Financial Advisor (October 16, 2013) --  It’s far too easy for brokers to clean up their disciplinary records, says a new study of arbitrator-ordered expungements.
           
Finra arbitrators are rubber-stamping requests 90 percent of the time to remove customer complaints, according to the Public Investors Arbitration Bar Association (Piaba), which represents plaintiffs’ attorneys.

The study analyzed 1,600 cases, from January 1, 2007 through 2011.
  
Through mid-May 2009, expungement was granted in 89 percent of the cases, the study found. From May 2009 through the end of 2011, brokers were granted expungements in 97 percent of cases.

The two periods correspond to different Finra reporting requirements. Piaba only looked at cases resolved by settlements or stipulated awards, where the broker also requested an expungement.
 
 An expungement is “supposed to be an extraordinary relief measure,” said Piaba president Scott Ilgenfritz, a partner with Johnson, Pope, Bokor, Ruppel & Burns LLP.
  
The study “clearly indicates that the current expungement procedures are seriously flawed,” he said
 
Piaba’s study is the first in-depth review of expungement rulings. The group wants Finra and state regulators to more closely scrutinize how arbitrators are granting expungements.          
  
Plaintiffs’ lawyers and regulators have been concerned about brokerage firms settling with customers in exchange for not opposing an expungement request. The process gives the appearance of buying a clean record.
       
But defense attorneys note that brokers ask for expungements in only a fraction of cases, and those that do may be deserving of relief.
      
Under Finra rules, brokers must show that a customer's complaint was false, factually impossible or clearly erroneous, or that the rep was not involved with the client.

In August, Linda Fienberg, president of Fire’s arbitration unit, said that the regulator is considering changes in those standards.
   
This week, Finra issued guidance on its expungement rules, telling arbitrators to better explain their reasons for granting relief, and describing what documents or evidence they relied on.
          
The expungement studies are just the latest developments involving the expungement controversy.
          
In 2009, Finra began requiring brokers to publicly report any arbitration in which they were involved, even if they were not part of the case. The change closed a loophole that allowed brokers to avoid disclosing many customer claims.
          
But Finra’s move created another problem: an increased number of brokers with customer complaints on their records, but with no clear-cut way to seek expungement other than to file an entirely new claim.
           
Enter Finra once more. In May 2012, it began working on a proposal (called an “in re” procedure) to make expungement easier for these brokers. Last December, Finra's board gave the go-ahead to file the proposal with the SEC, but the industry is still waiting to see it.
           
The in-re procedures, if approved, are expected to lead to a rise in expungement requests.
            
Meanwhile, the Securities Industry and Financial Markets Association (Sifma) wants to see the proposed procedures used for the removal of unproven customer complaints.
          
"Sifma believes that the continued disclosure of denied or unfounded written customer complaints serves no regulatory purpose," the trade group wrote in a comment letter. These complaints remain on a broker's public record as long as the individual is registered, Sifma said.
          
(Finra began disclosing all historic complaints, regardless of age, in August 2010. Prior to that, unproven allegations were dropped after two years.)
           
Despite the constant back and forth over Finra’s expungement process, the regulator may find itself increasingly out of the loop.
          
An August 2012 decision by a California appeals court ruled that brokers could have their records expunged under a principle of basic fairness, or equity, rather than under Finra rules.
          
The broker who brought the California case wanted to expunge 17 customer complaints and a regulatory action.
          
Since brokers must get a judge to confirm arbitrator-awarded expungements, they might as well just go straight to the courthouse, Riffer figures.
          
This summer, in a novel move, he filed an expungement request with a California court on behalf of a “John Doe” broker.
          
“The idea was, if we win and get expungement, there shouldn’t be a record in the public court system” of the actual broker’s name, Riffer said. Otherwise, it defeats the purpose of an expungement.
          
So far, the “John Doe” filing looks unusual, but more brokers might try it. Like court cases, expungement decisions are available in Finra’s public arbitration database, even if the customer claim has been removed from the BrokerCheck reporting system.
          
As more disciplinary information becomes available online, thanks to technology upstarts like BrightScope, which is working hard to aggregate registration data and make it user-friendly, registered reps will increasingly look for creative ways to expunge damaging information.
          
And that could make the debate over expungement proceedings increasingly testy.