CityWire (May 19, 2021) - The advocacy association is urging Finra to install an ‘independent investor advocate’ to bring balance to the process of arbitrating investor complaints.
The Public Investors Advocate Bar Association (Piaba) thinks Finra isn’t doing enough to fix what it considers to be a ‘broken’ and ‘abuse-ridden’ expungement process for brokers seeking to erase customer complaints from their public records.
The association yesterday published a report analyzing some 700 arbitration awards granted by Finra from August of 2019 to October of 2020. It found the number of expungement awards granted by Finra has risen more than 1,000% between 2015 and 2020 – just 59 such awards having been issued in 2015.
The study found arbitrators grant expungement requests 90 percent of the time. Piaba argues that this statistic is a direct result of rules that make it difficult for investors and state regulators to voice their opposition to expungement requests. In particular, they point out that state regulators aren’t notified of an expungement until after it is already granted by an arbitrator and removed from Finra’s central registration depository, or CRD, from which BrokerCheck sources its data.
In a virtual roundtable discussion held Tuesday to summarize the study’s findings, Joseph Borg, the director of the Alabama Securities Commission, said that it’s a problem that he and other regulators are barred from seeing expunged customer complaints.
‘I would like to know what was on that complaint file completely, not just what’s left, before I make a determination whether this is a person I want in my state working with my folks and asking them for their retirement funds,’ he said, making an exception for ‘extraordinary remedies’ like incorrect names or factually impossible situations within a complaint.
In a statement emailed to Citywire, Finra said that a proposed rule change that will go in front of the SEC later this month addresses many of the concerns raised by Piaba.
‘In particular, the proposal provides additional notification to state securities regulators. 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... stakeholders to continue to improve the expungement process,’ a Finra representative said.
Piaba says Finra’s proposal, if passed, still wouldn’t address the root problem: ‘the proposed rule will still allow brokers to present their expungement request unopposed in the vast majority of cases,’ the study says.
According to Piaba’s study, giving invested parties an opportunity to oppose an expungement request would go a long way in preventing problem behavior from being swept under the rug. The study found that when a broker-dealer respondent opposes an expungement request, arbitrators are 5.4 times more likely to deny it. When customers oppose expungement, arbitrators are 4.3 times more likely to deny it, the study said.
In the livestreamed video conference, Piaba Foundation president Jason Doss explained why investors don’t often participate in the expungement process, referencing a tactic used by brokers and advisors wherein ‘the broker waits until after the conclusion of the arbitration when the investor is done, mentally and financially done with that process, to then file a new [request for expungement] calling that person a liar. Then, the investor has to relive this entire terrible process again. But this time, there’s no financial incentive to do so. They have to, what, pay a lawyer to go out and defend the integrity of the CRD database? Investors are not often willing to do that.’
Piaba suggests a more effective solution would be for Finra to install an ‘independent investor advocate’ somewhere in the arbitration process to serve a function like that of the ‘guardian ad litem’ in a court case. The advocate, who Piaba suggested could be funded by Finra or by public grants, would be able to oppose expungements on behalf of interested parties, including investors who’ve filed complaints and state regulators.
‘This is a huge regulatory black hole that is just getting worse with every passing year,’ Doss said in the conference call. ‘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.’
Piaba describes itself as ‘an international bar association whose members represent investors in disputes with the securities industry.’ This is the third report on Finra’s expungement system published by the association. Previous reports were published in 2013 and 2019.