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FINRA seeks to beef up confidence about broker oversight

The Financial Industry Regulatory Authority has come in for a lot of criticism in recent months. We highlighted some of the issues that the industry-funded organization has been struggling to address in our last post. This time we focus on another: the apparent lack of transparency regarding consumer complaints or findings of malpractice against brokers and advisors.

It is a general rule of thumb that when you enlist the services of an investment broker or planner you should conduct a check of the person for possible complaints or citations. This is supposed to be made easier by such public databases as BrokerCheck. But, as has been reported in The New York Times and The Money Pivot in recent months, all too often broker records have been erased through expungements connected with arbitration proceedings.

According to one survey reported in October, arbitrators agreed to advisor requests for expungement in nearly every case as part of settlements with plaintiffs. That review was conducted by the Public Investors Arbitration Bar Association.

Such expungements are allowed, but they aren't supposed to be so easily granted. Indeed, they are supposed to be the exception, not the rule. FINRA requirements state that a broker is supposed to bring a separate request to an arbitration panel, and if expungement is granted, a court order must then be sought to have the records removed from the public database.

Reacting to the PIABA study, FINRA recently indicated that it is taking steps to remedy the situation. They reportedly include stepping up training and guidance for arbitrators related to expungement proceedings. In addition, the group says it is conducting a broader review of current rules which may lead to changes that could offer more clarity about what can and can't be approved as part of arbitration settlements.

With all those qualifiers in the statement from FINRA, some might legitimately question whether anything is likely to change.

Source: OnWallStreet.com, "FINRA Tightens Arbitration Rules," Mason Braswell, Dec. 1, 2013

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