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October 16, 2013 at 10:16 AM
A study of more than 1,600 arbitration cases over the past five years shows an “alarmingly high” rate of brokers who were able to get their arbitration histories wiped clean, leaving investors vulnerable to potential fraud and abuse, according to a just-released report by the Public Investors Arbitration Bar Association (PIABA).
In reviewing all securities arbitration awards in cases filed between Jan. 1, 2007, and Dec. 31, 2011, in which the word “expungement” appears, the report by PIABA, which is an association of lawyers who represent aggrieved investors, found:
- An “alarmingly” high percentage of arbitration cases resolved by settlement or stipulated awards where expungement relief has been granted. For the time period Jan. 1, 2007 through mid-May 2009, expungement was granted in 89% of the cases resolved by stipulated awards or settlement. (The May 2009 end date reflects a change in reporting requirements mandating more information about arbitration cases.)
- For mid-May 2009 through the end of 2011, expungement relief was granted in nearly every instance: 96.9% of the cases resolved by settlements or stipulated awards.
- Some stockbrokers have taken a particularly aggressive approach to wiping their slate clean. One individual associated with a brokerage firm requested expungement 40 times, and arbitration panels granted such relief to that individual 35 times.
“To say that ‘expungement’ of customer claims from broker records is a major investor protection problem is an understatement,” said Scott Ilgenfritz, outgoing president of PIABA, and author of the expungement study, during a Wednesday conference call to announce the study’s findings. “What is supposed to be an extraordinary relief measure is now being sought and granted in roughly nine out of the 10 settled cases that we studied.”
Such a high percentage of expungements “clearly indicates that the current expungement procedures are seriously flawed. Regulators need to step in and crack down on the granting of expungements, particularly in settled cases.”
FINRA responded in a statement that the recent increase in expungement requests, as PIABA noted, is largely attributable to the 2009 change to the Forms U4 and U5 that increased the number of customer claims reported against brokers, and consequently in an increase in brokers pursuing expungement relief. “While still significant, the number of arbitrator-recommended expungements executed by FINRA following a court order during the five-year period (838 orders) covered by the study is less than 5% of the total number of customer disputes filed (17,635).”
FINRA maintains the qualification, employment and disclosure histories of 5,100 broker-dealers and approximately 660,000 of their securities employees in the electronic CRD system. FINRA and the North American Securities Administrators Association (NASAA) established the CRD system in 1981.
“PIABA’s study makes many valid points. Expungement is and should continue to be an extraordinary remedy,” says Andrea Seidt, NASAA president and Ohio securities commissioner. “We share PIABA’s concerns that there be robust oversight of the process to ensure that expungement is not easily granted. Such oversight helps to ensure the integrity of the CRD system that regulators, investors and industry rely upon for information about the background of stockbrokers.”
Seidt says that NASAA continues to work with FINRA “to address these concerns and looks forward to working constructively with all interested parties to ensure that the expungement process requires a thorough and thoughtful analysis of each request.” While FINRA has very recently undertaken steps to better educate arbitrators concerning their roles in the expungement process “and the critical importance of accurate customer claims information with respect to investor protection,” said Ilgenfritz, “FINRA’s arbitrator education efforts need to go further, and FINRA needs to propose rule changes.”
