[Federal Register: March 10, 2003 (Volume 68, Number 46)]
[Notices]
[Page 11435-11439]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10mr03-96]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47435; File No. SR-NASD-2002-168]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the National Association of
Securities Dealers, Inc. Relating to Proposed Rule 2130 Concerning the
Expungement of Customer Dispute Information From the Central
Registration Depository System
March 4, 2003.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 19, 2002, the National Association of Securities Dealers,
Inc. (``NASD'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by NASD.
NASD amended the proposed rule change on January 28, 2003.\3\ The
Commission is publishing this notice to solicit
[[Page 11436]]
comments on the proposed rule change, as amended, from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter, dated January 28, 2003, from Patrice M.
Gliniecki, Vice President and Deputy General Counsel, NASD, to
Katherine A. England, Assistant Director, Division of Market
Regulation, Commission (``Amendment No. 1''). In Amendment No. 1,
NASD modified the proposed rule text to clarify that the
requirements of paragraph (b) are to apply only in such cases when
the NASD has not otherwise waived such requirements. In addition,
Amendment No. 1 added language to the Purpose section to clarify
that, pursuant to the rule, the NASD will participate in such
judicial proceedings and generally oppose expunging dispute
information and also to clarify that the NASD retains the discretion
not to oppose expungement. Amendment No. 1 also clarifies that
application of the proposed rule will apply to customer dispute
information only and not apply to other expungement directives
(e.g., related to certain criminal information and certain
defamatory information). Finally, Amendment No. 1 explains that NASD
Dispute Resolution will draft training materials for arbitrators
regarding the standards upon which an arbitration award, directing
expungement, may be confirmed by a court.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to adopt NASD Rule 2130 governing the expungement
of customer dispute information from the Central Registration
Depository (``CRD[reg]'' or ``CRD system'') and various internal
guidelines to be adopted by NASD regarding the handling of requests to
expunge customer dispute information from the CRD System. Below is the
text of the proposed rule change. Proposed rule language is in italics.
* * * * *
2130. Obtaining an Order of Expungement of Customer Dispute Information
from the Central Registration Depository (CRD System)
(a) Members or associated persons seeking to expunge information
from the CRD system arising from disputes with public customers must
obtain an order from a court of competent jurisdiction directing such
expungement or confirming an arbitration award containing expungement
relief.
(b) Members or associated persons petitioning a court for
expungement relief or seeking judicial confirmation of an arbitration
award containing expungement relief must name NASD as an additional
party and serve NASD with all appropriate documents unless this
requirement is waived pursuant to subparagraphs (1) or (2) below.
(1) Upon request, NASD may waive the obligation to name NASD as a
party if NASD determines that the expungement relief is based on
judicial or arbitral findings that:
(A) the claim, allegation or information is without factual basis;
(B) the complaint fails to state a claim upon which relief can be
granted or is frivolous; or
(C) the information contained in the CRD system is defamatory in
nature.
(2) If the expungement relief is based on judicial or arbitral
findings other than those described above, NASD, in its sole discretion
and under extraordinary circumstances, also may waive the obligation to
name NASD as a party if it determines that:
(A) the expungement relief and accompanying findings on which it is
based are meritorious; and
(B) the expungement would have no material adverse effect on
investor protection, the integrity of the CRD system, or regulatory
requirements.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. NASD has prepared summaries, set forth in Sections A, B,
and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to establish procedures
for expunging customer dispute information from the CRD system. The
proposed rule will require all directives to expunge customer dispute
information from the CRD system to be confirmed by or ordered by a
court of competent jurisdiction. The proposed rule includes any such
directives that may be in: (1) Judicial proceedings seeking expungement
(including proceedings seeking expungement relief resulting from
settlements in disputes between public customers and member firms or
their associated persons in which the parties agree to expungement of
customer dispute information as part of the settlement); (2)
arbitration awards rendered in disputes between public customers and
member firms or their associated persons in which the parties agree to
expunge customer dispute information as part of the settlement and then
present the settlement to the arbitration panel for inclusion in a
stipulated award; and (3) arbitration awards issued after a decision on
the merits.\4\
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\4\ NASD Dispute Resolution will draft training materials for
arbitrators and informational materials for parties regarding the
standards under which customer dispute information may be expunged.
