Should NASD Regulation adopt a rule or Interpretive Material that would
explicitly articulate NASD Regulation's authority to pursue disciplinary actions
for violations of just and equitable principles of trade against a member or
associated person who seeks to have information about an arbitration claim
expunged after there has been an award rendered against that member by the
arbitrators or seeks to expunge any arbitration award that does not contain an
expungement order and a finding of at least one of the criteria described in the
Notice?
__ Yes _X No __ See my attached written comments
Contact Information
Name: Dan Jamieson
Firm:
Address: 14341 Spa Drive
City Huntington Beach
State/Zip: CA 92647
Phone: 714-891-2278
E-Mail: broker_advocate@hotmail.com
Are you:
__ An NASD Member
X An Investor
__ A Registered Representative
__ Other:
Attached Written Comments
No further rules are needed. The CRD will always be imperfect, and have missing information, perhaps due is some part to lax oversight by regulators regarding adequate disclosures. (For example, the "rogue broker" scandal-a widespread failure to report bad reps; or numerous U-5 defamation scandals and never any enforcement for malicious filings by firms). Now for unknown reasons, NASDR is proposing elaborate news rules. Incredibly, NASDR is even proposing an additional fact finder even when a case is decided in arbitration, and an expungement ordered by those very same panelists. Why hear the facts again? Is NASDR truly so doubtful about the competence of its own justice system? If lack of written awards is the problem, NASDR should stop discouraging such awards.
Regulators might do a better job of enforcing consistent disclosure, and targeting truly bad brokers and firms. Scumbag lawyers and firms that conspire to keep dirty brokers clean can easily be picked up by an alert regulatory community without the need for unneeded [sic] rulemaking.
Sincerely,
Dan Jamieson
***
EXHIBIT B
(Dan Jamieson comment to NTM 02-74)
Dec. 14, 2002
Dan Jamieson
14341 Spa Drive
Huntington Beach, CA 92647
Barbara Z. Sweeney
NASD
Office of the Corporate Secretary
1735 K Street, NW
Washington, DC 20006-1500
Via e-mail at pubcom@nasd.com
Dear Ms. Sweeney:
Thank you for taking comments on NTM 02-74.
The notice says: "NASD currently provides an unparalleled
amount of information about firms, markets and regulation to the
public [and disclosure policy] has been the topic of frequent public attention."
The SRO/state disclosure policy deserves close attention. No other group of employees, no other profession or trade, has the level of disclosure as do registered representatives ("brokers"). Neither Doctors, lawyers nor airline pilots face the same level of scrutiny and invasion of privacy. Adding to brokers' problems is the "easy on, never off" policy regarding CRD data; a first-class stamp is all it takes to tar a broker's public record with an unproven allegation, but a long, costly and risky arbitration/court-ordered expungement process is required to get it off.
Although certainly useful as a possible model for other professions to follow, the level of disclosure required by the securities industry's CRD system has crossed the line and become a serious and harmful invasion of privacy for individuals, including hundreds of thousands of employees and independent contractors. The unchecked, raw data provided about brokers' personal and employment histories could well be unconstitutional.
The NASD must address two basic inequities in the current disclosure system: 1) The disclosure of unproven allegations; 2) The unequal requirements faced by individual brokers vs. firms.
Unproven Allegations
The notice claims to be a thorough review of disclosure policy. However, if this were a serious review on the NASD's part, the association would perform a meaningful study of disclosure regimes used in various professions and trades.
Two quick examples: 1) Under Sarbanes-Oxley, accountants who are under investigation will make no public disclosures until they have been given a chance to shape up, fail at that effort, and then lose their case in a formal disciplinary proceeding. Only then would their public records be affected. 2) The California Contractors State License Board, probably similar to many others, cannot disclose complaints against building contractors until the cases are referred for legal action, and only construction-related civil judgments known to the CSLB are disclosed. Arbitrations are not listed unless the contractor fails to comply with the terms of the arbitration.
