PIABA Lashes Out at Finra Expungement Process

October 16, 2019

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The Public Investors Advocate Bar Association is asking the Financial Industry Regulatory Authority to immediately halt all requests by brokers to expunge customer complaints, saying they and their firms are systematically gaming, exploiting and abusing the arbitration process.

The trade group for plaintiffs’ lawyers issued its call as Finra is preparing to file a revision of its expungement rules with the SEC aimed at making it tougher for brokers to erase complaints from their state regulatory and BrokerCheck records. The core of the rule involves creation of a group of specially trained arbitrators to hear expungement cases.

In a study issued Tuesday, The PIABA Foundation marshalled statistics on the 1,078 expungement-only cases filed from 2015 to 2018 to illustrate what it calls an alarming increase in filings and a reluctance by arbitrators to deny expungement. Customers rarely wish to spend time and money presenting evidence against brokers once their underlying claims settle, lawyers say.

PIABA, which set up the foundation to “promote investor literacy,” hopes to raise money for a pro bono program that will encourage investors to oppose expungement requests, it said in a foreword to the study. 

“The Finra [expungement] process..is being systematically gamed, exploited and abused with one-sided hearings, manipulation of arbitrator selection, deletion of significant customer complaints and abusive (and possibly fraudulent) conduct to such an extent that it must be frozen until it can be repaired,” according to the study.

Expungement-only claims rose from 59 in 2015 to 545 in 2018, with the underlying complaints in those claims rising from 102 to 1,026 in those years, it said. Brokerage firms opposed expungement in fewer than 2% of the cases (even though they are technically named as respondents by brokers seeking amendment of their U5 reports), and customers participated in hearings in just 13% of cases, PIABA said.

“Based on the results of this study, BrokerCheck can no longer be considered a reliable tool for investors to use when researching the background of brokers,” said Jason Doss, an Atlanta-based lawyer who co-authored the report and who heads the PIABA Foundation.  

A Finra spokeswoman said the industry-funded regulator’s proposal for a special roster of arbitrators addresses some of PIABA’s complaints. 

“We believe it is important to ensure that there is an appropriate process for investors to access information that is relevant to them about their financial advisers’ prior experience, while also providing financial professionals the opportunity to address incorrect or inaccurate information,” the Finra spokeswoman said. “FINRA’s Board approved rule filings aimed at improving the expungement process.”

PIABA wrote in the study that “there is no reason to believe additional training will have any effect on this problem.” 

Instead, it urges Finra and/or the Securities and Exchange Commission to create an investor protection advocate to participate in every expungement-only case. 

Finra could finance the advocate process by restricting brokers’ ability to obtain expedited expungement hearings with single arbitrators by requesting a monetary penalty of $1 from their firms. Finra rules permit expedited hearings when monetary damages are sought—a process aimed at lowering expenses for protesting investors but one that the study said is exploited by brokers who typically withdraw their damage request at evidentiary hearings.

In the three years analyzed in the study, Finra passed up more than $6 million in revenue from hearing and other fees because of the $1 “trick,” the study said.

The study also criticizes Finra for lacking a process to ensure that customers receive notices of expungement requests from brokerage firms, and asserts that lawyers for firms and their brokers collaborate to choose arbitrators most likely to grant expungement in an attempt to sanitize the industry’s reputation.  

Dochtor Kennedy, whose Colorado-based firm AdvisorLaw specializes in representing brokers seeking expungements, said the study oversimplifies the process as a consumer protection issue and fails to address the problem of frivolous complaints that are often dismissed in underlying cases but remain on public display.

“PIABA is comprised almost exclusively of attorneys and others who represent individuals and public investors,” he said. “Our justice system in this country is one where everybody should have an opportunity to confront the accuser, everybody should have an opportunity to have their story heard and find out if it’s a true or false allegation.”

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