[Federal Register: December 24, 2003 (Volume 68, Number 247)]
[Notices]
[Page 74667-74673]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24de03-143]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48933; File No. SR-NASD-2002-168]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc; Order Granting Approval of Proposed Rule Change and
Amendment No. 1, Thereto, and Notice of Filing and Order Granting
Accelerated Approval to Amendment No. 2, Thereto, Relating to Proposed
NASD Rule 2130 Concerning the Expungement of Customer Dispute
Information From the Central Registration Depository System
December 16, 2003.
I. Introduction and Description of the Proposal
On November 19, 2002, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities
and Exchange Commission (``SEC'' or ``Commission''), pursuant to
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ a proposed rule change that would: (1)
Require all directives to expunge customer dispute information from the
Central Registration Depository (``CRD'or ``CRD system'') to be
confirmed by or ordered by a court of competent jurisdiction; (2)
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; and (3) 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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On January 28, 2003, NASD submitted Amendment No. 1 to the proposed
rule change.\3\ The proposed rule change, as amended, was published for
comment in the Federal Register on March 10, 2003.\4\ The Commission
received 28 comments on the proposal from a wide range of sources. The
NASD responded to these comments by amending the filing on September
11, 2003.\5\ This order approves the proposed rule change, as amended
by Amendment No. 1. In addition, the Commission is publishing a notice
to solicit comment on and is simultaneously approving, on an
accelerated basis, Amendment No. 2 to the proposal. Below is the text
of the proposed rule change, as amended by Amendment No. 2. Deletions
of the proposed rule text, which was published in the Notice, appear in
[brackets]; proposed rule language to be added by Amendment No. 2
appears in italics.
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\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'').
\4\ See Securities Exchange Act Release No. 47435 (March 4,
2003), 68 FR 11435 (``Notice'').
\5\ See letter from Shirley H. Weiss, Associate General Counsel,
Office of the General Counsel, NASD, to Jonathan G. Katz, Secretary,
Commission (September 11, 2003) (``Amendment No. 2''). In Amendment
No. 2, the NASD made certain changes to its proposed rule text in
response to comments received by the Commission in connection with
the filing. The Amendment No. 2 rule text changes are published in
their entirety and discussed at length below.
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* * * * *
[[Page 74668]]
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 subparagraph (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
affirmative judicial or arbitral findings that:
(A) the claim, allegation, or information is [without factual
basis] factually impossible or clearly erroneous;
(B) the [complaint fails to state a claim upon which relief can be
granted or is frivolous] registered person was not involved in the
alleged investment-related sales practice violation, forgery, theft,
misappropriation, or conversion of funds; or
(C) the [information contained in the CRD system is defamatory in
nature] claim, allegation, or information is false.
(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.
(c) For purposes of this rule, the terms ``sales practice
violation,'' ``investment-related,'' and ``involved'' shall have the
meanings set forth in the Uniform Application for Securities Industry
Registration of Transfer (``Form U4'') in effect at the time of
issuance of the subject expungement order.
* * * * *
II. Summary of Comments and Response to Comments
A. Comments Received
As stated above, the Commission received 28 comments from a variety
of sources.\6\ The majority of comments received were in favor of the
NASD putting a rule in place on this topic, but had a variety of
suggestions as to how to make the proposed rule text more effective.
The arguments put forth in the comments are summarized as follows.
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\6\ See Letter to Margaret H. McFarland, Deputy Secretary,
Commission, from Charles W. Austin, Jr., Executive Vice-President,
Public Investors Arbitration Bar Association (March 28, 2003)
(``PIABA Comment); letter to Secretary, Commission, from Joel A.
Goodman and Stephen Krosschell, Goodman & Nekvasil, P.A. (March 29,
2003) (``G&N Comment''); electronic mail (``e-mail'') to Secretary,
Commission, from Barry D. Estell (March 28, 2003) (``Estell
Comment''); letter to Secretary, Commission, from C. Thomas Mason
III (March 31, 2003) (``Mason Comment''); letter to Jonathan G.
