VIA EMAIL: RULE-COMMENTS@SEC.GOV
Elizabeth M. Murphy Secretary
Securities and Exchange Commission
100 F Street NW
Washington DC 20459-1090
Subject: File No. SR-FINRA-2009-008
From: William S. Shepherd, Managing Partner
Shepherd Smith Edwards & Kantas, LLP
THIS LETTER IS WRITTEN IN SUPPORT OF NEEDED CHANGES IN REPORTING REQUIREMENTS
Over the past two decades our law firm has represented thousands of investors, primarily in securities arbitration. Prior to that, I was a registered person in the securities industry and Vice President of several major brokerage firms. I then earned a legal masters degree (LLM) in Securities Regulation from Georgetown University Law School. The goal of this letter is to provide the SEC and others with a few important relative statistics and other facts:
ONE IN ONE HUNDRED: Each year there are approximately 5,000 claims filed in securities arbitration, while there are over 500,000 registered persons. Thus, LESS THAN ONE IN ONE HUNDRED BROKERS ARE THE SUBJECT OF SECURITIES ARBITRATION CLAIMS EACH YEAR. (Also note there are over 50 million investors meaning that, while almost all recently lost money, only one in 10,000 will likely file for recovery of their losses each year.)
ONE IN THIRTY COMPLAINTS: Each year our firm is contacted by approximately 5,000 investors seeking to hire us to represent them. Yet, our seven attorneys can only handle 150 or so cases per year, LESS THAN ONE IN 30 PERSONS WHO SEEK OUR REPRESENTATION. Although some complaints lack merit, we primarily must decline cases based on the size of the loss. The growing complexity of securities arbitration dictates that we simply can not handle claims for less than $100,000. Our breakeven overhead is $20,000 per case (defense firms routinely charge brokerage firms this or more). This is relevant because COMPLAINT REPORTING IS VITAL for firms to assess whether a broker deserves additional scrutiny in the hiring and retention process. As well, reported complaints are the only source of information for investors to propose questions to those who seek to manage their savings and/or their retirement funds.
LET US REGULATE: During the 1930’s, after the debacle of 1929, Congress sought to regulate of the securities industry through securities laws and creation of the SEC. The securities industry responded with "LET US DO IT! Delegate the authority to us and we will regulate our own. Simply oversee us!" Their wish was granted and, for seven decades that structure has existed – with mixed reviews. Recently, these reviews have turned almost unanimously sour and we today watch to determine how regulators will respond to recent public outcry.
ROGUE BROKERS: Over the past 40 years, securities spokespersons have claimed that the primary problem in the industry lies not with securities firms, but with a few "ROGUE BROKERS" who drift from firm to firm. Yet, current efforts to identify such "ROGUE BROKERS" bring screams from the industry to prevent regulators and the public from identifying those who they claim are the villains. While I maintain that the problem is far more systemic than a few "bad apples," the securities industry should at least be intellectually honest regarding "rogue brokers" rather than oppose proposals to identify such culprits!
ABSURDITIES AND LOOPHOLES: The goal of reporting requirements – ON PAPER – is to require brokers and their firms to report significant complaints against them. When I entered the securities industry in 1970, such reporting allowed firms to assess brokers on a basis that "where there is smoke there is often fire." Brokers were still innocent until proven guilty, but would be required to answer some questions. Complaints properly create those questions.
1. This was then modified to only "written complaints," which are now even sought, but with hidden motives: On TV we learn: "You are entitled to an attorney … [and] … anything you say can be held against you in a court of law." Yet, investors are not "read their rights." Instead, they are told to write a letter, leading them to believe firms will respond by redressing their complaints. Yet, many of these investors prejudice their potential case by sparring with the firm’s attorney without advice of an attorney of their own. Shameless! Firms then wait for months to respond, usually after investors repeatedly inquire about a response. That response almost universally curt: "We find no wrongdoing." Meanwhile, the clock is running against the investor on any applicable statutes of limitations and the arbitration eligibility rule. Shameless!
2. Firms then contort language and convolute wording in reporting requirements. For example, despite the obvious loss involved, if no monetary amount is requested in the written complaint it is not reported. As well, firms deny that a "written" Statement of Claim filed in arbitration seeking substantial sum are "written complaints involving more than $10,000," while choosing not to report as required. Even when such written Claims are attached to a letter sent to the firm prior to filing, this is not defined as a "written complaint" which meets the reporting threshold. Absurd!
3. Firms also rely upon language regarding a broker being "named" in a court or arbitration claim to exonerate themselves from reporting the complaint. Meanwhile, language in the U-4 form indicates that a broker must report such complaints and, through its supervisory role, the firm must make certain this is done. Yet, in virtually every case, even our own clients’ Claims (complaints) are notably absent from the broker’s CRD when the case reaches a hearing a year or more after the case was filed. We are left to wonder: How many other complaints have been omitted?
4. Attorneys are reluctant to name the broker because firms then engage two lawyers, one for themselves and one for the broker to gain unfair advantage through additional strikes in the arbitrator selection process. Sad - but true - that brokerage firms "game" the arbitration process just as they "game" the reporting system! What they are effectively saying to the SEC is: "Whatchagonna do about it?" I say: "Good question!"
5. If they can’t find a loophole, firms simply ignore reporting requirements. Regulators do little or nothing with the usual result that, if caught, offenders are simply asked to disclose the event. Fines are rare, and usually a slap on the wrist. Any regulator should be appalled with this state of affairs!
A LOOK UNDER THE CURTAIN: It is amazing that members of the securities industry are besieged with angst that the public will be able to "look under the curtain" to learn whether other investors may have encountered problems with a self-proclaimed expert who contacts them on the phone promising protect to their life-blood in retirement. Industry persons now express outrage that their records could be exposed in much the same manner as other professionals’ records are made available to employers and the public. Insurance companies access driving records before "investing" in a driver. These very financial institutions can readily obtain a credit report on each of us at will.
CHECK MY RECORD – PLEASE! Meanwhile, those in the "silent majority" of the financial industry, those who have no such complaints, can only benefit by public scrutiny of competitors who generate repeated complaints. "CHECK MY RECORD" is the reward these diligent salespersons deserve, rather than for securities regulators to assist their competitors to hide flawed records.
INNOCENT UNTIL PROVEN GUILTY: As covered above, this is a "red herring". Those who claim injustice in the reporting system ignore reality. For example: Investors’ complaints are not "reported," only "noted"- and in the words of the alleged offender - along with the complaining person’s name. Instead, it is the brokers and their firms who are then free to publish any answer, remark or "spin" they feel will exonerate them in the eyes of the reader.
PLEA TO THE SEC: We have reached a moment of truth in which, with the spotlight upon you, you can demonstrate clearly whether your actual goal is to protect investors - or protect problematic members of the securities industry. At this point I do not challenge your integrity – rather I will rely upon it.
William S. Shepherd
Managing Partner
Shepherd, Smith & Edwards, LLP