April 18, 2009
Scot Bernstein
Law Offices of Scot D. Bernstein
A Professional Corporation
10510 Superfortress Avenue, Suite C
Mather Field, California 95655
Telephone: 916-447-0100
Facsimile: 916-933-5533
www.sbernsteinlaw.com
April 17, 2009
U.S. Securities and Exchange Commission
VIA EMAIL ONLY TO rule-comments@sec.gov
Re: SR-FINRA-2009-008
Dear Sir or Madam:
Thank you for the opportunity to comment on SR-FINRA-2009-008. I will confine my comments to the provision that will, at long last, require reporting of alleged sales practice violations on a registered person's Form U-4 or U-5 even when that individual is not named as a respondent. The flaw that the proposed change will correct is a longstanding embarrassment to our securities regulatory system – one that many securities practitioners, myself included, brought to the NASD's attention many times over many years.
Consider the current and longstanding absurdity. If a customer writes a letter asserting that a registered person engaged in misconduct, and the letter is carried to the person's broker-dealer by the United States Postal Service, the allegation must be reported on a U-4 or U-5. If the customer instead uses a courier service such as UPS, the allegation still must be reported. If the letter is hand-carried by the customer or a friend, or even by a dog or a circus bear, the allegation still must be reported.
But there is one special courier that magically erases the duty to make that disclosure to the public. And who is that magic courier? Why, it's FINRA, the self-regulatory organization whose job it is to protect investors. Given the industry's vociferous opposition to the proposed rule change, one might wonder whether the industry's dominating presence on the FINRA Board of Governors could have been one reason why this ridiculous situation has persisted for so long.
This is an enormous problem. Contributing to its scale is the fact that many practitioners feel compelled to refrain from naming registered persons in statements of claim. There are multiple reasons for this practice. Perhaps the most disturbing is that arbitration panels all too often issue non-joint-and-several awards in securities arbitration cases. A non-joint-and-several award is a disaster for a defrauded saver or investor, because the portion of the award for which only the registered person is liable is likely to be uncollectable. So it is as though that portion of the award didn't exist at all.
How does a practitioner protect his or her client from that risk? By not naming the registered person. So the risk that the arbitrators will ignore the longstanding legal doctrine of respondeat superior and render a portion of the award effectively worthless is an important reason why the scale of the current rule's corruption of the CRD has been so substantial.
It is bizarre to realize that the public record has to be corrupted and incomplete because arbitrators can be counted upon to utterly ignore as basic a legal principle as respondeat superior a significant percentage of the time. It is enough to make one wonder whether arbitration truly is "just a different forum" for the resolution of disputes and whether statutory rights really can be reliably vindicated there.
I strongly urge the Commission to approve that portion of SR-FINRA-2009-008 that would eliminate the longstanding embarrassment that is the current rule and instead put full disclosure above the industry's predictable desire to hide the ball.
Thank you for your attention to this letter.
Very truly yours,
Scot Bernstein
Scot Bernstein
Law Offices of Scot D. Bernstein,
A Professional Corporation
10510 Superfortress Avenue
Suite C
Mather Field, California 95655
Telephone: 916-447-0100
Fax: 916-933-5533