Does your broker have a clean record?

Study reveals 'alarmingly' high percentage of complaints removed from records

By Jodi Mohrmann - Managing Editor of special projects
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A study by the Public Investors Arbitration Bar Association is shaking up the financial industry, revealing that an "alarmingly" high percentage of cases, brokers are getting investor complaints removed from their publicly accessible records.

You want your investments in the right hands which is why Damon Petraglia thoroughly checked out his financial advisor.

"It's very important for me to have somebody reliable and capable," he said.

But Petraglia is no average investor. He's a private investigator. People hire him to check out their stock brokers.   It's easy to get background info on any federally licensed financial professional on the Financial Industry Regulatory Authority", or FINRA's, website.   These public records list licenses a broker holds, and where they've worked.  But what you may not see even surprised Petraglia.

"I don't think very many people knew about this," said Petraglia.

"It is the security industry's dirty little secret," added Attorney Jason Doss with the Public Investors Arbitration Bar Association, or PIABA.

The secret, revealed in the new study which says stock brokers are able to keep complaints filed against them a secret in many cases.  Brokers have the right to request a complaint be expunged from their record if they feel it was false.   

Federal guidelines say expungement is an "extraordinary relief."  But this study found between mid-May 2009 to 2011, when cases were "resolved by settlements", arbitrators approved brokers requests to remove complaints from their records nearly 97 percent of the time. 

"This is a major problem that must be fixed," said Doss.

If a broker's record is wiped clean there's no way investors, regulators or future employers can ever find out.  The study found one broker requested expungement 40 times and arbitration panels granted it 35 times.

The group behind the study says sometimes investors are given a settlement trade off.

"There will be a provision that says in exchange for that money the customer has to agree not to oppose the expungement request, and it just basically just wipes it under the carpet," said Doss.

FINRA is now taking action, saying the study "underlines and emphasizes serious concerns."  And the agency is sending notices to arbitrators, reminding them about "the extraordinary nature" of expungement relief. 

But what if a broker really was wrongly accused? Or what if a financial issue just wasn't their fault?   

"We closely guard our reputations so if there's something where we have complaints against us that are unwarranted or unfounded we want to protect our reputation," explained Ed Gjertsen with the Financial Planning Association.

Gjertsen says just because an advisor went through an arbitration doesn't mean they're a bad broker.  If you're concerned about your financial professional, ask them about their record.  

"I think what the study showed us is that there's probably a lot more due diligence that the average investor has to do," said Gjertsen. "Whether it's engaging with an advisor and asking them the direct question of saying 'Hey have you ever been involved in an arbitration?'"

Petraglia says he thinks this financial shake up should be a financial wake up to everyone.

"If you're pick a bad broker, you could lose the entire investment," he warned.

A court must also approve a broker's expungement request before it becomes final.   FINRA is reviewing its rules and may consider future changes as well.   Several U.S. senators are also now taking a closer look at the system.  One has already written a letter to the Securities and Exchange Commission demanding big changes.  

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