April 8, 2008
I write regarding the NASD/FINRA's latest attempt to "fix" the broker expungement problem. FINRA's motivation is meritorious, but once again its method falls short of a good solution.
The decision to expunge is a very serious one, and it should not be considered and decided by decision-makers cut from an arbitrator's (equitable) cloth.
The decision instead should be vested in real regulators, such as the Securities Administrator for the state where the broker works, or by FINRA's National Adjudicatory Council.
Only such entities have the regulatory focus necessary to make this important decision.
In addition, and more important, the SEC and FINRA must address the huge hole that persists in the Public Information system. Under current rules, an arbitration claim brought against a firm that does not also name the individual broker as a Respondent (in the caption)is not considered a written complaint against that broker, and is not reported. That "exception" to reporting exists even if the broker's name appears prominently in the text of the arbitration complaint. Indeed, even if there are ten such arbitration claims, or 100, there will be no reporting of that fact to the public.
Disclosure ought not turn on whether the broker was named separately as a Respondent. Many attorneys, including myself, often do not separately name individual brokers because it is unnecessary (given the rule of Respondeat Superior).
The SEC and FINRA must fix this hole if the system is to produce the disclosure the public deserves.