Appeals court decided on transparency - and on investors' good

WASHINGTON - A recent decision by a federal appellate court goes a long way to protect investors.

The U.S. Court of Appeals for the District of Columbia reversed a lower court that had ruled a stockbroker could have a customer's complaint purged from his record.

At its core, this case - Karsner v. Lothian - is about transparency. With so much emphasis put on the need for people to save and invest, the regulatory safety nets designed to protect investors from unethical and unscrupulous brokers and advisers shouldn't be compromised.

The appeal arose when Melanie Lubin, the Maryland securities commissioner, sought to oppose a stockbroker's attempt to obliterate an arbitration case from his state licensing record.

The case involved a Maryland mutual fund broker who, according to court documents, allegedly put an investor in unsuitable investments and performed negligently in managing the investor's account, resulting in the investor losing more than $104,000.

The investor complained and the case went to arbitration. The two sides agreed to a settlement, with the investor receiving $47,000. But in exchange for settling, the investor was asked to agree to a stipulation that all references about the dispute be dropped from the broker's Central Registration Depository record.

The Central Registration Depository is a system used by states and other regulators to process applications for securities industry licenses. The North American Securities Administrators Association (NASAA) maintains the database in an agreement with the Financial Industry Regulatory Authority (FINRA), the securities industry's self-regulatory organization.

After the arbitration panel approved the settlement, Lubin stepped in, objecting not just to this case but in general to the pattern of such complaints and settlements being expunged.

"People shouldn't be able to buy a clean record," Lubin said.

Federal or state securities laws require brokers, investment advisers and their firms to be licensed or registered, and to make important information public. Regulators caution investors that before they give their money to anyone or pay for any investment advice, first check the firm's or individual's record.

To help investors make those checks, FINRA has set up a database called BrokerCheck (www.brokercheck.finra.org). The information, which is free, is derived from the Central Registration Depository. In addition to searching BrokerCheck, Lubin said you should also contact your state's securities regulator, which often has information not listed in the central depository. To contact your state regulator, go to www.nasaa.org.

When you check these sources, you can find out if a broker is licensed in your state. You can find information about the broker's educational background and where he or she has worked previously. And most importantly, you can look for complaints from other investors. Many who lost money to con artists or bad brokers could have avoided being scammed or put into inappropriate investments had they just checked out the person's record first.

So, you see, that's why it's important that brokers who have run-ins with investors shouldn't be allowed to expunge their records, even in cases where a complaint was settled with no finding of fault or misdeed.

"The court agreed with us that the state has an absolute right to protect its interests and those of its citizens from a broker's attempt to expunge records of proved or alleged professional misconduct," Maryland Attorney General Douglas Gansler said of the appellate decision.

NASAA also applauded the ruling. The decision helped "protect the integrity of (Maryland's) public records from being weakened by brokers seeking to create the impression of a clean slate by removing negative information from their disciplinary histories," said Karen Tyler, North Dakota securities commissioner and president of NASAA.

Removing information from the registration depository has been a concern to state securities regulators, Lubin said. Records can be wiped clean only if the complaint is found to be false or erroneous, or if the wrong person was named in a complaint. The rule was put in place to ensure regulators would get the full story of a broker's history in working with investors.

Understandably, people get upset when they lose money. Some investors complain about losses even when nothing inappropriate was done. However, if broker records can be so easily expunged, state securities regulators won't be able to accurately rely on information in the depository. With so many inexperienced investors, it's crucial that regulators have information on all disciplinary proceedings and arbitration claims. Otherwise, how will they be able to detect a pattern of bad behavior by a broker or firm?

"It's important that the records be preserved so regulators can do their jobs, and so investors can make a decision on whom to do business with," Lubin said.

Kudos to Maryland officials for fighting to keep the national broker licensing and registration system transparent. I certainly hope other state securities regulators do the same.

• singletarym@washpost.com. © 2008, Washington Post Writers Group