Brokers, Bribes, and Rewriting History

Those of you who know me personally have probably heard me state my case about the pathetic and disappointing industry we call financial services (of which I am a part of).

Almost daily, I find myself shaking my head at things that you’d expect to find in a bad tabloid or a late night infomercial, rather than an industry supposedly made up of genuine professionals.

While there are indeed folks who are committed to upholding a different set of principles than the industry as a whole, the vast majority of the business is still dominated by dishonest business practices. And in reality I’m not sure you can even call whatever the industry stands for “principles.”

The Latest Example of Everything that is Wrong with Financial Sevices

However, the news I saw last week really takes the cake.

Last Tuesday, the Securities and Exchange Commission (SEC) approved a rule proposed by the Financial Industry Regulatory Authority (FINRA) designed to limit the ability of broker-dealers and their financial advisor representatives from wiping their regulatory records clean following an arbitration case.

FYI: FINRA is a non-governmental, self-regulatory organization that oversees broker-dealers and their advisor representatives. FINRA generally handles day-to-day regulation of its member firms, however, the organization ultimately reports to the SEC. Registered Investment Advisor (RIA) firms (of which Wealth Engineers is one), on the hand, report directly to the SEC or their state securities regulator and are not regulated in any way by FINRA.

Prior to this rule, it has been common practice for broker-dealer firms and their advisors to essentially bribe their customers as part of an arbitration settlement in exchange for the customer agreeing not to oppose an expungement of the case from the broker’s record.

What is Expungement?

For those not familiar with expungement (don’t worry, I wasn’t very familiar with it either), it’s the process through which a registered representative of a broker-dealer (a broker financial advisor) can: to have removed from his or her public regulatory record maintained through the Central Registration Depository (“CRD”) information concerning a complaint or complaints made by investors which arise from the conduct of the broker.” [this definition is from the PIABA report I link to below]

With Enough Money, You can Just Rewrite History

In other words, here is a typical scenario:

  1. A broker financial advisor sells an unsuitable security to a customer causing unexpected investment losses.
  2. The customer hires a lawyer and the parties go to arbitration.
  3. The broker financial advisor agrees to a monetary settlement in exchange for the customer agreeing not to contest the advisor’s request to remove the disclosure of the event from their record.

Essentially, broker financial advisors have for years been able to buy off their damaged customers in order to keep them quiet and simultaneously clean up their public record. It’s almost like magic!

How Common is This?

This problem has been so prevalent that the Public Investors Arbitration Bar Association (PIABA) conducted a study last year to illustrate just how frequently this occurs. The PIABA reviewed every securities arbitration award in cases filed between January 1, 2007 and December 31, 2011 in which the word “expungement” appeared and found the following:

  • From January 1, 2007 through mid-May 2009, expungement was granted in 89% of the cases resolved by stipulated awards or settlement.
  • From mid-May 2009 through the end of 2011, expungement relief was granted in 96.9% of the cases resolved by settlements or stipulated awards.
  • Some stockbrokers have taken a particularly aggressive approach to wiping their slate clean. One individual associated with a brokerage firm requested expungement 40 times, and arbitration panels granted such relief to that individual 35 times.

I am very familiar with the dishonest dealings of many in the broker-dealer world, but even I was shocked to see the magnitude of this violation of the public’s trust.

FINRA has Allowed its Members to Make a Mockery of Public Disclosure

89% and 96.9% are huge numbers. Even if the PIABA’s findings were cut in half it would still be alarming. However, when broker financial advisors are able to wipe their slate clean in 9 out of 10 cases, it demonstrates that FINRA has allowed its members to make a mockery of public disclosure.

Any reasonable person who was reading through the history of a broker would assume that the information is thorough and accurate. Unfortunately, that just isn’t the case.

The fact that it has taken so long for FINRA to address this issue (and only then after being essentially forced to by the SEC) should really tell you all you need to know about the broker-dealer world.

Why investors continue to tolerate such nonsense is beyond me. You deserve better and you should demand better.


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