Finra's efforts to limit brokers' ability to clear their records of alleged misconduct have failed to reduce the number of times it occurs, according to an investor advocate group.
The Public Investors Arbitration Bar Association released a report Tuesday showing that Finra reforms haven't curbed the use of so-called expungement.
The study shows that in 460 arbitration cases resulting in stipulated awards or settlements between Jan. 1, 2012, and Dec. 31, 2014, expungement was granted in 87.8% of the cases in which it was sought.
The review is a follow-up to a
similar study PIABA conducted in 2013, which showed that expungement was granted in nine out of 10 settled cases in which it was requested by a broker between Jan. 1, 2007, and May 18, 2009.
After the earlier study, the
Financial Industry Regulatory Authority Inc. increased guidance and training for arbitrators related to expungement and
approved a rule that prohibits arbitration settlements conditioned on expungement.
“Unfortunately, the result of the analysis of the statistics regarding expungement relief sought in cases involving stipulated awards or settled customer claims remains alarming,” the PIABA report states. “The statistics indicate that Finra's efforts have failed to assure that expungement relief is an extraordinary remedy granted only in cases in which the customer dispute information requested to be expunged has no meaningful investor protection or regulatory value.”
Finra questioned PIABA’s methodology and conclusions.
“PIABA’s study reflects no qualitative analysis of the awards recommending expungement and therefore no assessment of whether the information that was the subject of the recommendation had any investor protection or regulatory value,” Finra said in a statement. “Moreover, only 11% of the total number of cases cited in PIABA’s study resulted in a recommendation for expungement as of Sept. 30, 2015.”
Finra added that it has taken several steps over the last couple years to improve the expungement process, such as strengthening arbitrator training and recently
codifying guidance to arbitrators that emphasizes that expungement is an “extraordinary remedy.” The regulator said its arbitration task force is considering creating a Special Arbitration Panel comprised of specially trained arbitrators to make decisions on expungement requests.
Most customer arbitration cases do not involve expungement requests, according to Finra statistics. During the three-year period of PIABA's new study, expungement came up in about one-third of the 833 cases and about one-third of those cases resulted in an award. An award must be made before a broker can get an expungement.
When brokers are granted expungement, it clears alleged wrongdoing from their profiles in the
BrokerCheck public database. PIABA warned that this could give investors a false impression of the integrity of a broker they might hire.
“With the expungement rates being what they are … investors are not getting the information they need,” PIABA President Joe Peiffer said in a conference call with reporters.
The lawyers' group recommended several steps to improve the expungement process, including having a Finra attorney review broker requests, notifying state regulators of expungement requests, limiting the time after a settlement in which brokers seek expungement, and strengthening arbitrator training.
Finra only grants expungements through a court order. PIABA wants to simplify the criteria for getting to that step, which now involves finding that the allegations are false or that the broker was not involved in the transgression.
“Those standards should be replaced with a single standard: that the information sought to be expunged has no meaningful investor protection or regulatory value,” the PIABA report states.
Ultimately, expungement decisions should be taken out of the hands of arbitrators, PIABA said.
“The obligations and burdens associated with safeguarding the accuracy and integrity of customer dispute information, just like the obligations and burdens associated with maintaining the [Central Registration Depository] system, should be those of Finra and state regulators,” the PIABA report states. “They should not fall on customers who have settled their claims or their attorneys who are not compensated for opposing expungement relief sought by brokers.”
