PIABA to SEC: Bar Brokers From Buying a Clean Record

Group urges adoption of FINRA’s proposition

To Better Protect Investors, SEC Needs to Approve FINRA-Proposed Rule That Would Prohibit Arbitration Settlements From Being Conditioned on Investor Agreement to Clear “Black Marks” From a Broker’s Record.

WASHINGTON, D.C. – July 24, 2014 – With the expiration yesterday of a deadline for a decision about a key rule that would protect investors, the Public Investors Arbitration Bar Association (PIABA) is calling on the U.S. Securities and Exchange Commission (SEC) to approve Rule 2081 without further delay. The rule, proposed by the Financial Industry Regulatory Authority (FINRA), would prohibit 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.

Attorney Jason R. Doss, president, PIABA, said: “Approving this rule would help to reduce FINRA’s lack of transparency about a broker’s complaint history. 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.”

An alarming rate of expungement relief

A PIABA study released last October showed expungement relief was granted at an alarmingly high portion of the time in arbitration cases resolved by settlement or stipulated awards. For the time period of the analysis – January 1, 2007 through mid-May 2009 – expungement was granted in 89 percent of the cases resolved by stipulated awards or settlement. Even more startling, in the most recent time period studied – mid-May 2009 through the end of 2011 – expungement relief was granted in nearly every instance – 96.9 percent of the cases resolved by settlements or stipulated awards.

This was due, in part, to brokerage firms conditioning settlements with investors on their agreement not to oppose expungement requests made by the broker to the arbitrator after the investor dismissed their claims pursuant to the settlement agreement. The result of expungement is that even if a broker was guilty of wrongdoing, the complaint would be erased from their background record.

Doss added: “Expungement not only compromises the integrity of the Central Registration Depository (CRD), a database that is accessible by the public and records information such as customer complaints, it also deprives other investors from being able to learn important information about their financial adviser. Investors doing their due diligence about a financial advisor with expunged customer complaint information would have an incomplete picture of the background of that broker and may mistakenly believe for example, that the financial advisor had no prior complaints.”

Investors have a right to know if their current or potential trusted broker has been the subject of any customer complaints. It is imperative that the SEC ensure that investors have access to this key piece of information

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. FINRA 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. 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.

Investor’s right to know

FINRA has been working towards better educating arbitrators concerning their roles in the expungement process and the critical importance of accurate customer claims information with respect to investor protection.

“Investors have a right to know if their current or potential trusted broker has been the subject of any customer complaints. It is imperative that the SEC ensure that investors have access to this key piece of information so they can make an informed decision based on a more complete picture of a broker’s background,” Doss concluded.

The Financial Industry Regulatory Authority (FINRA) sent the proposed rule to the SEC in April. On June 11, a notice published in the Federal Register indicated the SEC was granting itself a 45-day extension to weigh the merits of a proposal. That extension runs out on July 22, 2014. A comment letter filed by PIABA can be found here.





Public Investors Arbitration Bar Association is an international, not-for-profit, voluntary bar association of lawyers who represent claimants in securities and commodities arbitration proceedings and securities litigation. The mission of PIABA is to promote the interests of the public investor in securities and commodities arbitration, by seeking to protect such investors from abuses in the arbitration process, by seeking to make securities arbitration as just and fair as systemically possible, and by educating investors concerning their rights. For more information, go to www.piaba.org.