April 24, 2008
Dear Ms. Morris:
Please accept this brief comment in support of the proposed revisions to the rule relating to expungement relief.
I am an attorney whose practice focuses on representation of public investors in disputes with their stockbrokers and financial advisors. As such, I am keenly interested in the procedures which govern the FINRA arbitration process--likewise, I am deeply concerned about the accuracy of the information which may be retrieved from the CRD system by members of the public who seek information about their brokers.
Currently, the CRD system is a sham. No user of the CRD system can have any comfort level in the accuracy of CRD information. One of the reasons for this is the unfortunate frequency with which FINRA arbitration panels have issued expungement directives, which need only to be approved by a court to be effective. Many of these expungements have come without serious deliberation on the part of the FINRA panel, and often the public customer has been coerced into agreeing to expungement as a condition to a settlement of their valid claim.
I support this rule change for the simple reason that it is a huge improvement upon the current system. I hope that the rule will be speedily approved.
Having said this, I welcome FINRA's efforts to continue to improve the integrity of the CRD system. For example, the reporting rules have had a gaping loophole, in that brokers who were not named as respondents in FINRA statements of claim were not required to make a report to the CRD. Many claimants' lawyers, for a variety of reasons, name only the brokerage firms as respondents in their cases. In those cases, despite the fact that the individual broker's name appeared dozens of times in the statement of claim as the primary wrongdoer, there is no requirement that the broker or firm make disclosure to the CRD of the complaint against the broker. I am gratified to note that, just today, FINRA has posted a rule proposal to close this loophole. While I have not yet had an opportunity to study the rule, I am hopeful that the rule will address this issue in a manner which will be in the best interests of public investors and other users of the CRD system.
In my opinion, the way for FINRA to restore integrity to the CRD system is by one of two methods: either do away with expungements entirely, or take the decision regarding expungements out of the hands of the arbitrators.
The simplest way to restore the CRD system is to do away with expungements. While many in the industry may complain that this is unfair, I would note that the CRD system permits the person making disclosure to respond to the complaint with his or her own version of the facts. Moreover, the system requires disclosure of the outcome of the arbitration. Where the broker succeeds in the arbitration, or where the claim is dropped without any payment of funds, it would seem that this would have the same effect as an expungement.
If FINRA and the state regulators feel that we should continue to have expungements, I strongly believe that arbitrators should have nothing to do with the decision. Expungements ought to be a matter for those who regulate the industry, not those who decide civil disputes between the industry and its customers. A FINRA panel of arbitrators should not have such regulatory power--just as a panel is limited to making a reference to FINRA for disciplinary action when they see a rule violation, they should be limited to making a reference for consideration of expungement when they think a case was without probable cause. While I express no opinion as to which regulator should have the authority to recommend expungement, I strongly believe it should NOT be the arbitration panel.
The rule change is a positive one, and should be approved. I thank you for this opportunity to comment on the proposed rule.
Scott R. Shewan
Born, Pape Shewan, LLP