Attention all producers: Stockbrokers to whom you refer clients for advice on investing in stocks may not have the unblemished records that public records would seem to indicate.
So reports the Public Investors Arbitration Bar Association (PIABA) in a study of more than 1,600 arbitration cases over a recent five-year period.
In reviewing all securities arbitration awards in cases filed between Jan. 1, 2007 and Dec. 31, 2011 in which the word “expungement” appears, PIABA found that:
- An “alarmingly” high percentage of arbitration cases resolved by settlement or stipulated awards where expungement relief has been granted. For the period Jan. 1, 2007 through mid-May 2009, expungement was granted in 89 percent 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 the most recent time period, 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.
- Some stockbrokers have been aggressive in wiping their slate clean. One individual associated with a brokerage firm requested expungement 40 times. And arbitration panels granted such relief to that individual 35 times.
In the securities industry, the term “expungement” refers to the process by which an individual stockbroker licensed through the Financial Industry Regulatory Authority (FINRA), the industry self-regulatory organization, can seek to have removed from his or her public regulatory record any record of a complaint or complaints made by investors arising from the conduct of the broker.
The public typically accesses this Central Registration Depository information through state securities offices and FINRA’s BrokerCheck program. For its data, PIABA used the main independent arbitration case tracking system maintained by the Securities Arbitration Commentator.
“To say that ‘expungement’ of customer claims from broker records is a major investor protection problem is an understatement,” says attorney Scott Ilgenfritz, president of PIABA and author of the expungement study. “The result is that investors who are diligent enough to seek out information about brokers may be getting a woefully incomplete picture of the individual to whom they will entrust all or most of their nest egg.
“What is supposed to be an extraordinary relief measure is now being sought and granted in roughly nine out of the 10 settled cases that we studied,” he adds. “This clearly indicates that the current expungement procedures are seriously flawed. Regulators need to step in and crack down on the granting of expungements, particularly in settled cases.”