U.S. stockbrokers often get their public records wiped clean after settling arbitration cases, according to new research from a group of lawyers that represent investors in securities arbitrations.
A new study from the Public Investors Arbitration Bar Association (PIABA) that looked at more than 1,600 arbitration cases found that between January 1, 2007 through mid-May 2009, expungement was granted in 89% of the cases resolved by stipulated awards or settlement; and from mid-May 2009 through the end of 2011, expungement relief was granted in nearly every instance, 96.9% of the cases resolved by settlements or stipulated awards. One broker requested expungement 40 times, and arbitration panels granted relief to that individual 35 times, it says.
Expungement refers to the process by which a broker can seek to have complaints removed from their public regulatory record. As a result, it concludes that investors who rely on public records to check out the background of their current or potential stockbrokers are, in many cases, unlikely to be getting a complete picture.
“To say that ‘expungement’ of customer claims from broker records is a major investor protection problem is an understatement,” said Scott Ilgenfritz, president of the PIABA, and author of the study. “The result is that investors who are diligent enough to seek out information about brokers may be getting a woefully incomplete picture of the individual to whom they will entrust all or most of their nest egg. What is supposed to be an extraordinary relief measure is now being sought and granted in roughly nine out of the 10 settled cases that we studied.”
The Financial Industry Regulatory Authority (FINRA) released a statement on the study, noting that it “underlines and emphasizes serious concerns FINRA shares with respect to the expungement process.”
FINRA says it recently provided expanded guidance to assist arbitrators with respect to expungement, and is enhancing arbitrator training. It’s also reviewing its rules and interpretations, and says it will consider changes “to provide clarity as to what actions in connection with conditions on settlements violate conduct rules.”
The PIABA says that FINRA’s arbitrator education efforts need to go further, and that it needs to propose rule changes regarding the ability of brokers to make settlements conditional on expungement. And, it says that the procedures applicable to motions for expungement relief need to be changed too.
“FINRA needs to review and critically assess all motions for expungement relief, particularly those made in cases resolved by settlement,” it says. “FINRA also needs to review and critically assess settlement agreements.”