NASD Expungement Proposal Tramples Brokers Rights

securities lawyer

NASDR Proposal Contains Provisions to Continue Ignoring the Awards of Its Own Arbitrators, and to Fine Brokers Who Attempt to Obtain Relief From the Courts.

By Mark J. Astarita, Esq.


The problems associated with the NASD’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.

But, 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, and the problem still exists today.

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 arbitrators, 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.

In January 1999, under pressure from the State Securities Administrators, the NASD apparently decided that the arbitrators, who are so carefully chosen by its own arbitration division, should not have the power to award this relief and imposed a “moratorium” on arbitrator-ordered expungements from the CRD system. Under the moratorium, which is still in effect, the NASD 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.

The NASD’s “moratorium” was met with shock and many commentators wondered how the NASD could possibly seek to avoid arbitrators’ orders against it, while at the same time forcing others to abide by the same award. The NASD will suspend the license of a broker who does not honor an arbitrator’s award, and an the same time was announcing that it was not going to abide by an arbitration award. This interesting insight into the NASD’s collective thought process was interesting, since the NASD’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, the NASD 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.”.

The NASD never explained this glaring inconsistency, and for years has continued its refusal to abide by an arbitrator’s award, absent a court order.

In October, 2000, the NASD issued a press release regarding its refusal to abide by arbitrators’ decisions, and addressing the concerns of PIABA, which claimed 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 “PIABA’s 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 “PIABA’s 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.”

Lastly, in recognizing the diligence of arbitrators, and putting this entire controversy in perspective, 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.

The juxtaposition of the NASD’s comments about diligent arbitrators with their own refusal to abide by their awards was interesting, but now the NASD announced its new proposal for expungement, and apparently forgot everything they said last year. The new proposal, continues the same distain for arbitrator awards, and in fact, continues the outrageous refusal to abide by the awards of NASD appointed arbitrators, even if they are court ordered.

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 , which announces a new proposal, and “Seeks Comment On Proposed Rules And Policies Relating To Expungement Of Information From The Central Registration Depository.”

According to the Notice, the NASD is going to condition its compliance with arbitrator orders, and will honor them in only three instances (1) where there is a finding that 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) where there is a finding that the claim is without legal merit; or (3) where there is a finding that the information on the CRD system is defamatory in nature. If the arbitrators do not make those specific findings, the NASD has announced that they will not abide by the decision. Keep in mind, if a member firm decided that it was not going to abide by an NASD arbitration award, the NASD would suspend their license.

Incredible as all of this may seem, the Notice goes further. The NASD also states: “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? If the NASD is going to put restraints on arbitrator’s powers, how about a requirement that an arbitrator make specific findings before awarding punitive damages?

The Notice then goes a step further, and attempts to place qualifications upon which court orders it will abide by, and which court orders it will ignore. According to the release, the NASD is not going to honor court ordered, stipulated awards unless the court order meets its criteria.

The arrogance is simply incredible. The NASD is actually announcing,hat it will not abide by arbitrator awards and it will not abide by court orders, unless it deems them appropriate. 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. The fireworks should really be flying when a judge is faced with this position.

Unfortunately, there is more. 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. Seeking relief in the courts is a basic freedom that we all enjoy. It is one of the founding principles of our nation. 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. Has the NASD lost it collective mind?

Expungement is an important tool in an arbitrator’s arsenal of remedies. It helps to insure that an unfair and punitive disclosure system does not destroy the lives of registrants who are subjected to the whims of regulators and customers. The NASD should approve every expungement order that its arbitration panels enter. How can the NASD expect public customers and registered persons to have respect for the process when the NASD itself is thumbing its nose at the process?

Those of us who deal with the NASD and its Staff on a regular basis know how hard the Staff works, and that they sometimes have an impossible workload. However, we also know that the NASD Staff can also project the attitude of indifference to the rights of brokers, and too often treats brokers like they are criminals. This new proposal is an affront to the entire arbitration system and the enforceability of arbitrator awards. It is, at a minimum, a public relations nightmare for the NASD.

It is also an attempt by the NASD to put itself above the law, and to exempt itself not only from the rules of our court system, but the Constitution itself. While the proposal will surely be stricken by the courts if it is ever adopted, the question will remains – what in the world are you thinking?

Does the NASD really believe that it is above the law? Can they really be this arrogant?

The comment period ends on December 31. If you do not file a comment, you will be doing yourself a great disservice. The proposal is available at http://www.nasdr.com/pdf-text/0165ntm.txt . The online system to submit comments is at the NASD’s web site, at http://www.nasdr.com/rfc/01-65.asp

 

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.



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