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Erasing a Broker’s Black Marks

By on January 20, 2014
Categories: FINANCIAL PLANNING, MARKET NEWS

Americans searching for reputable financial professionals should always check to see if an advisor has black marks on their public records.

Investors who want to do their due diligence on a stockbroker, however, could find nothing amiss even if the broker has been the subject of many claims. That’s because brokers who have encountered claims are routinely getting their cases expunged from the public records.

Here’s some background on the problem:  investor complaints against a stockbroker, if not resolved by the firm, will routinely end up in arbitration. (It’s extremely difficult for an investor to sue a broker.) The sort of claims  that end up in front of arbitration panels include:

  • Excessive trading in a client’s account to generate commissions.
  • Selecting investments that are not suitable.
  • Negligence.

A database called BrokerCheck contains information about individual brokers including investor complaints and regulatory investigations.  Consumers are advised to look up brokers in this database to see if they have experienced problems with their clients.

A new report by the Public Investors Arbitration Bar Association (PIABA), however, revealed that the vast majority of brokers who attempt to get their black marks expunged from BrokerCheck are succeeding even though arbitration panels are only supposed to grant such requests in rare cases.

The PIABA looked at 1,600 arbitration cases during different time periods within a five-year span ending in December 2011. From 2007 through mid May 2009, brokers got their arbitration records expunged 89% of the time! From mid May 2009 through 2011, brokers were even more successful. They got their cases erased 96.9% of the time.

One broker, who was ensnared in dozens of arbitration cases, asked for 40 expungements and managed to wipe out 35 cases.

“To say that expungement of customer claims from broker records is a major investor protection problem is an understatement,” said Scott Ilgenfrit, the outgoing president of PIABA and author of the study, during a press conference. “What is supposed to be an extraordinary relief measure is now being sought and granted in roughly nine out of 10 cases that we studied.”

After the study was released, FINRA, the nation’s largest independent securities regulator, which oversees BrokerCheck, said it also was concerned about the ease of obtaining an expungement. FINRA said it would be enhancing abritrator training and reviewing its rules.

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