Wall Street brokers asking to expunge disclosures at record pace

Reuters News
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Posted: Sep 11, 2012 8:05 PM
Wall Street brokers asking to expunge disclosures at record pace

By Suzanne Barlyn

CORONADO, California (Reuters) - Securities brokers are on pace to make the most requests to clean up their public disclosure records ever lodged in one year, a lawyer for a national organization of state securities regulators said Tuesday.

Brokers have made 354 requests so far in 2012 to expunge information such as details of customer arbitration complaints from records that investors and securities firms use to research brokers' professional histories, said A. Valerie Mirko, assistant general counsel for the North American Securities Administrators Association (NASAA).

The number is almost as high as the 372 expungement requests brokers made during all of 2011 and is likely to increase in the final quarter, said Mirko, speaking at an annual conference for NASAA, an organization of state securities regulators.

Brokers' expungement requests so far this year have nearly tripled from the 126 total requests made in 2008, according to NASAA. The increase, say regulators, corresponds with a surge in arbitration cases investors filed against brokerages stemming from losses in the 2008-2009 financial crisis.

Those arbitration cases peaked at more than 7,000 filed during 2009, according to the Financial Industry Regulatory Authority (FINRA), an industry-funded watchdog. FINRA rules require disclosure of arbitration complaints on brokers' records if the brokers are involved in the transaction at issue, even if they are not named personally in the case.

After those cases are decided or settled - which can take 18 months or more - some brokers consider requesting removing the complaints from their records. That typically involves another type of FINRA arbitration. Arbitrators, in those cases, must apply FINRA's standards for recommending an expungement, such as deciding that the disclosure was made in error or false.

But many brokers who are successful do not then obtain a court order to finalize the expungement, a necessary final step in the process, Melanie Senter Lubin, Maryland Securities Commissioner, said at the NASAA conference. "I'm amazed how many go through the process and don't get a court order," she said.

Still, the 354 expungement requests this year represent a small fraction of customer arbitration cases resolved following the financial crisis. Parties settled 9,100 arbitration claims between 2010 and July 2012, while arbitrators decided 2,770 cases during the same period, according to FINRA statistics.

The surge in expungement requests is not necessarily bad for investors "as long as the numbers are proportional to the numbers of arbitrations," said Barbara Roper, director of investor protection for the Consumer Federation of America, an advocacy group. "That said, we don't like expungement," she said in a telephone interview.

"The whole point of these disclosures is to put investors on notice of information that might affect their decision about who to entrust with their life savings," Roper said. "You should err on the side of providing more information not less."

(Reporting by Suzanne Barlyn in Coronado, California; Editing by Gary Hill)