Public information on stockbrokers may be incomplete according to a recent study conducted by the Public Investors Arbitration Bar Association (PIABA). The study revealed that the overwhelming majority of financial advisors in arbitration cases who filed motions for expungement were granted that relief, allowing the complaint to be wiped from their record. This is particularly troubling because it means that, even if an investor thoroughly investigates their potential or current financial advisor, they might not find out that he or she has a history of misconduct until it is too late.
The results of the study were based on five years of data from securities arbitration cases filed between January 2007 and December 2011.
Specifically, the study found that:
- From 2007 to Mid-May 2009, 89 percent of expungement requests were granted in cases involving some form of award or settlement.
- From the end of May 2009 until the end of 2011, this already-high percentage increased to a 96.9 percent approval rate for all expungements requested in cases resolved by award or settlement.
- One of the more zealous financial advisors went so far as to request expungement 40 times. He was approved in 35 of those cases.
“To say that ‘expungement’ of customer claims from broker records is a major investor protection problem is an understatement,” commented Attorney Scott Ilgenfritz, president of PIABA and author of this study.
Even when investors are using every means available to investigate the backgrounds of various financial advisors, their investigations will come up short because many financial advisors were able to erase part of their investment history. This inevitably leaves investors with incomplete information, or worse, they believe that their broker has no history of misconduct or complaints when, in reality, they do.
One tool intended to inform potential investors and protect them from being vulnerable to fraud and other misconduct is the CRD system. FINRA and the North American Securities Administrators Association (NASAA) established this electronic system more than 30 years ago.
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When stockbrokers receive approval for expungement, they can get complaints removed from the CRD, even though this was not the intent of granting expungement relief. According to the SEC, who approved of FINRA expungement rules, record clearing should only be granted on a limited basis, and in a way that does not interfere with investors protecting themselves against fraud and related misconduct. FINRA made similar statements regarding expungements only being granted under suitable conditions.
And yet, the realities revealed in the PIABA study indicate a much more liberal application of the rules, leaving many concerned for investor safety. In response to their findings, PIABA made three suggested changes for how expungements are handled in the securities industry.
First of all, FINRA arbitrators may lack adequate training when it comes to ruling on motions for expungement. PIABA suggests more training and a higher quality of training as one solution to this problem.
Second, PIABA proposed a procedural change that would restrict including expungements as part of settlement negotiations. Currently, what is happening in many cases is that a settlement offer is conditional upon the investor agreeing to let the respondent (financial advisor) make a motion for expungement without protest.
Finally, PIABA suggests that FINRA take a more active role in the decisions made by arbitrators. Ideally, that “more active role” would involve FINRA reviewing and analyzing all motions for record sealing before the arbitrator makes a ruling.
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The expungement process used by stockbrokers in FINRA arbitration must be changed to better protect investors. Lead Attorney David Meyer is an active member of PIABA and is ready to fight for you if you’ve suffered significant financial losses as a result of investment misconduct. To learn more, contact the firm today for a free evaluation of your case.
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