States Use Data to Screen Broker License Applications for Bad Actors

WASHINGTON, D.C. (July 28, 2014) – The North American Securities Administrators Association (NASAA) today endorsed a call by the Securities and Exchange Commission (SEC) for the Financial Industry Regulatory Authority (FINRA) to thoroughly examine its rules that allow brokers to erase potentially damaging information from their public records.

“NASAA strongly supports FINRA’s efforts to improve the expungement process in order to prevent the removal of important information from the Central Registration Depository (CRD). 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 Andrea Seidt, NASAA President and Ohio Securities Commissioner. “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.”

Seidt’s comments followed the July 22 approval by the SEC of FINRA Rule 2081 to prohibit brokers from requiring clients to agree to not oppose the removal or expungement of a damage claim as a condition of the claim’s settlement. Seidt said the rule is a positive first step toward discouraging firms and their representatives from bargaining for the removal of potentially valuable regulatory information that should remain available to regulators, employers, customers and potential customers through the CRD and FINRA’s online BrokerCheck service.

Developed by NASAA and NASD (now FINRA), CRD consolidated a paper-based licensing and regulatory process into a single, nationwide computerized registration and licensing database. It includes employment history information as well as regulatory and disciplinary actions. Information from the CRD is available to the public from state securities regulators or through BrokerCheck. A similar system, the Investment Adviser Registration Depository (IARD), contains information about registered investment advisers.

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 NASAA’s May 14, 2014 comment letter to the SEC, Seidt suggested FINRA consider other steps to remediate the expungement process, including adoption of substantive expungement rules, 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 said 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. Brokers and investment advisers usually accept the state’s request, but those who resist can expect formal state enforcement action in the nature of denial, suspension, or revocation of license.

According to NASAA statistics, more than 15,700 state license applications were withdrawn from 2008 to 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.”

For More Information:
Bob Webster | Director of Communications


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