Lawyers who represent investors say records are wiped clean too often
The Wall Street Journal (October 20, 2015 2:55 pm) -- Lawyers who represent investors in cases against the securities industry on Tuesday called for additional action to limit the removal of black marks from brokers’ records.
The Public Investors Arbitration Bar Association released data showing that many brokers are still getting customer-damage claims erased from their public records after those claims are resolved through the arbitration process at the Financial Industry Regulatory Authority.
Finra arbitration panels recommended expungement in 87.8% of the 460 cases with such requests that were both filed and settled in the three years from 2012 through 2014. The latest figure is lower than the 96.9% expungement rate that an earlier Piaba report tallied for settled cases in the period from May 18, 2009, through 2011.
Still, the group called the latest statistic alarming. It is important “to protect the regulatory records so that if customers go look up their broker, they can see customer complaints or settlements,” said Joseph Peiffer, a New Orleans-based lawyer and president of Piaba, in an interview.
One change suggested by Piaba is to have the expungement decision for settled cases moved out of the hands of arbitrators and into the hands of Finra’s disciplinary wing, said Mr. Peiffer.
Finra has a different view of the situation.
“Finra has taken numerous steps to make clear that expungement is an extraordinary remedy,” a spokeswoman said. “Piaba’s study reflects no qualitative analysis of the awards recommending expungement and therefore no assessment of whether the information that was the subject of the recommendation had any investor protection or regulatory value.”
The Securities and Exchange Commission approved a Finra proposal last year to eliminate a common practice in which clients were asked, as a condition of a settlement, not to oppose the expungement of the case from the broker’s record. This became effective July 30, 2014.
The SEC, at the time, said the ban was a constructive step to help assure that wiping of customer-dispute information from a broker’s record is “permitted only in the appropriate narrow circumstances.”
This followed a move by Finra in October 2013 to strengthen guidance and training for arbitrators on this topic, including requiring arbitration panels to provide more details on the rationale for granting expungement in arbitration awards. Last month the regulator’s board of governors gave the go-ahead for Finra to file with the SEC a proposal formally incorporating that guidance and best practices into the rules.
“It is a good step in the right direction, but it doesn’t go far enough,” Mr. Peiffer said.
The Finra spokeswoman also noted that the regulator’s arbitration task force, which includes several Piaba members, convened last year and formed an expungement subcommittee to discuss possible enhancements to the process.
Among the possibilities under consideration, she added, are the creation of a panel composed of specially trained arbitrators who would make decisions on requests for expungement. The task force is expected to issue its final report by the end of this year.
The cases studied by Piaba were only a fraction of all arbitration cases. A total of 7,621 cases were filed by customers, but in some cases not fully resolved, during that three-year period.
One reason the study focused on settled cases, Mr. Peiffer said, is because in those cases, arbitrators don’t always get to hear the customer’s side of the story when making decisions about expungement.
Write to Anna Prior at anna.prior@wsj.com