Securities Industry Association

March 31, 2003

Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549

Re: File No. SR-NASD-2002-168
Proposed Rule 2130 Concerning Expungement of Customer Dispute
Information from the Central Registration Depository System

Dear Mr. Katz:

The Securities Industry Association ("SIA")1 appreciates the opportunity to offer comment in response to the referenced rule filing by NASD ("Rule Filing") relating to expungement of customer dispute information from NASD's Central Registration Depository ("CRD"). Specifically, NASD proposes to adopt new NASD Rule 2130 which, among other things, would require court confirmation of all directives to expunge customer dispute information from the CRD system, as well as implement various NASD internal guidelines for the handling of requests for expungement relief.

SIA previously submitted extensive comments to the NASD on December 31, 2001 in response to NASD Notice to Members 01-65, which sought input from interested parties on proposed rules, policies and procedures for handling requests to expunge information from the CRD. Although NASD has since revised some of its initial proposal, many of the core procedures remain intact. As a result, SIA continues to have fundamental concerns regarding the current proposal, and therefore, repeats the views expressed in our previous letter, which we incorporate by reference herein.

I. Introduction

As a threshold matter, we support the objectives of the proposed rule changes and commend the NASD for its efforts to ensure that the information contained within the CRD database is complete, accurate and current. Like the self- organizations that rely on the CRD information for carrying out their public responsibilities, member firms utilize the CRD system in hiring and supervising registered representatives. Though unfortunate, SIA also recognizes that not every expungement request may be appropriate and therefore favors implementation of reasonable procedures that safeguard against the "misuse" of the expungement remedy by those who would intentionally seek to circumvent their reporting obligations. Accordingly, we applaud NASD for undertaking to make certain that fact-finders, namely NASD arbitrators, consider all competing interests before directing or granting expungement of customer dispute information. 2

SIA also shares the view that expungement is an "extraordinary" remedy, as it is the only means of purging factually incorrect information from a registered person's permanent record. We must not forget, however, that the CRD system itself is equally extraordinary and has no analog in any other professional or commercial field.3 In contrast to other licensing disclosure systems, the contents of the CRD system are public, readily accessible and sweep in unproven and unscreened allegations for all to see.4 Nor is there any limitations period after which unfounded accusations are automatically removed from a person's CRD record. Any allegation of a sales practice violation - irrespective of how old, frivolous, or facially incorrect - is captured by the CRD system and will remain there until the allegation is expunged. As such, the CRD system is unquestionably unique, and it is this uniqueness that must inform any plan to alter the expungement remedy. SIA, therefore, echoes the concern expressed by NASD that compelling issues involving personal privacy and fundamental fairness require "a fair process" for the removal of erroneous CRD information.

We do not believe, however, that the proposed procedures strike a fair balance between the important disclosure interests and legitimate due process concerns at stake. Indeed, we find that proposed Rule 2130 is inconsistent with the provisions of Section 15A(b)(6) of the Securities Exchange Act of 1934, as amended ("Exchange Act")5 because, among other things, it will ultimately disadvantage investors by inundating them with incorrect and potentially misleading information, as well as unfairly discriminate against those innocent individuals who cannot afford the expense of a court proceeding to remove false information from their CRD record.

Specifically, SIA continues to object to the proposed amendments on the grounds that they remain unduly burdensome, inefficient, and unfair. Indeed, we find the proposed measures to be so economically prohibitive, that we fear the remedy will ultimately fall into misuse. In the end, measures which are intended to preserve the integrity of the CRD information, will cause the CRD database to be filled with inaccuracies and potentially misleading information that disserves investors, regulators, registered persons, and firms alike -- all of whom have a stake in ensuring that the CRD system is scrupulously fair, correct and current.6 Meanwhile, registered persons unjustly or mistakenly accused of professional impropriety are left without a fair and expeditious process to remove frivolous accusations from their permanent record. Thus, while we appreciate NASD's efforts to address these complex issues, any process that creates procedural impediments to the quick and inexpensive correction of a false statement is no solution and must be rejected.

As detailed in our prior letter, SIA's chief objections to the proposed Rule relate to the mandatory court confirmation requirement, as well as NASD's compulsory participation as a party in all expungement proceedings. Such mandates are an unwarranted, resource-inefficient appendix to what is meant to be a streamlined process.

SIA's concerns about the propriety of the proposed amendments are heightened further still in light of NASD's most recent efforts to significantly expand the information it currently makes available to the public through its Public Disclosure Program ("PD Program").7 Specifically, NASD proposes to disseminate over the Internet a host of CRD data, including certain information that NASD has traditionally excluded as irrelevant, potentially inflammatory or outdated. Among other things, this new disclosure regime would include historical Uniform Form filing information, individual licensing examination results, and comparative data. Of these, perhaps the most problematic is the historical form filing information, which encompasses events reported in error, as well as previously reported information that is no longer reportable, either due to a change in the question or a "sunset" provision within the question. Thus, if adopted, this new disclosure system would display over the Internet, not only information currently available to the public through the existing PD Program, but an entirely new category of information -- such as "stale" customer complaints reported during the lifetime of the registered person8 -- irrespective of how old or incorrect.

