Finra arbitrators add more detail to expungement decisions

Explanations for removing a complaint from a broker's record range from a couple paragraphs to several pages, but critics still worry about the impact to investors of wiping a slate clean

Apr 10, 2017 @ 1:50 pm

By Mark Schoeff Jr.

Some of the mystery surrounding the removal of client complaints from brokers' records is being cleared up by more detailed expungement explanations from Finra arbitrators.

The greater transparency can be seen in recent arbitration awards. The expungement decisions range anywhere from two to six paragraphs — as illustrated in a UBS case over Puerto Rican bonds and a customer dispute involving H.D. Vest Investment Services — to the arbitration-award equivalent of "War and Peace" — six-page opinions in a claim against a Merrill Lynch broker and one against controversial former broker Kathleen Tarr.

The number of explained expungements in cases where the parties reached a settlement has increased to 22% through the first quarter of 2017, from 15% in the beginning of 2016, according to a review of hundreds of cases conducted by the Securities Arbitration Commentator after a query from InvestmentNews.

"Arbitrators are feeling ... in stipulated proceedings that they owe a greater explanation as to why they're doing what they're doing," said Rick Ryder, editor of the Securities Arbitration Commentator. "They are perhaps taking a view that a good explanation is a precedent. It helps the parties to have these explanations."

Nearly every brokerage contract includes a mandatory arbitration clause. Customer disputes are usually settled by a panel of three arbitrators, who either have an industry background or are what is known as "public" arbitrators. They make decisions not only on the case but also on whether the complaint should be listed on a registered representative's BrokerCheck profile.

The granting of expungement — or removal of complaints — is controversial because investor advocates say it can cover up a broker's checkered history and deceive an investor searching for an adviser. The Public Investors Arbitration Bar Association has conducted studies that show expungement is granted nearly 90% of the time it is requested by brokers involved in a dispute.

Although arbitrators are providing more detail about their expungement decisions, Hugh Berkson, a principal at McCarthy Lebit Crystal & Liffman and a former PIABA president, remains concerned that the expungement rate is too high.

"Having an explanation is good, but I'm far more interested in a correct decision," he said. "If the arbitrators have to explain themselves, maybe they think about the expungements a little bit more. One would hope that you would get better decisions."

The Financial Industry Regulatory Authority Inc., under Rule 2080, requires that arbitrators articulate why they have granted expungement. In October 2013, the regulator released further guidance, telling arbitrators they "should ensure that the explanation is complete and is not solely a recitation of one of the Rule 2080 grounds or language provided in the expungement request."

Finra also clarified what it's seeking last fall in arbitrator training materials, Mr. Berkson said.

"Finra, to its credit, is trying to be more explicit in the instruction given to arbitrators who are making these expungement decisions," he said.


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