by Jesse LeVine
Having a reliable and honest broker is crucial for investing. Brokerage firms want brokers who make the firm money without compromising the firm’s reputation and subjecting it to a lawsuit. Investors want honest brokers that make their clients money and look out for their best interest. In an attempt to incentivize investors and ease concerns on the integrity of investing, the Financial Industry Regulatory Authority (“FINRA”) offers a free “Broker Check” service that allows investors to look up any broker who works for a FINRA member firm. FINRA’s Broker Check is available on FINRA’s website and provides a list of broker transgressions and employment history. However, the current regulations on FINRA’s Broker Check have been the subject of much scrutiny in recent months.
Under FINRA’s current rules, settlement disputes between investors and brokers can include provisions that enable brokers to expunge conduct that would otherwise be found in a FINRA Broker Check. This policy has generated so much criticism that FINRA is considering tighter regulations that may take effect as soon as April 2014. FINRA rule changes must be approved the U.S. Securities and Exchange Commission (“SEC”). It is unlikely that the SEC would oppose the rule change; however, brokers will likely challenge the proposed changes to settlement agreements and broker records. According to a study by the Public Investors Arbitration Bar Association, FINRA granted expungement relief in 96.9% of cases from May 2009 through December 2011. This statistic is particularly concerning because investors are not able to see the broker conduct that gave rise to the dispute and expungement.
On January 6, 2014, Senators Jack Reed and Chuck Grassley wrote a letter to FINRA’s Chairman and Chief Executive Richard Ketchum urging reform to FINRA’s current rules on broker records. In part, the Senators stated: “We share FINRA’s view that ‘expungement is an extraordinary remedy that should be granted only under appropriate circumstances,’ and that it should be permitted ‘only when it has no meaningful investor protection or regulatory value.’ However, we believe that meaningful investor protection includes the disclosure of whether a customer dispute was settled. Not just for transparency sake, but also to help prospective investors make informed decisions about which individuals or firms with whom to do business.”
FINRA has yet to make an official decision on the requests made by Senators Reed and Grassley. However, the issue of expungement in broker records has generated enough attention that a resolution is likely to come within the next few months. The letter written by Senators Reed and Grassley can be viewed on Senator Grassley’s website. FINRA Chairman Richard Ketchum wrote a detailed letter in response shortly after receiving the Senators’ letter. Ketchum assured Senators Reed and Grassley that FINRA was reviewing the issues raised in the letter sent by Reed and Grassley. FINRA’s response can be found on Senator Grassley’s website.