The lobbying group of plaintiffs’ lawyers who represent customers in disputes with their brokers is calling on FINRA and the SEC to “immediately halt” the practice that allows arbitration panels to expunge customer complaints from a rep’s record.
The group, the Public Investors Arbitration Bar Association (PIABA), released a survey Sept. 24 of 200 “stipulated” awards—cases that were settled by the opposing parties before the arbitrators made a final ruling—issued in 2006. The brokers requested expungement of the customer complaint in 185 of those cases and received that remedy in 182 of them. And in 130 of those cases—a whopping 71.4 percent—arbitrators granted expungement before any hearing on the merits of the case went forward.
Steven B. Caruso, a New York lawyer and president of PIABA, said the group undertook the study because customers were complaining, believing their broker had a clean record, only to discover over the course of an arbitration proceeding that his or her record of customer complaints had been expunged. A rule adopted in December, 2003 requires arbitrators to make affirmative, fact-based findings that the customer claim was factually impossible or clearly erroneous, or false, or that the broker was not involved in the alleged misconduct, in order for a rep to be eligible for expungement. (Caruso was named to the Registered Rep.“Ten To Watch” list this past August.)
“How does an arbitration panel make these specific findings, which are required under the rule, without holding a hearing?” asked Caruso. In fact, in four settled cases, arbitrators cited no ground for granting expungement. Currently, arbitrators are required only to complete a one-hour home study course to be eligible to consider expungement requests.
The survey found that one rep., Joseph Karsner of Maryland, received 18 recommendations for expungement in 2006, 17 of them without any hearing. “I mean, that’s just egregious,” Caruso said. Calls to Karsner’s lawyers were not returned.
But Caruso said FINRA has the ultimate responsibility to insure the integrity of information on brokers in the Central Registration Depository. “FINRA has an obligation to step in and stop abuse of that rule,” he said. “We think the entire process of expungement needs to be re-evaluated again.”
In a written statement responding to the survey, FINRA did not dispute the findings, but noted that recommendations for expungement are down, and pointed out that the survey was based on just 2 percent of all closed arbitration cases. “FINRA has worked diligently to reduce the number of recommendations to expunge from its arbitration forum,” the FINRA statement said. The number of recommendations dropped to 562 last year, or more than a third from 2005.
In each of these cases, the customer’s lawyer has signed off on expunging the broker’s record as part of the settlement. But that, according to Caruso, is part of the problem. “It’s the quid pro quo” for any settlement, he said.
The CRD system was designed to protect investors from unscrupulous reps. Reps claim that too often a disgruntled client can get a complaint on a Form U4 even if the charge is without merit. (For more, see
And, in New York, a court recently ruled that firms have an “ absolute privilege” (read: protection) from punitive monetary damages even if an inaccurate or outright lie is placed on a reps U5. Firms say without legal protection, advisors lawyers would attack them for libel, thereby gutting the purpose of the CRD system. For more, click here.)