As with the expungement proposal, SIA provided extensive comments with respect to the NASD's Public Information Review Initiative, raising both privacy and due process concerns.9 While we do not seek to recommence the debate over the wisdom or fairness of the public disclosure system here, it is both appropriate and necessary to consider carefully how the proposed limitations on the expungement remedy and the proposed changes to the PD Program will interact. We believe that these changes in tandem will create a disclosure system that unfairly places securities professionals under the harsh glare of a universally accessible, 24-hour electronic bulletin board that indiscriminately records and displays sales practice complaints made against them - no matter how frivolous, outdated or unfounded - with little ability on their part to remove the stain of a baseless claim expeditiously and inexpensively. Clearly, the effect of such a system would be unfair and unjust and we respectfully urge the Commission to view any proposed changes to either system very carefully.

II. Court Confirmation Undermines the Credibility of Arbitrators and the Arbitration Process

Among the most problematic aspects of the proposed rule is the inability of arbitrators to render final determination with respect to a request for expungement of a facially inaccurate customer claim. If adopted, proposed Rule 2130 will require a court of competent jurisdiction to confirm all directives to expunge customer dispute information from the CRD record, irrespective of the nature of the claim or to what extent an arbitration panel scrutinized the claim. Specifically, court confirmation is required for (i) arbitration awards issued after a decision on the merits; (ii) arbitration awards in which the parties agree to expungement relief as part of the settlement and then present the settlement to the arbitration panel; and (iii) judicial proceedings seeking expungement, including proceedings seeking expungement relief resulting in settlements in which the parities agree to expungement as part of the settlement. Thus, Rule 2130 will render meaningless an expungement order contained within an arbitration award unless a court confirms the order.

Not only is such a mandatory external confirmation requirement inconsistent with the fundamental principles underlining the arbitration process, it sends the dangerous and unmistakable message that arbitration panels cannot be trusted to apply the expungement remedy judiciously absent court oversight. Such a rule is ill conceived and runs directly counter to the expansive authority granted to arbitrators.

It is well settled that Federal Arbitration Act ("FAA") bestows upon arbitrators great latitude to fashion remedies and awards as they deem appropriate. 9 U.S.C. §§ 5, 9. It is not surprising, therefore, that federal courts consistently recognize arbitrators as "private judges," with no less freedom than a court of law. Such plenary power permeates the NASD Dispute Resolution Code of Arbitration Procedure as well. Specifically, the Code empowers NASD Dispute Resolution arbitrators to adjudicate all liability issues in a particular case and "award any relief that would be available in court under the law."10 This includes compensatory and punitive damages, attorneys' fees,11 and arbitration costs.12 Arbitration panels also may make disciplinary referrals in instances of serious regulatory violations.

Moreover, once rendered, arbitration awards are considered by the NASD to be final adjudications, in full force and effect.13 As such, awards must be paid in full within thirty days unless a motion to vacate is made in the appropriate court.14 Failure to make prompt payment may result in suspension proceedings against the member firm or associated person. Notably, the Code does not obligate prevailing parties to seek court confirmation as a prerequisite to other arbitrator ordered relief. Yet, since January 1999, and as proposed in this Rule Filing, this is precisely the predicament in which falsely or inaccurately accused registered persons find themselves. Having finally been exonerated of any wrongdoing by a duly constituted arbitration panel, such individuals must still obtain court confirmation to remove the damaging information from their permanent public record.

Surely, if arbitrators can be trusted to reach binding decisions, award millions of dollars in compensatory and punitive damages, and make disciplinary referrals, they can be trusted to evaluate and grant expungement relief without need for court oversight.

III. NASD and State Regulators Should Not Be Permitted to Second Guess Arbitration Awards Containing Expungement Relief

In addition to court review, NASD also proposes that anyone seeking to enforce an expungement award must name NASD as a party to the proceeding so that (i) NASD may undertake its own independent analysis of the propriety of the expungement relief ordered by the arbitrators, and (ii) state securities regulators are afforded the opportunity to object to such relief. Such a process, we believe, promises to open a Pandora's box of unintended consequences, not the least of which is the further and more substantial erosion of the arbitration process. By according to both itself and the state securities regulators the authority to review, object to, and seek to set aside part of an arbitration award, NASD disserves an arbitration process that is intended to quickly, fairly, and inexpensively resolve securities disputes.15