Katz, Secretary, Commission, from Stuart J. Kaswell, Senior Vice
President and General Counsel, Securities Industry Association
(March 31, 2003) (``SIA Comment''); e-mail to Commission Rule
Comments from Steven M. Sherman (March 31, 2003) (``Sherman
Comment''); e-mail to Commission Rule Comments from Alan L. Sachs
(March 28, 2003) (``Sachs Comment''); e-mail to Commission Rule
Comments from Helen Mangano (March 28, 2003) (``Mangano Comment'');
e-mail to Commission Rule Comments from John J. Miller (March 30,
2003) (``Miller Comment''); letter to Jonathan G. Katz, Secretary,
Commission, from Gerald S. Siegmyer, Siegmyer, Oshman & Geddie,
L.L.P. (April 7, 2003) (``SO&G Comment''); letter to Commission from
Donald G. McGrath, McGrath & Polvino, PLLC (March 27, 2003) (``M&P
Comment''); letter to Commission from A. Daniel Woska, Woska &
Hasbrook (March 31, 2003) (``W&H Comment''); letter to Jonathan G.
Katz, Secretary, Commission, from Dan Jamieson (April 25, 2003)
(``Jamieson Comment''); letter to Commission from Kenneth R. Hyman,
President, Partnervest Securities, Inc. (May 19, 2003)
(``Partnervest Comment''); e-mail to Commission from Steven K.
McGinnis (May 19, 2003) (``McGinnis Comment''); letter to Commission
from Robert L. Hicks, President, Finance 500 (May 19, 2003)
(``Finance 500 Comment''); e-mail to Commission Rule Comments from
Robert Eastmann (June 3, 2003) (``Eastmann Comment''); letter to
Margaret H. McFarland, Deputy Secretary, Commission, from Deborah
Bortner, North American Securities Administrators Association CRD
Steering Committee Co-Chair and Washington State Director of
Securities (June 4, 2003) (``NASAA Comment''); e-mail to Commission
Rule Comments from Tammy McQuade (June 7, 2003) (``McQuade
Comment''); e-mail to Commission Rule Comments from Fired Broker
(June 9, 2003) (``Fired Broker Comment''); e-mail to Commission Rule
Comments from Mike Marchetta (June 10, 2003) (``Marchetta
Comment''); e-mail to Commission Rule Comments from David Macias
(June 10, 2003) (``Macias Comment''); e-mail to Commission Rule
Comments from djs (June 10, 2003) (``djs Comment''); 23
substantially identical form letters to Commission from John
Schooler, President, WFP Securities (May 21, 2003) (``Form Letter
Comment''); e-mail to Commission Rule Comments from Richard Lavoice
(July 29, 2003) (``Lavoice Comment''); e-mail to Commission Rule
Comments from Steve Kus (July 2, 2003) (``Kus Comment''); e-mail to
Commission Rule Comments from David Haburjak (July 8, 2003)
(``Haburjak Comment''); and e-mail to Commission Rule Comments from
Jim Aldendifer (October 12, 2003) (``Aldendifer Comment'').
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Argument #1--The criteria adopted with respect to when the NASD
will waive its involvement at the court confirmation level should be
the criteria used by arbitrators for granting expungement. In short,
rather than simply the criteria for NASD joining the court confirmation
proceeding, the standards should be applied directly to arbitrators
through the NASD's Code of Arbitration Procedures.\7\
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\7\ See PIABA Comment and Mason Comment.
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Argument #2--Member firms and associated persons will be in a
position to ``buy clean records'' through an arbitration award
containing unwarranted expungement criteria that includes one of the
three standards proposed.\8\
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\8\ See PIABA Comment; G&N Comment; Estell Comment; Mason
Comment; SO&G Comment; W&H Comment; and Jamieson Comment.
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Argument #3--The standard for proving a defamation claim varies by
jurisdiction and, in conjunction with the proposed standard language
invoking defamation principles, the result will be confusion as to
which law should be applied.\9\
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\9\ See PIABA Comment.
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Argument #4--An absolute or partial privilege exists for defamation
claims that arise out of quasi-judicial proceedings (e.g., arbitration)
in most jurisdictions, but not all. Thus, confusion could result from
the lack of uniformity in this regard.\10\
Argument #5--Extensive collateral litigation will be required to
resolve which jurisdiction's defamation standard should apply.\11\
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\10\ See PIABA Comment; G&N Comment; Mason Comment; Mangano
Comment; and SO&G Comment.
\11\ See PIABA Comment.
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Argument #6--The proposal will cause a ``chilling effect.''
