June 13, 2013 / 1:11 PM / 6 years ago

Plan for quashing broker complaints to meet resistance

(Reuters) - Within the next few weeks, the Financial Industry Regulatory Authority (FINRA) expects to send the Securities and Exchange Commission a proposal to make it easier for securities brokers to erase certain black marks from their records.

A screen displays stock charts while a trader works at his post on the floor at the New York Stock Exchange, May 30, 2013. REUTERS/Brendan McDermid

Once it arrives at the SEC, the plan will meet some resistance from independent consumer attorneys who represent the interests of investors.

FINRA, the industry-supported regulatory organization, is aiming its relief at brokers in a bind: their records are often tattooed with arbitration cases filed against their firms and not the brokers themselves. Brokers who may have unknowingly sold problematic products that were promoted by their firms as safe — such as auction rate securities - now get black marks on their records when firms settle those cases or arbitrators rule against the firm.

Consumer attorneys say a streamlined process that makes it easier for brokers to erase black marks could deny investors important information they should have for researching advisers. The Public Investors Arbitration Bar Association (PIABA), a group of lawyers who represent investors in securities arbitration cases, plans to air those concerns at the SEC, which must review and approve changes to FINRA’s rules.

The proposal would give brokers multiple chances to clear their records — during arbitration and afterwards, with the streamlined process — while “investors...(only) get one chance to recoup their life savings,” said Steven Caruso, a PIABA member and securities arbitration lawyer in New York.

A FINRA spokeswoman said the regulator will consider the many suggestions it expects to receive when the plan moves to the SEC.


The debate is heating up as regulators field a wave of requests from brokers to erase or “expunge” their records. Those requests follow a surge in arbitration cases stemming from the 2007-2008 financial crisis.

Keeping a clean record can be a challenge, brokers say, because of a 2009 FINRA rule that expanded the types of arbitration complaints that appear on brokers’ public records.

When a broker is involved in a transaction that becomes the subject of an investor arbitration, details of that case must go on the broker’s record, even if the broker is not named in the case. And the very fact that the broker isn’t an official party is what makes it so hard for them to get their records scrubbed.

To get those details expunged, brokers must get arbitrator approval. The process can require enlisting help from their firms during a settlement, or filing their own separate arbitration case against the investor or firm. Furthermore, arbitrators who recommend expungement must demonstrate that the investor’s claim is false or that the information is a mistake.


The fast track options that FINRA is considering include a new solo arbitration that would not require naming other parties. The broker would present reasons for expungement to an arbitrator, who would decide if erasing those details is warranted, without having to review the entire case or hear from the aggrieved investor. The broker would then need to get an order from a court, already a final step in expungement cases.

PIABA is concerned that the arbitrator’s recommendation may come too easily. They may ultimately make recommendations without knowing the broker’s complete disciplinary record and may never hear the investor’s side of the story, Caruso said.

A FINRA spokeswoman said that now, arbitrators often decide brokers’ expungement requests at the same time as the investor’s case. They have access to all evidence, she said.

That doesn’t happen in every case, and many settle without tackling expungement, lawyers say. That leaves brokers to pursue the expungement on their own in proceedings where information about the investors’ case is not available.

Even under the proposed plan, a broker’s record couldn’t be erased without the broker getting a final court order. State regulators also monitor the proceedings, said Melanie Senter Lubin, Maryland Securities Commissioner.

What’s more, brokers who did nothing more than sell products their firms hawked as being safe may have a valid point about wanting to clean their records, Lubin said, noting “a lot of us don’t hold it against the when it’s a product failure.”

Reporting by Suzanne Barlyn; editing by Linda Stern and Andrew Hay

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