A full review of various disclosure regimes is needed because the NASD cannot look out for the interests of its members' employees. The association has clearly shown a history of siding with its member firms, especially in regards to rules affecting associated persons. This bias is an understandable result of self-regulation; it can be mitigated, however, by carefully reviewing how Congress, professions, and states have balanced the need for disclosure with privacy interests of individuals involved in the regulated trade.
Another missing component in this notice is any mention of removing information from the CRD database. Why isn't the NASD reviewing expungement policy as well? While NASD has lowered and continues to propose lower thresholds for raw allegations to be made about registered individuals, the NASD at the same time has made it more difficult to remove spurious data. (The NASD has even proposed inserting itself into the expungement process as a party to a court-ordered expungement order!) The result is an "easy on, never off" policy that is fundamentally unfair.
Firms vs. Brokers: Unequal Disclosures
The notice fails to address another significant problem with the industry's public reporting system: the inequitable disclosure regime enjoyed by member firms. The NASD (and NYSE, under similar rules) already has a wealth of information provided by firms. But much of this information--possibly the most important information--is never disclosed to the public. Yet, most similar disclosure information regarding brokers is publicly disclosed. How can NASD claim to be making a thorough review of disclosure policy and not address this blatant discrepancy? A level playing field between for firms brokers must be put in place at once.
NASD Conduct Rule 3070 requires both associated persons and member firms to disclose to the NASD a long list of information. The relevant sections state that (bold emphasis added):
a) Each member shall promptly report to the Association whenever such member or person associated with the member:
(2) is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery;...
(7) is a defendant or respondent in any securities or commodities-related civil litigation or arbitration which has been disposed of by judgment, award or settlement for an amount exceeding $15,000. However, when the member is the defendant or respondent, then the reporting to the Association shall be required only when such judgment, award, or settlement is for an amount exceeding $25,000.
(8) is the subject of any claim for damages by a customer, broker, or dealer which is settled for an amount exceeding $15,000. However, when the claim for damages is against a member, then the reporting to the Association shall be required only when such claim is settled for an amount exceeding $25,000.
c) Each member shall report to the Association statistical and summary information regarding customer complaints in such detail as the Association shall specify...
Clearly, then, under the rules firms must report certain customer complaints, and all settlements against the firm of $25,000 and against all brokers associated with the firm for $15,000, as well as statistical summary information regarding customer complaints.
Why then, is this information at the firm level not disclosed by the NASD through CRD, just as it is for individual brokers?
Following are specific inequities between what individual brokers must report, versus what member firms must report. These inequities benefit member firms. Because the Exchange Act expressly forbids such discrimination and unfairness, the NASD must immediately address these inequities:
--Settlements: Brokers must publicly report settlements of $10,000 or more. Not only do firms not publicly disclose settlements, they need not bother reporting settlements to regulators until such settlements reach the $25,000 level; or, in the case of their associated persons, the $15,000 level. Why the lack of public disclosure? Why the difference in reporting thresholds? More cases are settled than arbitrated--especially those cases involving egregious conduct by the broker or firm, which are more likely to be settled away from the public eye. The result is that probably the vast majority of cases brought against a firm where the customer is given some compensation are never disclosed on the firm's CRD record. This is a major loophole in the CRD system. Non-disclosure of settlements at the firm level also causes conflicts with brokers who may want to fight a case and preserve a clean record, while the firm could care less because there is no reputational risk for a firm in settling a case.
--Customer complaints: While individual brokers must publicly disclose most customer complaints, and certainly those that allege $5,000 or more in damages, firms do not. Why? And is a full database of customer complaints available, that is, an aggregate total from SEC and state complaint files together with SRO data? If not, why not? The NASD proposes showing aggregate data somehow, so why not show a complete data set?
