Reuters logo
Lawyers say FINRA lets brokers sanitize records of complaints
October 16, 2013 / 7:13 PM / 4 years ago

Lawyers say FINRA lets brokers sanitize records of complaints

ORLANDO, Fla., Oct 16 (Reuters) - 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 investors.

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, PIABA’s president.

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 representing investors.

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 “extraordinary relief.”

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 found.


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 said. (Reporting by Suzanne Barlyn; Editing by Jed Horowitz, Gary Hill)

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below