Two recent initiatives are intended to work in investors’ favor when it comes to the controversial practice of arbitration agreements.
First, the Financial Industry Regulatory Authority will review a controversial proposal in arbitration cases that allows brokers to expunge black marks from their record. Second, is the Investor Choice Act of 2013, a bill intended to ensure that investors have access to the judicial system by prohibiting use of mandatory pre-dispute securities arbitration agreements.
Linda Fienberg, president of FINRA’s dispute resolution unit, told a gathering of industry attorneys at a New York event held by the Practising Law Institute in early August that FINRA is “looking at the issues raised by investors concerning settlement negotiations when an expungement request is involved,” according to Reuters.
Feinberg said to expect a new rule proposal on the subject as soon as April.
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Reuters reported that according to a review by Seth Lipner, a New York lawyer who represents individuals in arbitration claims against the industry, brokers who asked arbitrators for expungement after investors’ cases settled succeeded 93% of the time. “Expungement is just too easy after settlement,” Lipner told Reuters.
But independent broker-dealer recruiter Jonathan Henschen told Investment Advisor that “in today’s environment, getting any marks expunged from [a broker’s] record is very difficult.” To say that “it is too easy to erase some of the criticism made against them is simply not true—it is very difficult to get anything removed.”
Henschen said that in his dealings with brokers and advisors, he “comes across advisor situations frequently where we recommend that the advisor obtain a securities attorney to get frivolous marks removed from their record. Customer complaints that are denied or never pursued have no business on a rep’s record.” Other situations “such as issues between a product company and the client where the rep is not involved are also prime examples where expungement is appropriate.”
While FINRA’s expungement review and the Investor Choice Act, introduced by Rep. Keith Ellison, D-Minn., a member of the House Financial Services Committee, are not “directly” related, Michael Canning, director of policy for the North American Securities Administrators Association, told Investment Advisor that they both highlight the “long-standing concerns that, for various reasons, the arbitration forum is skewed in favor of the industry.”
Arbitration, Canning added, “acts to delay [actions by] bad actors from becoming public and deprives other investors [from getting] certain information about certain brokers. That’s one of the reasons why, in many cases, other dispute forums like court are superior because there’s not the same ability to sweep things under the rug.”