SIA Opposes New Expungement Rule Proposal

Cites “Dangerous and unmistakable message that…arbitration panels cannot be trusted”

SIA COMMENTS ON NTM 01-65: The Securities Industry Association responded, in a letter dated December 31, 2001, to NASD’s request for comment on a proposal to revise its rules and policies on expungement.

The letter, signed by SIA SVP and General Counsel Stuart J. Kaswell, eludes easy summary, as it is excellently crafted, its tone conveying both force and respect and its text mixing both strong disagreement with the proposed mechanisms with support for common objectives.

Writing on behalf of an unnamed “Committee,” Mr. Kaswell begins by emphasizing the unique nature of the Central Registration Depository as highly public, easily accessible, and inclusive of “unproven and unscreened allegations for all to see.” [italics in original]. Given these elements and the lack of a limitations period on the life of stored information, “any process that creates procedural impediments to the expeditious and inexpensive correction of a falsity is no solution and must be rejected.” In that regard, SIA opposes court confirmation of arbitration Awards as an expungement prerequisite. The process is time-consuming and expensive, but “more troubling is the dangerous and unmistakable message that … arbitration panels cannot be trusted to apply the expungement remedy judiciously absent court oversight.” Moreover, the required notice to NASD, when confirmation is pursued, creates “undue costs and delays in obtaining expungement relief” and it also invites “adversarial retrials of issues already decided by arbitration panels.” The invitation to intervene poorly uses regulatory resources and threatens finality by distorting the confirmation process.

The Association also believes that stipulated Awards should not be restricted to matters involving “factual impossibility” or “clear error” and it proposes safeguards that could protect against the threat that settling respondents will “buy” expungements. The 9-page letter concludes with suggestions for opening up the narrow criteria of “without legal merit” or “defamatory in nature” to encompass fact patterns and circumstances that might be otherwise unjustly excluded from eligibility for expungement. “[W]rongly accused respondents must have unfettered access to the only remedy that can remove the blight of a false claim from a very public and unique record.” The answer, therefore, does not lie in the NASD’s proposed course of “narrow and overly stringent limitations…. [T]he answer may be found in promulgating fair guidelines for expungement, training arbitrators on the meaning and proper application of those guidelines, and then trusting arbitration panels to continue to do what they have done so well for many years ? render fair, impartial, and final decisions.” [italics in original].

(SAC Ref. No. 02-03-01)

For more on the expungement controversy, see NASD Expungement Order Proposal Released

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

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