Depending on whom you talk to, it may have just become a little bit harder for registered reps to erase disputes from the Central Registration Depository (“CRD”) records system. The Financial Industry Regulatory Authority proposed a rule last week that would require arbitrators to take some extra steps before recommending expungement of information from a broker’s “permanent” record. (Ironically, there is no similar database for registered investment advisors or their investment advisor reps (IARs)—who love to tout their fiduciary status.)
The proposed rule requires arbitrators who are considering a broker’s expungement request to hold a recorded hearing by telephone (or in person), and provide a brief written explanation of the reasons for ordering expungement. In cases that have been settled, arbitrators would be required to review the settlement documents including amounts paid, and terms and conditions.
“It is critical that information in the CRD system—on which regulators, investors and the securities industry rely—is accurate and complete," says Linda Fienberg, president of FINRA Dispute Resolution. "These proposed changes will enhance the integrity of the reporting system and ensure investor protection."
But Joe Sack, founder of Sack Law Firm in New York, says, “The proposed expungement procedures sound great in theory, but in practice they will end up denying expungement to deserving registered reps.”
The proposal comes about a month after Registered Rep. wrote about the New York attorney general’s office launching a quiet crusade to prevent reps from erasing customer complaints in settlements with clients. At the time of the story, New York State Assistant Attorney General, R. Verle Johnson, had intervened in seven court proceedings to oppose the confirmation of expungement of investor complaints as recommended by arbitrators.
Part of the concern stems from out-of-arbitration settlements, where lawyers say the plaintiffs agree to essentially rescind their claims about the broker as part of a monetary settlement. Ted Eppenstein, senior partner at Eppenstein and Eppenstein in New York, says almost all settlements require it of plaintiffs. “It’s bad for everyone because the [plaintiff] doesn’t usually care at that point what goes on the record because he’s found another broker. The harm has been done, and he’s just trying to get some recovery. It’s the thousands of people looking up brokers’ records who are being harmed, because the record will not adequately reflect what happened.”
A Giant White Wash?
In September, the Public Investors Arbitration Bar Association, a lobbying group of plaintiffs’ lawyers who represent customers, released a survey showing that in 71 percent of customer awards issued by panels of FINRA arbitrators in 2006, “arbitrators were permitted to recommend expungement of customer complaints from the CRD without any indication of an evidentiary hearing.” In each of those cases, the customer's lawyer signed off on expunging the broker's record as part of the settlement. The PIABA could not be reached for comment.
FINRA says its proposal to require a hearing will ensure that arbitrators consider the facts for—and against—a broker’s request for expungement, especially in cases where the terms of a settlement can put pressure on customers. The proposed rule would also require that arbitrators explain the underlying factual basis for their ruling.
But Sack says the settlements occur in the most minor of cases, and doesn’t mean the broker did something wrong. “The truth is that most every claim regardless of merit has a settlement value, as far as accounting for risk, defense costs and the overall cost of business. As a result, firms are often willing to settle even the most pathetic cases. However, most arbitration panels aren’t willing or able to make the distinction that a broker didn’t necessarily do anything wrong just because money is being paid out,” he says.
Michael F. Bachner, senior partner at Bachner & Associates in New York, represents brokers in regulatory and white collar-criminal matters, and says while the proposed rule allows investors to have the comfort of knowing that some thought went into the process by which a brokers record is cleaned, it may place a needless burden on brokers facing frivolous claims.
He says some sophisticated clients use the CRD as a weapon against their brokers. One investor, for example, who had a previous issue with a broker threatened to file a complaint against when the client heard that the rep was switching firms. “[The investor] knew the broker couldn’t process any account-transfer forms if he had an outstanding complaint. It’s close to extortion,” Bachner says.
He suggests there is a general distrust surrounding FINRA’s arbitration process which is sometimes regarded as pro-industry. “Now there is an effort to show the public that FINRA is taking an active view and making sure investors are protected. Unfortunately, this is making it more difficult for brokers to clean their records of cases that never should have been brought in the first place,” Bachner says.
Pat Huddleston, who runs the consumer advocacy Web site Investor's Watchdog, and was a former branch enforcement chief at the SEC, says he thinks it’s a positive step, but he thinks that responding attorneys will find a way to get around whatever rules are put in place for expungement. Huddleston’s Web site charges investors $49 and up for reports that describe arbitration proceedings or settlements dug up from public records that have been expunged from brokers’ records.