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Wall Street watchdog to review tactic for cleaning broker records
August 2, 2013 / 4:51 PM / 4 years ago

Wall Street watchdog to review tactic for cleaning broker records

NEW YORK (Reuters) - Wall Street’s industry-funded regulator, FINRA, will review a controversial practice in arbitration cases that critics say makes it too easy for brokers to scrub some black marks from their records, according to an official with the organization.

A street sign for Wall Street hangs in front of the New York Stock Exchange May 8, 2013. REUTERS/Lucas Jackson

“We are looking at the issues raised by investors concerning settlement negotiations when an expungement request is involved,” Linda Fienberg, president of the Financial Industry Regulatory Authority’s dispute resolution unit, told a gathering of industry attorneys late on Thursday.

She told them to expect a new rule proposal on the subject as soon as April 2014.

Expungement is the term for when a firm or broker erases details of a financial settlement from their public records. It often happens when investors file complaints against brokerages involving transactions in which individual brokers are involved. If the investor agrees as part of a financial settlement not to oppose a future proceeding by the firm or broker to erase those details, they can be more easily expunged from the broker’s record.

To have an arbitration case erased, a broker must get a court order, after getting a decision from arbitrators to recommend expungement.

Brokers who asked arbitrators for expungement after investors’ cases settled succeeded 93 percent of the time, according to a review by Seth Lipner, a New York lawyer who represents individuals in arbitration claims against the industry. “Expungement is just too easy after settlement,” he said.

Both Lipner and Fienberg spoke at a securities arbitration seminar sponsored by the Practising Law Institute, a group that provides continuing education programs to lawyers.

The FINRA review will include considering whether there should be a change in standards for granting an expungement and what types of materials arbitrators should consider, Fienberg said.

Critics argue that expungements deny investors all the disclosures they might want to review before choosing a broker. But securities industry lawyers counter that brokers’ records should not have to carry black marks from cases in which investors have not proven their claims, or which involve entire classes of securities that failed.

Questions about whether settlement agreements between investors and brokerages should include provisions aimed at helping the broker secure an expungement fueled a spirited debate among lawyers who spoke at the program.

FINRA runs the securities arbitration forum in which investors and their brokerages agree to resolve their dispute. Securities industry professionals must also resolve most employment-related legal disputes in the forum, including requests to remove unflattering details from their public disclosures.

An investor’s testimony against a broker during an expungement hearing can sway an arbitrator to decline the broker’s request, lawyers say.

But that seldom happens, Lipner found. Looking at the first six months of this year, he identified 205 expungement cases that followed deals to settle investors’ arbitration cases against brokerages. Arbitrators recommended expungements in 192 of those cases, a 93.6 percent rate.

“I don’t want to suggest that expungement is not an appropriate piece of relief in a lot of cases. But 93 percent seems like a lot,” said Lipner.

Lawyers for brokerages who often assist their brokers in obtaining expungements say their firms are responsible for ensuring that the public disclosures are accurate.

Those disclosures are not accurate when they include details about cases that do not have much substance, the lawyers said. For example, the record of a Wells Fargo Advisors broker was recently sullied by details about an arbitration in which “he didn’t even place the order that was the basis of the claim,” said Patricia Cowart, a lawyer for Wells Fargo & Co. who heads the company’s retail brokerage litigation section.

“Having expungement available is absolutely critical,” she said. “The importance of having an accurate and fair record will affect (a broker‘s) livelihood,” Cowart said.

FINRA tightened its expungement rules in 2008 by requiring that arbitrators make certain findings of fact before recommending an expungement. They include finding that the information on the broker’s disclosure report was included by mistake or that the investor’s claim was false.

The regulator is also closer to submitting its plan to the U.S. Securities and Exchange Commission for a streamlined expungement process for brokers who want to clean up their records when they are not named as parties in a case, Fienberg said.

Reporting by Suzanne Barlyn; Editing by Linda Stern and Dan Grebler

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