Investors will be disinclined to bring any arbitration claims because
of the near certainty that members and associated persons will raise
defamation as a defense and counterclaim.\12\
Argument #7--The proposal will result in a ``dispositive motions
practice.'' The formal pleading requirements established by the
proposal will give rise to an expensive and legally complex motions
practice (thus defeating the main goal of arbitration--informal and
inexpensive conflict resolution).\13\
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\12\ See PIABA Comment; G&N Comment; Estell Comment; Mason
Comment; Sachs Comment; Mangano Comment; Miller Comment; SO&G
Comment; M&P Comment; and W&H Comment.
\13\ See PIABA Comment; G&N Comment; Estell Comment; Mason
Comment; Sachs Comment; Mangano Comment; Miller Comment; SO&G
Comment; M&P Comment; and W&H Comment.
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[[Page 74669]]
Argument #8--NASD Rule 2110 (``just and equitable principles of
trade'') should be strengthened to prevent the use of unwarranted
criteria for expungement or a new rule should be adopted that states
that a member may not seek expungement unless one of the standards is
met.\14\
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\14\ See PIABA Comment; G&N Comment; and NASAA Comment.
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Argument #9--Expungements generally will increase because of the
additional criteria and such an increase is clearly detrimental to
investors.\15\
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\15\ See G&N Comment and SO&G Comment.
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Argument #10--A conflict will be created in cases when it is in the
investor's interest to settle (through an arbitration award containing
expungement criteria), but the investor's counsel will be averse to
admitting to have filed a claim warranting expungement (e.g., a
defamatory claim).\16\
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\16\ See G&N Comment.
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Argument #11--Pro se investors will be unable to meet the
heightened formal pleading requirements established by the proposed
standards.\17\
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\17\ See G&N Comment.
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Argument #12--The status quo is not unfair and altering the status
quo would place member and associated records in a privileged class
relative to other classes of public records (i.e., civil actions are
not expungeable from the public record).\18\
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\18\ See Estell Comment; Sherman Comment; Mangano Comment;
Miller Comment; and M&P Comment.
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Argument #13--The court confirmation process will be an
insufficient safeguard relative to the added expungement criteria,
because the NASD does not have the resources to put forth serious
opposition to expungements at the court confirmation level.\19\
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\19\ See G&N Comment; Estell Comment; Mason Comment; Jamieson
Comment.
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Argument #14--CRD information is considered to be part of the
states' books and records. NASAA and the states currently insist that
only ``factually impossible'' claims are expungeable and, thus, an
expansion of the expungement criteria would conflict with the states'
books and records laws.\20\
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\20\ See Estell Comment; Mason Comment; and Sherman Comment.
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Argument #15--Investors already view the NASD arbitration process
with suspicion and adding criteria for expungement will serve to
exacerbate this perception.\21\
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\21\ See Estell Comment; Sherman Comment; and Mangano Comment.
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Argument #16--The integrity of the CRD will be negatively affected
by the proposal.\22\
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\22\ See Mason Comment; Sachs Comment; SO&G Comment; M&P
Comment; and W&H Comment.
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Argument #17--The court confirmation process is still too
burdensome on members and associated persons and this burden should be
eased, rather than increased.\23\
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\23\ See SIA Comment.
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Argument #18--The proposal evidences a general lack of respect for
arbitrators. Moreover, it will undermine the integrity of arbitrators
by limiting their decision-making ability.\24\
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\24\ See SIA Comment; Jamieson Comment; Partnervest Comment;
McGinnis Comment; Finance 500 Comment; and Form Letter Comment.
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Argument #19--The proposal should not be acted upon in isolation,
instead it should be combined with NASD NtM 02-74 regarding expanding
the amount of information that brokers must report, generally.\25\
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\25\ See SIA Comment and Jamieson Comment.
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Argument #20--The proposal would automatically convert the NASD
into an adversary of members at the court confirmation level.
Furthermore, the proposal will create a systemic prejudice on the part
of NASDR against members.\26\
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\26\ See Partnervest Comment; McGinnis Comment; Finance 500
Comment; and Form Letter Comment.
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Argument #21--The court confirmation process will require a
rehearing of the issues and recalling of witnesses. Such rehearing and
recalling will not only be inefficient, but could result in the
confirming court making different findings from those made in the
underlying arbitration proceeding. This could create confusion as to
the status of the underlying arbitration decision.\27\
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\27\ See SIA Comment; Partnervest Comment; McGinnis Comment;
Finance 500 Comment; and Form Letter Comment.
