What Do Brokerage Clients and Mushrooms Have in Common?


In the interest of decorum, we will only mention the first part of the punch line of this old joke—that they are both kept in the dark, although we certainly think that the second part (what they are both fed) is relevant as well, but we will leave that for another day. The Public Investors Arbitration Bar Association (PIABA) has just completed a study in which they found that stockbroker arbitration slates were wiped clean nine out of ten times after the stockbroker sought “expungement” in settled cases.  The PIABA stated that their findings raise the troubling question of whether investors are being kept in the dark about arbitration cases. They cite one case of a broker who managed to get 35 out of 40 cases expunged. The fact that this broker had 40 claims against him should be reason enough for him to be permanently barred from the securities industry, but apparently the Financial Industry Regulatory Authority (FINRA, the keeper of these records via its Central Registration Depository) sees it differently, not to mention the firm that employs the broker.

PIABA studied 1,600 arbitration cases over the five-year period ending on December 31st, 2011. Attorney Scott Ilgenfritz, the president of PIABA and the author of the study, summarized it perfectly:

“To say that ‘expungement’ of customer claims from broker records is a major investor protection problem is an understatement. The result is that investors who are diligent enough to seek out information about brokers may be getting a woefully incomplete picture of the individual to whom they will entrust all or most of their nest egg. What is supposed to be an extraordinary relief measure is now being sought and granted in roughly nine out of the 10 settled cases that we studied. This clearly indicates that the current expungement procedures are seriously flawed. Regulators need to step in and crack down on the granting of expungements, particularly in settled cases.”


Rachel Weintraub, the legislative director and senior counsel of the Consumer Federation of America (CFA) was absolutely correct when she made this statement:

“When it is too easy for brokers to get complaints expunged from their records, investors who attempt to do the right thing and check out the broker’s disciplinary record may end up making their decision based on incomplete information. Worse, they may be led to believe that a broker has a clean disciplinary record when that is far from true. This leaves investors vulnerable to fraud and abuse.”

To remedy this situation, PIABA recommends improved training for arbitrators so that they fully understand the implications of expungement and when it may be an inappropriate action. PIABA also recommends that FINRA take a more active role in reviewing expungement requests and not simply leave it to the arbitrators. Lastly, when expungement is sought, FINRA should notify the state securities commissioner and allow him (or his representative) to have a say on whether it should be granted.

While many investors (including clients of investment advisory firms) require the services provided by a brokerage firm (e.g., Charles Schwab, Fidelity Investments, and TDAmeritrade), IFA counsels them to avoid a relationship where a broker is choosing the client’s investments, particularly when the broker receives commissions for trading or receives payments from mutual fund companies. If you are in such a relationship and would like to receive the advice of a true fiduciary, please call us at 888-643-3133.