investors are recorded. Naturally, the CRD has to have integrity, and the securities industry certainly must not allow brokers unfettered access to remove client complaints they find inconvenient. But, in its zeal to control the ability of customers and brokers to negotiate complaints off U-4s as part of a legal settlement, the National Association of Securities Dealers Regulation Inc. (NASDR), which oversees the CRD system, is going too far. NASDR intends to limit expungements to complaints that are either factually wrong or defamatory.
The NASDR's expungement proposals are a bad idea because no one has demonstrated that there is anything even remotely resembling a problem in this area. Not only are there no persuasive statistics, but the regulators also fail to fully recognize that customers routinely concoct complaints against registered reps and broker/dealers in an effort to force a cash payment. Sometimes the so-called victims are also victimizers.
I recently counseled a former compliance director who was wrongly named in an NASD public customer arbitration. An NASD arbitration panel awarded more than $250,000 against him in default — even though he had quit the broker/dealer six months before the account was opened and any transaction occurred. Why? Because the NASD failed to serve him at his addresses of record, and so he didn't show up to defend himself.
After my client desperately contacted the claimant's lawyer about the Kafkaesque situation, that attorney voluntarily submitted an affidavit to the arbitration panel requesting that the complaint against my client be dropped, and asked that all associated damages and penalties also be withdrawn. Upon receipt of the affidavit, the panel dismissed the case, reversed the fees and recommended that the complaint be expunged from my client's U-4. That wasn't the end, however. Both the NASD and the CRD refused to expunge the information without a court order. My client could not afford the legal fees necessary to obtain the court order, and the NASD would not pay, either. His record remains blemished.
I agree with the Securities Industry Association (SIA), which warns that the CRD system widely disseminates unproven and unscreened allegations (including claims that are frivolous and factually incorrect). Claimants often trump up their complaints by naming everyone who ever worked at a broker/dealer and by alleging every possible form of misconduct, and, boom, it's on your U-4, U-5 and CRD. Ever try to switch brokerages with such a record? You are radioactive. And see what happens when you tell your prospective employer that you were named by mistake. Their response is: Call us when the case is settled or you win.
Bureaucracies love to identify nonexistent problems and propose complex solutions that defy common sense. This appears to be a perfect example of such illogic. Can't we simply create a panel of one state regulator, one NASDR regulator and an industry participant and allow them to consider requests for CRD expungement? If they deny the appeal, then the respondent could proceed to the courts. Draft whatever expungement definitions are appropriate, but recognize that employees don't have unlimited financial resources for costly appeals — particularly in these difficult times.
Bill Singer is a partner in the law firm of Singer Frumento LLP. singerfru.com