FINRA Gets Tougher On Brokers Seeking Expungements

BrokerIt may soon be harder for brokers and financial advisers in the securities industry to scrub their records of investors’ complaints from their disciplinary records.

Last month, the Financial Industry Regulatory Authority (FINRA) approved a rule that will prevent brokers and advisors from “conditioning settlements of customer disputes on, or otherwise compensating customers for, an agreement not to oppose a request to expunge information” from a broker’s or financial adviser’s records.

FINRA, a nonprofit charged by Congress to regulate the securities industry, maintains a database that contains information on brokers including customer complaints, regulatory actions and brokers’ criminal histories, liens and bankruptcies.

The veracity of the broker database is critical for investors. A 1987 Supreme Court decision allows brokerage firms to insist that customers forfeit their right to sue in court. Should a dispute arise, customers are forced into arbitration. And since arbitration hearings are closed and the documents are not made public, the BrokerCheck database is the only tool an investor has to vet a broker or financial adviser.

The proposed rule change was spurred by critics, including investors and the plaintiffs’ bar, who contend that some brokers are simply buying a clean record by offering compensation in return for customers agreeing not to oppose an expungement request.

The Public Investors Arbitration Bar Association (PIABA), which represents investors in arbitration cases, published a study last October that revealed that brokers are able to obtain expungement in about nine out of ten cases resolved by settlement or a stipulated award. Between January 2007 and May 2009, expungement was granted 89% of the time in cases resolved by stipulated awards or settlement, and 96.9% of the time between May 2009 and December 2011, according to the study.

Korein Tillery attorney George Zelcs noted: “Investors are clearly entitled to this valuable information about their brokers. This rule change is long overdue.”

The new rule is at the U.S. Securities and Exchange Commission (SEC) for further review, and will be open for public comment before a final decision is made.

-Mary Ellen Egan

Email:megan@koreintillery.com