Court Makes It Easier for Securities Brokers to Obliterate Past Indiscretions

Wednesday, September 05, 2012

A securities industry watchdog not particularly known for its bark or bite may find itself on a tighter leash in California after an appellate court ruling made it easier for securities brokers to expunge their past records.

Until the California First District Court of Appeal’s unanimously ruling last week, the Financial Industry Regulatory Authority Inc. (FINRA) would pretty much only remove information from its extensive database of bad broker behavior if the data was shown to be wrong. Many of the database citations grew out of FINRA arbitration actions between brokers and their clients, and date back many years.

Securities broker Edwin E. Lickiss argued that wasn’t fair.

Information in his files was old, easily misinterpreted and much more public since the advent of the internet, he said. Lickiss also argued that he had been a model citizen since 17 parties filed arbitration cases against him over his involvement in a securities deal that went scandalously bad in the ‘90s. He was also the subject of a regulatory action and fine.

But Lickiss never argued that the information was wrong.

The original trial court ruled against Lickiss, citing FINRA Rule 2080’s simple standard of truth for determining what was included in one’s file. However, the appellate court said those grounds were too narrow and that fairness, not truth, should be the standard.

That decision could give about 285,000 licensed brokers in California an opportunity to clean up their records, too. “Now you have some precedent, at least in California, for opening the floodgates,” James Sallah, a lawyer who represents brokers, told Reuters.

FINRA is an independent private corporation—often mistaken for a government agency—which regulates securities firms in the United States. It oversees nearly 4,380 brokerage firms, 162,845 branch offices and 629,640 registered securities representatives.

Although FINRA’s database was the subject of the Lickiss lawsuit, its primary activity is providing mandatory arbitration of disputes between brokers and clients.

Arbitration is a contentious issue, some questioning its very role in a society that values one’s constitutionally guaranteed day in court. A 10-year study of 14,000 arbitration cases found that someone suing a major brokerage firm could expect to recover about 12% of its claim and that successful claims declined during that period.  

FINRA has brought 6,291 disciplinary actions and levied more than $254 million in fines since it was created in 2007, following the merger of two other securities watchdogs. Its data includes customer complaints and information about investment-related, consumer-initiated litigation or arbitration. The public can access information on the background, business practices and conduct of FINRA member firms and their representatives through BrokerCheck, an online application.

–Ken Broder


To Learn More:

Analysis: California Broker Case May Open Door to Erasing the Past (by Suzanne Barlyn, Reuters)

FINRA Marks Five Years (by Travis Sanford, Courthouse News Service)

Edwin E. Lickiss v. Financia Industry Regulatory Authority (Leagle)

California Court Says Brokers Can Invoke Equitable Powers to Expunge CRD Records (Securities Law Prof Blog)

Family Accused of Taking Securities Tests 64 Times to Memorize Questions and Sell Them (by David Wallechinsky, AllGov)

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