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Argument #22--The current system of disclosing unproven allegations
is inequitable and making it more difficult for members and associated
persons to remove such allegations from their CRD records is ``doubly
unfair.'' \28\
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\28\ See Eastmann Comment; McQuade Comment; Fired Broker
Comment; Marchetta Comment; Macias Comment; djs Comment; LaVoice
Comment; Kus Comment; Haburjak Comment; and Aldendifer Comment.
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B. Amendment No. 2
In Amendment No. 2, the NASD addressed a number of the comments
received by the Commission in response to the publication of the notice
in the Federal Register. As noted above, some commenters expressed
concern that the mere existence of an NASD rule governing expungement
could encourage registered persons to seek expungements and make
expungement easier to obtain. NASD noted its belief that this is not a
legitimate concern. NASD stated that these commenters may not have
considered the fact that NASD currently expunges information from the
CRD system when ordered to do so by a court of competent jurisdiction,
and that court-ordered expungements currently are not subject to any
NASD limitations or standards.\29\ Under the 1999 moratorium,
registered persons seeking expungement relief need only obtain a court
order to expunge or court confirmation of an arbitration award granting
expungement relief. Under the proposed rule, NASD stressed that it will
have the opportunity to review the basis for expungement and to oppose
an expungement in court unless there is a specific finding that the
expungement meets one of the prescribed standards.
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\29\ NASD has, since the inception of the CRD system, executed
expungements involving customer dispute information based on a court
order or (since the imposition of the moratorium in 1999 on
expungements based solely on arbitration awards) court confirmation
of an arbitration award directing expungement. These court orders
included expungement relief granted in cases involving both
settlements and hearings on the merits.
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In Amendment No. 2, NASD discussed a concern raised by commenters
that arbitrators should have sole authority and complete discretion to
order expungement. They suggested that NASD's and the States' proposed
role in the court confirmation process would undermine arbitrators'
credibility. In response, NASD argued that, to the contrary, the
critical element in the proposal is NASD's reliance on fact finders,
especially arbitrators, to find that the expungement relief is based on
one of the standards in the proposed rule. Also of note, NASD stated in
Amendment No. 2 that NASD Dispute Resolution will provide training to
arbitrators regarding the standards for expungement that will trigger
the NASD waiver of opposition. Under proposed Rule 2130, NASD asserted
that it will rely on arbitrators' findings and waive participation in
the court confirmation process if arbitrators have appropriately
awarded expungement.
Other commenters contended that the proposed procedures will be
economically prohibitive. In response, NASD recognized that the
additional step of naming NASD as a party may involve additional costs.
In an effort to minimize costs to the parties, NASD may waive
participation in the court confirmation process before filing with the
court if the parties give NASD a copy of the award to review and the
[[Page 74670]]
arbitrators have ordered expungement based on one of the standards in
the rule. NASD noted the belief that the availability of this waiver
process should limit any additional costs to the parties.
The NASD also spoke to whether the proposed rule will discourage
settlements, since the parties will no longer have total control over
whether information about the arbitration will be expunged. NASD
admitted that it is unable to predict the ultimate effect of the
proposed rule on settlements. Further, NASD noted that compliance with
the proposed rule may have the effect of decreasing the number of
settlements that are reached. Currently, it is possible that
respondents may agree to pay damages as a quid pro quo for expungement
and obtain court confirmation of the expungement. NASD believes that
the proposed rule will reduce, if not eliminate, the risk of expunging
information that is critical to investor protection and regulatory
interests as a condition in settlement negotiations. NASD asserted that
the potential dampening effect on settlements must be weighed against
the integrity of the information in the CRD system, and the ability of
public investors and regulators to examine the entirety of a registered
person's record, with the limited exceptions as proposed.
A number of comments received expressed the concern that members
and associated persons will be able to ``buy clean records'' by
inserting terms into arbitration settlements that match the standards
established under the proposed rule. NASD responded to this concern in
Amendment No. 2 by asserting that the ``affirmative determination''
requirement imposed on arbitrators should foil attempts to ``buy a
clean record.'' Under the proposed standard, dismissal of a claim alone
would not be a sufficient basis for ordering expungement. NASD states
that its arbitrator training materials will make clear that an
expungement order must be premised on an affirmative determination by
the arbitrator that the respondent was not involved in the alleged
investment-related sales practice violation, forgery, theft,
misappropriation, or conversion of funds. Without such an affirmative
finding, NASD would have no basis under this standard to waive its
obligation to be named as a party in the court confirmation process.