--Investment-related lawsuits. While individual brokers must report and publicly disclose all investment-related lawsuits, firms report only select suits to regulators but do not publicly report this data. Why don't firms report all suits on Form BD? Why isn't the firm data on suits alleging theft, misappropriation or forgery, which the NASD possesses now, disclosed publicly?
A side note to investment-related lawsuits: In conjunction with the SROs, the Securities Arbitration Commentator newsletter apparently collects arbitration awards from all forums, yet only NASD awards are reported on CRD. Why? Further, SROs actively discourage arbitrators from explaining their decisions, further reducing important disclosure information that could help investors spot problem actors and firms, or help repair the reputation of a party unfairly charged. This non-explanation policy should be changed. After all, the real reason more detail is not given, at least in part, is to give firms more "wiggle room" in how the case gets reported, according to one SRO arbitration official. Why not address these issues in this notice?
--Regulatory investigations vs. proceedings. While individual brokers must report regulatory "investigations," firms must report regulatory inquiries only when those inquiries reach the "proceeding" stage. A proceeding is defined in the Forms BD and U-4 as a more formal stage of an investigation. This higher threshold for firms is unfair. Why are not regulatory investigations against firms publicly reported on the CRD as they are with brokers? Form BD needs to be amended to comport with U-4 requirements.
--Criminal charges. Form BD requires only that firms disclose criminal charges and convictions for the last 10 years. But individual brokers must disclose all criminal charges and convictions and this data is disclosed on the CRD. Why the difference?
--Undue control by the industry. Regulators report disclosure information via the Form U-6, but firms can change the wording prior to the data being posted on CRD, according to one state assistant attorney general. Words like "revocation" or "fraud" are sometimes altered, apparently. The NASD is supposedly looking into tightening up the process. Perhaps that's true, but the process must be open and clear, to ensure the public and brokers that no games are being played when it comes to firms' own disclosures. Since firms have control and access to the disclosure system, and since it is their association that runs it, doubts remain about the fairness of what gets on the system and why.
Because most or all of the above items are already reported in one form or another, disclosing this data will not increase member firms' compliance or reporting obligations.
One would hope that these discrepancies in the disclosure regime are not due to industry influence over the NASD. But clearly, the less-stringent disclosure requirements for firms exist and work to the industry's advantage in keeping a cleaner image and minimizing evidence for private litigation.
Due to all the issues of fairness described above, the current disclosure system violates the 34 Act's requirement for fair dealing, nondiscriminatory treatment and rules that act in the public interest.
Comments on Specifics Within NTM 02-74
--The gateway concept. A gateway should refer consumers to state regulatory authorities for further information and complaints against brokers and dealers. More information about brokers and firms is available from states, and CRD users should be so informed.
--Alerts. NASD should be careful about providing "alerts" regarding CRD data (e.g., an electronic alert for updated data or a certain type of data). Already the level of disclosure of unproven allegations is harmful; an alert system could simply compound this problem.
--Disclosing historical forms. This idea appears to propose that all unproven allegations against brokers, regardless of the date, would be disclosed by NASD to the public. This should not be done. Instead, NASD should reconsider whether disclosure of unproven allegations should be done at all.
--Broker responses. Brokers must have the right to file their own responses to any data onto the CRD. U-6 and U-4 DRP pages should be created.
--Creating summary and aggregate data may not be useful. Comparative information as outlined in the notice would be helpful to the public, however the NASD should first focus on the completeness and integrity of the data. Otherwise, comparisons will be misleading. As the NTM says, "NASD believes more can be done across NASD regulatory systems to ensure data integrity, reduce or eliminate reporting gaps, and ensure that the information is reported quickly. ..." This admission is welcome. It is not hard to find missing data, or erroneous data, on the CRD.
Nevertheless, one never sees any serious punishment for failures to report data. Brokers are generally not trained to report their data-that process is still controlled by member firms. Firms tend to use the system to their own benefit in reporting, or not reporting, disclosable information.