IV. Proposed Rule is Unduly Burdensome, Costly, and Resource Inefficient

In addition to undermining the credibility of arbitrators and the arbitration process generally, the proposed court confirmation procedures will result in undue costs and delays in obtaining expungement relief. Confirmation proceedings will become expensive, adversarial retrials of issues already decided by arbitration panels. Parties will be forced to file longer and more substantial briefs, courts will require more extensive documentation of arbitration hearing records, oral arguments will not be uncommon, and appeals may well follow. Firms, especially smaller firms, having already incurred the expense of defending the registered employee in the original arbitration claim, may balk at committing additional resources necessary to get the expungement award confirmed in an adversarial court proceeding. Consequently, a registered representative would be placed in the undesirable position of having to choose between spending significant personal resources to pursue the confirmation, or living with a blemish on his or her CRD record that an arbitration panel has already ordered removed.

Nor will these additional costs be borne by member firms and their associated persons alone. Both NASD and the state regulators will have to allocate substantial financial and administrative resources to ensure a uniform mechanism for the systematic reviews of expungement awards. Once named in a proceeding, NASD also will have to contend with widely varying state procedural rules governing entering appearances, filing responsive pleadings and motion practice. This undoubtedly will necessitate local counsel, adding further to the mushrooming expense of what is intended to be a quick and efficient dispute resolution process. Interestingly, there has been no discussion, either in the initial Notice or current Rule Filing, of how NASD or state regulators intend to staff and fund this component of the proposed procedures. SIA respectfully suggests that investor protection would be far better served by allocating state and NASD resources for purposes other than participation in redundant state court proceedings.16 As detailed above, interjecting additional layers of duplicative judicial and regulatory review depletes valuable administrative and economic resources from all segments of the securities industry while providing nominal benefit. SIA further believes that the proposal would not withstand the SEC's scrutiny under the cost/benefit standard established in Section 3(f) of the Securities Exchange Act of 1934. If for no other reason, this factor alone requires rejection of the proposal. We therefore urge the Commission to give serious consideration to our concerns and restore awards containing expungement provisions to the rightful status of every other arbitration award.

Given existing market conditions, as well as the current crisis in investor confidence, now more than ever, it is imperative that unfairly or inaccurately accused registered persons be permitted to quickly and inexpensively expunge patently false allegations of professional misconduct from their permanent public record - especially, in instances of factual impossibility and clear error. Where it is clearly evident that a customer complaint or arbitration claim mistakenly names a registered representative, fairness dictates that such error be removed from that person's permanent CRD record expeditiously and without need for further review by a court.

This is especially important given the "shotgun" approach utilized by some claimants and their counsel. Unfortunately, experience shows that many claims and complaints contain a garden variety of alleged wrongful acts, including fraud, churning, unauthorized trading and conversion of funds, without prior sufficient knowledge of all facts to substantiate the claim. Moreover, the claim or complaint also often will name as respondents a host of registered persons who had no involvement with the transaction in dispute, including, for example:

  • individuals who are employed in a purely administrative, operational or customer-service capacity and performed purely ministerial acts in connection with the account (i.e. processing of unsolicited orders);

  • legal or compliance department personnel who interacted with the customer after the disputed transaction occurred (such as by responding to a customer complaint);

  • CEOs, high-level executives or managers of the firm who had no direct dealings with the customer or the account and had no supervisory responsibility over the registered representative handling the account or transaction at issue;

  • members of a designated "sales team" (such as in the case of on-line brokerage firms) who had no involvement with disputed transaction; and

  • brokers who had nothing to do with the account in question or who handled the account only after the transaction at issue had been executed.

In such cases, and in particular those which involve "factual impossibility" or "clear error" (i.e., claimant names someone who was not employed by the firm during the relevant time period),17 we believe that expungement relief should be granted with minimal cost and effort. Under the rules of the SROs, arbitrators selected to hear cases are empowered to decide all matters in controversy between the parties and to order any relief that would be available in a court of law. There is no compelling justification for isolating one form of relief - expungement - and superimposing a court confirmation requirement in order for such relief to be effective. The arbitrator(s) selected to adjudicate that matter should be permitted to review and make a final determination whether expungement relief is warranted without need for onerous confirmation proceedings that improperly invite review of such awards by NASDR staff, state regulatory agencies, and the courts.

Finally, we hope that the Commission will support our recommendation that NASD implement better control measures to promote more responsible pleading by claimants and their counsel.  One suggestion is to require claimants and their counsel to certify to a good faith basis for naming each of the respondents in the claim.

V. Conclusion

SIA appreciates the opportunity to provide comments on the proposed expungement procedures. Although we commend NASD for their efforts to address this complex issue, we believe the proposed procedures are fraught with difficulties that do not adequately balance the legitimate concerns of all impacted constituencies.

