Senators Probe Broker Background Check Expungement Practices

A InvestmentNews article recently highlighted the efforts of two U.S. senators that have asked the Financial Industry Regulatory Authority (FINRA) to provide new details on the process that allows brokers to clean their disciplinary records of customer complaints.  Sen. Jack Reed (D-R.I.) and Sen. Chuck Grassley (R-Iowa) also said Wall Street’s industry-funded securities regulator should respond to criticism that the current expungement practice creates BrokerCheck reports that could mislead investors.

“We believe that meaningful investor protection includes the disclosure of whether a customer dispute was settled,” the senators wrote. “Not just for transparency sake, but also to help prospective investors make informed decisions about which individuals or firms with whom to do business.”

Under the current system FINRA Rule 2080 allows brokers to petition the organization to clean their public disciplinary reports if an investor files a complaint and “the claim, allegation, or information is false.”  However, in my opinion the process is abused and cases which should not be expunged are routinely cleaned from broker records. Attorneys representing claimants are placed in the position of agreeing to expungement in order to settle their client’s case.  Thus, a process that was meant to provide a mechanism to remove untrue claims against a broker is often times being used as a low-cost bargaining chip in settlement negotiations concerning meritorious claims.    Further, there is no incentive for an attorney to argue against including a consent to expungement as part of the settlement agreement language because it costs the client nothing and the settlement conversation itself may be made contingent upon expungement as being a part of the ultimate resolution.

Nonetheless, the investing public is harmed by the removal of the complaint from the broker’s record in several ways.  First, prior complaints are often indicative of a the broker’s pattern of practice in their treatment of customers.  A broker with five churning complaints against them is rarely a coincidence and information concerning those claims can be useful in present client’s claim.  Second, a record of investor complaints allows arbitration panels and FINRA to consider harsher penalties and fines for repeated misconduct.

An October report by the Public Investors Arbitration Bar Association (PIABA), found that FINRA arbitrators granted “expungement” at least 90% of the time in a sample of 1,625 cases between 2007 and 2011.  PIABA recommended that FINRA review requests to clean brokers’ records, improve arbitrators training on expungement, and ban settlements containing requirements that investors who file complaints agree to not oppose the expunging of brokers’ records.

The senators asked FINRA to respond by Jan. 6 to PIABA’s recommendations.  They also proposed draft legislation to empower FINRA to limit broker expungement practices and also asked for details on when and why brokers’ records are expunged.  FINRA previously stated that it understands and appreciates PIABA’s concerns and is providing additional guidance to arbitrators and reviewing its expungement rules.

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