Too easy for brokers to clean records, lawyers say

Records erased in 97% of cases settled from May '09 through Dec. '11

Oct 16, 2013 @ 3:31 pm

By Mark Schoeff Jr.

Brokers who are the subject of investor arbitration cases can clear their record of any wrongdoing too easily, according to a lawyers' group that represents plaintiffs.

A study released on Wednesday by the Public Investors Arbitration Bar Association shows that so-called expungement was granted in at least 90% of the time in the 1,625 cases in which it was mentioned between 2007 and 2011.

the Public Investors Arbitration Bar Association shows that so-called expungement was granted in at least 90% of the time in the 1,625 cases in which it was mentioned between 2007 and 2011.

Between January 2007 and May 2009, expungement was granted 89% of the time in cases resolved by stipulated awards or settlement and 96.9% of the time between May 2009 and December 2011.

From 2007 through 2011, a total of 17,635 cases were filed at the Financial Industry Regulatory Authority Inc., which conducts arbitration proceedings. Brokers can request expungement from Finra arbitrators, who must find and document that their cases meet certain criteria for false claims. If expungement is granted, the claim is removed from the broker profile in Finra's BrokerCheck system.

Originally established to protect brokers who are the targets of false claims, removing any evidence of a claim from a broker's record is now becoming a routine part of broker settlements with investors, the plaintiffs' organization asserted in a media conference call.

“Investors who rely on public records of stockbrokers are unlikely to be getting a clear picture,” PIABA president Scott Ilgenfritz said. “Finra is allowing the disclosure information in the regulatory record to be for sale. Regulators need to step in and crack down on expungement, particularly in settled cases.”

PIABA recommends that Finra strengthen training of its 6,462 arbitrators regarding the expungement process, approve a rule preventing expungement from being part of settlements and scrutinize expungement requests more closely.

“Finra needs to take more action to protect investors,” said Jason Doss, the incoming PIABA president. “We have the hard data to prove that point.”

Finra attributed the recent increase in expungement requests to a 2009 change in U4 and U5 forms that increased the number of claims against brokers. The regulator noted that Finra granted 838 expungements following court orders between 2007 and 2011, or less than 5% of the cases filed during that time.

“In addition to the steps it is taking to provide additional guidance and training to arbitrators, Finra is reviewing its rules and interpretations, and will consider changes to provide clarity as to what actions in connection with conditions on settlements violate conduct rules,” the organization said in a statement.

On Monday, the broker-dealer regulator posted expungement guidance on its website reminding arbitrators that the process should occur “only under appropriate circumstances,” including instances in which “the claim, allegation or information is factually impossible or clearly erroneous ... or false.” A broker who was involved in a sales practice violation or the theft of investor funds is not eligible for expungement.

The Finra guidance emphasized that expungement is an “extraordinary remedy.” It directed arbitrators to gather information they believe is relevant to the expungement request, review the broker's BrokerCheck report and consider whether the investor participated in the expungement hearing.

Bryan Ward, a partner at Sutherland Asbill & Brennan LLP, said the Finra guidance goes too far.

“I find it disconcerting that Finra is trying to add to and amend the expungement rule without going through the rulemaking process,” Mr. Ward said.

He also said that arbitrators should not delve into the details of the settlement process.

“It's irrelevant, it's confidential and it's often outside the knowledge of the broker, who may not have been involved at all in the settlement negotiations,” Mr. Ward said.

A major problem with the expungement process is that investors don't pay attention because they've already got an award in the settlement.

“Claimants still have no real incentive to show up at these hearings for expungement,” said Robert Banks Jr., owner of Banks Law Office PC. “The only solution is to get rid of expungement. An inaccurate [BrokerCheck] report is worse than having no report at all because it gives investors a false sense of security.”

Mr. Ilgenfritz said that Finra should be more forceful in preventing expungement.

“Finra needs to take a more active role in the front end of the expungement process,” he said.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Mar 13

Conference

WOMEN to WATCH

InvestmentNews is honoring female financial advisers and industry executives who are distinguished leaders at their firms. These women have advanced the business of providing advice through their passion, creativity, inclusive approach and... Learn more

Featured video

Events

Martin Dempsey: Geopolitical hotspots (and how they could impact investing)

What are the big international hotspots and how could it affect advisers and investors. Gen. Martin Dempsey, the former chairman of the joinst chiefs of staff, offers his unique perspective.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Tax reform will boost food, chemicals, rail stocks. Technology? Not so much

Conagra and Berkshire Hathaway are two stocks that should benefit most from changes in the tax code.

Brace for steepest rate hikes since 2006 in new year

Citigroup, JPMorgan Chase predict average interest rates across advanced economies will climb to at least 1 percent in 2018.

Why private equity wants a piece of the RIA market

Several factors, including consolidation in the independent advice industry and PE's own growing mountain of cash, are fueling the zeal to invest.

Finra bars former UBS rep for private securities transactions

Regulator says Kenneth Tyrrell engaged in undisclosed trades worth $13 million.

Stripped of fat commissions, nontraded REIT sales tank

The "income, diversify and interest rate" pitch was never the main draw for brokers.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print