Senators push for tighter expungement rules for brokers

A bipartisan pair of legislators wants to make it more difficult for investment professionals to wipe their disciplinary records clean

By Trevor Hunnicutt   |  December 16, 2013 - 6:41 pm EST

A bipartisan duo of U.S. senators Monday pushed Finra to provide new details on a process that allows brokers to sanitize their disciplinary records.

Sen. Jack Reed (D-R.I.) and Sen. Chuck Grassley (R-Iowa) also said Wall Street's industry-funded securities regulator should respond to criticisms that whitewashed BrokerCheck reports could mislead investors.

“We believe that meaningful investor protection includes the disclosure of whether a customer dispute was settled,” the senators wrote. “Not just for transparency sake, but also to help prospective investors make informed decisions about which individuals or firms with whom to do business.”

The letter reignited a debate over the Financial Industry Regulatory Authority Inc. system that allows brokers to petition to clean their public disciplinary reports, which was catalyzed most recently by a group of lawyers that represent investors. An October report by the Public Investors Arbitration Bar Association, found that Finra arbitrators granted “expungement” at least 90% of the time in the 1,625 cases in which the term was mentioned between 2007 and 2011.

PIABA recommended that Finra itself review requests to clean brokers' records and improve its training of the corps of volunteer arbitrators who currently decide when to grant such requests. PIABA also said Finra should ban settlements containing requirements that investors who file complaints agree to not oppose the expunging of brokers' records.

Touting their letter as being in the interest of “fair financial markets and transparency,” the senators asked Finra to respond by Jan. 6 to PIABA's recommendations. They proposed draft legislation to empower Finra to ensure that slate-swiping is limited and also asked for details on when and why brokers' records are expunged.

Finra previously has said it shares PIABA's concerns and is providing additional guidance to arbitrators and reviewing its other rules. In a statement provided by spokeswoman Nancy Condon, the regulatory body said it “looks forward to working with” the senators “to address the important issues raised today.”

Finra going after rogue brokers

Finra will be paying close attention to the customer accounts of high-risk brokers as they review firms' sales practices.

By InvestmentNews, January 12, 2014

In its annual letter to broker-dealers listing its examination priorities, Finra included many areas on which it has focused in past years, such as structured products, suitability of investment recommendations and conflicts of interest. A new — and welcome — area it is turning its attention to this year is rogue brokers.

Unfortunately, rogue brokers have been around for a long time. They are the brokers who skip from firm to firm, racking up investor complaints, arbitration awards and enforcement actions along the way.

The brokers depicted in the new Martin Scorsese film, “The Wolf of Wall Street,” were rogue brokers for sure, but there are many others who are not as flashy but whose misdeeds are often just as harmful. They hurt investors and the reputation of the firms they work for — although sometimes the firms themselves are just as guilty — and are a stain on the entire securities industry.

The Financial Industry Regulatory Authority Inc. has said that this year, it will do more to monitor and prevent these serial offenders from causing additional mischief as they leave one firm for another. In some cases, they have been fired for disciplinary problems. In other cases, they were working for a troubled broker-dealer that was forced to shut down and are looking for new employment.

Finra has put broker-dealers on notice that its examiners will be reviewing their due diligence on background checks for new hires, as well as the adequacy of supervision of high-risk brokers. Finra said it also will be paying close attention to the customer accounts of high-risk brokers as they review a firm's sales practices.

Since Finra has disclosed that it will have rogue brokers in its cross hairs, it behooves broker-dealers to make sure they are doing everything they can on the front end to not hire a problem employee. In the past, it sometimes has been hard to find out the exact circumstances of a broker's departure from a previous employer, because that employer did not want to be named in a defamation suit. That said, broker-dealers have to make sure they are getting all documentation pertinent to prospective employees' work histories before they are hired.

Now that Finra is taking steps to get rid of its bad apples, legislators and government regulators should start looking at ways to make sure the pipeline between the securities and insurance industries is being monitored more closely. In some cases, problem insurance brokers have been able to restart their careers at securities firms and vice versa.

InvestmentNews has documented several cases where stockbrokers have been barred from the securities industry by Finra or the Securities and Exchange Commission but have been able to retain their state insurance licenses. This gives them carte blanche to take advantage of investors and consumers in new ways that are just as devious as their past practices.

It would be good to know that once individuals have been thrown out of one industry, they cannot simply start again in a related business and hurt more people.

