April 8, 2008
The purpose of this letter is to provide the Securities and Exchange Commission with comments on the above referenced proposed rule change which was filed by the Financial Industry Regulatory Authority, Inc. (FINRA) on March 13, 2008.
I am an attorney whose practice is exclusively devoted to the representation of public investors in their disputes with the securities industry. Moreover, I am the immediate-past President and a current member of the Board of Directors of the Public Investors Arbitration Bar Association (PIABA).
Subject to consideration of the comments set forth below, it is my personal opinion that the proposed rule change, which would establish new procedures that arbitrators must follow when considering any requests for expungement relief under NASD Conduct Rule 2130, would enhance the integrity, accuracy and completeness of the information in the Central Registration Depository (CRD) system and, accordingly, is critical to investor protection.
Over the course of the past few years, the expungement of customer complaints from the CRD registration records of individual brokers has approached levels that are unacceptably alarming.
On September 24, 2007, during the term of my PIABA Presidency, our association undertook the preparation of a detailed study (PIABA Study) of all arbitration awards issued in calendar year 2006 that contained requests for expungement relief that had been submitted by individual brokers.
As noted in the press release that accompanied the PIABA Study, the analysis clearly exposed the fact that the current requirement that arbitrators have to complete a one (1) hour home study course in order to be eligible to consider expungement requests, does not appear to be sufficient to communicate either the critical importance of the information on the CRD system to public investors and regulators or the fact that an inappropriate expungement, undertaken without any viable merit-based hearing, undermines the integrity of the entire investor protection and regulatory framework in our securities markets.
The PIABA Study, for example, indicated that in more than 71% of the stipulated arbitration awards that were reviewed, arbitrators were permitted to recommend the expungement of customer complaints from the registration records of brokers without any indication of an evidentiary hearing having been held.
Similarly, the PIABA study indicated that expungements were granted in more than 98% of all of the stipulated or settled arbitration awards where the expungement relief had been requested by the individual broker and, in fact, there was a single individual broker who, in just calendar year 2006 alone, had received the expungement of eighteen (18) separate customer arbitration claims from eighteen (18) separate arbitration panels.
While, based on both the PIABA Study and my own personal observations, I remain concerned as to whether individual arbitrators should even be entrusted with the authority to recommend any expungements, in the event that it is decided to continue to provide arbitrators with this authority, then at least I am encouraged by the fact that, in order for arbitrators to perform the critical fact finding necessary before granting expungement, the proposed rule change would mandate that arbitrators hold a recorded hearing session, by either telephone or in person, so that full consideration can be given to the applicable facts and circumstances.
Similarly, in cases involving settlements, the portion of the proposed rule change which would require arbitrators to review the settlement documentation, consider the amount paid to any party, and consider any other terms and conditions of the settlement that might raise concerns about the associated persons involvement in the alleged misconduct before awarding expungement, is an excellent solution.
Finally, the portion of the proposed rule change which would require arbitrators to assess all forum fees, associated with the determination of the appropriateness of expungement, against the individual brokers who had requested the expungement relief, is an appropriate, fair and equitable solution.
In summary, it is my personal opinion that the proposed rule represents a fair and balanced approach to the competing interests on this issue and should be approved, on an accelerated basis, without any further delay.