Between 2012-14, expungement was granted in 87.8% of cases in which it was sought, according to the Public Investors Arbitration Bar Association

InvestmentNews (Oct 20, 2015 11:18 am) -- Finra's efforts to limit brokers' ability to clear their records of alleged misconduct have failed to reduce the number of times it occurs, according to an investor advocate group.

The Public Investors Arbitration Bar Association released a report Tuesday showing that Finra reforms haven't curbed the use of so-called expungement.

The study shows that in 844 arbitration cases filed between Jan. 1, 2012, and Dec. 31, 2014, expungement was granted in 87.8% of the cases in which it was sought.

The review is a follow-up to a similar study PIABA conducted in 2013, which showed that expungement was granted in nine out of 10 settled cases in which it was requested by a broker between Jan. 1, 2007, and May 18, 2009.

After the earlier study, the Financial Industry Regulatory Authority Inc. increased guidance and training for arbitrators related to expungement and approved a rule that prohibits arbitration settlements conditioned on expungement.

“Unfortunately, the result of the analysis of the statistics regarding expungement relief sought in cases involving stipulated awards or settled customer claims remains alarming,” the PIABA report states. “The statistics indicate that Finra's efforts have failed to assure that expungement relief is an extraordinary remedy granted only in cases in which the customer dispute information requested to be expunged has no meaningful investor protection or regulatory value.”

Finra did not immediately respond to the PIABA study.

When brokers are granted expungement, it clears alleged wrongdoing from their profiles in a public database known as BrokerCheck. PIABA warned that this could give investors a false impression of the integrity of a broker they might hire.

The lawyers' group recommended several steps to improve the expungement process, including having a Finra attorney review broker requests, notifying state regulators of expungement requests, limiting the time after a settlement in which brokers seek expungement, and strengthening arbitrator training.

Ultimately, expungement decisions should be taken out of the hands of arbitrators, PIABA said.

“The obligations and burdens associated with safeguarding the accuracy and integrity of customer dispute information, just like the obligations and burdens associated with maintaining the [Central Registration Depository] system, should be those of Finra and state regulators,” the PIABA report states. “They should not fall on customers who have settled their claims or their attorneys who are not compensated for opposing expungement relief sought by brokers.”