Therefore, NASD should first focus on full and accurate reporting, establish a relevant benchmark with cross checks, then when the data meets an acceptable standard NASD could consider a process of reporting comparative data. Right now, "comparative" information for firms or individuals that have been diligent about reporting, or have even been over-reporting, would look much worse when compared to less-careful firms or brokers. Hardly the right incentive.
--Do not implement the Inactive Disclosure Review. Unless NASD is serious about putting Merrill Lynch, et. al., on inactive status for disclosure failure, the idea would be patently unfair. This idea looks to be targeted at individual brokers, many of whom will unwittingly be put into this new penalty box--unable to serve clients or make a living. Where is the similar penalty box for firms? No such proposal is offered, which seems discriminatory. Once the NASD gets serious about enforcing disclosure rules, the industry will follow. Associated persons should not be used as scapegoats. A website for reporting violations would help, assuming the NASD will dedicate the resources to follow up and ensure compliance. At the same time, NASD should implement an early warning system to firms and brokers who are delinquent in making disclosures.
--U-5 termination information. The notice asks about changing the timing and process for releasing Form U-5 data, to report the data as soon as the information is filed. On the surface, this change would be detrimental to brokers who would not have a chance to review and respond to U-5 filings, which by their very nature are unilateral allegations made by former employers who may have many reasons to blackball their former rep, including financial reasons.
The NASD should give serious consideration to not releasing form U-5 information. The information is one-sided and notoriously unreliable, yet can do great harm to professional reputations. The current termination reporting process is dysfunctional, unfair to associated persons and controlled by member firms, who, on the one hand claim they face huge damage exposure in disclosing problem brokers, but on the other hand continue to use the U-5 to malign disfavored former employees, including whistleblowers. Current policy at least allows some time for the broker to file his or her explanation or denial of U-5 information. While sensitive termination information may be necessary for regulators and firms, policymakers should consider not publicly disclosing this data, at least until it is vetted by a neutral. Few other professions or employees face such public scrutiny of alleged reasons for leaving an employer. Reducing public exposure of this data should also mitigate litigation fears of member firms. However, all termination information should be shared with the affected broker, who must have the right to respond and litigate defamatory material. Hence, NASD should not make the U-5 process any more damaging than it already is, and should consider keeping some or all of this information between regulators, as is done now in the registration and regulator comment sections, or in archived databases on CRD.
As a side note, it is odd that while on the one hand NASD professes to want to expand disclosure of sensitive information relating to individual brokers, at the same time it is providing a way for its members to bury termination information. A two-year old section in the CRD system, the Registration Comments section, allows firms to unofficially change the reason for termination and comment about why a broker was terminated. Although state and federal regulators have online access to the information, the comments section is not a part of the official CRD record and not disclosable through the NASD's public disclosure system, although individual states may disclose the information. What's more, firms can apparently delete or amend their own comments at any time, and the records are not archived unless they're printed and saved while still in the system. It's unclear whether brokers are notified of any registration comments in their records and get a chance to respond, as they can with U-5 information.
Despite these concerns with U-5 reporting, the system is designed to publicly report termination data on currently registered brokers. it seems the height of hypocrisy for NASD to now suggest expanding and alerting the public to raw allegations against brokers, when it has done the exact opposite with termination information.
--Imposition of a late disclosure filing fee. Doesn't such a fine already exist?
Against whom would the new fine be charged? NASD fails to tell us. Remedial training would be a better step before imposing fines. Generally, brokers are given no training on their disclosure obligations. Firms control the filing process. Yet fines will more likely be applied to brokers, rather than firms, so a late filing fine would be unfair.
--Establish a tipster web page. This may not a bad idea, assuming NASD does something with the information. However, NASD knows well that it receives many leads and complaints about missing disclosures and unexecuted expungements. NASD could be much more proactive in ensuring accurate and timely disclosure, with or without a tipster page.