No amendment to the Code of Arbitration Procedure is currently
anticipated.
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The proposed rule also will require member firms and associated
persons seeking expungement to name NASD as an additional party in any
judicial proceeding seeking expungement relief or confirming an
arbitration award containing expungement relief. Under the proposed
rule, NASD will participate in such judicial proceedings and generally
will oppose expunging dispute information in such judicial proceedings
unless the arbitrators or the court have made specific findings that
the subject matter of the claim or the information in the CRD system:
(1) Is without factual basis (i.e., is factually impossible or clearly
erroneous); (2) fails to state a claim upon which relief can be granted
or is frivolous; or (3) is defamatory in nature. NASD will retain
discretion under the proposed rule not to oppose expungement relief in
exceptional cases where the basis for the expungement does not fall
within one of the three standards. NASD would exercise such discretion
only if it determines that the expungement is meritorious and would
have no material adverse effect on investor protection, the integrity
of the CRD system or regulatory requirements.
The proposed rule will also permit member firms and associated
persons to ask NASD to waive the requirement to name NASD as a party on
the basis that the expungement order meets at least one of the
standards for expungement articulated in the proposed rule. This will
save members and NASD time and expense by enabling NASD to review the
findings of the arbitrators or court and determine to waive
participation in the judicial proceeding if NASD determines that the
findings made by the arbitrators or the court meet at least one of the
standards in the rule. If the expungement order fails to meet at least
one of the standards in the rule, NASD will participate in the judicial
proceeding and oppose the expungement.
Consistent with existing CRD policy, certain expungement directives
will not be subject to the proposed rule. For example, NASD will
continue to expunge certain information that is not customer dispute
information, such as certain criminal information, pursuant to federal
and state law. Also, NASD may execute, without a court order, an
arbitration award rendered in a dispute between a member and a current
or former associated person that contains an expungement directive in
which the arbitration panel states that expungement relief is being
granted based on the defamatory nature of the information.
The CRD system is an on-line registration and licensing system for
the U.S. securities industry, state and Federal regulators, and self-
regulatory organizations (``SROs''). The CRD system contains broker-
dealer information filed on the Uniform Application for Broker-Dealer
Registration (``Form BD'') and the Uniform Request for Withdrawal from
Broker-Dealer Registration (``Form BDW'') and information on associated
persons filed on the Uniform
[[Page 11437]]
Application for Securities Industry Registration or Transfer (``Form U-
4'') and the Uniform Termination Notice for Securities Industry
Registration (``Form U-5''). The CRD system also contains information
filed by regulators via the Uniform Disciplinary Action Reporting form
(``Form U-6''). The CRD system contains administrative information
(personal, organizational, employment history, registration and other
information) and disclosure information (criminal matters, regulatory
disciplinary actions, civil judicial actions, financial information,
and information relating to customer disputes) filed on these forms.
For purposes of this rule, ``customer dispute information'' includes
customer complaints, arbitration claims, and court filings made by
customers, and the arbitration awards or court judgments that may
result from those claims or filings. This category of information
contains allegations that a member or one or more of its associated
persons has violated securities laws, regulations, or rules.
NASD operates the CRD system pursuant to policies developed jointly
with the North American Securities Administrators Association
(``NASAA''). NASD works with the SEC, NASAA, other members of the
regulatory community, and member firms to establish policies and
procedures reasonably designed to ensure that information submitted to
and maintained on the CRD system is accurate and complete. These
procedures, among other things, cover expungement of information from
the CRD system in narrowly defined circumstances. NASAA and some states
have taken the position that information in the CRD system is a record
of any state that uses the information to make a licensing decision,
and that state laws generally do not permit information to be expunged
once it has been filed on the CRD system, absent a court order that
explicitly directs expungement.
Since the inception of the CRD system in 1981, NASD generally has
honored court-ordered expungements and, until January 1999, NASD also
honored arbitrator-ordered expungements that were contained in final
awards. In January 1999, after consultation with NASAA, NASD imposed a
moratorium on arbitrator-ordered expungements from the CRD system.\5\
Under the moratorium, which is still in effect, 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.\6\
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\5\ The moratorium was announced in Notice to Members 99-09.
