Financial Advisor IQ (October 25, 2023) By Jake Martin
An investor advocacy group is urging state securities regulators to pool their resources to participate in and oppose brokers’ expungement requests in certain cases that historically went unopposed.
Arbitrators for the Financial Industry Regulatory Authority are still too sympathetic when it comes to granting brokers’ requests to erase customer complaints, plaintiffs’ lawyers found in a new report. But some recent rule changes could dampen that long-running trend.
The Public Investors Advocate Bar Association, known as Piaba, found that arbitrators at Finra are still granting roughly 90% of brokers’ so-called “straight-in” expungement requests, in which brokers file arbitrations against their own brokerage firm to try to clear their record of customer complaints, typically without opposition. The issue has been a sticking point for the investor advocacy group for the better part of a decade.
Piaba has largely blamed the lopsided results favoring brokers on the structure of the expungement proceedings, as arbitrators are often working off just the broker’s version of events and whatever evidence they make available.
The latest iteration of Piaba’s study, released Tuesday, reviewed data from January 2019 to August 31 of this year and found that 2,259 of 2,506 straight-in expungement requests were granted. Brokerage firms continued their practice of not opposing expungement requests in 92% of cases, “likely because they have an incentive to erase customer complaints as well,” Piaba noted.
The updated study comes a week after a new Finra rule went into effect that will make it easier for state securities regulators to participate in and oppose expungement in these types of arbitrations. Piaba members speaking during a webinar with media on Tuesday said they believe the tweaks to the rule will make it harder for brokers to clear their record and bolster the integrity of the expungement process.
Finra had seen a “big rush” in straight-in expungement cases leading up to the rule change, Joe Peiffer, a Louisiana lawyer and incoming Piaba president, said during the webinar. However, the added wiggle room for state regulators and pro bono lawyers to step in may put a damper on that activity, he added.
Piaba also announced an expansion of a pro bono program to provide legal representation to investors seeking to oppose expungement requests related to their claims. The group also revealed a new partnership with the Alabama Securities Commission to offer a training program to state securities regulators meant to help them collaborate and effectively intervene in straight-in proceedings.
“We welcome state securities regulators’ participation to the arbitration process because it is their regulatory information that is being erased,” said Jason Doss, an Atlanta lawyer who co-authored the report and is a founding director of the Piaba Foundation, in a statement. “We worked hard to clearly identify the root of the problem and now it is time to work even harder to achieve the goal of expungements being granted only in extraordinary circumstances.”
Piaba’s study found that the brokers’ home states in more than half of the awarded cases during the relevant period were California, Florida, New York, New Jersey or Texas. The group noted that brokers, on average, are registered in 16 states simultaneously, and that any state where a broker is registered may participate in the expungement process.
If states coordinated and shared the responsibility of participating in straight-in expungements, it’s “plausible” they could “achieve 100% participation in straight-in expungement arbitrations with negligible additional impact on existing state resources,” Piaba added.