FINRA aims to ban deals that make clearing brokers' records easier

Fri Jan 24, 2014 5:32pm EST

(Reuters) - Wall Street's industry-funded watchdog will propose banning settlements in disputes between brokerages and investors that require investors to not oppose erasing details about complaints from brokers' public records, its chief wrote in a letter to two U.S. senators released on Friday.

Settlement agreements that provide additional compensation to investors who allege they lost money because of their brokers' advice, in exchange for not trying to block the removal of black marks from their brokers' records, could interfere with determining if a broker is entitled to such relief, wrote Richard Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority.

The remarks appeared in a letter Ketchum wrote to Senator Jack Reed, a Democrat of Rhode Island, and Senator Chuck Grassley, a Republican of Iowa, dated January 6.

The two senators, who released the letter on Friday, wrote to FINRA in December to press for details about the regulator's process for erasing, or "expunging," details about investors' complaints from brokers' public records.

The senators' request followed a study by the Public Investors Arbitration Bar Association (PIABA), a group of securities arbitration lawyers, finding that 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.

"(I)t appears the organization is taking this problem seriously," Reed and Grassley said in a joint statement on Friday.

FINRA's arbitration unit head, Linda Fienberg, said last August that new rules could be issued to address the problem as soon as April 2014. The nature of those rules, however, was unclear.

FINRA rule changes must be approved by the U.S. Securities and Exchange Commission.

Investors who claim to have lost money because of a broker's misconduct or advice often file a case against the broker's firm in FINRA's securities arbitration forum. Details about the complaint then appear in the broker's publicly available disclosure report in a free database for investors known as BrokerCheck.

Brokers who want to erase those details typically file their own FINRA arbitration cases, asking for a recommendation to expunge their records. FINRA's arbitrators are separate from its regulatory staff. Brokers who are successful must then obtain a court order to complete the process. FINRA can oppose the court application.

PIABA has alleged that brokerages strong-arm investors into waiving their rights to oppose expungements. The idea, however, "does not always originate with the brokerage firm or the broker," Ketchum wrote.

Ketchum's nine-page letter also addressed other PIABA recommendations, as the senators requested.

FINRA can still improve by sending a regulatory staffer to each expungement arbitration, instead of waiting until a broker requests court confirmation of the arbitrator's recommendation, said Jason Doss, PIABA's president. Nonetheless, FINRA's effort to possibly ban bargaining for expungements is a "step in the right direction," Doss said.

(Reporting by Suzanne Barlyn; Editing by Leslie Adler)

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