In summary, much about the CRD system is to be commended. No other industry offers such full and accessible disclosure about both firms and individuals in an industry. Truly, the SEC, SROs and state regulators have "set the bar" many notches above any other industry. Yet the bar may be too high and be infringing on privacy rights of individuals; this issue should be addressed in this notice. Likewise, there is no reason to expand the disclosure of unproven allegations against individuals in the brokerage industry, a practice unheard of in any other industry. The NASD also fails to address the inequities at the firm and broker disclosure level. While several of the ideas floated in this notice have merit, the NASD must first address issues of fairness, accuracy and completeness of data in the current system. Ignoring these problems with the current disclosure system exposes the NASD and others to charges of violating the law.
Sincerely,
Dan Jamieson
***
EXHIBIT C
Firms Finagle Public Disclosures
ON WALL STREET
November 1, 2002
While individual brokers must publicly disclose a wealth of disciplinary information, brokerage firms have it much easier.
Take the states' inquiry into analyst conflicts at the major firms: Such an investigation would be reportable at the individual broker level, but not so for firms. That's why none of the firms under investigation by the states have reported the matter on their public records. Until a firm is formally charged, you won't see it disclosed on the Central Registration Depository (CRD) system.
Brokers must also publicly report many settlements. Firms don't. Even though firms report settlements of $25,000 or more to the NASD, that information is not publicly disclosed.
This works to the industry's advantage in keeping a cleaner image because more cases are settled than arbitrated -- especially those cases involving egregious conduct by the broker or firm, which are more likely to be settled away from the public eye. Non-disclosure of settlements at the firm level also causes conflicts with brokers who may want to fight a case and preserve a clean record.
While brokers must publicly report sales-practice complaints from customers that allege $5,000 or more in damages, the same information for firms is not publicly disclosed. Brokerage firms disclose to the NASD customer complaints alleging $15,000 or more in damages, but only regulators see this data.
A similar disparity exists regarding any investment-related civil lawsuits -- brokers must report them, firms do not. And while both brokers and firms must disclose any past criminal charges or convictions, firms only have to disclose these events within the past 10 years.
"The reason for the difference in treatment between firms and individuals is unclear," says Edward Siedle, a former SEC attorney who runs Benchmark Financial Services in Lighthouse Point, Fla., and conducts investigations for institutional money managers. Siedle has created his own database of disclosure information to fill in the gaps.
The SEC declined comment. The NASD did not respond by press time.
Furthermore, intra-industry cases, such as employment claims, are not logged onto the CRD, so there's no way to check a firm for a pattern of employment abuses or see allegations by whistleblowers.
Meanwhile, firms have devised their own way of quietly communicating about brokers. A two-year old section in the CRD system allows firms to unofficially comment about why a broker was terminated. And since firms control much of the disclosure-filing process, they can also control how items get reported.
For example, regulators report disclosure information via the Form U-6, but firms can change the wording prior to the data being posted on CRD, according to Roberta Cross Guns, special assistant attorney general in the Montana state auditor's office in Helena. Words like "revocation" or "fraud" are sometimes altered, she complains, adding that the NASD is supposedly looking into tightening up the process.
The NASD on its public disclosure system shows final NASD arbitrations on the records of both firms and brokers, but arbitrators are discouraged by the SROs from detailing why they ruled the way they did. One reason for this is to give firms more "wiggle room" in how the case gets reported, according to one SRO arbitration official.
And because firms are responsible for filing ongoing disclosures on forms U-4 and U-5, they ultimately control how those disclosures are worded.
"Any issue over reporting is decided to the benefit of the industry," Siedle says, adding that the disclosure system is "riddled with loopholes."
Dan Jamieson
***
EXHIBIT D
Dec. 16, 2002
Dan Jamieson
14341 Spa Drive
Huntington Beach, CA 92647
Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Petition for rulemaking, via regular mail
Dear Mr. Katz:
I hereby petition the SEC to take action to ensure a lawful disclosure regime in the securities industry. This petition is timely because the NASD is now engaged in reviewing its CRD disclosure regime (see NASD NTM 02-74). Yet the NASD and other regulators are ignoring key areas where reform is needed to comply with the '34 Act and possibly other laws.
