Investors beware: Stock brokers can clean tarnished records
(MoneyWatch) Investors hoping to check out the disciplinary history of their stock broker may be getting woefully incomplete information, according to a study conducted by a trade association for securities lawyers.
Indeed, after reviewing data on brokers requesting so-called "expungements" -- a process by which a broker can wipe his record clean of a legal settlement -- an official from the Consumer Federation of America said the information available to the public about the legal history of brokers is sometimes so incomplete that it gives a misleadingly rosy picture.
"Too liberal granting of broker expungements provides a falsely reassuring picture," said Rachel Weintraub, senior counsel for the Consumer Federation of America. "Investors are not just uninformed, they are misinformed."
Reviewing more than 1,600 arbitration cases filed against brokers and brokerage firms over the past six years, the Public Investors Arbitration Bar Association, a group that represents securities lawyers, found that brokers who asked to have their records wiped clean of a legal settlement with a client almost always were successful. In fact, one broker who asked to have 40 cases erased from the public database was successful in all but 5 instances, the study's authors found. Moreover, an increasing number of brokers are requesting expungements - and they're regularly granted in cases that have settled without going to a full hearing, according to the study.
Securities industry officials say that nothing in the study indicates that the process of clearing broker records is being abused. Securities law allows brokers to have their legal records wiped clean when a claim against them was erroneous, factually impossible or when the broker can show that he or she was not involved in the wrongdoing. Assuming that arbitrators apply existing law correctly, the fact that 96 percent of the brokers requesting expungements receive them is not an indicator of wrongdoing, says Kevin Carroll, associate general counsel for the securities Industry Association.
The study's authors acknowledged that the study measured quantitative, rather than qualitative, data. Thus, PIABA can't say how often the expungement process was used appropriately or abused. However, they contend that numbers themselves give cause for worry.
The Financial Industry Regulatory Authority, which regulates brokers and brokerage firms, says the PIABA study raises alarms. But the regulatory group stresses that just 5% of the brokers involved in shareholder litigation over the past five years have been successful in having their records cleared. Nonetheless, the agency says it is reviewing the guidelines it provides to arbitrators to ensure that the record-clearing process isn't over-used.
In the meantime, investors are still urged to check their broker's disciplinary history through FINRA's broker check web site or by calling 800-289-9999. Investors can also check a broker's history with state securities regulators, who sometimes maintain more complete documentation on a broker's history.
