The problems associated with FINRA‘s CRD Disclosure System are well known to visitors to SECLaw.com, as we have written about the issue a number of times. The concept of disclosing every allegation, justified or not, against a registered person, to anyone who cared to ask, is unheard of in our system of justice. The addition of BrokerCheck, where the information is available to anyone with an Internet connection has made the situation intolerable. For that reason, we are often asked to file an expungement request with FINRA, to remove unwarranted items from the CRD system
The interests of investor protection overrode the concepts of fundamental fairness and due process for brokers, and today there is full disclosure of every wart, pimple and untrue allegation made against a broker. Not fair to the broker, but of a theoretical benefit to the investing public.
Part of the problem are customer arbitrations. Customers can file an arbitration against a broker for anything, at virtually no cost to the customer. They can say anything they want, it doesn’t cost them anything, and there is no penalty for making a false accusation, and no sanctions for filing a frivolous complaint. I addressed this issue in October, 1997 in my column Rogue Customers, which generated quite a bit of interest when it first appeared in Research Magazine.
The problem of course, is that the frivolous complaint goes on a broker’s CRD report, and stays there. For many years, brokers and firms were able, as part of arbitration awards, to obtain an expungement order from a panel of arbitrations, directing that the CRD system remove any references to the dispute.
The use of expungement orders by arbitrators provided a mechanism to, in a small way, address the wrongs inflicted by the system, and to remove from the CRD system customer complaints which did not belong there. If the arbitrators involved in hearing the case agreed, the reference to the matter was removed from the broker’s permanent record.
Then FINRA apparently decided that the arbitrators, who are so carefully chosen by its own arbitration division, should not have the power to award this relief. In January 1999, under pressure from the State Securities Administrators, the NASD imposed a “moratorium” on arbitrator-ordered expungements from the CRD system. Under the moratorium, which is still in effect, FINRA will not expunge information from the CRD system based on a directive contained in an arbitration award rendered in a dispute between a public customer and a firm or its associated persons, unless that award has been confirmed by a court of competent jurisdiction.
FINRA’s “moratorium” was met with shock and many commentators wondered how the FINRA could possibly seek to avoid arbitrators’ against it, while at the same time forcing others to abide by the same. It was clear that what the FINRA said was that it was not going to honor arbitration awards entered by FINRA appointed arbitrators, in a FINRA sponsored arbitration. At the same time, FINRA forces member firms and registered representatives, to pay such awards, and to forego their rights under state law to appeal such awards. This interesting insight into the FINRA’s collective thought process is interesting, since the FINRA’s own Code of Arbitration Procedure clearly provides that “[t]he arbitrator(s) shall be empowered to award any relief that would be available in court under the law.” After the new policy, FINRA should have amended the rule to state The arbitrator(s) shall be empowered to award any relief that would be available in court under the law, except relief which benefits an associated person.”
FINRA never explained this glaring inconsistency, and for years has continued its refusal to abide by an arbitrator’s award, absent a court order.
On October 12, 2001, the NASD, claiming that it has been working on the expungement issue for three years, released Notice to Members 01-65.
Apparently, according to the press release that issued a week before the Notice, reflected apparent pressure from PIABA, which claims that too many courts are granting expungement orders. Readers must keep in mind that PIABA is a group of attorneys who represent customers in arbitrations against brokers.
PIABA’s self interest in the issue is apparent, and unfortunately, it is PIABA attorneys who are often the attorneys who inappropriately name registered persons in arbitration claims. For example, in a case I recently handled where a Director of PIABA represented the customer, the attorney named everyone on Form BD as a respondent, including the Information Technology Officer. The head of computer operations! He was dismissed from the case by the arbitrators, but only at the conclusion of the hearing.
The NASD press release pointed out the PIABA bias, noting that the statistics presented by PIABA “do not accurately and completely characterize the expungement issue.” The NASD pointed out that “PIABAs report also does not adequately address the relevance of the number of times that arbitrators denied expungement requests by brokers who otherwise prevailed in the arbitration.” The NASD concluded that “PIABAs report fails to acknowledge the diligence arbitrators exercise in granting expungement relief, as demonstrated by the number of instances in which they grant expungement for some brokers but not others in the same case.”
Lastly, in recognizing the diligence of arbitrators, the NASD stated that expungement orders are granted in less than 1% of all cases decided in 2000. By my count, that means that expungement was ordered in less than 60 cases, of the 6,000 that were filed.
A week later, the NASD announced its new proposal for expungement, and apparently forgot everything they said the week before. According to the Notice, the NASD has identified three instances where it believes expungment is warranted: a finding that (1) factual impossibility or “clear error” exists (e.g., the associated person named in the proceeding did not work for the firm, or worked in a different office, and was named in error); (2) the claim is without legal merit; or (3) the information on the CRD system is defamatory in nature.
Simple enough, and nothing startling or earth-shattering here. While it is amazing that the NASD took three years to come up with this list, reading further, we learn that the most important basis, number 2, is going to be further qualified.
Quoting from the Notice, “NASD Regulation also generally believes that, before any customer dispute information is expunged, an independent fact finder should make a finding that expungement relief is warranted on one of these three bases. With respect to the second category (i.e., claims that are found to be “without legal merit”), NASD Regulation emphasizes that merely prevailing in an arbitration or court proceeding would not, by itself, justify expungement. A fact finder would be required to make a specific finding that a claim was factually impossible, without legal merit, or defamatory in nature before NASD Regulation would execute any expungement directive.”
Why is it that an arbitrator can award punitive damages of $28,000,000 against a firm, without making any findings regarding anything, he can make disciplinary referrals against a broker without any findings, yet when he wants to tell the NASD to do something, the NASD refuses to honor the award, and is now attempting to require specific findings?
The Notice then goes a step further, and removes stipulated awards from the criteria! As incredible as it may sound, the NASD is discouraging parties from settling arbitrations, and is proposing to ignore stipulated awards from the expungement criteria! The NASD is not going to honor court ordered, stipulated awards!
The arrogance is simply incredible. The NASD is actually announcing, that it will not abide by arbitrator awards, and it will not abide by court orders. When an arbitration award is confirmed in court, it is a judgment like any other judgment. The parties must abide by it, and third parties must honor it. But the NASD wants to exclude itself from the United States justice system!
But wait, we are not done. The NASD is also proposing to bring disciplinary proceedings against any member who attempts to obtain an expungement order in violation of this proposed rule! Brokers have already given up their Fourth Amendment Rights, their Fifth Amendment rights, huge portions of the due process protections afforded to all, and now the NASD is attacking the First Amendment? Let us search your office without a warrant, or we will yank your license. Answer our questions, or we will yank your license. Seek redress in the courts, and we will yank your license.
- Federal Securities Law, a Securities Lawyer Guide
- Introduction to State Securities (Blue Sky) Laws
- Overview of the Securities Arbitration Process
- Expungement of Customer Complaints