While it is clear that the integrity of the CRD system must be protected and that respondents should not be able to expunge valid claims of professional misconduct, it is equally plain that wrongly accused respondents must have unfettered access to the only remedy that can remove the blight of a false claim from a very public and personal record. The solution to the apparent tension between these interests does not lie in erecting barricades to the availability of expungement relief in the form of narrow and overly stringent limitations. Nor does it lie in imposing an onerous confirmation process that improperly invites de novo review of arbitration awards by NASD staff, state regulatory agencies, and the courts. Rather, the answer may be found in promulgating fair guidelines for expungement, training arbitrators on the meaning and proper application of those guidelines, and then trusting arbitration panels to continue to do what they have done so well for many years - render fair, impartial, and final decisions.

We hope this letter has been helpful and appreciate the opportunity to provide input on the proposed procedures. If we can provide any further information or clarification of points made in this letter, please contact me or Amal Aly, Associate General Counsel, at (212) 618-0568.


Stuart J. Kaswell
Senior Vice President and General Counsel

cc: Annette L. Nazareth, SEC, Director, Division of Market Regulation
Robert L. Colby, SEC, Deputy Director, Division of Market Regulation
Catherine McGuire, SEC, Associate Director, Division of Market Regulation
Robert A. Love, SEC, Special Counsel, Division of Market Regulation
Robert R. Glauber, NASD, Chairman and Chief Executive Officer
Mary L. Schapiro, NASD, President, Regulatory Policy and Oversight
Elisse B. Walter, NASD, Executive Vice President
R. Clark Hooper, NASD, Executive Vice President,
   Office of Disclosure and Investor Protection
Derek W. Linden, NASD, Senior Vice President, CRD Public Disclosure
Richard Pullano, NASD, Chief Counsel and Associate Director,
   CRD Public Disclosure
Linda Fienberg, NASD-Dispute Resolution, President

1 The Securities Industry Association brings together the shared interests of more than 600 securities firms to accomplish common goals. SIA member-firms (including investment banks, broker-dealers, and mutual fund companies) are active in all U.S. and foreign markets and in all phases of corporate and public finance. Collectively they employ more than 495,000 individuals, representing 97 percent of total employment in securities brokers and dealers. The U.S. securities industry manages the accounts of nearly 93-million investors directly and indirectly through corporate, thrift, and pension plans. In 2001, the industry generated $280 billion in U.S. revenue and $383 billion in global revenues. (More information about SIA is available on its home page:
2 We are pleased that NASD intends to implement our recommendation that their arbitrators be provided with adequate guidance and training materials on the standards upon which to grant expungement relief.
3 It is our understanding that neither doctors, lawyers, nor any other body of professionals are subject to a national system of public disclosure that reports even the flimsiest unproven allegation.
4 Question 23I(l) of the Uniform Application for Securities Industry Registration and Transfer ("Form U-4") requires that registered representatives report any arbitration matter in which he or she is named as a respondent if the claim alleges a sales practice violation. It also requires reporting of all customer complaints, with narrow exception, which allege sales practice misconduct.
5 15 U.S.C. 780-3(b)(6).
6 Private investors look to the public disclosure component of the CRD when making decisions to do business with a particular registered representative or firm.
7 See NASD Notice to Members 02-74, soliciting comment on NASD's Public Information Review Initiative.
8 This commonly refers to customer initiated complaints that are more that 24 months old and were neither settled nor pursued in arbitration or litigation.
9 See SIA Comment Letter, dated January 6, 2003, which we incorporate by reference herein.
10 NASD Rule 10214.
11 NASD Rule 10215.
12 NASD Rules 10305(c) and 10332(c).
13 NASD Rule 10330(b) reads: "Unless the applicable law directs otherwise, all awards rendered pursuant

to this Code shall be deemed final and not subject to review or appeal."

14 NASD Rule 10330(h).
15 The NASD and NASAA "jointly administer the CRD system" and that CRD "policy" is "established with NASAA and the SEC." SIA understands that the CRD system is the product of a private agreement between NASAA and NASD. We also understand that the current proposal arises out of NASAA's assertion that the CRD system constitutes an official state "record" that cannot be altered by expungement. Certainly, before we proceed down this dangerous path and substantially diminish the important role of arbitrators and the arbitration process generally, we would hope that NASAA proffer meaningful authority to support this "state-record" claim.
16 SIA find it particularly puzzling that NASD would propose such resource-inefficient procedures in light of its current Rule Modernization Initiative, which is intended to minimize costs to both NASD and industry while maximizing regulatory benefit.
17 Other common errors include situations where the claimant or regulator: (i) intends to name one registered representative at the firm but mistakenly names another; or (ii) names the current branch manager, when in fact that branch manager was not the branch manager at the time the transaction in dispute occurred.