Brokers can expect a new rule that will make removing customer complaints and disciplinary actions from their public records much more difficult.
Proposed by the NASD more than a year ago, but approved by the SEC just last month, Rule 2130 says complaints, with the exception of the most blatantly ridiculous, will not be expunged without a fight. Essentially, a rep who wants to get his record cleared after being exonerated by arbitrators will have to take it court—and potentially with the NASD opposing them. The NASD is expected to announce soon when the rule goes into effect.
There are exceptions: if the customer’s claim is found to be clearly without factual basis, if the information in the CRD is defamatory, or the claim is frivolous. Those will be removed easily.
Without meeting one of those requirements, a broker who is exonerated of any wrongdoing by an arbitration panel and wants the complaint expunged must make a case in a court of law for the information to be removed. However, the NASD makes it clear that brokers with weak cases will have a particularly difficult time of it. Indeed, the NASD says it will actively oppose brokers in such court proceedings.
Bill Singer, an attorney at Gusrae Kaplan & Bruno, believes the rule brings in some unnecessary regulation, asserting that the “purpose of arbitration is not regulation.” He also asks “Why shouldn’t the arbitration panel—which can recommend punishment and compensation—be able to expunge?”
The new rule extends the NASD’s January 1999 moratorium on arbitrator-ordered expungements. Since that time, a broker exonerated during arbitration has also needed a court order to have his record expunged. Before that moratorium, a broker’s public record could be expunged by either of two ways: if an arbitration panel recommended it based on merit and it was approved by a court, or if the broker’s firm settled with the plaintiff before any hearing.
Supporters of the changes claim the pre-1999 rules allowed brokers to, in effect, buy clean records through settlements. Critics of the old rules also say they don’t allow for accurate evaluation of the volume of complaints being lodged. Customers wishing to screen brokers may not know how many complaints truly have occurred.
“If it’s a ‘he-said, she-said’ kind of complaint, or arbitration was filed, but it wasn’t proven one way or the other, it still occurred. It should exist,” says Stephen Berkeley, an attorney at Eccleston & Assoc., a Chicago-based securities law firm.
However, the SIA, the chief lobbying organization for broker/dealers, says the new rules add an additional court review and confirmation after arbitration that isn’t necessary. “We find that the confirmation adds little to investor protection and only serves to delay the rightful vindication of individuals accused of wrongdoing,” said the SIA in an official comment to the SEC. The SIA also wants the SEC to protect brokers from disgruntled investors and unscrupulous claimant counsel by requiring a statement that there is a “good-faith basis for naming the registered person.”
David Robbins, a partner in New York firm Kaufmann, Feiner, Yamin, Gildin & Robbins, also believes more power should be in the hands of the arbitrator. “Arbitrators should make all the decisions, really. In all likelihood, the court will simply rubber stamp its decision anyway.”
On the other side of the aisle, attorneys for investors remain skeptical. Charles Austin Jr., president of the Public Investor Arbitration Bar Association, said: “It’s better than the current system, but it doesn’t go as far as we’d like it to.”