Commenters expressed concern that the ``complaint fails to state a
claim upon which relief can be granted'' standard, which parallels a
motion to dismiss made in federal court, could be interpreted to
authorize arbitrators to grant such motions in arbitration. In
response, NASD modified in Amendment No. 2 the language describing the
standards under which NASD may waive participation in the court
confirmation process. Currently, there is no provision in the Code of
Arbitration Procedure that either permits or prohibits motions. NASD
did not intend for the proposed rule to have any effect on the
authority of arbitrators to grant or deny motions to dismiss a claim
before a hearing on the merits. Therefore, through Amendment No. 2,
NASD eliminated the ``complaint fails to state a claim upon which
relief can be granted'' standard and replaced it with a more objective
standard based on CRD reporting requirements. Specifically, Amendment
No. 2 proposed a standard that would require an affirmative arbitral or
judicial finding that the registered person was not involved in the
alleged investment-related sales practice violation, forgery, theft,
misappropriation, or conversion of funds. Such a finding, NASD argued,
would be consistent with the registered representative reporting ``No''
answers to current Question 14I(1) of the Uniform Application for
Securities Industry Registration or Transfer (``Form U-4''). Should
arbitrators make the required finding, NASD argued, no logical basis
would exist for reporting the underlying complaint and other
information on an individual's CRD record. NASD stated its belief that
this revised standard eliminates any unintended implications for the
arbitration process, while preserving the intended substantive effect
of the standard.
Commenters were also concerned that the ``defamatory in nature''
standard would encourage respondents to counterclaim for defamation and
require claimants to defend such claims, thereby creating undue burdens
on public investors in the arbitration process. Some commenters
correctly noted that claims in arbitration are privileged and therefore
immune from suit. In response, NASD stated that it believes the
proposed rule should not substantially affect either the substance or
procedure of an arbitration proceeding and should not place any undue
burden on claimants in the arbitration process. Thus, to avoid the
possibility that the proposed standard might result in additional
counterclaims for defamation, NASD replaced it in Amendment No. 2 with
a requirement that the arbitrator or adjudicator make a finding that
the claim, allegation, or information is ``false.''
Some commenters expressed the concern that the ``without factual
basis'' standard is overly vague. In response, NASD replaced the
``without factual basis'' standard with a ``factual impossibility or
clearly erroneous'' standard. NASD asserted that this standard has a
clear meaning to regulators and public investors and was favored by a
number of commenters. This standard, NASD believes, would enable an
individual who has been erroneously named in an arbitration, because he
or she was not even employed by the member firm during the relevant
time, to obtain expungement of a dismissed complaint.
Some commenters suggested that the burden of complying with the
three proposed standards should be placed squarely upon the NASD's
members. Such a rule would require that NASD members only seek
expungement of data from the CRD system, if such data fits within one
of the three standards. NASD noted that it does not believe such an
approach is necessary to achieve the objectives of the proposed rule.
Federal and state courts, that are fully informed about the investor
protection and regulatory implications of a proposed expungement order,
NASD argued, should be trusted to make the proper decision.
Other commenters put forth the argument that the burden of
complying with the three proposed standards should be applied to
arbitrators directly through the NASD's Code of Arbitration Procedure.
NASD argued that imposing substantive requirements on arbitrators via
the Code of Arbitration Procedure would be inappropriate. NASD stated
that in no other instance does the Code of Arbitration Procedure impose
limitations on arbitrators' ability to decide a legal issue. NASD
asserted that arbitrators will know the standards for expungement
relief under proposed Rule 2130, because they will have received
appropriate training, and members and associated persons will know that
arbitrators will only grant expungement relief based on those
standards. Therefore, NASD stressed that, although the proposed rule
does not place any specific obligations on arbitrators or respondents,
all parties and arbitrators will be aware of the standards under which
expungement relief should be granted.
As discussed above, under proposed Rule 2130, NASD will participate
in the court confirmation proceeding and oppose confirmation of the
expungement portion of the arbitration award if the expungement order
does not meet one of the specified criteria. Some commenters asserted
that NASD
[[Page 74671]]
will be unable to present sufficient opposition to expungement attempts
at the court confirmation level. NASD responded in Amendment No. 2 by
stating that these comments were without merit or supporting evidence.
