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Wall Street Erases Its Own Mistakes

The online database known as BrokerCheck serves as a repository of Wall Street brokers’ bad behaviors, allowing the public to check for any red flags before investing. A report released yesterday, though, found that in the vast majority of cases, brokers who asked to have bad marks removed from their records were successful.

The study, conducted by the Public Investors Arbitration Bar Association, found that 96.9% of requested “expungements” were granted from May 2009 to December 2011.

The Financial Industry Regulatory Authority (FINRA), a private organization through which the financial industry polices itself, is charged with approving or denying the deletions through an internal arbitration process. Known as a self-regulatory organization (SRO), FINRA is funded by the companies it oversees.

FINRA told The New York Times that deletions are only supposed to happen under “extraordinary” circumstances. 

From The New York Times article:

The industry’s regulatory body is trying to address the issue. On Monday, the regulator e-mailed a notice to arbitrators, advising them that information about a broker “should be expunged only when it has no meaningful investor protection or regulatory value.” [FINRA] advised arbitrators to examine brokers’ records to see if they had had previous problems with customers before granting expungement, and to explain their reasons for any deletions.

Michelle Ong, a [FINRA] spokeswoman, said in a statement that the regulator shares the “serious concerns” raised in the study and is “enhancing arbitrator training with added emphasis on the importance of the integrity of the information” in its broker database. [FINRA] is also reviewing its rules and interpretations, the statement said.

Self-regulation, in any industry, can lead to a lack of accountability and oversight. In 2012, the Project On Government Oversight wrote a letter to the House Committee on Financial Services raising concerns about FINRA’s effectiveness, and more specifically, the "lack of transparency and accountability in FINRA's mandatory arbitration system." In some cases, suits filed in public courts are moved to FINRA, where testimonies and evidence can be kept private.

Furthermore, a 2012 Government Accountability Office (GAO) report found that the Securities and Exchange Commission had been conducting "routine inspections" of FINRA's arbitration programs, "but not as frequently as it had planned." 

By: Avery Kleinman
Former Beth Daley Impact Fellow, POGO

Avery Kleinman At the time of publication, Avery Kleinman was the Beth Daley Impact Fellow for the Project On Government Oversight.

Topics: Financial Sector

Related Content: Financial Industry Regulatory Authority (FINRA), Financial Oversight

Authors: Avery Kleinman

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