The NASD's disclosure program is governed by federal law, SEC regulations, and NASD rules approved by the SEC. Other sources of disclosure data may be governed by different rules. Changes required via this petition may be needed in disclosure Forms BD and U-4, the NASD's Information Policy, including IM-8310-2 and any other relevant SRO or SEC rules, interpretations and disclosure forms.
1) I petition the SEC to put a stop to the reporting of unproven allegations against individual brokers; to study other disclosure regimes as to how to appropriately handle allegations; and to ensure an equitable balance between letting information get on the CRD vs. getting it off.
The level of disclosure required by the CRD system has crossed the line and become a serious and harmful invasion of privacy for individuals, including hundreds of thousands of registered employees and independent contractors. The unchecked, raw data provided about associated persons' personal and employment histories could well be unconstitutional. Unproven allegations against individuals and possibly against firms, should not be disclosed, including unproven customer complaints and termination information. This is only fair. No other profession faces such untoward scrutiny. For example, under the Sarbanes-Oxley Act, accountants who are under investigation will make no public disclosures until they have been given a chance to shape up, fail at that effort, and then lose their case in a formal disciplinary proceeding. Only then would their public records be affected. Neither do doctors, attorneys or airline pilots have their reputations tarred by such extensive disclosure, and certainly not by disclosure of unproven allegations. A full review of various disclosure regimes is needed because the NASD cannot look out for the interests of its members' employees. The association has clearly shown a history of siding with its member firms, especially in regards to rules affecting associated persons. This bias is an understandable result of self-regulation; it can be mitigated, however, by the SEC carefully reviewing how Congress, professions and states have balanced the need for disclosure with the privacy interests of individuals involved in the regulated trade, and ensuring that NASD follow disclosure regimes similar to those used in other industries, at least when it comes to reporting raw allegations.
Surely, withholding unproven allegations is appropriate, especially given how difficult it is to get information off the CRD system. While thresholds for disclosing raw allegations have been dropped, at the same time it has become more difficult to remove spurious data. (The NASD has even proposed inserting itself into the expungement process as a party to a court-ordered expungement order!) The result is an "easy on, never off" policy that is fundamentally unfair and in violation of the '34 Act.
2) I petition the SEC to equalize the disclosure regime for firms, making it the same as the regime for brokers.
Under NASD Conduct Rule 3070, firms report to the NASD certain customer complaints, and all settlements against the firm of $25,000 and against all brokers associated with the firm for $15,000, as well as statistical summary information regarding customer complaints. The NYSE requires similar reporting.
Why then, is this information at the firm level not disclosed by the NASD through CRD, just as it is for individual brokers (via the U-4)?
One reason may be that regulators have not thought it important for investors to be informed about the disciplinary history of a firm. Yet history shows this assumption to be false. For example, how many penny stock firms could have existed had a vibrant system of firm-level customer complaint disclosure been in place and enforced? How many investors would have been helped had they seen complaints from investors or from former or current brokers of a firm regarding the firm's suspect research?
Following are specific inequities between what individual brokers must report, versus what member firms must report. These inequities benefit member firms. The Exchange Act expressly forbids such discrimination and unfairness.
--Settlements: Brokers must publicly report settlements of $10,000 or more. Not only do firms not publicly disclose settlements, they need not bother reporting settlements to regulators until such settlements reach the $25,000 level; or, in the case of their associated persons, the $15,000 level. Why the lack of public disclosure for firms? Why the difference in reporting thresholds? More cases are settled than arbitrated--especially those cases involving egregious conduct by the broker or firm, which are more likely to be settled away from the public eye. The result is that probably the vast majority of cases brought against a firm where the customer is given some compensation are never disclosed on the firm's CRD record. This is a major loophole in the CRD system. Non-disclosure of settlements at the firm level also causes conflicts with brokers who may want to fight a case and preserve a clean record, while the firm could care less because there is no reputational risk for a firm in settling a case. Lack of settlement disclosure also helps drive expungement activity, by making it easy for a firm to settle a case when the broker involved is removed from the complaint; when this happens, the public sees no record of the case whatsoever, and the broker, even if a rogue, keeps a clean record and may continue bringing revenue into the firm.
