April 16, 2009
I strongly support the portion of the proposed rule which closes the loophole that permits nonreporting of registered representatives who are identified in an arbitration claim, but not named as a party.
I have devoted a significant portion of my practice to the representation of public investors in disputes with brokers and their firms. As such, I rely on the integrity of the CRD system. Unfortunately, the integrity of the CRD system is suspect. To a large degree, this is due to the anomalous rule which this proposal would remedy.
As several commenters have already noted, there are a number of tactical reasons that an attorney representing an investor might choose to forgo naming the individual broker. I am one practitioner who often chooses not to name the individual broker. In most cases, very little is added by naming the representative, as the firm is responsible for the broker's conduct under application of normal rules of agency and respondeat superior.
By contrast, FINRA's arbitration rules contain a very strong disincentive for naming the broker. Under the arbitrator list-selection rules, each separately represented party is entitled to four automatic strikes as to each group of eight arbitrators (public chair, public, and industry). When an investor names both the broker and the firm, and each respondent retains separate counsel, the respondents will have twice as many strikes of potential arbitrators. As the makeup of the arbitration panel is often one of the most dispositive issues in a FINRA arbitration, this provides a huge advantage to the industry respondents when an individual broker is named.
The end result is that there are brokers I have filed nine claims against who have no CRD record. This is inconsistent with the purposes of the CRD system, which are to protect the public and provide useful information to regulators and prospective employers.
It is true that brokers are sometimes wrongly accused. In such an event, the broker is likely to be able to show ultimate success in the arbitration or litigation matter. Moreover, a broker is always permitted to tell his or her side of the story in connection with a U4 or U5 filing.
This rule change is long overdue. Please approve this change as expeditiously as possible.
Scott R. Shewan