Personal Finance

Some brokers game the system to scrub complaints from their records, report claims

By October 15, 2019 No Comments

If you’ve settled an arbitration case with your broker at some point, there’s a chance it isn’t showing up in the popular database used by consumers to check financial advisors’ backgrounds.

A new report from an investor advocacy group claims that some brokers and brokerages — with the aid of a handful of law firms — are gaming the regulatory system to get customer complaints removed from their industry-related records, which means those claims won’t show up on BrokerCheck.

That online search tool is operated by the brokerage industry’s self-regulatory organization, the Financial Industry Regulatory Authority, or FINRA, which oversees roughly 626,000 brokers and the 3,600 firms that employ them.

A sign for the Financial Industry Regulatory Authority (FINRA) is seen outside the offices in New York’s financial district.

Brendan McDermid | Reuters

“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, president of the PIABA Foundation, a nonprofit that released the report on Tuesday.

FINRA, which has said in the past that it was exploring improvements to the expungement-request process, did not respond to an inquiry from CNBC.

The study is based on the group’s research of nearly 1,100 “expungement-only” arbitration cases processed by FINRA from 2015 through 2018.

These cases arise when an individual broker, who was named in a customer complaint that gets settled through arbitration, then seeks to have the information scrubbed by filing a separate claim against the firm that also was involved in the settlement (and was their employer at the time of the complaint).

The group says that during the four years its research covered, the number of these expungement-only cases rose by 924% to 545 in 2018 from 59 in 2015 — 1,078 in all during that time.

Here how it works: The broker seeking expungement files a $1 claim against the brokerage. That low amount reduces the incentive for the firm to protest, the foundation says. An added benefit: Just one FINRA-approved arbitrator hears the case instead of the more common three-person panel.

“These are being done to limit the number of eyes that are looking at these expungement requests,” Doss said.

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Of the 1,078 expungement-only cases initiated from 2015 through 2018, the brokerage firms did not oppose the individual broker’s expungement request in 1,055 cases — more than 98% of the time.

The PIABA Foundation said it found instances of investors getting settlement awards of more than $100,000 that eventually were removed from a broker’s record.

Attorney Julian Friedman, senior counsel in the New York office of law firm Ballard Spahr — who says he has represented individual brokers in expungement cases — said the requests can be appropriate.

Often, he said, a client complaint that names both the firm and the broker results in the brokerage settling, although there is never a finding of liability on behalf of the individual named.

“The client’s claim could have been valid, but it could have been a claim based on the failure of the system [at the brokerage firm], not a failure of the individual person,” Friedman said.

Meanwhile, the PIABA Foundation also recommends that FINRA halt all expungement proceedings right away as well as the filing of new cases and establish an investor advocate who would be present in every expungement proceeding.

Additionally, the group is suggesting that FINRA’s BrokerCheck, as well as a similar database whose records feed BrokerCheck, include a warning stating that results won’t include all customer complaints due to expungements.

“It’s time to stop tinkering around the edges of the expungement process and get the process fixed once and for all,” said Celiza Bragança, a board member at the PIABA Foundation.

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