Law Offices of David Harrison Obtains $4.3 Million Award Against Wedbush on Behalf of Stock Broker

FINRA fines Bank of America, Wells Fargo

June 4, 2013
WASHINGTON (AP) — The Financial Industry Regulatory Authority has ordered Bank of America Corp. and Wells Fargo & Co. to pay fines and restitution to settle charges that investor clients were pushed into investments that were inconsistent with their risk preferences.

The industry watchdog said Tuesday that it fined Wells Fargo Advisors LLC, the successor to Wells Fargo Investments, $1.25 million and ordered it to reimburse roughly $2 million in losses to 239 customers.

FINRA also slapped Merrill Lynch, Pierce, Fenner & Smith Inc. — BofA's broker-dealer and successor to Banc of America Investment Services Inc. — with a $900,000 fine and ordered it to pay $1.1 million to reimburse losses incurred by 214 customers.

FINRA officials found that brokers for the lenders' investment subsidiaries had recommended their customers buy floating-rate bank loan funds.

Those funds are mutual funds that generally invest in a portfolio of secured senior loans made to borrowers with below investment-grade credit. As a result, those funds are subject to significant credit risk, FINRA noted.

The watchdog found that customers' tolerance for investment risk, investment objectives and financial conditions were inconsistent with the risks and features of the floating-rate funds that their brokers were recommending.

And yet, the brokers recommended buying floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for the customers, FINRA concluded.

FINRA also found that the firms failed to train their sales forces about the funds' risks, and failed to reasonably supervise the funds' sales.

In agreeing to the settlement terms, Wells Fargo and Bank of America neither admitted nor denied the charges.

A spokesman for Bank of America of Charlotte, N.C., said the lender was pleased to resolve the matter.

Separately, Wells Fargo, San Francisco, noted that the settlement resolves an issue related to activities that took place between 2007 and 2008 before Wells Fargo Investments merged into Wells Fargo Advisors.

Wells Fargo shares ended regular trading down 29 cents at $40.44. The stock added 5 cents to $40.49 in extended trading.

Shares in Bank of America closed lower in regular trading, slipping 19 cents to $13.36.

SEC Cracking Down On Investment Advisers

Agency files record number of cases in fiscal 2012; more of the same coming

By Mark Schoeff Jr. at Investment News

November 14, 2012

The Securities and Exchange Commission is cracking down on investment advisers at a record level, the agency announced on Wednesday.

The SEC took 147 enforcement actions against advisers and investment companies in fiscal year 2012, which ended on Sept. 30. That number is one more than the previous record of 146 set in fiscal year 2011. The agency also took 134 enforcement actions against brokers, a 19% increase over the last fiscal year.

The SEC highlighted cases against UBS Financial Services of Puerto Rico and two of its executives for disclosure violations related to closed-end mutual funds. It also touted a case against OppenheimerFunds “for misleading investors in two funds suffering significant losses during the financial crisis.”

UBS and Oppenheimer paid more than $26 million and $35 million, respectively, to settle the charges.

Overall, the SEC filed 734 enforcement actions in fiscal year 2012, which fell one short of its fiscal 2011 record of 735. In 2012, the agency obtained more than $3 billion in penalties and disgorgements for harmed investors, an 11% increase over last year. Over the last two years, the SEC has obtained $5.9 billion in disgorgements and penalties.

The agency said that the enforcement productivity is the result of the “most significant reorganization [of the division] since it was established in the early 1970s.” Among other reforms, the division has streamlined its structure, set up specialized units, including the Asset Management Unit, strengthened training, bolstered its tips and complaints process and hired industry experts with experience in complicated financial products and transactions.

“The record of performance is a testament to the professionalism and perseverance of the staff and the innovative reforms put in place over the past few years,” SEC chairman Mary Schapiro said in a statement. “We've now brought more enforcement actions in each of the last two years than ever before, including some of the most complex cases we've ever seen.”

Earlier this week the SEC was mostly dealt a setback in its case against Bruce Bent and his son, Bruce Bent II, who were cleared of fraud in a federal civil trial on Monday. The SEC had charged the pair with misleading investors about the safety of the $62-billion Reserve Primary Fund, a money market fund that “broke the buck” in 2008, when Lehman Brothers Holdings Inc. went bankrupt.

The jury did rule that the company was liable for fraud and that Bruce Bent II was guilty of negligence.

