A study of more than 1,600 arbitration cases over the past five years shows an “alarmingly high” rate of brokers who were able to get their arbitration histories wiped clean, leaving investors vulnerable to potential fraud and abuse, according to a just-released report by the Public Investors Arbitration Bar Association (PIABA).
In reviewing all securities arbitration awards in cases filed between Jan. 1, 2007, and Dec. 31, 2011, in which the word “expungement” appears, the report by PIABA, which is an association of lawyers who represent aggrieved investors, found:
“To say that ‘expungement’ of customer claims from broker records is a major investor protection problem is an understatement,” said Scott Ilgenfritz, outgoing president of PIABA, and author of the expungement study, during a Wednesday conference call to announce the study’s findings. “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.”
Such a high percentage of expungements “clearly indicates that the current expungement procedures are seriously flawed. Regulators need to step in and crack down on the granting of expungements, particularly in settled cases.”
FINRA responded in a statement that the recent increase in expungement requests, as PIABA noted, is largely attributable to the 2009 change to the Forms U4 and U5 that increased the number of customer claims reported against brokers, and consequently in an increase in brokers pursuing expungement relief. "While still significant, the number of arbitrator-recommended expungements executed by FINRA following a court order during the five-year period (838 orders) covered by the study is less than 5% of the total number of customer disputes filed (17,635)."
FINRA maintains the qualification, employment and disclosure histories of 5,100 broker-dealers and approximately 660,000 of their securities employees in the electronic CRD system. FINRA and the North American Securities Administrators Association (NASAA) established the CRD system in 1981.
“PIABA’s study makes many valid points. Expungement is and should continue to be an extraordinary remedy," says Andrea Seidt, NASAA president and Ohio securities commissioner. "We share PIABA’s concerns that there be robust oversight of the process to ensure that expungement is not easily granted. Such oversight helps to ensure the integrity of the CRD system that regulators, investors and industry rely upon for information about the background of stockbrokers."
Seidt says that NASAA continues to work with FINRA "to address these concerns and looks forward to working constructively with all interested parties to ensure that the expungement process requires a thorough and thoughtful analysis of each request.” /* .premium-promo { border: 1px solid #ddd; padding: 10px; margin: 0 10px 10px 0; width: 200px; float: left; } .premium-promo li, .premium-promo ul { list-style-type: none; margin: 0; padding: 0; } .premium-promo li { margin: 0 0 10px; padding: 0 0 10px; border-bottom: 1px dotted #ddd; } .premium-promo h3 { text-transform: uppercase; font-size: 11px; } .premium-promo h4 { font-size: 16px; } .premium-promo a { text-decoration: none !important; } .premium-promo .btn { background: #0069a1; border-radius: 4px; display: inline-block; padding: 5px 10px; clear: both; color: #fff; font-weight: bold; } .premium-promo .btn:hover { background: #034c92; } */ While FINRA has very recently undertaken steps to better educate arbitrators concerning their roles in the expungement process “and the critical importance of accurate customer claims information with respect to investor protection,” said Ilgenfritz, “FINRA’s arbitrator education efforts need to go further, and FINRA needs to propose rule changes.”
FINRA responded in its comment the same day that it shares PIABA's concerns with respect to the expungement process. As a result of these concerns, FINRA said it "recently provided expanded guidance to assist arbitrators in the proper performance of their responsibilities with respect to expungement, and is enhancing arbitrator training with added emphasis on the importance of the integrity of the information in the CRD system." In addition to the steps FINRA is taking to provide additional guidance and training to arbitrators, the self-regulator said that it is "reviewing its rules and interpretations, and will consider changes to provide clarity as to what actions in connection with conditions on settlements violate conduct rules."
Specifically, the PIABA report recommends the following: “FINRA needs to propose a rule change with respect to respondents and their counsel bargaining for in settlement negotiations or conditioning a settlement upon an investor’s agreement to not oppose expungement or an agreement to expungement.”
Incoming PIABA president Jason Doss said on the call that FINRA also needs to provide “more and better training for arbitrators.” The training required by FINRA for arbitrators to be able to rule upon a motion seeking expungement relief “is limited,” he said. As it stands now, he said, arbitrators are only required to take an online training course, which takes approximately one hour, and pass a test concerning the materials included in the online training course.
Doss said the issue is "systemic," and shows a "dramatic increase" in the number of brokers asking for expungement and getting it.
The report also notes that FINRA should take the following steps:
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