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Two U.S. senators press Wall Street watchdog on process for erasing broker records
December 16, 2013 / 11:27 PM / 4 years ago

Two U.S. senators press Wall Street watchdog on process for erasing broker records

Dec 16 (Reuters) - Two U.S. senators want Wall Street’s industry-funded watchdog to clarify and strengthen standards for allowing stock brokers to wipe details about investor complaints from their public disclosure records, according to a letter dated Monday.

The bipartisan request to the Financial Industry Regulatory Authority (FINRA) from Senator Jack Reed, a Democrat from Rhode Island, and Senator Chuck Grassley, a Republican from Iowa, stems from a study by a group of securities arbitration lawyers that suggested brokers are often successful in erasing or “expunging” details in a particular circumstance.

The Public Investors Arbitration Bar Association (PIABA), which unveiled the study in October, found 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.

Now Reed, a senior Democratic member of the Senate Banking Committee, and Grassley, who has long been interested in oversight issues related to the financial services sector, want more details from FINRA, according to a letter they wrote to its chairman and chief executive, Richard Ketchum. For example, they asked FINRA to reveal the number of times it “questioned or challenged” instances of expungements for brokers and detailed descriptions of each instance.

“FINRA shares the senators’ serious concerns,” a FINRA spokeswoman said in a statement. The regulator recently issued guidance to assist arbitrators in the proper performance of their expungement responsibilities, she said. FINRA is also enhancing arbitrator training on the issue, the spokeswoman said.

Investors who allege they lost money because 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, however, can oppose the court application.

Many settlement agreements in securities arbitration disputes between brokerages and customers require investors not to object to the broker’s expungement request, PIABA has said. Wall Street firms typically insist on the provision, PIABA has said. That means arbitrators who recommend expungement only hear one side of the story, the group has said.

“We believe that meaningful investor protection includes the disclosure of whether a customer dispute was settled,” Reed and Grassley wrote.

Reed and Grassley also want FINRA to respond to recommendations that PIABA made in its study, including a procedure that would require FINRA to review brokers’ expungement requests when they are filed with its arbitrators.

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.

The senators asked FINRA to respond to their requests by Jan. 6. (Reporting by Suzanne Barlyn; Editing by Lisa Shumaker)

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