Expungement Granted in High Percentage Of Broker-Dealer Arbitration Settlements
By Yin Wilczek
Oct. 16 –Expungement relief was granted in a very high percentage of arbitration cases filed by investors against broker-dealers, particularly those that were resolved by settlement or stipulated awards, a new study by the Public Investors Arbitration Bar Association found.
The study, released Oct. 16, reviewed more than 1,600 Financial Industry Regulatory Authority arbitration cases filed between Jan. 1, 2007, and Dec. 31, 2011, in which the word “expungement” appeared. It found that between Jan. 1, 2007 through May 17, 2009, FINRA panels granted expungement relief in 60.3 percent of arbitration cases, allowing broker-dealers to remove those customer claims from their records.
More recently, the study found that between May 18, 2009 through Dec. 31, 2011, the arbitration panels granted expungement relief in 61.9 percent of the cases.
The statistics involving arbitration cases resolved by settlement or stipulated awards were even more “alarming,” the study said. It found that between Jan. 1, 2007, through mid-May 2009, expungement was granted in 89 percent of cases resolved by stipulated awards or settlement.
The study also found that between mid-May 2009 through the end of 2011, expungement relief was granted in 96.9 percent of cases resolved by settlement or stipulated awards.
Moreover, the study found that in one particularly egregious case, a broker applied for expungement relief 40 times in 36 months, and the relief was granted 35 times.
The study’s author–PIABA President Scott Ilgenfritz, who is a partner in Johnson, Pope, Bokor, Ruppel & Burns LLP, Tampa, Fla.–told reporters during a conference call that ultimately, investors are getting a “woefully incomplete picture” of their stockbrokers when consulting the Central Registration Depository.
The CRD system–established by FINRA and the North American Securities Administrators Association in 1981–contains information, including disciplinary histories, about the 5,100 broker-dealers and their 660,000 employees that are registered and licensed by FINRA.
When the Securities and Exchange Commission approved FINRA’s expungement rules in 2008, the understanding was that the remedy would be used only in “extraordinary” circumstances, Ilgenfritz said. However, the PIABA study found that expungement relief is granted in nine out of 10 settled cases.
“This clearly indicates that the current expungement procedures are seriously flawed,” Ilgenfritz said. “Regulators need to step in and crack down on the granting of expungements, particularly in settled cases.”
Incoming PIABA president Jason Doss, owner of the Doss Firm LLC in Marietta, Ga., agreed that the expungement process is “clearly broken.”
“We have believed for some time now that expungements are a significant investor protection issue, but this new study from PIABA now documents precisely just how bad the situation is,” Doss said. He added that the study showed a “dramatic increase” in expungement requests over the last few years, suggesting that it is a “systemic” problem.
In response to a question, Ilgenfritz said it was “difficult to tell” whether the expungements might have been fair or justified. However, he said that it “seems a very high percentage” of cases in which expungement relief is granted.
Among other recommendation, the study suggested that FINRA amend its rules to make it a violation of Rule 2010 for broker-dealers, as part of settlement discussions, to negotiate for customers to agree to expungement relief.
FINRA also should play a more active role in the expungement process by reviewing all motions for relief, particularly those involving settled cases, the study said. It further recommended that FINRA significantly improve its training for arbitrators regarding expungement requests. “That training should include an emphasis on the critical importance of the integrity of the disclosure information on the CRD system,” the study said.
Ilgenfritz told reporters that PIABA has shared a final draft of the study with FINRA’s Dispute Resolution division. “Our hope here at PIABA is that FINRA will seriously consider some of the rule changes” and other recommendations made in the study, he said. “Essentially right now you have a situation where with respect to settlements, FINRA is allowing the disclosure information and the regulatory record to be for sale, and it shouldn’t be that way.”
In response to the study, FINRA issued a statement saying that it shared PIABA’s serious concerns about the expungement process.
“As a result of these concerns, FINRA recently provided expanded guidance to assist arbitrators in the proper performance of their responsibilities with respect to expungement, and is enhancing arbitrator training with added emphasis on the importance of the integrity of the information in the CRD system,” the self-regulatory organization said. Moreover, “FINRA is reviewing its rules and interpretations, and will consider changes to provide clarity as to what actions in connection with conditions on settlements violate conduct rules.”
The SRO also said that the recent increase in expungement requests, as noted in the PIABA study, was largely a result of a 2009 change to certain forms, which increased the number of customer claims against brokers, and thus increased the number of 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 percent of the total number of customer disputes filed (17,635),” the SRO said.
SEC spokesman John Nester declined to comment on the study.
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