NASD noted that it is committed to enforcing the proposed rule, as
amended, and that it has an obligation as a self-regulatory
organization to fulfill all of its regulatory obligations. Furthermore,
NASD stressed that it will be subject to Commission oversight in its
administration of the proposed rule. As a further means to ensure that
the court is made aware of the investor protection and regulatory
implications of an expungement, NASD noted that states will be able to
intervene if they have concerns regarding whether investor protection
or regulatory issues have been fairly considered by the NASD.\30\
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\30\ NASD represented to the Commission that it is in the
process of establishing a notice procedure, whereby the state(s) in
which a member or associated person is registered would be notified
when that member or associated person seeks a waiver of NASD
involvement in the court confirmation level. To the extent that the
state(s) wishes to intervene, it could so petition the court.
Telephone conference between Shirley H. Weiss, Associate General
Counsel, Office of General Counsel, NASD, and Christopher B. Stone,
Special Counsel, Division of Market Regulation, Commission (October
17, 2003).
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The NASD also discussed on the effective date of the proposed rule
in Amendment No. 2. NASD stated that, following Commission approval of
proposed Rule 2130, it will announce the approval of the Rule in a NtM,
which also will announce the effective date of Rule 2130. According to
NASD, the NtM will announce that the requirements of Rule 2130 will
apply to all arbitrations or civil lawsuits filed on or after the
effective date. NASD noted that all requests to expunge customer
dispute information from the CRD system arising from arbitrations or
civil lawsuits filed before the effective date of the rule, including
any settlements arising therefrom, will continue to be subject to the
terms of the moratorium in effect as of January 19, 1999.
III. Discussion and Commission's Findings
The Commission has carefully reviewed the proposed rule change, as
amended, the comments, and the NASD's response thereto, and finds that
the proposed rule change, as amended, is consistent with the Act and
the rules and regulations promulgated thereunder applicable to a
national securities association,\31\ and, in particular, with the
requirements of section 15A \32\ of the Act. Specifically, the
Commission finds that approval of the proposed rule change is
consistent with section 15A(b)(6) \33\ of the Act because it is
designed to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest. The Commission
finds that the proposed rule change, as amended, is reasonably designed
to accomplish these ends by allowing fact finders and the NASD to
consider all competing interests before directing or granting
expungement of customer dispute information from the CRD.
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\31\ 15 U.S.C. 78f(b). In approving this proposal, the
Commission has considered the proposed rule's impact on efficiency,
competition and capital formation. 15 U.S.C. 78c(f).
\32\ 15 U.S.C. 78o-3.
\33\ 15 U.S.C. 78o-3(b)(6).
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Moreover, the Commission, pursuant to section 19(b)(2) \34\ of the
Act, finds good cause for approving Amendment No. 2 prior to the 30th
day after the date of publication of notice thereof in the Federal
Register. As discussed below, the Commission believes that the NASD has
responded to the concerns raised by the commenters and has struck a
fair and reasonable balance between the burden that the proposed rule
change will impose upon member firms and associated persons and the
benefit that the proposed rule change will bestow upon investors,
generally. To the extent that the NASD's Amendment No. 2 has not
specifically addressed any arguments raised, the Commission is not
persuaded by these arguments. The Commission believes that the proposal
is a clear improvement over the current system for the expungement of
information from the CRD system and believes that it should be put into
place as soon as practicable to ensure that investors and regulators
have access to more accurate information through the CRD system.
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\34\ 15 U.S.C. 78s(b)(2).
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With respect to Argument Nos. 1-9, 11, 13, and 18 discussed above,
the Commission believes that the NASD has sufficiently responded in
Amendment No. 2. Specifically, with respect to Argument Nos. 1 and 8,
the Commission believes that the NASD has sufficiently justified its
application of the standards in question to the NASD's waiver or non-
waiver of involvement at the court confirmation level. Argument Nos. 1
and 8 assert that the standards should be applied to arbitrators
through the Code of Arbitration Procedure and to NASD members seeking
expungement, respectively. The Commission agrees with the NASD that
standards will be most effectively applied at the waiver juncture. In
no other instance in the NASD's Code of Arbitration Procedure are
arbitrators bound by substantive restrictions on how they decide an
arbitration case. Moreover, as the NASD notes in Amendment No. 2,
arbitrators will be aware of the standards that will be utilized with
respect to the NASD's waiver of involvement, and, thus, arbitrators
will indirectly consider them. NASD notes in Amendment No. 2 that the
standards should not be applied to members directly, because federal
and state courts are more than able to make the proper decisions with
respect to arbitration award confirmation. The Commission agrees with
this analysis, and also believes that the potential involvement of the
NASD at the court confirmation level will provide greater safeguards
than simple application of the rule to members.