--Customer complaints: While individual brokers must publicly disclose most customer complaints, and certainly those that allege $5,000 or more in damages, firms do not. Why? And is a full database of customer complaints available, that is, an aggregate total from SEC and state complaint files together with SRO data? If not, why not? The NASD proposes showing aggregate data somehow, so why not require it to show a complete complaint data set?
If unproven allegations are to be disclosed, then the SEC must ensure that firms disclose all customer complaints. Ideally, a full set of data would be disclosed.
--Investment-related lawsuits. While individual brokers must report and publicly disclose all investment-related lawsuits, firms report only select suits to regulators but do not publicly report this data. Why don't firms report all suits on Form BD? At a minimum firms should publicly disclose suits alleging theft, misappropriation or forgery-data the NASD possesses now. If unproven allegations are to be disclosed, the SEC must ensure disclosure of all investment related lawsuits pending against firms. This would include disclosure of data now reported on lawsuits alleging theft, misappropriation or forgery.
--Regulatory investigations vs. proceedings. While individual brokers must report regulatory "investigations," firms must report only regulatory "proceedings." A proceeding is defined in the Forms BD and U-4 as a more formal stage of an investigation. This higher threshold for firms is unfair. Why are not regulatory investigations against firms publicly reported on the CRD as they are with brokers?
The level at which a regulatory inquiry should be disclosed could be worthy of debate. However, regulators have wisely created some threshold for public disclosure of a regulatory inquiry by an associated person: the receipt of a Well's notice. This threshold gives credence to this petition's argument that some kind of similar threshold be given to raw allegations.
As the SEC's Division of Market Regulation's 1994 Large Firm Project report noted, on Page 14:
"The Staff recommends that all SROs should make public disciplinary actions against member firms and individuals when the SRO initiates the disciplinary action by filing formal charges. The NASD began disclosing its initiated disciplinary actions in July 1993. The NYSE's Board of Directors approved a proposal to make its statements of charges public by having them available through the CRD. The disciplinary filings to the CRD from the NYSE commenced on April 25, 1994. Other exchanges, however, do not publicly disclose their disciplinary actions until the matter has been resolved or action completed by the SRO. The Division believes that, once an SRO has made a determination that there is probable cause for believing the securities laws or the rules of the SRO have been violated and has actually initiated a disciplinary action, this information should be publicly available through inclusion in the CRD maintained by the NASD on behalf of the states and the SROs. In addition to the benefits to investors of inclusion of this information in the CRD, such disclosure will remove existing benefits firms receive from dilatory tactics that delay resolution of the disciplinary proceeding." [Emphasis added.]
Division Staff made no distinction between firm and broker disclosure in opining that "SROs should make public disciplinary actions against member firms and individuals when the SRO initiates the disciplinary action by filing formal charges." (Emphasis added.) How did the "formal charges" standard come to be a lower threshold for brokers, and a higher threshold for member firms?
The SEC must change Form BD to comport with U-4 requirements and ensure equal reporting by firms and brokers of formal charges by regulators.
--Criminal charges. Form BD requires only that firms disclose criminal charges and convictions for the last 10 years. But individual brokers must disclose all criminal charges and convictions and this data is disclosed on the CRD. Why the difference?
The SEC must require firms to disclose all past criminal charges and convictions.
Because most or all of the above items are already reported in one form or another, disclosing this data will not increase member firms' compliance or reporting obligations.
One would hope that these discrepancies in the disclosure regime are not due to industry influence over the NASD. But clearly, the less-stringent disclosure requirements for firms exist, and work to the industry's advantage in keeping a cleaner image and minimizing evidence for private litigation.