\6\ Under existing CRD policy, and consistent with the 1999
moratorium, NASD may execute, without a court order, arbitration
awards rendered in disputes between registered representatives and
firms that contain expungement directives in which the arbitration
panel states that expungement relief is being granted because of the
defamatory nature of the information. These expungements are not
covered by the moratorium and will not be covered by the proposed
rules and policies.
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Since imposing the moratorium, NASD has been considering how to
craft an approach to expungement that would allow NASD, in its capacity
as an SRO and as operator of the CRD system, effectively to challenge
expungement directives that might diminish or impair the integrity of
the system and to ensure the maintenance of essential information for
regulators and investors.\7\ Such an approach necessarily requires NASD
to balance three competing interests: (1) The interests of NASD, the
states, and other regulators in retaining broad access to customer
dispute information to fulfill their regulatory responsibilities and
investor protection obligations; (2) the interests of the brokerage
community and others in a fair process that recognizes their stake in
protecting their reputations and permits expungement from the CRD
system when appropriate; and (3) the interests of investors in having
access to accurate and meaningful information about brokers with whom
they conduct, or may conduct, business.
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\7\ In July 1999, NASD issued Notice to Members 99-54 seeking
comment on possible approaches to addressing arbitrator-ordered
expungements of information from the CRD system.
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NASD is cognizant of the importance of ensuring that the
expungement policy does not have an overly broad chilling effect on the
settlement process or inappropriately interfere with the arbitration
process or arbitrators' authority to award appropriate remedies. NASD
and other regulators participating in the CRD system agree that
expungement is extraordinary relief, and that courts granting
expungement relief under the existing rules and procedures may not
fully consider all of the competing interests referenced above. NASD
believes that the additional safeguards and procedures proposed herein
will allow fact finders and NASD to consider all competing interests
before directing or granting expungement of customer dispute
information from the CRD system.
2. Statutory Basis
NASD believes that the proposed rule change, as amended, is
consistent with the provisions of section 15A(b)(6) of the Act,\8\ in
that the proposal is designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
and, in general, to protect investors and the public interest. NASD
believes that the proposed rule change, as amended, is designed to
accomplish these ends by allowing fact finders and NASD to consider all
competing interests before directing or granting expungement of
customer dispute information.
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\8\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD does not believe that the proposed rule change, as amended,
would result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
In October 2001, NASD published Notice to Members 01-65 (``NtM 01-
65'' or ``Notice'') requesting comment on the establishment of certain
criteria that must be met, and procedures that must be followed, before
NASD would expunge certain information from the CRD system pursuant to
an expungement order. NtM 01-65 encouraged members, investors,
registered representatives, and other interested persons to comment.
NASD proposed in NtM 01-65 that the CRD system expunge customer dispute
information only if certain criteria are met and certain protocols
followed. Specifically, NASD requested comment on whether expungement
of customer dispute information from the CRD system should generally be
limited to cases where the expungement order is based on a finding by
an arbitrator or a court that (1) The subject matter of a claim or
information in the system involves a case of factual impossibility or
``clear error''; (2) the claim is without legal merit; or (3) the
information contained in the CRD system is determined to be defamatory
in nature.
NASD also sought comment on (1) Specific procedures that would be
required to be followed depending on whether the finding that is made
results from a contested proceeding or from a settled matter; (2) the
adoption of a rule amending the Code of Arbitration
[[Page 11438]]
Procedure to require a finding in an arbitration award of one or more
of the expungement criteria discussed in the Notice; and (3) the
adoption of a rule or Interpretive Material that clearly articulates
NASD's authority to pursue disciplinary action against a member or
associated person who seeks to have information about an arbitration
claim expunged after there has been an award rendered against that
member or associated person by the arbitrators or seeks to expunge any
arbitration award that does not contain an expungement order and a
finding of at least one of the criteria set forth in the Notice. NtM
01-65 provided members and other interested parties with a checklist of
four questions that they could use to respond to the request for
comment in addition to, or in lieu of, sending written comments. NASD
noted that the checklist did not cover all aspects of the proposal, and
it encouraged commenters to provide written comments, as necessary.
