Changes to expungement procedures have made it tougher for brokers to sanitize their records, but a continuing practice may help them avoid disclosing certain details that should be public.
Public regulatory filings about brokers typically include details of arbitration cases filed by aggrieved investors. But this information can be erased if a settlement is reached that stipulates the investor can't contest the expungement of the case.
This long-standing practice can weaken disclosure systems that exist to help investors evaluate advisors, according to some lawyers. Some information about arbitration cases doesn't appear in the Financial Industry Regulatory Authority's BrokerCheck system, although it should, they say. BrokerCheck, a free database run by Finra, aims to help investors research the professional backgrounds of wire house advisors.
Settlements that require keeping quiet during expungement proceedings "denigrate the integrity of BrokerCheck" while placing investors and their lawyers in an inappropriate role, says Peter Mougey, president of the Public Investors Arbitration Bar Association, a Norman, Okla., group whose members represent investors in Finra arbitrations.
One recent case, against Bank of America Corp.'s Merrill Lynch & Co. and a former broker, illustrates how such deals work. An estate representing a former customer filed a $1.5 million claim in 2009, alleging civil fraud and sales of unsuitable investments, among other things, according to an arbitration ruling. In June the parties settled for an undisclosed amount. The investor's estate also agreed not to contest the broker's expungement request or appear at her hearing.
A Finra panel agreed to the expungement in a ruling last week. The panel, in fact, found that the estate's "claim, allegation, or information is false." Since 2009, arbitrators have been required to make one of three specific findings before recommending an expungement, including false claims or information. Rules also require the arbitrator to conduct a recorded hearing, among other things, and review documents, including the statement of claim, answer and settlement agreement.
Arbitrators in the case found that information substantiated the broker's claims that "Claimants' allegations of unsuitability and excessive trading were false," according to the ruling. The broker, who wasn't accused of any wrongdoing, now needs a court order to complete the expungement process, as is typical in expungement cases.
A Merrill Lynch spokesman said the company is pleased with the arbitrators' resolution. A spokeswoman for UBS AG, where the broker now works, declined to immediately comment.
The case also highlights another disclosure issue: the potential for brokers' records to be tattooed by frivolous complaints, lawyers say. "Sometimes, there may be cases where the allegations are so far from the truth that it may be unfair to tarnish a broker's license," says Raymond Moss, a securities arbitration lawyer for Smith Moss Kline & David LLP in Atlanta. Expungement agreements can help resolve those concerns.
But there is a problem with reaching findings without questioning investors, says Jeffrey Sonn, a securities arbitration lawyer in Fort Lauderdale, Fla., who advises clients against agreeing to expungement deals. Arbitrators "hear just one side of the story," he says.
Regulators, however, are more upbeat about the fairness of expungement proceedings. Expungement requests have declined substantially since the procedural changes took effect in 2009, says John Cronin, Vermont securities director.
State and industry regulators also have exercised their rights in some cases to oppose certain arbitrators' expungement recommendations in court, says Linda Fienberg, president of Finra's dispute resolution unit. Other safeguards include a separate Finra review of arbitrators' expungement recommendations, she says.
Fienberg says more regulation isn't needed to prohibit settlements in which investors agree not to contest expungements. "If the investor or investor's lawyer is able to work out a really good settlement, I think the investor has every right to accept," she says.
