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Regulation and Compliance > Federal Regulation > FINRA

SEC OKs FINRA Rule on Expungement of Broker Black Marks

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The Securities and Exchange Commission approved Tuesday a rule proposed by the Financial Industry Regulatory Authority to prohibit arbitration settlements from being conditioned on investor agreement to clear “black marks” from a broker’s record.

FINRA’s Rule 2081 prohibits conditioning a settlement between a FINRA member and an investor resulting from the arbitration process on a requirement that the investor not oppose expungement – or erasing details about the complaint being settled – from the broker’s public record.

FINRA sent the proposed rule to the SEC in April. On June 11, a notice in the Federal Register stated that the SEC was granting itself a 45-day extension to weigh the merits of the proposal. That extension expired Tuesday.

Approval of the rule “helps to reduce FINRA’s lack of transparency about a broker’s complaint history,” said Jason Doss, president of the Public  Investors Arbitration Bar Association, in a statement. “All investors should have access to accurate and complete information when making a decision about who to entrust with their life savings. Brokers with investor complaints that have settled should not be able to sanitize their records by erasing black marks.”

PIABA released a study last October of more than 1,600 arbitration cases over the past five years that showed an “alarmingly high” rate of brokers who were able to get their arbitration histories wiped clean, leaving investors vulnerable to potential fraud and abuse.

From Jan. 1, 2007, through mid-May 2009, the PIABA study found, 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.

PIABA’s expungement study also recommended that FINRA play a much more active role in arbitrators’ rulings on motions for expungement relief, particularly in cases resolved by settlement.

“A needs to review and critically assess settlement agreements. Additionally, the analysis recommended that, for cases resolved by settlement, FINRA should require respondents to provide to FINRA the settlement agreement along with the motion for expungement relief,” PIABA said in its Tuesday statement. “Upon receipt of any motion for expungement relief and any settlement agreement, FINRA should provide those documents to the securities commissioner for the state in which the case was filed.”

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