NASD extended the comment period from November 24, 2001 to December 31,
2001. NASD received a total of 579 responses to the Notice.
Forty of the 579 responses to NtM 01-65 consisted solely of written
comments. A significant percentage of the remaining 539 commenters
identified themselves as registered representatives associated with
NASD member firms, and these commenters overwhelmingly opposed the
imposition of any additional substantive or procedural obligations
before expungement of customer dispute information could be effected.
Commenters responded to the four questions as follows: \9\
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\9\ Some commenters submitted duplicate responses to the
questions; NASD considered these as one vote per question. For those
commenters who changed their answers to the questions in a second
response, NASD considered only the second response. NASD staff also
notes that not all commenters responded to each question.
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Question 1 asked: ``Should [NASD] adopt a rule that would require
members to provide notice to [NASD] and make [NASD] a party to the
proceeding before seeking a court order directing expungement or
confirming an arbitration award that contains an expungement
directive?'' Forty commenters answered ``yes,'' 495 commenters answered
``no,'' and four commenters did not answer this question.
Question 2 asked: ``Should [NASD] establish specific standards that
must be met before it will execute orders directing it to expunge
customer dispute information from the CRD system? Are the standards
identified in the Notice (i.e., factually impossible/clear error;
without legal merit; and defamatory in nature) appropriate?'' Fifty-one
commenters answered ``yes,'' 483 commenters answered ``no,'' and five
commenters did not answer this question.
Question 3 asked: ``Should [NASD] execute arbitrators'' directives
to expunge customer dispute information from the CRD system if (1)
arbitrators make specific findings in stipulated or consent awards; (2)
arbitrators expressly include those findings in an award; and (3) a
party confirms the award in a court of competent jurisdiction?''
Eighty-eight commenters answered ``yes,'' 441 commenters answered
``no,'' and 10 commenters did not answer this question.
Question 4 asked: ``Should [NASD] adopt a rule or Interpretive
Material that would explicitly articulate [NASD's] authority to pursue
disciplinary actions for violations of just and equitable principles of
trade against a member or associated person who seeks to have
information about an arbitration claim expunged after there has been an
award rendered against that member by the arbitrators or seeks to
expunge any arbitration award that does not contain an expungement
order and a finding of at least one of the criteria described in the
Notice?'' Forty-eight commenters answered ``yes,'' 483 commenters
answered ``no,'' and eight commenters did not answer this question.
Of the 40 commenters who responded by letter, 25 were NASD members
or persons associated with NASD members.\10\ NASAA, the Securities
Industry Association (``SIA''), the Public Investors Arbitration Bar
Association (``PIABA''), the National Association of Investment
Professionals (``NAIP'') also commented, as did a number of non-
industry persons who have an interest in the arbitration process. There
was a wide variance in these comments, ranging from approval of some or
all of the proposed procedures to total disapproval. Among the concerns
raised by commenters were: the proposed procedures requiring court
confirmation would be burdensome and costly; mandatory court
confirmation and naming NASD as a party would undermine the arbitration
process; the proposed procedures would create a conflict of interest
between firms and representatives in settlements because the firm might
wish to settle a case, regardless of its merits, thereby precluding the
representative from obtaining an expungement; and the proposed criteria
for expungement were too vague and/or too restrictive.
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\10\ A number of commenters did not identify any affiliation.
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Some of these commenters recommended new requirements in the
arbitration process to handle expungement requests. For example, it was
suggested that arbitrators be required to decide claims of defamation
based on the law of the state in which the party claiming defamation
maintains his/her/its principal office, or in accordance with the terms
of an agreement between the parties. Another suggestion was to require
claimants to attest that they are bringing the claim in good faith and
to give arbitrators the authority to award sanctions against claimants
who bring claims in bad faith or without a reasonable basis. Some
commenters suggested that a party submitting a stipulated award
containing a recommendation for expungement to a court for confirmation
should attach an affidavit setting forth facts constituting ``factual
impossibility'' and/or ``clear error.''
Based on the comments to NtM 01-65, NASD is proposing to retain the
core substantive requirements of the expungement program described in
NtM 01-65, but is also proposing certain modifications to the program
proposed in the Notice. NASD recognizes that any expungement program
requires a balancing of competing interests. NASD believes that the
proposed rule will: help to ensure that information submitted to and
maintained on the CRD system is accurate and complete; give regulators
the broad access to customer dispute information that they need to
fulfill their regulatory responsibilities; give individuals in the
brokerage community a fair process that protects their reputations and
permits expungement from the CRD system when appropriate; and gives
investors access to accurate information about brokers with whom they
conduct, or may conduct, business.
