Broker expungement requests soar. Is it a problem for FINRA?
Expungement requests have exploded in recent years as brokers seek to exploit loopholes in FINRA’s rules in order to erase consumer complaints from their records, an investor advocacy group says.
“The expungement process is being systematically gamed by brokers and brokerage firms,” says Jason Doss, an attorney and PIABA Foundation president.
Expungement-only cases have skyrocketed over the past three years, jumping to 545 in 2018 from 59 in 2015 to 545 in 2018, according to a new study by PIABA, an association of attorneys.
Client complaints — whether denied, settled or otherwise — typically show up on an advisor’s FINRA BrokerCheck record. However, brokers can request that client complaints be expunged from their record at the time a client files a complaint in FINRA arbitration. They can also request it after the fact by initiating an arbitration against their own firm, seeking expungement and nominal damages of just $1.
In the latter case, the arbitration claim doesn’t have to name the customer involved. And because the broker seeks so little in damages, the claim gets special status under FINRA arbitration rules, being heard by just one arbitrator rather than a full panel of three. This also typically results in about $8,000 less in FINRA fees to the broker, according to PIABA.
Most of expungement requests sail through the system, potentially preventing investors from learning material facts when researching advisors via BrokerCheck, the group says. Brokerage firms typically don’t oppose the request; in fact, the firm did not oppose the broker’s expungement request in 1,055 of 1,078 cases, according to the study.
When brokerage firms did not object, arbitrators denied the expungement request just 11% of the time, the study says.
PIABA says there’s no basis for concluding that so many client complaints were false or so flawed as to require being expunged from a broker’s record.
“Based on the results of this study, BrokerCheck cannot be considered a reliable tool for investors to check on brokers. There are too many complaints that are being wiped clean,” says Doss, one of the coauthors of the study. His law practice is based in Marietta, Georgia.
FINRA’s board approved rule filings last year aimed at improving the expungement process, a FINRA spokeswoman said in a statement. Those filings included a proposal to create a new roster of arbitrators trained to hear expungement requests. The proposal has to be approved by the SEC.
“We believe it is important to ensure that there is an appropriate process for investors to access information that is relevant to them about their financial advisors' prior experience, while also providing financial professionals the opportunity to address incorrect or inaccurate information,” the spokeswoman said in a statement.
But the problem is so severe in PIABA’s eyes that the group recommends halting expungements while FINRA addresses shortcomings.
“This situation requires major surgery, not Band-Aid,” says PIABA Foundation Board Member Celiza Lisa Bragança. She is also a former SEC branch chief and a Chicago-based attorney.
PIABA also suggest that the SEC or FINRA establish an investor protection advocate as a party to every expungement proceeding in order to ensure that complaints aren’t erased without a fair hearing.
“It’s the same problem over and over; we are trying to force what is a regulatory process into a private arbitration system. There needs to be some drastic and fundamental changes,” says Samuel Edwards, a Houston-based attorney and incoming president PIABA.