| ORLANDO, Fla.
ORLANDO, Fla. Oct 16 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
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,
The primary cause of the success is Wall Street's
traditional insistence that customers waive their right to
challenge so-called expungement requests as part of settlement
agreements, according to PIABA, the group of lawyers
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
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.
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.
PIABA is skeptical, the lawyers' group saying that a
previous change by FINRA to tighten the rules in 2009 was not
effective. Among the problems it 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.
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
Brokers say that simply because clients allege misconduct
such as civil fraud, negligence or selling unsuitable
securities, that doesn't mean their complaints should appear
permanently in BrokerCheck and other 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.
The 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.
PIABA also said FINRA should ramp up the expungement issue
in its training for arbitrators, who now get only an hour-long
online training course on the topic.
FINRA's 2009 attempt to curb expungements requires
arbitrators to spell out in writing that the grant was made
because an investor's claim was false or a mistake. But that has
not impeded the surge of expungement recommendations, PIABA
(Reporting by Suzanne Barlyn; Editing by Jed Horowitz, Gary