Brokers’ Expungement Success Should Prompt Bolstered Reforms: Plaintiff Lawyers
The 90% success rate brokers have achieved in the past 15 months at winning expungements of customers’ complaints from their public records should alarm investors and state regulators, a group of plaintiff lawyers who represent investors suing brokers said Tuesday.
PIABA, which last year unsuccessfully asked Finra to put a moratorium on a skyrocketing number of expungement requests, said that Finra arbitrators had granted 700 expungements over 15 months between August 1, 2019 to October 31, 2020. That compares with just 105 in 2015 and reflects a 1,000% increase, the group said. Brokers have won a total of 3,378 expungement awards over the past 14 years, according to the study.
Arbitrators in the Finra-administered forum are “rubber stamping” expungement requests, rather than evaluating if brokers have made a case for the “extraordinary relief” they seek, according to Jason Doss, the president of the PIABA foundation and a lawyer in Marietta, Georgia, who spoke to reporters after the report was released.
Brokerage firms also show little resistance to having brokers’ records cleaned up—not objecting to the requests 98% of the time, according to the report.
The flawed expungement process ultimately fails to provide investors “meaningful opportunity to investigate” brokers before they hire them and state investigators prior to allowing them to receive licenses, Doss said.
PIABA lawyers proposed as a solution having independent investor advocates embedded in the expungement process, similar to public courts’ appointment of ad litems, who appear during proceedings on behalf of unrepresented children’s interests in litigation.
The independent investor advocates, paid for by Finra or grants, would be “defending the integrity” of Finra’s Central Registration Depository, the database behind BrokerCheck, Lisa Braganca, who is PIABA Foundation vice president and a lawyer in Skokie, Illinois, told reporters.
In an email, a Finra spokesperson expressed no enthusiasm for that PIABA proposal. Instead, the spokesperson argued that the proposed Finra reforms, awaiting SEC approval, address “many of the concerns raised by PIABA.”
The Finra proposed changes include: providing additional notification to state securities regulators, allowing for the random selection of three rather than just one arbitrator, establishing shorter timeframes to bring expungement claims, and “requiring specially trained and qualified arbitrators in most expungement contexts,” the spokesperson added.
Finra is “committed to working collaboratively” with “other stakeholders to continue to improve the expungement process,” the spokesperson wrote.
But the Finra proposed changes “are not enough,” Braganca said, repeating the conclusions of the new report.
“The data strongly indicates that arbitrators are granting expungement requests 90% of the time because they are being provided with one-sided presentations about the merits of the customer complaints, not because of lack of training,” the PIABA report states.
Although brokerage customers can appear at Finra hearings, few have the resources, skills, or the motivation since they’ve already settled their claims, said Doss, reiterating concerns that PIABA has raised in earlier critiques of the expungement process.
When customers do show up, often with PIABA-organized pro bono representation, they are treated as “speed bumps” and not given enough documentation to meaningfully advocate, he said.
“If the SEC approves FINRA’s current proposed incremental rule changes, it will likely be several more years until this issue is revisited. In the meantime, brokers and brokerage firms will find new ways to game the system and thousands of additional valid customer complaints will be wrongfully erased from the public record,” the PIABA foundation report states.
“These erasures not only hurt the investing public who need accurate background information on brokers when selecting a trusted financial professional, but it also will harm securities regulators’ ability to perform their critical regulatory functions,” the report concludes.