The SEC has been criticized for not punishing Wall Street executives allegedly responsible for the 2008 market collapse. In its announcement on Wednesday, the agency said that it filed “29 separate actions naming 38 individuals, including 24 CEOs, CFOs and other senior corporate officers, regarding wrongdoing related to the financial crisis.”

Merrill fined $500,000 for not filing reports: FINRA

(Reporting By Suzanne Barlyn; Editing by Alden Bentley)

(Reuters) - Merrill Lynch accepted a $500,000 fine to settle charges that it failed to file, or was late with, hundreds of required reports about its brokers, including details of customer complaints, Wall Street's industry-funded watchdog announced Monday.

In addition, Merrill Lynch, a unit of Bank of America Corp, did not properly supervise or train employees who were responsible for tracking and reporting complaints about brokers, said the Financial Industry Regulatory Authority (FINRA), which also censured Merrill.

The firm's conduct, which occurred between 2005 and 2011, included not notifying FINRA about 650 reports, ranging from arbitration claims filed by customers to settlements reached by the brokerage, according to a regulatory document.

Securities industry rules require brokerages to disclose certain information about its brokers, including criminal and civil complaints involving them, typically within 30 days. Those details are available in databases for regulators, other securities brokerages, and investors. Brokerages must also submit a form to the regulator when it hires a new broker or when a broker leaves.

Merrill's violations may have prevented investors from fully researching the backgrounds of certain brokers through FINRA's database for investors, known as BrokerCheck, FINRA said.

The brokerage learned of the problems during an internal review that began in 2009, according to Merrill spokesman, William Halldin. "We have enhanced our policies and procedures to address issues raised in this matter and to ensure that client complaints are properly reported," Halldin said.

Among the problems: The firm was late or failed to report certain criminal and civil complaints it received about brokers during a three-year period, according to FINRA.

Merrill self-reported its problems to FINRA, according to its settlement with the regulator. As part of the settlement, Merrill neither admitted nor denied the charges, but consented to FINRA's findings

Expungement by FINRA

When a broker is named as a respondent in a customer-initiated arbitration, the arbitration claim and any allegations of wrongdoing are required to be reported on the broker's Form U4. Brokerage firms must submit a disclosure report when a broker is the "subject of" allegations of sales practice violations made in arbitration claims or civil lawsuits, but is not a named party to the arbitration or lawsuit. Once reported, this information is recorded on the broker's record in the Central Registration Depository (CRD®) System and becomes available to the public upon request through FINRA's BrokerCheck program.

Brokers may seek to have a reference to allegations or to involvement in an arbitration removed from their CRD® System records. The process of removing this information from the CRD® system is called "expungement."

Before ruling on a request for expungement, the arbitrators must review and follow the procedures provided under FINRA Rules 2080, 12805 and 13805.

FINRA Rule 2080 contains standards and procedures for expungement of customer dispute information from CRD. The rule requires that a court of competent jurisdiction confirm an arbitration award granting expungement relief or order such expungement.  It also requires that firms or associated persons name FINRA as an additional party in any court proceeding in which they seek an order to expunge customer dispute information or request confirmation of an award containing an order of expungement. FINRA will generally oppose confirmation of the expungement portion of the arbitration award in most cases in which it participates in the judicial proceeding.

Upon request, however, FINRA, in its discretion, may waive the requirement to name FINRA as a party in these proceedings provided the arbitration award directing expungement contains at least one of the following judicial or arbitral findings:

the claim, allegation or information is factually impossible or clearly erroneous;
the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
the claim, allegation or information is false.

FINRA Rules 12805 and 13805 provide enhanced safeguards to ensure that arbitrators have the opportunity to consider the facts that support or weigh against a decision to grant expungement. These rules also provide that expungement occurs only when the arbitrators find and document one of the narrow grounds specified in FINRA Rule 2080. Under FINRA Rules 12805 and 13805, the panel must follow the outlined procedures in order to grant expungement of customer dispute information under FINRA Rule 2080:

The arbitration panel must hold a recorded hearing session by telephone or in person regarding the appropriateness of expungement.

In cases involving settlements, the arbitration panel must review the settlement documents, consider the amount paid to any party and consider any other terms and conditions of the settlement that might raise concerns about the associated person's involvement in the alleged misconduct before awarding expungement.
The arbitration panel must indicate which of the grounds for expungement under FINRA Rule 2080(b)(1)(A)-(C) serves as the basis for their expungement order, and provide a brief written explanation of the reasons for ordering expungement.

The arbitration panel must assess against the parties requesting expungement relief all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement.