Spotlight

The Cornell Securities Law Clinic has filed a Comment Letter with the Securities and Exchange Commission supporting changes to require brokerage firms to report, as customer complaints, allegations of sales practice violations made in arbitration claims and civil lawsuits against registered persons who are not named as parties in those proceedings. 

Currently, a written customer complaint (or settlement in response to the written complaint) alleging certain sales practice violations by a registered person is required to be reported, but an arbitration claim or civil court complaint with identical allegations need not be reported unless the registered person is named as a party in the proceeding. The Clinic argued that this distinction makes no sense. Regulators have an interest in receiving information regarding alleged sales practice violations regardless of whether the private litigant decides to name the registered person as a respondent in a case.

The Proposed Changes eliminates this irrational distinction and ensures that alleged sales practice violations are reported. The Clinic argued that it makes sense not to rely upon litigation decisions by private litigants in determining whether substantive allegations of sales practice violations are reported.

There may be numerous valid legal and tactical reasons why a public customer may choose not to name a registered person in an arbitration or civil court complaint, including but not limited to, the naming of the registered person being legally unnecessary since the member firm is liable for the conduct of its employees within the scope of their employment; difficulty locating the registered person; concerns that having multiple respondents may prolong a hearing; concerns that naming the registered person may result in an uncollectible award solely against the registered person; and concerns that naming the registered person may make it more difficult to settle the case.

Accordingly, the Clinic pointed out, there are many instances where public customers choose not to name the registered person as a respondent in a case, for reasons having nothing to do with the regulatory purpose behind reporting requirements. Nonetheless, this civil litigation decision results in numerous arbitration claims and court complaints not being reported. The Clinic supported FINRA’s effort to close this loophole.

The Clinic also supported a provision in the Rule Proposal raising the dollar threshold for reporting settlements of customer complaints from $10,000 to $15,000. The Clinic supported the Proposed Changes because raising the threshold to $15,000 struck a fair balance among competing interests. The Clinic acknowledged concerns that raising the dollar threshold for reporting settlements may decrease the reporting of sales practice violations, and thereby impede the regulatory function of FINRA. The Clinic argued that the answer to this concern would be to have no minimum threshold and to report all allegations of sales practice violations. In the absence of elimination of a minimum threshold, however, the Clinic saw no appreciable regulatory downside from the increase to $15,000.

The Clinic opposed a third aspect of the Rule Proposal, to allow member firms to amend the date of, or reason for, termination of registered representatives. Member firms would have to give a reason for each amendment. FINRA would notify other regulators and the broker-dealer with which the person is currently associated (if the person is associated with another firm) when a date of termination or reason for termination has been amended.

The Clinic objected to this third part of the Rule Proposal due to the lack of standards pertaining to these amendments, which would leave the process wide-open to manipulation. To the extent that there are no discernable standards as to when a firm may make an amendment or standards as to what should be stated in the reasons for an amendment, the Clinic opposed this change, except in instances of clerical error.

Clinic students Brian Kwang-Soo Youn (‘09), Kanwardeep Singh (LLM ‘09) and Qing (Jenny) Want (‘10) participated in the drafing of the Comment Letter.