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TheStreet Open House

Does Your Financial Advisor Really Have a Clean Record?

By Hal M. Bundrick

NEW YORK (MainStreet) ¿ When hiring a financial advisor, investors are told to "do their research" by using public databases such as BrokerCheck to search for past complaints and compliance infractions. But advisors may have already wiped the slate clean.

The Public Investors Arbitration Bar Association (PIABA) studied more than 1,600 arbitration cases in which the word "expungement" appeared and found that from January 1, 2007 through mid-May 2009, broker records were scrubbed in 89% of the cases resolved by stipulated awards or settlements. Even more recently -- since mid-May 2009 through the end of 2011 -- expungement relief was granted in nearly every instance: 96.9% of cases.

PIABA found one broker who requested expungement 40 times, and arbitration panels granted a clean record to that individual 35 times. Financial advisors seeking expungement are looking to remove investor complaints from the Central Registration Depository (CRD), the official database accessed by the public through state securities offices and FINRA's BrokerCheck program.

"To say that 'expungement' of customer claims from broker records is a major investor protection problem is an understatement," says Scott Ilgenfritz, president, PIABA. "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. 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."

While the Securities and Exchange Commission (SEC) approved FINRA rules related to expungement, the federal oversight agency did so on the understanding that the granting of such relief would be an extraordinary remedy.

"One of the key recommendations we make to investors is to check the record of anyone they are thinking of trusting with their money," says Rachel Weintraub, legislative director and senior counsel for the Consumer Federation of America (CFA). "But when it is too easy for brokers to get complaints expunged from their records, investors who attempt to do the right thing and check out the broker's disciplinary record may end up making their decision based on incomplete information. Worse, they may be led to believe that a broker has a clean disciplinary record when that is far from true. This leaves investors vulnerable to fraud and abuse."

Better training for arbitrators is needed, according to PIABA.

"Changes need to be made with respect to the content and thoroughness of the training arbitrators are required to complete before they can rule upon a motion seeking expungement relief," says Ilgenfritz. "Changes should also be made with respect to the procedures applicable to motions seeking expungement relief."

FINRA responded to the report, issuing a statement saying the regulator is working to provide additional guidance and training to arbitrators.

"As a result of these concerns, FINRA recently provided expanded guidance to assist arbitrators in the proper performance of their responsibilities with respect to expungement, and is enhancing arbitrator training with added emphasis on the importance of the integrity of the information in the CRD system," the FINRA statement says. "While still significant, the number of arbitrator-recommended expungements executed by FINRA following a court order during the five-year period (838 orders) covered by the study is less than 5% of the total number of customer disputes filed (17,635)."

--Written by Hal M. Bundrick for MainStreet

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