NASD wants tougher rules to prevent inappropriate deletion of data

Brokers who run afoul of regulations or get caught up in customer disputes could soon find it even harder to keep their past from coming back to haunt them.

The National Association of Securities Dealers, the industry’s self-regulating organization, is proposing new ground rules for removing information from the Central Registration Depository, a public database about brokers and their representatives.

In the proposal, the NASD says a potential for inappropriate use of the deletion process exists, particularly when parties agree to expunge customer dispute information as part of a settlement.

Registered representatives, however, have long complained that customer complaints and disciplinary action contained in the CRD could unfairly tarnish their reputation.

“That has been a problem for some time,” says Patrice Stewart, chief executive officer of Portfolio Performance Analysis Inc. in Traverse City, Mich., which independently analyzes customer complaints for broker-dealers and clients.

Ms. Stewart is chairman of the legal committee of the National Association of Investment Professionals, a St. Paul, Minn., organization for registered representatives.

“There are a lot of customer complaints that are not merited,” says Ms. Stewart.

new standards

But the NASD counters that both the investing public and regulators have an interest in preventing customer dispute information in the CRD from being expunged when two private parties agree to settle a civil suit or arbitration claim.

Most customer disputes are resolved in arbitration, or without any findings of fact, the NASD notes.

The organization singles out “stipulated” or “consent” awards because no hearings or independent findings are involved and no public record is created in those cases.

To delete information, at least one of three standards would have to be met, each involving the finding of an arbitration panel, court or jury:

* Information in the system would have to be clearly in error.

* A judgment in favor of a firm or individual would have to be made, plus a further finding that the claim was without legal merit.

* Information in the CRD would have to be false and harm someone’s reputation.

In addition, the NASD would have to be a party to any court proceeding concerning changes of CRD information.

The NASD could take disciplinary action against any person or firm that tried to delete information without a court effacement order, or tried to delete information after arbitrators had made an award against them.

Until January 1999, the NASD allowed deletions to be made from the depository if ordered by arbitrators.

But state regulators complained about a lack of information to determine if a registered representative of a brokerage firm should be licensed.

In response, the NASD declared a moratorium on deletions unless a court confirmed an arbitrator’s decision.

Problems with the CRD have persisted for some time, says Alan Foxman, a lawyer in Boca Raton, Fla., who worked in the NASD’s arbitration department from 1989 to 1997. Mr. Foxman is chairman of the NAIP’s government relations committee.

The NAIP has complained to the NASD that brokerage firms sometimes have included derogatory information about departing representatives that the reps could not access.

In some cases, that caused states to deny licenses to reps, Mr. Foxman says.

“My initial impression is, we’d probably welcome having some formal procedures in place,” he says. But he questions why the NASD should be involved in court proceedings concerning the deletion of CRD information.

“If the fact finder has come to a determination that it’s appropriate under [the NASD’s] guidelines to have the information expunged, why do we have to go through the added cost of naming the NASD in a subsequent proceeding to confirm that order?” he asks. “And why should the NASD be able to come in and supersede that fact finder’s judgment?”

A complaint, Ms. Stewart adds, “doesn’t mean the broker didn’t do the best job they could with the information they had at the time. It’s not the broker’s fault all the time” when customers lose money.

Comments on the proposal must be filed by Nov. 24, and the measure must also be approved by the Securities and Exchange Commission before it becomes final.