Due to all the issues of fairness and lack of public disclosure described above, the current disclosure system violates the 34 Act's requirement for fair dealing, nondiscriminatory treatment and rules that act in the public interest. Therefore, the SEC must undertake to fix the inequities
3) I petition the SEC to ensure disclosure of all arbitration awards from all forums, and require or encourage basic explanations from arbitrators in the award.
In the SEC's 1994 Large Firm project report on rogue brokers, in Appendix A, page 9, the report says the "Division of Market Regulation has requested that all SROs operating arbitration programs forward information concerning arbitration decisions rendered in their forum directly to the CRD system so that this information is consistently disclosed to the public regardless of the arbitration forum and regardless of whether the registered representative timely files or amends a Form U-4 or RE-3." Meanwhile, in conjunction with the SROs, the Securities Arbitration Commentator newsletter collects and disseminates arbitration awards from all forums.
Despite the request from the Division nearly a decade ago, only awards from NASD arbitration forums are reported on CRD.
Further, SROs actively discourage arbitrators from explaining their decisions, further reducing important disclosure information that could help investors spot problem actors and firms, or help repair the reputation of a party unfairly charged. This non-explanation policy should be changed. After all, the real reason more detail is not given, at least in part, is to give firms more "wiggle room" in how the case gets reported, according to one SRO arbitration official. Providing "wiggle room" to firms (which by industry convention author or approve most U-4 language) while investors in a case have no ability to describe the outcome, is a violation of the '34 Act.
The SEC must ensure that all arbitrations are reported. It must also ensure that arbitration panels provide some minimal level of explanation, or at a minimum require that SROs do not in any way discourage panelists from doing so.
4) I petition the SEC to ensure that associated persons are alerted to, and can respond to, any data about them in all levels and databases of the CRD, including the Registration Comments section, and that all such entries are archived.
A section in the CRD system, the Registration Comments section, allows firms to unofficially change the reason for termination and comment about why a broker was terminated. Although state and federal regulators have online access to the information, the comments section is not a part of the official CRD record and not disclosable through the NASD's public disclosure system, although individual states may disclose the information. What's more, firms can apparently delete or amend their own comments at any time, and the records are not archived unless they're printed and saved while still in the system. It's unclear whether brokers are notified of any registration comments in their records and whether they get a chance to respond, as they can with U-5 information.
The SEC must ensure that brokers have access to all job-related CRD data regardless of where the data resides.
Sincerely,
Dan Jamieson
____________________________
| 1 | For example, not all arbitration awards are reported onto CRD. Only NASD awards are reported on PDP even though the SEC's 1994 Large Firm project report suggested that awards from all forums be disclosed on CRD. To this day, it has not happened. 1Further, many NASD awards appear to be missing.
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| 2 | Even though this commenter has been following the expungement debate in his role as a journalist covering the retail securities industry, he was unaware the rule had been published in the Federal Register until after the March 31, 2002 deadline for comments.
Further, the 573 comments to the NASD, including letters from a variety of participants, indicates the importance of this issue, and its controversial nature. It is troubling that with important rule filings needing public comment, the SEC's practice has been to oftentimes not post the request for comments on its website. For example, proposals to cap punitive damages in arbitration (SR-NASD-97-47), alter defamation law for industry employees (SR-NASD-98-18), and erode arbitrators' ability to handle court orders (SR-NASD-00-02) were all published in the Federal Register, but not posted on the SEC site where commenters can easily see the proposals, comment on them and read others' comments.
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| 3 | Contrast the non-SEC-posting of important arbitration and disclosure rules with the Commission's apparent practice of posting and exposing commentary on various rules relating to market structure. The public files and the ongoing debate regarding market structure is, in this commenter's view, the "state of the art" in a governmental public commentary process. The balance of views and responses is a valuable asset to any outside observer of this particular debate.
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