Financial Advisor (May 18, 2021) - With expungement arbitration awards soaring 1,000%, the Finra plan to fix the system that allows registered reps to erase misconduct and customer complaints from their BrokerCheck records does not go far enough and needs Securities and Exchange Commission intervention, the Public Investors Advocate Bar (PIABA) said during a press conference today.

The group urged the SEC, which is set to review Finra’s proposed fixes May 28, to create “significant new steps—including the creation of an independent Investor Advocate empowered to oppose expungement requests,” the trade group and the PIABA Foundation said in a new review released today.

The third review of its kind by PIABA found the broker practice of using expungement arbitration to erase all evidence of their wrongdoing through expungement has exploded more than 1,000% since 2019 and is “rubber-stamped” by arbitration panels 90% of the time.

“With so many brokers’ records being erased through unopposed expungements, how can BrokerCheck be relied upon today by investors to make informed decisions about whom they trust to manage their life savings?” PIABA President David P. Meyer asked at the presser.

The ability of state and federal securities regulators to police the marketplace for bad brokers is also compromised by the lack of accurate and complete complaint history on Brokercheck (or the CRD system) and the fact that Finra has given state regulators no path to oppose expungements, Meyer said.

“FINRA’s current rule proposal addresses many of the concerns raised by PIABA. In particular, the proposal provides additional notification to state securities regulators,” a Finra spokeswoman told Financial Advisor Magazine. “It also makes important changes to the expungement process such as the random selection of three arbitrators, establishing shorter timeframes to bring expungement claims, and requiring specially trained and qualified arbitrators in most expungement contexts. We are committed to working collaboratively with NASAA and other stakeholders to continue to improve the expungement process.”

“While we appreciate the fact that FINRA has taken a number of steps over the years to address abuses of its expungement process, the bottom line is that what is in front of the SEC right now is just not good enough,” PIABA Foundation vice president Lisa Braganca said.

As a result of expungement abuses, “the public record of hundreds of brokers – including a number of genuinely problem brokers – has been wiped clean.  Regulators, investors, brokers, and the public have lost customer dispute information, including disputes that were settled for hundreds of thousands of dollars,” Bragança added.

The new review found that number of expungement awards has exploded, rising from 59 in 2015 to more than 700 awards between August 1, 2019 and October 31, 2020, with more than 1,360 customer complaints being expunged.

Other key findings of the report include:

• Expungement Requests Are Rubberstamped 90% of the time. “Arbitrators have continued to grant expungement requests 90% of the time and the reason is that FINRA’s arbitration process allows brokers and brokerage firms to make expungement requests to arbitrators that are unopposed the vast majority of the time,” PIABA said.

• Three Arbitrators Just as Likely as One to Expunge. Data from all three PIABA studies, which analyzed 3,378 expungement awards over a period of 14 years, “show that FINRA’s current proposed plan to require a panel of three randomly-selected arbitrators from a special roster will not significantly reduce the percentage of expungement requests,” PIABA said. “This is because the proposed rule will still allow brokers to present their expungement request unopposed in the vast majority of cases.”

• Rules Make It Easy to Get Expungement, But Difficult to Oppose. “To reduce the number of expungements being granted, FINRA must provide a meaningful opportunity for all parties with an interest in the outcome of the expungement request, e.g., securities regulators and the customers who submitted the complaints, to present evidence opposing expungement, when appropriate. FINRA’s current expungement process does not provide that opportunity in a meaningful way,” PIABA said.

• Expungement Sees Few Objections, But They Make a Difference. “Brokerage firms object to expungements only 2% of the time and investors only 13% of the time, due to such real issues as cost, lack of meaningful notice and a decidedly ‘investor unfriendly’ process,” PIABA said. “However, the new 2021 report data show that arbitrators are 5.4 times more likely to deny expungement when the broker-dealer respondent opposes expungement and are 4.3 times more likely to deny expungement when customers oppose expungement.”

• Independent Investor Advocate Needed to Check Abuses. “If the expungement process is going to remain in FINRA arbitration, PIABA recommends that FINRA and/or the SEC create and embed an Advocate into the expungement process. The purpose of the Advocate would be to protect the [Brokercheck} data … which the investing public is encouraged to rely on as current and accurate,” PIABA said.

“The SEC needs to put this program under a microscope and take a very close look at our 14 years’ of findings,” PIABA Foundation President Jason Doss. “Right now, the states and FINRA jointly run the CRD system underlying BrokerCheck but the states get no notice of expungements until after they are granted in the arbitrations.

FINRA’s proposed rule changes provide earlier notice, but no way for states to intervene into the arbitration where explusion decisions are made. 

“This is a huge regulatory black hole that is just getting worse with every passing year,” Doss added. “An investor advocate empowered to intervene to oppose expungements to represent interested parties is the only way to fix this system and keep thousands of additional customer complaints from being wrongfully erased from the public records. States can only regulate the broker conduct that they can see and investors can only avoid the problem brokers they are informed about.”