Monday, October 21, 2013

Study on Expungements Reveals Gap in Investor Protection

By Tim Dulaney, PhD, FRM and Tim Husson, PhD

We often encourage investors to visit the Financial Industry Regulatory Authority's (FINRA) BrokerCheck system to check the record of their broker.  The broker's record contains information about their qualifications, employment and complaint history.  The completeness of the information contained within the complaint history has recently been called into question by the Public Investors Arbitration Bar Association (PIABA).

Last week, PIABA released a study (PDF) of over 1,600 arbitration cases filed from 2007 through the end of 2011.[1]  For the time period under consideration, the study found that expungement was granted in the great majority of arbitration cases resolved by stipulated awards or settlements.  As a result, the information contained in the CRD may be of limited utility to investors.  According to the study's author, Scott Ilgenfriz, "[t]his 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."

The study mentioned one particular broker who requested expungement 40 times and was granted expungement by arbitration panels in nearly 88% of the cases.  While expungement is meant to provide relief to brokers in extraordinary situations, this particularly egregious example highlights deficiencies in the implementation of FINRA's expungement process.  

FINRA is considering taking steps to "provide additional guidance and training to arbitrators" and is "reviewing its rules and interpretations" in connection with expungements.  Incomplete information contained on a broker's CRD entry could put investors at risk and allow dirty brokers to operate with impunity.  
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[1]An expungement essentially removes any record of a complaint from a broker's entry on the Central Registration Depository (CRD).  

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