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Your Permanent Record

The NASD is proposing expanded access to complaints against brokers (whether true or false) and making them available forever.

For years, brokerage clients have had access to their advisors' recent U-4 histories. But if the NASD has its way, investors will soon be able to find out much more. And the agency might get a green light from Congress.

Last December, the NASD announced its Public Information Review Initiative, which would radically change investors' access to information about brokers. Currently, a client can contact the NASD to retrieve past complaints — even unsubstantiated ones — dating back two years.

Should this initiative pass, all complaints will be retained on a permanent record, and any additions to that record will be available via e-mail to investors who sign up for an alert system. In addition, test scores, such as Series 7 grades, would be accessible through the updated NASD system.

Brokers are not pleased with this prospect. Many say that with this bid to look tough the NASD is running roughshod over their interests — and perhaps their rights. “The whole discussion is slanted against the broker,” one broker says. “This doesn't really do a service to the public whatsoever.”

In March, Congress held subcommittee hearings on a bill sponsored by Rep. Rick Renzi (R-AZ). The bill, which proposes to “enhance investor confidence by providing investors with easy online access to complete information about securities firms and their brokers,” not only gives “a registered securities association” (read: the NASD) the authority to employ such an online service — but it also makes it immune to litigation.

For example, if the NASD system provided your client with information that led to his dropping you, the NASD could not be held liable — even if the information provided by the system was erroneous.

Rep. Renzi, who serves on the House Financial Services Committee, says that during the hearings the loudest dissenting opinions concerned immunity. “The bill is meant to capture what the NASD does right now, but in an online conduit,” Renzi says. “What kind of information they provide could still be up for debate.” Renzi argues that the NASD would need protection from lawsuits if it were to efficiently provide the service. The bill, after an early-April markup period, could be up for a vote by the end of the month.

At an early March meeting, called by the NASD and featuring various members of the Securities Industry Association, the essentials of the plan, including the above changes, were laid out, ostensibly for discussion purposes. But a source attending the meeting says NASD presenters implied the adoption of these changes was a matter of when, not if.

“It was presented like this was definitely happening, and that we should prepare ourselves,” says the source. “This wasn't necessarily a matter up for debate.”

Brokers are concerned that if records are not purged of erroneous claims, they could give investors misleading, or inaccurate, impressions about a broker's actual performance.

Another concern: The availability of test scores. If, for example, you passed the Series 7 by one point, your clients will know. But “Series 7 test scores have absolutely nothing to do with whether or not you're a good broker,” one broker says. “That guy down the hall from you, the one who has the small book, I bet he did great on the exams. That means nothing.”

To be sure, the proposal could still change; it is currently in the discussion stage, and the NASD therefore had no comment. Industry insiders also figure that the NASD's proposal won't pass until the protective legislation passed.

“It seems like window dressing, all smoke and no fire,” says Bill Jacobson, a securities lawyer at Jacobson and Assoc. in Providence, R.I. (Jacobson also writes for Registered Rep.) The proposed measure, he says, won't really improve the average investor's ability to identify rogue brokers, he says.

Jacobson also objects to including exam grades. “It's almost childish to think giving exam grades provides any valuable information.”

He also warns that the plan, if enacted, could be used for nefarious purposes. In its current form, for example, a firm upset with a recently departed broker could trigger a complaint against a broker and have it sent out to all his current clients. “In that case, the NASD is just doing its dirty work for them,” Jacobson says.

It's not as far-fetched as it might sound. Renzi says he's aware of such concerns. “We want to make sure that it is not used for vengeful purposes,” he says.

Unsurprisingly, brokers dread the measure. “It's not really doing anything but making it look like everything is the broker's fault,” says one broker.

From personal experience he says he knows that complaints are frequently settled by the firm prior to an investigation or arbitration simply because the resultant legal fees aren't worth it. Still, those settlements stay on a broker's record. If those were more readily available, “It'd cost me clients — and money,” the broker says.

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