Evidence Grows Proving Wall Street Deregulation is Bogus

I came across the latest piece of evidence that supports the regulatory status-quo on Wall Street while catching up on some weekend reading. The latest issue of Barron’s has a column from Arindam Nag which covers the impending IPO of ManFinancial, the brokerage unit of ManGroup, a powerhouse UK-based financial services firm. Interestingly, the firm’s management has chosen to list the offering on the New York Stock Exchange, as oppose to the London Stock Exchange. I guess contrary to Paulson’s Committee on Capital Markets Regulation’s arguments, the NYSE has some competitive juice left after all.

Perhaps ManFinancial’s management paid close attention to the recent study released by a group of academies, regarded as the leading authorities on foreign companies that list shares in the U.S. The study, which was covered by the Wall Street Journal, found that “investors are still willing to pay a sizable premium for foreign-company shares listed in the U.S., in return for meeting tough U.S. regulatory standards.” In other words, it’s our regulatory environment that makes our markets more competitive.

Here’s a thought: If Paulson successfully scales back regulation then will a new group form: Deregulation was Ultimately a Major Blunder, or D.U.M.B.?

The U-5 Defamation Campaign Continues…

As we continue our campaign to persuade the NASD to revisit a rule originally proposed in 1998 known as “NASD Notice to Members 98-18,” that would have given securities firms a qualified privilege to information inserted into a departing employee’s Form U-5, I draw your attention to this letter I recently submitted to Jean I. Feeny, Associated Vice President and Chief Counsel in charge of the NASD’s Dispute Resolution department.

We aim to counter the recent Rosenberg v. MetLife decision, which established an absolute privilege standard in New York, by engaging the financial regulators directly. In addition to our online petition, this letter establishes that an absolute privilege standard not only is harmful to brokers and employees of securities firms, but to individual investors as well.

Significantly, I also point out that the opponents to the qualified privilege standard, namely the Securities Industry Association (SIA) and the Securities Industry and Financial Markets Association (SIFMA), in fact, supported the 1998 rule! You can view their original comment letter establishing their position here. As many parents would say of their unruly children, “give ‘em an inch and they’ll take a mile.”

Paulson Committee’s Next Target: You

A front page story in yesterday’s Wall Street Journal lifts the veil on an issue I’ve been concerned about for quite some time: the replacement of shareholder class action lawsuits with NASD-style arbitration. The main proponent of this initiative is once again, Secretary Paulson’s Committee on Capital Markets Reform. How no one is truly questioning this “blue ribbon” panel’s true motivation is beyond me, but that’s a story for another day…namely when I speak at the North American Securities Administrators Association (NASAA) Public Policy Conference on May 8, 2007.

The panel’s latest proposal would allow corporations to have special shareholder elections that could require anyone owning stock in the corporation to waive his or her right to initiate or join a class action lawsuit, instead electing for individual, private arbitration hearings.

At first glance you’d think that replacing costly class action lawsuits would be beneficial, but as always, the devil’s in the details. In fact, a couple of questions come to mind: Who would participate in the arbitration panels? Where would the arbitrations take place? Would the decisions and opinions be private or would they be made public to provide precedential value? Who in the world would oversee the process and pay for it?

You can bet that the little guy won’t like the answers to those questions. The real motivation behind this proposal is to allow Corporate America to “divide and conquer” each shareholder lawsuit. It’s also an attempt to scare away smaller investors with claims of less than $50,000. After all, would you pay an attorney to argue a case where the likelihood of winning is less than 50 percent and even then, you’ll probably get a few pennies on the dollar?

It might seem a little strange for this argument to be coming from me, a securities arbitration specialist, but I think that without significant reform to the securities arbitration process, this proposal is anti-investor.

Coastal States Erode Brokers' U-5 Rights - Support our Petition to the NASD Asking for a Uniformed "Qualified" Standard

As discussed in my last blog post, the New York Court of Appeals last week held that securities industry employees working in the state have no legal recourse if they have been illegally defamed on their Form U-5 by a former employer.

Think about that -- no legal recourse even though they were unfairly defamed. None. Zero. Zip.

As questionable as that outcome was, New York is not the first state to take that questionable stance. California also gives securities industry firms a free rein when it comes to an "absolute" privilege to such statements. These are the only two states to do so, probably because the other 48 know they have it absolute-ly wrong.

Elsewhere in the country, firms only have a "qualified" privilege. States like Illinois, Tennessee, Georgia, Michigan, Florida, and Oklahoma accept that employees have a right to due process and recognize that they should be able to seek legal recourse should former employers file false and defamatory statements that can ultimately serve to sound the death knell to their careers in the securities industry.

State-by-state standards make no sense. It's time for one uniform standard, for one central "playbook" that preserves brokers' rights by giving them legal recourse should they be the unfortunate victim of what essentially amounts to a corporate smear campaign.

As I recently wrote to Mary Schapiro, Chairman and CEO of the NASD, the time is now for the NASD to revisit a rule first proposed in 1998 to adopt the "qualified" privilege standard.

I hope you will join this cause and sign my online petition here.