AdvisorHub (October 24, 2023) - A group of plaintiff lawyers is seeking to capitalize on reforms put in place this month by the Financial Industry Regulatory Authority to curtail the sky-high success rates for brokers clearing their public records of customer complaints.

The Public Investors Advocate Bar Association is launching a program to expand its pro bono representation of investors in expungement arbitrations with the hopes of encouraging more investors to have their voices heard, according to an announcement on Tuesday. 

It is also partnering with the Alabama Securities Commission on a new training program for state regulators regarding expungements. The training is a response to one of the changes under the new Finra rules that includes notifying state securities regulators and giving them the opportunity to participate in expungement cases. 

The new rules are critical for reining in expungements as arbitrators in Finra’s dispute resolution forum have continued to grant expungements in about 90% of cases, according to a PIABA study released along with the announcement. 

“The study shows that expungements have continued to be granted too frequently but demonstrates how new FINRA rules…have the potential to fix the problems with the process,” PIABA stated. 

Finra’s reforms to the expungement procedures, which took effect on October 16, were part of a rule change that had been in the works for over three years and was approved by the Securities and Exchange Commission in April. 

The new rules additionally require that expungement cases be decided unanimously by a three-member panel of public arbitrators who have received “enhanced expungement training.” Under the old rules, a sole arbitrator could recommend erasing blemishes from a broker’s public record.

The new rules also require brokers to make their expungement requests within two years after the closing of an arbitration or litigation, or three years if the complaint did not result in a formal proceeding, reducing the window of time brokers have to seek the erasures.

The effectiveness of Finra’s reforms will hinge on state regulators participating in expungements, according to Joe Peiffer, the incoming president of PIABA. “The rule change should make a big difference, but it won’t make a big difference if the state regulators and other attorneys for investors don’t do their jobs,” he told reporters in a briefing. 

For its study, PIABA evaluated 2,506 awards issued for straight-in expungement requests from January 1, 2019 to August 31 this year. In 2,259 of those cases, the arbitrators agreed to remove the disclosures, the PIABA report said. 

In most cases, brokers do not face any opposition in filing their cases. Firms only opposed a broker’s expungement request in 8% of cases. 

Customers participated in only about 10% of the evaluated cases. Unsurprisingly, PIABA noted that arbitrators were more likely to issue a denial when customers did object to the expungements. Arbitrators ruled against brokers’ proposed record-clearing in 31% of the cases when customers objected, according to the report. 

Peiffer, a managing partner at Peiffer Wolf Carr Kane & Conway in New Orleans, said that until the reforms “one sided expungements erode[d] the integrity of Finra database and erase[d] serious complaints from Main Street investors.” 

Most brokers are “good brokers with no customer complaints,” Peiffer said, but when expungements are granted with no substantive opposition there is no differentiation between them and the “scumbag brokers who had 20 customer complaints but got them all expunged.”