Lawyers say FINRA lets brokers sanitize records of complaints
ORLANDO, Florida (Reuters) - Brokers who seek to erase black marks from their public records succeed at an "alarmingly high" rate following settlements with investors who alleged they lost money, according to a study by lawyers who represent investors.
Brokers succeeded 96.9 percent of the time between mid-2009 and the end of 2011 in expunging details about cases brought by investors against their firms that were later settled, according to the Public Investors Arbitration Bar Association, a trade group for lawyers representing investors.
As a result, the investing public may check databases such as the Financial Industry Regulatory Authority's BrokerCheck website and still get an incomplete picture about questionable sales practices by brokers and firms, said Scott Ilgenfritz, PIABA's president.
The primary cause of the success is Wall Street's insistence that customers waive their right to challenge so-called expungement requests as part of settlement agreements, according to PIABA, the group of lawyers representing investors. Many investors sign off on the deals in order to get their money without a drawn-out fight, said Ilgenfritz during a call with reporters on Wednesday.
Officials at FINRA, the industry-funded watchdog that oversees most broker-client arbitration disputes, has acknowledged the problem. The regulator launched efforts this week to inform arbitrators that expungement should be "extraordinary relief."
FINRA's arbitration unit head, Linda Feinberg, said in August that new rules could be issued to address the problem as soon as April 2014.
Nonetheless, the 838 expungements ultimately granted through FINRA's process during PIABA's overall five-year study period is less than 5 percent of the 17,635 investor disputes filed, FINRA said on Wednesday. A 2009 rule change drove the recent requests, FINRA said. It required brokers to disclose when they were involved in transactions that promoted investor cases against their firms, even if the brokers were not named, FINRA said.
On Monday, FINRA issued guidance for arbitrators that suggests, among other things, that they review whether the expungement request followed a settlement.
"We needed to enhance the guidance that we give as to what our expectations are of this extraordinary remedy," Feinberg said in an interview on Tuesday. She also said that FINRA will beef up its training for arbitrators.
A previous change by FINRA to tighten the rules in 2009 was not effective, PIABA said. Among the problems PIABA sees is that FINRA's regulatory staff does not attend arbitration hearings, which are conducted by autonomous arbitrators.
Brokers who win expungement requests must get confirmation from a court, where FINRA can oppose the requests, but by then the process is often too far advanced, according to PIABA. "By the time an award is rendered, the animals have left the barn," PIABA's Ilgenfritz said in an interview at the group's annual meeting in Orlando, Florida.
The PIABA analysis, based on data from the Securities Arbitration Commentator, a Maplewood, New Jersey-based service that analyzes arbitration trends, covered 1,625 expungement decisions over five years. In the mid-2009 through 2011 period, the 97 percent success rate was hit. From January 2007 through mid-2009, brokers achieved an 89 percent success rate, the study found.
Brokers say that simply because clients allege misconduct such as civil fraud, or selling unsuitable securities, that does not mean their complaints should appear permanently in regulatory databases. Some complaints, they say, are frivolous.
Some brokers are outliers in pursuing expungements. The PIABA study cited one who requested expungement 40 times - and was granted relief by arbitration panels for 35 of the requests.
One key solution is for FINRA to play a greater role in the process, according to PIABA. The investors' lawyer group recommends that FINRA regulators review expungement requests as they are filed, especially in cases where the investors may have waived their right to take part in the hearings.
FINRA's 2009 attempt to curb expungements requires arbitrators to spell out in writing that the grant was made because, for example, an investor's claim was false or a mistake. But that has not impeded the surge of expungement recommendations, PIABA said.
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