Pittsburgh Post-Gazette (October 25, 2015 11:00 pm) -- Two years after lawyers representing investors complained that an industry watch dog was allowing the records of problem brokers to be erased too often, not much has changed.

That’s the assessment of the Public Investors Arbitration Bar Association, or PIABA, which represents investors who file complaints about the way they were treated by brokers. The complaints are heard in arbitration procedures overseen by the Financial Industry Regulatory Authority, or FINRA. The organization regulates about 637,000 brokers and the more than 4,000 securities firms for which they work.

PIABA reported last week that in about 88 percent of the 460 arbitration cases between 2012 and 2014 that were either settled or involved awards to investors, the subjects of those complaints were able to get information about their involvement erased from a site that is supposed to help investors perform background checks on brokers.

“Investors rely on this information. ... With the expungement rates being what they are, they are not getting the information that they need. The system is broken,” said PIABA president Joe Peiffer, a New Orleans attorney.

A 2013 study by the lawyer group that looked at cases involving settlements or awards to investors between 2007 and 2011 found expungements occurred in about 90 percent of the cases.
Consequently, PIABA believes diligent investors who use FINRA’s BrokerCheck database to research a broker are not getting a complete picture.

FINRA issued a statement saying that only a very small portion of cases involving customer complaints involve expungement requests. The regulator said there are flaws in PIABA’s report.

One of them is that it “reflects no qualitative analysis of the awards” so it doesn’t determine whether records were erased appropriately or inappropriately. The regulator, which is funded by Wall Street, said it is continuing efforts, with the help of the lawyer group, to make sure expungement is only granted when it is appropriate.

Reasons for erasing the records include cases where a broker was named in a complaint but was not involved in the problem an investor complained about; the wrong broker was named; or where the charge the investor made was false.

Records are not supposed to be expunged if the information in question is useful to regulators or helps protect investors.

Last year, the U.S. Securities and Exchange Commission approved a FINRA proposal to prohibit erasing the record.

Faced with the prospect of losing a case after going through the costly and time-consuming arbitration process, some investors settle their complaint on the condition that the record of the dispute will be obliterated. In exchange for the cash, these investors don’t oppose their brokers going to court seeking to have the record expunged.

That can leave investors who rely on BrokerCheck in the dark.

Some experts think the rule will reduce the number of times records are erased inappropriately. Others believe it won’t have much of an effect because most investors won’t endure the time and expense of opposing a broker’s expungement request.

Those requests have to be approved by a judge. FINRA erases records only after being ordered by a court to do so.

FINRA is considering creating a panel of specially trained arbitrators who would decide whether records should be expunged.

During a conference call with journalists Tuesday, officials with the Public Investors Arbitration Bar Association said FINRA has failed to curb the number of times expungement requests are granted.

“A wholesale change needs to occur with respect to the handling of broker requests for expungement relief in settled customer cases,” said Hugh Berkson, a Cleveland attorney who will be the next president of the bar group.

The ongoing dispute over how complete of a record investors get when they consult BrokerCheck shouldn’t stop them from using it. They can also check a broker through state regulators or do an Internet search that may fill in some missing pieces. When interviewing potential brokers, they should ask tough questions, including whether anything about their record has been wiped clean.

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.