NASD has incorporated the following modifications based on its
review of the comments. NASD proposes to modify the three broad
categories proposed in NtM 01-65: ``without factual basis,'' ``without
legal merit,'' and ``defamatory in nature.'' The ``without factual
basis'' standard would include, as identified in the Notice, the
``factually impossible'' and ``clear error'' standards. Of the three
categories proposed, the ``without legal merit'' standard drew the most
comments, ranging from claims that it is too narrow, too broad, or too
vague. To address those comments, NASD proposes to change the ``without
legal merit'' standard to a standard of ``failure to state a claim upon
which relief can be granted'' or ``frivolous.'' NASD
[[Page 11439]]
proposes to retain the ``defamatory in nature'' standard proposed in
NtM 01-65. Although this standard was the subject of many comments, it
has been used successfully in the arbitration forum in registered
representative/member firm arbitrations, and NASD believes that it is
appropriate as proposed.
NASD proposed in NtM 01-65 to limit expungement relief in
stipulated awards to cases involving ``factual impossibility'' or
``clear error'' on the basis that persons in those circumstances should
be able to avail themselves of the settlement opportunity outside of
arbitration, and then request that an arbitrator issue an award that
incorporates the stipulated settlement and includes expungement relief
for certain named parties. In excluding the other two grounds for
expungement from its initial proposal, NASD noted that it believed that
it was unlikely that claimant or claimant's counsel would agree that
the claim or information at issue was lacking in legal merit or was
defamatory in nature. In response to comments, NASD proposes to modify
the original proposal to allow expungement relief in stipulated awards
(or on the basis of a settlement) based on all three grounds, with a
uniform requirement that there be specific judicial or arbitral
findings in all such cases. In connection with making the required
arbitral findings in such cases, NASD will explore the use of
telephonic versus in-person hearings, as well as the option of making a
decision based on briefs and affidavits from the parties and relevant
third parties.
In response to commenters' concerns about the burdens and costs in
naming NASD as an additional party in any judicial proceeding seeking
expungement relief or confirming an arbitration award containing
expungement relief and serving NASD with the appropriate court papers,
NASD proposes to retain these requirements, but it further proposes to
permit parties to ask NASD to waive the requirement that it be made a
party upon a showing that the expungement relief being requested is
within the established standards. This will save members and NASD time
and expense by enabling NASD to review the findings of the arbitrators
or court and determine to waive participation in the judicial
proceeding if the findings meet at least one of the standards in the
rule. If the expungement order fails to meet at least one of the
standards in the rule, NASD will participate in the judicial proceeding
and oppose the expungement. NASD also proposes to retain discretion not
to oppose expungement relief in exceptional cases where the basis for
the expungement does not fall within one of the three standards. NASD
would exercise such discretion only if it determines that the
expungement is meritorious and would have no material adverse effect on
investor protection, the integrity of the CRD system, or regulatory
requirements.
After reviewing the comments, NASD also determined not to adopt a
rule or Interpretive Material that would explicitly articulate NASD's
authority to pursue disciplinary actions for violations of just and
equitable principles of trade against a member or associated person who
seeks to have information about an arbitration claim expunged after
there has been an award rendered against that member by the arbitrators
or seeks to expunge any arbitration award that does not contain an
expungement order and a finding of at least one of the criteria
described in the Notice. NASD believes that it currently has authority
under Rule 2110 to bring a disciplinary action against NASD members and
their associated persons who contravene the standards set forth in
NASD's proposed rule and policies. NASD will revisit this issue in the
future should it appear that such a rule is necessary.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve such proposed rule change, as amended, or
B. Institute proceedings to determine whether the proposed rule
change, as amended, should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change, as
amended, that are filed with the Commission, and all written
communications relating to the proposed rule change, as amended,
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for inspection and copying in the Commission's
Public Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of the NASD. All
submissions should refer to File No. SR-NASD-2002-168 and should be
submitted by March 31, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.3-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-5602 Filed 3-7-03; 8:45 am]
BILLING CODE 8010-01-P