The Law Planet Blog

FINRA, the securities regulatory agency governing all stockbrokers, has announced its approval of a new expungement rule in a press release dated December 14, 2007. This is further evidence of regulatory scrutiny of a long-standing practice of obtaining expungements in the settlement of customer claims.

Many moons ago, when my hair was more plentiful and darker, the warring parties in a securities arbitration could simply agree to have the customer complaint removed from the broker's record, get the arbitrators to sign off on it and the deal was done. NASD got wise to this practice and enacted a series of ever-tightening rules regarding expungements. First time around, the arbitrators had to grant the expungement and the award was required to be confirmed by a court, unless the defamatory U-5 filing was the subject of the arbitration, in which case no court confirmation was necessary.

The NASD then enacted standards that must be met regarding the expungement of customer complaint information. Arbitrators were to apply certain standards in granting expungements. Additionally, NASD was to be notified when a broker sought a court confirmation of an expungement order. It appears that these standards and practices were not enough. Much settlement money changed hands and arbitrators were still granting expungements.

This new rule, as proposed, tightens the noose further. An evidentiary hearing is required and the terms of the settlement with the customer must be disclosed. This raises an interesting question. If the brokerage firm pays the money and the customer gives a separate release to the broker, which release is relevant to the arbitrators' inquiry?

FINRA's concern about expungements is understandable. As the custodian for CRD, which is relied upon customers and regulators as the broker's record, expungements can skew a broker's history. At the same time, a broker should have a right to have frivolous items removed.

That's the view from The Law Planet - Jupiter, Florida. Happy holidays to one and all.

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Posted In: Securities Arbitration , Securities Industry

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As a securities litigation lawyer, I often wonder what is the next "big thing" going to be. It's never a matter of "if", but only a matter of "when." We have now been handed the "what" which is the subprime credit markets. An article in Investment News reported that Bank of America is closing its Strategic Cash Fund after its assets dropped from $40 billion to $12 billion. While not specifically mentioned in the article, it is common knowledge that the uneasiness in the corporate credit markets stems from the so-called "Subprime Crisis."

What is this "Subprime Crisis" anyway? Subprime borrowers were high risk - paying higher interest rates than standard risk borrowers. These are the "junk bonds" for the new era. Suddenly, people are surprised that these high risk borrowers, some of whom were speculating, others of whom were simply over-extended, could not afford to pay. And suddenly basic economics takes over.

Houses go on sale for lower prices because of the supply. The questionable buyers can't step up and buy these houses, so there are fewer qualified buyers in a market filled with lightly used houses. Of course, most these qualified buyers have houses of their own, so they may not even be interested in moving. And, ultimately, the market finds a new level. Which economics genius thought that housing prices were going to continue skyward?

All of these defaults, of course, brought down the value of the securities issued to finance the borrowing. And that caused the subprime market to swirl around the bowl for a while, finding its own level, but taking a number of purportedly sophisticated players with it. And now we have the average, and not-so-average, retail investor who put there money in these subprime instruments claiming that they were unsuitable. Maybe they were, maybe they weren't. One thing's for sure. It looks like we found the next "big thing."

That's the view from The Law Planet - Jupiter, Florida.

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Blatant self-promotion warning!! I was asked to speak at an NBI seminar entitled "Identifying and Preventing Securities Fraud". It will take place on February 18, 2008. My topic is "Securities Fraud - How It's Done and Who Gets Blamed." I'm looking forward to sharing what little insight I have with the seminar attendees.

You can register at www.nbi-sems.com. This is a basic level seminar.

Hope to see you there!

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