The North American Securities Administrators Association (NASAA) said it supports efforts to limit the ability of U.S. brokers to keep client complaints off their disciplinary records.
Last week, the U.S. Securities and Exchange Commission (SEC) approved a proposal by the Financial Industry Regulatory Authority (FINRA), changing its rules to prohibit brokers from requiring clients to agree to not oppose the removal or “expungement” of a damage claim as a condition of settling the claim. On Monday, the NASAA came out in favour of the change, and also said that it supports the SEC’s call for FINRA to consider further changes to the rules that allow brokers to erase potentially damaging information from their public records.
Andrea Seidt, president of NASAA and Ohio Securities Commissioner, said the FINRA rule change is a positive first step toward discouraging firms and reps from “bargaining for the removal of potentially valuable regulatory information that should remain available to regulators, employers, customers and potential customers through the [Central Registration Depository (CRD)] and FINRA’s online BrokerCheck service.”
And, she said that NASAA strongly supports FINRA’s efforts to improve the expungement process. “Expungement is an extraordinary remedy that should only be used in very limited circumstances, but existing arbitration practice demonstrates that is not the case. Expungement has become a common, albeit unwritten, condition of settlement with requests routinely rubber-stamped by arbitration panels,” said Seidt. “We look forward to working with FINRA on improving the expungement process, which is critical for the CRD system from both a system integrity and public policy perspective to ensure the investing public has access to meaningful broker information.”
Additionally, NASAA notes that the SEC also called on FINRA to “conduct a comprehensive review of its expungement rules and procedures to determine whether additional rulemaking is necessary or appropriate to assure that expungement in fact is treated as an extraordinary remedy.” In a comment letter to the SEC earlier this year, Seidt suggested FINRA consider changes including adopting substantive expungement rules, requiring advance notice to affected state regulators, potential delineation of claims that are ineligible for expungement, and the prospect of expungement-only arbitration or regulatory panels.
Seidt also stressed that it is important to maintain the integrity of CRD data because state securities regulators rely upon it to make licensing decisions about brokers seeking to do business within their jurisdictions. “A sketchy CRD record will often lead a state to demand voluntary withdrawal or termination of the application,” she said.
The CRD was developed by NASAA and FINRA predecessor, the NASD, to consolidate the paper-based licensing and regulatory process into a single, national computerized registration and licensing database. It includes employment history information as well as regulatory and disciplinary actions.
NASAA reports that its statistics show that more than 15,700 state license applications were withdrawn between 2008 and 2013. States also used CRD and IARD records to deny, revoke, suspend or condition approximately another 4,400 licenses during the same period.
“State securities regulators used these public records to weed out more than 20,000 individuals over the past five years in support of our responsibility to screen bad actors and others who seek to harm investors in our jurisdictions,” Seidt said. “This gatekeeper function is just one of the many ways state securities regulators work to protect investors and bolster their confidence in our financial markets and in the professionals who provide them with important financial services.”