With respect to Argument No. 2, concerning the ``buying of clean
records,'' the Commission is satisfied that the NASD's requirement that
an ``affirmative'' determination be made by an arbitrator will provide
sufficient regulatory protection. In the initial proposed rule filing,
the NASD's proposal simply required that a finding be made by an
arbitrator that matched one of the proposed standards. In response to
this, commenters expressed the concern that members and associated
persons would be able to negotiate for the inclusion of a finding in
the arbitration settlement that matched one of the requisite standards.
By requiring an ``affirmative determination'' on the part of the
arbitrator that one of the standards was met, the NASD asserted that
this concern and the ability of members and associated persons to ``buy
clean records'' will be greatly reduced. The Commission agrees with the
NASD's analysis in this regard.
Argument Nos. 3-6 and 10 all relate to the potential problems that
could be caused by the NASD's use of the word ``defamation'' in one of
the three standards for waiver. In response to these arguments, the
NASD proposed replacing the phrase ``information contained in the CRD
system is defamatory in nature'' with ``claim, allegation, or
information is false.'' The Commission believes that this change
sufficiently addresses Argument Nos. 3-6 and is satisfied that the new
proposed language should achieve the NASD's goal in this respect (i.e.,
ensuring that the CRD system contains accurate information).
Argument Nos. 7 and 11 are concerned with the proposed rule leading
to a formal dispositive motions practice at the arbitration level. The
Commission believes that the NASD has
[[Page 74672]]
sufficiently responded to this argument through Amendment No. 2. As
discussed at length above, the initial proposed rule text included
language that tracked Federal practice pleading requirements. Such
language, the commenters argued, could lead to a complex, lengthy, and
expensive dispositive motions practice. By removing this potentially
problematic language in Amendment No. 2, the Commission believes that
the NASD has responded sufficiently to these concerns.
With respect to Argument No. 9, concerning the NASD's proposed rule
text itself leading to an increase in expungements, the NASD disagreed.
The Commission agrees with the NASD in that the proposed rule is
clearly an improvement over the current expungement system in which
there are no parameters placed on expungements being incorporated into
arbitration awards.
With respect to Argument No. 13, concerning the NASD's inability to
present serious opposition to expungement requests at the court
confirmation level, the NASD provided some comfort. In Amendment No. 2,
the NASD stressed that it is a federally registered self-regulatory
organization that is required by the federal securities laws to enforce
its rules.\35\ Moreover, to the extent it fails in that regard, it must
answer to the Commission. The Commission acknowledges that the extent
to which the proposed rule will ultimately require the NASD to contest
expungements at the court confirmation level cannot be divined. The
Commission believes, however, that the proposal is an improvement over
the current system for expungement. To the extent that the NASD's
responsibilities at the court confirmation level ever became untenable,
the Commission would expect the NASD to approach the Commission with a
proposed rule change or in some way seek to alter the process to ensure
that the NASD fulfills its self-regulatory obligations.
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\35\ See Section 19(g) of the Act, 15 U.S.C. 78s(g).
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With respect to Argument No. 18, concerning the proposal's lack of
respect for the arbitration process, the NASD responded in Amendment
No. 2. The NASD noted that, rather than indicating a lack of respect
for arbitration, the proposal demonstrates that the NASD is prepared to
rely heavily on the fact-finding ability of arbitrators. Once an
arbitrator makes an ``affirmative determination'' that one of the
standards has been met, the NASD will waive its involvement at the
court confirmation level. The Commission believes that the proposal
strikes the appropriate balance between providing arbitrators with
sufficient flexibility in addressing issues, while at the same time
placing appropriate parameters on the type of information that is
potentially expungeable from the CRD system.
