by Lauren Gonzalez
On Wednesday, October 16, 2013, the Public Investors Arbitration Bar Association (“PIABA”) released the findings of a study which raises the notion that investors relying on the public brokerage background reports on FINRA’s website are unlikely to be getting the complete picture.
When an investor lodges a complaint against his or her broker, the complaint moves through FINRA, the Financial Industry Regulatory Authority. Easily accessible on FINRA’s website is its BrokerCheck® tool, which allows for investors to research a member firm or broker and learn about the broker’s employment history, educational background, certifications, and importantly, whether a customer has ever filed a dispute against that broker or brokerage firm.
PIABA’s five-year study of more than 1,600 arbitration cases showed that in cases filed between January 1, 2007 and mid-May 2009, expungement was granted in 89% of the cases resolved by stipulated awards, commonly the result of settlements. For the time period beginning mid-May 2009 through the end of 2011, 96.9% of the cases resolved by stipulated award also granted expungement relief. One financial professional was granted expungement 35 times out of the 40 times he requested it. To have a record expunged means to have any record of a complaint made by investors removed from a broker’s public regulatory record.
The idea that an investor or an arbitrator deciding a case is not receiving a complete picture of a broker’s complaint record can be a scary thought. President of PIABA, Scott Ilgenfritz, commented that “[t]he result is that investors who are diligent enough to seek out information about brokers may be getting a woefully incomplete picture of the individual to whom they will entrust all or most of their nest egg … [W]hat is supposed to be an extraordinary relief measure is now being sought and granted in roughly nine out of 10 settled cases that we studied.”
An investor who sees that a broker has a myriad of customer disputes may be less likely to elect that person as his or her broker. Also, the number and type of customer disputes filed against a broker can influence an arbitrator’s decision in later cases filed against that broker. For instance, think about a broker who has had 10 previous customer complaints of churning an account with nine of those complaints expunged. An arbitrator making a decision on a churning case involving that particular broker would be more likely to grant an award in favor of the investor in a churning case if the nine expunged records still existed on the broker’s record. Similarly, the arbitrator would be less likely to grant an award in favor of the investor in a churning case if the broker’s report only showed one prior customer complaint. The unfortunate truth is that the broker still has those ten complaints; however, under the current rules investors, and eventually arbitrators may not be able to fully see the entire picture. When an arbitrator is making this decision, the arbitrator often times holding the investor’s entire life savings in his hands. Full disclosure of any and all prior complaints and disclosures would make for a more fluid relationship between investor and broker prior to the arbitration process.
As per the PIABA report, the SEC and FINRA intended for expungement to be an extraordinary remedy, not one that is freely given. Several recommendations that the report makes include more thorough training for arbitrators regarding motions seeking expungement relief, FINRA proposition of rule changes with respect to respondents bargaining for settlement negotiations upon an agreement to expunge, and changes to the procedural application in motions for expungement relief.
This report indicates an eye-opening realization of the need for change. Allowing for complaints to be expunged so easily is a detriment to investors who are attempting to do their due diligence in selecting an appropriate broker to entrust their hard-earned money with. This report means that investors cannot rely on FINRA’s BrokerCheck® reports and investors must be more creative in their background checks on potential brokers. One solution would be for investors to look at all awards involving that broker through FINRA’s website.
FINRA has already sent a notice to its arbitrators on expanded expungement guidance. In its notice, FINRA attached mandatory reading for all FINRA arbitrators. FINRA also mentioned in its notice that the organization planned to issue follow-up communications including revisions to its expungement arbitrator online training course, an “Arbitrator Audio Workshop”, an article in an upcoming issue of its arbitrator newsletter, and revisions to the “Expungement Page” on its website.
It will be interesting to see how this report and raw data will impact FINRA’s rules and regulations in the near future.