By Suzanne Barlyn
June 13 (Reuters) - Within the next few weeks, the Financial
Industry Regulatory Authority (FINRA) expects to send the U.S.
Securities and Exchange Commission a proposal to make it easier
for securities brokers to erase certain black marks from their
Once it arrives at the SEC, the plan will meet some
resistance from independent consumer attorneys who represent the
interests of investors.
FINRA, the industry-supported regulatory organization, is
aiming its relief at brokers in a bind: their records are often
tattooed with arbitration cases filed against their firms and
not the brokers themselves. Brokers who may have unknowingly
sold problematic products that were promoted by their firms as
safe -- such as auction rate securities - now get black marks on
their records when firms settle those cases or arbitrators rule
against the firm.
Consumer attorneys say a streamlined process that makes it
easier for brokers to erase black marks could deny investors
important information they should have for researching advisers.
The Public Investors Arbitration Bar Association (PIABA), a
group of lawyers who represent investors in securities
arbitration cases, plans to air those concerns at the SEC, which
must review and approve changes to FINRA's rules.
The proposal would give brokers multiple chances to clear
their records -- during arbitration and afterwards, with the
streamlined process -- while "investors...(only) get one chance
to recoup their life savings," said Steven Caruso, a PIABA
member and securities arbitration lawyer in New York.
A FINRA spokeswoman said the regulator will consider the
many suggestions it expects to receive when the plan moves to
The debate is heating up as regulators field a wave of
requests from brokers to erase or "expunge" their records. Those
requests follow a surge in arbitration cases stemming from the
2007-2008 financial crisis.
Keeping a clean record can be a challenge, brokers say,
because of a 2009 FINRA rule that expanded the types of
arbitration complaints that appear on brokers' public records.
When a broker is involved in a transaction that becomes the
subject of an investor arbitration, details of that case must go
on the broker's record, even if the broker is not named in the
case. And the very fact that the broker isn't an official party
is what makes it so hard for them to get their records scrubbed.
To get those details expunged, brokers must get arbitrator
approval. The process can require enlisting help from their
firms during a settlement, or filing their own separate
arbitration case against the investor or firm. Furthermore,
arbitrators who recommend expungement must demonstrate that the
investor's claim is false or that the information is a mistake.
The fast track options that FINRA is considering include a
new solo arbitration that would not require naming other
parties. The broker would present reasons for expungement to an
arbitrator, who would decide if erasing those details is
warranted, without having to review the entire case or hear from
the aggrieved investor. The broker would then need to get an
order from a court, already a final step in expungement cases.
PIABA is concerned that the arbitrator's recommendation may
come too easily. They may ultimately make recommendations
without knowing the broker's complete disciplinary record and
may never hear the investor's side of the story, Caruso said.
A FINRA spokeswoman said that now, arbitrators often decide
brokers' expungement requests at the same time as the investor's
case. They have access to all evidence, she said.
That doesn't happen in every case, and many settle without
tackling expungement, lawyers say. That leaves brokers to pursue
the expungement on their own in proceedings where information
about the investors' case is not available.
Even under the proposed plan, a broker's record couldn't be
erased without the broker getting a final court order. State
regulators also monitor the proceedings, said Melanie Senter
Lubin, Maryland Securities Commissioner.
What's more, brokers who did nothing more than sell products
their firms hawked as being safe may have a valid point about
wanting to clean their records, Lubin said, noting "a lot of us
don't hold it against the when it's a product failure."
(Reporting by Suzanne Barlyn; editing by Linda Stern and Andrew