While Amendment No. 2 does not directly address Argument Nos. 12,
14-17, and 19-22, the Commission is not otherwise persuaded by these
arguments. The Commission believes that the proposal strikes the
appropriate balance between permitting members and associated persons
to remove information from the CRD system that holds no regulatory
value, while at the same time preserving information on the CRD system
that is valuable to investors and regulators.
With respect to Argument No. 12, concerning the proposal's
establishment of a privileged class of public records, the Commission
is unconvinced. The Commission believes that, notwithstanding the state
``public record'' status of data in the CRD system, such data is
expungeable under certain circumstances. Indeed, a process for the
expungement of data from the CRD system has been in place since the
establishment of the CRD system. The Commission also is not persuaded
by this ``states'' rights' argument and notes that NASAA itself did not
make this argument to the Commission.
With respect to Argument No. 14, concerning the rule's potential
conflict with the states' books and records rules, the Commission is
not persuaded. NASAA works closely with the NASD in the operation and
enhancement of the CRD system. To the extent this is a valid concern of
the states, the Commission would have expected NASAA to have raised
this point. In fact, NASAA submitted a detailed comment letter on the
proposal and did not raise this concern.
With respect to Argument Nos. 15 and 16, concerning a worsening of
the already poor perception that investors have of the NASD arbitration
process and of the integrity of CRD data, the Commission is not
persuaded. These arguments appear to rely on the assumption that
adopting explicit criteria for expungement will make expungement
easier, compromise the process for expungement, and, ultimately,
degrade the CRD system. As discussed at length above, the Commission
believes that the proposal will have the opposite effect. Specifically,
the Commission believes it will strengthen the expungement process, by
ensuring that only information that is not valuable to regulators and
investors is expunged from the CRD system.
Argument Nos. 17 and 20-22 ostensibly relate to maintaining the
accuracy of data that appears in the CRD system. Specifically, by
making it more difficult to expunge information, the arguments aver,
members and associated persons will be less likely and less able to
expunge inaccurate information from the system--ultimately, degrading
the system. The Commission appreciates these arguments and agrees that
expungement of inaccurate information from the CRD system is crucial to
the system's value. Further to that point, the Commission would clearly
be opposed to any proposed rule that would place an unfair burden upon
members and associated persons seeking to expunge inaccurate
information from the system. The Commission, however, does not believe
that the proposal will make expungement of appropriate information from
the system overly or unfairly difficult. To the extent a member or
associated person seeks to expunge appropriate information, the NASD
should waive involvement at the court confirmation level. In such a
circumstance, the process should function not unlike how it currently
functions and should not require a significant rehearing of the issues
and/or recalling of witnesses. The Commission believes that the
proposal has been structured in such a way that the potential for
divergent findings at the court confirmation level and the arbitration
level has been minimized. In sum, the Commission believes that the
proposal addresses the serious Commission concern that valuable
information is being expunged from the CRD system through arbitration
settlements that include negotiated expungement instructions.
Finally, with respect to Argument No. 19, asserting that the
proposal should be acted upon in conjunction with NASD NtM 02-74, the
Commission does not agree. The NASD is a registered national securities
association and is owed a certain degree of latitude with respect to
how it carries out its self-regulatory responsibilities. The Commission
believes that the decision to file this proposal separately from the
proposal that will follow from NtM 02-74 is the type of self-regulatory
decision that the NASD has discretion to make. Moreover, NtM 02-74 has
not yet been filed by the NASD and the Commission does not believe it
would be in the interests of investors to delay the Commission's action
on the instant proposal.
[[Page 74673]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2, including whether the amendment
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. Comments
may also be submitted electronically at the following e-mail address:
rule-comments@sec.gov. All comment letters should refer to File No. SR-
NASD-2002-168. This file number should be included on the subject line
if e-mail is used. To help the Commission process and review your
comments more efficiently, comments should be sent in hardcopy or by e-
mail but not by both methods. Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
communications relating to the proposed rule change 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 January 14, 2004.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\36\ that the proposed rule change (SR-NASD-2002-168), as modified
by Amendment No. 1, be, and it hereby is, approved, and that Amendment
No. 2 be, and hereby is, approved on an accelerated basis. As discussed
above, the NASD will announce the effective date of this proposed rule
change through a NtM to be circulated as soon as possible after the
publication of this approval order in the Federal Register.
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\36\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-2(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-31646 Filed 12-23-03; 8:45 am]
BILLING CODE 8010-01-P