Investor Advocacy Group Blasts FINRA Complaint Resolution Process

A group representing individual investors has released a study asserting that a Wall Street watchdog has too easily allowed brokers to expunge client complaints from their records – sometimes without holding a hearing.

A Reuters news report said the Public Investors Arbitration Bar Association (PIABA).report showed that the Financial Industry Regulatory Authority (FINRA) allowed brokers to wipe out 98% of such client disputes.

In 71% of the cases addressed through FINRA’s stipulated awards process, the complaints were expunged without conducting an inquiry, the study found. The study looked at some 200 stipulated or settled customer awards issued in 2006 and filed since April 2004.

“Complaints are being wiped off without arbitrators holding any hearings on the merits. That is a huge problem if you’re a customer and go to FINRA looking for any record of problems. You won’t find any,” PIABA president Steven Caruso said, according to the news report.

FINRA, created by the merger of the regulatory arms of the National Association of Securities Dealers and New York Stock Exchange, maintains a database of customer allegations, which is designed to help investors better identify problem brokers.

A 2003 regulation required that complaints be expunged only after an arbitration panel held hearings.

According to the Reuters report, FINRA did not dispute the study’s findings, but asserted that recommendations to expunge complaints are down and that PIABA focused on just 2% of all closed arbitration cases to buttress its complaints.

“FINRA has worked diligently to reduce the number of recommendations to expunge from its arbitration forum,” the group said in a statement. The number of recommendations to expunge dropped to 562 last year, or more than a third from 2005,” according to FINRA.

PIABA’s Caruso, a longtime critic of Wall Street’s arbitration process, acknowledged that the recent bull market has led to a drop in complaints. Last year, 7,212 customer complaint cases were wrapped up by panels, down 20% from 2005.