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Dependence on Brokercheck as a Source is No Longer Feasible

The Public Investor Advocacy Bar Association (PIABA) Foundation’s most recent report, co-authored by Jason Doss and Lisa Bragança, argues that investors can no longer depend on the BrokerCheck background disclosure system to assess brokers’ backgrounds. To read the entire study, Click Here.

What does Brokercheck entail?

FINRA, the Financial Industry Regulatory Authority, maintains an online resource known as BrokerCheck. This provides users with details from the CRD, a comprehensive database of state regulations associated with brokers and brokerage firms. BrokerCheck/CRD information consists of customer grievances, regulatory sanctions, bankruptcies, registrations, and similar data.

The SEC, FINRA, and state regulators encourage investors to use BrokerCheck to look up the credentials of brokers and brokerages. Unfortunately, this tool does not accurately reflect customer grievances. Thus, customer complaints should be taken into account when researching a broker.

The PIABA Foundation has revealed that the technique which brokers use to “eliminate” (erase) customer grievances from the CRD that they deem as irrelevant or unjust is no longer functional. BrokerCheck is malfunctioning.

Expungement Defined

An expungement is a process which involves the removal of certain records from a person’s criminal history.

A broker may ask for expungement of information from the CRD regulatory record and their BrokerCheck record in a customer arbitration proceeding. Many brokers wait and request expungement in an additional arbitration case that is opened after the customer arbitration is resolved. If the panel agrees to the request and the court approves the award, FINRA will remove the information from CRD, making it no longer visible on BrokerCheck.

FINRA has indicated that the expungement of customer complaints from CRD should only be allowed in rare scenarios. Arbitrators should, thus, only grant this extraordinary relief following a positive determination that:

(A) it is either not possible or incorrect to assert the claim, allegation, or information.

A registered person was not implicated in any purported investment-linked sales practice infringement, forgery, theft, misappropriation or unlawful use of resources.

It is denied that the claim, assertion, or information is accurate.

In situations where it is supposed to be applied solely to extraordinary cases, brokers are using the expungement process to wipe away thousands of customer complaints from their records. Erasing from public view legitimate and noteworthy client grievances – some of which have been settled for large amounts of money – this is undermining the precision and completeness of both CRD and BrokerCheck.

What is Meant by “Expungement-Only” Circumstances?

An individual broker may request an “Expungement-Only” case, which would mean that any customer complaints would be removed from their record by initiating an arbitration proceeding against their firm. This type of request is usually submitted long after the customer dispute has been handled.

Between the years 2015 – 2018, a remarkable 924% surge was seen in the filing of “Expungement-Only” cases. This was reflected in brokers petitioning to expunge 2,194 customer complaints found in 1,078 arbitration proceedings.

What Issues are Associated with the Expungement Process?

Allowing brokers to remove “inaccurate” or “impossible” customer complaints from the public record is the purpose of the expungement process. It is important for investors to take into account valid, substantial customer complaints that have been settled when evaluating a prospective broker. However, these settlements and numerous other customer complaints are wiped away from public and regulatory sight – for good.

A major issue with the expungement process is that the broker’s request usually goes unchallenged. In an Expungement-Only case, the broker takes legal action against their brokerage firm, which rarely resists the request. The brokerage firm actually creates a mutual benefit for both parties by wanting customer complaints to be removed from the broker’s public record. Hence, even if the brokerage firm has spent a large sum of money to settle a customer dispute, they are content with an arbitration panel determining that the customer complaint was “false” or “factually impossible.”

The majority of people would most likely disagree that the complaint made against them was untrue or inconceivable. Yet, the customer is not regarded as a participant in an Expungement-Only proceeding. They were a part of the arbitration that had been settled but were not obligated to be present in the expungement trial. People generally do not participate in Expungement-Only trials due to the fact that they do not receive proper notification of the expungement appeal. FINRA has not put in place enough protective measures to guarantee that customers are informed in an opportune, precise and significant way about the expungement hearing. Even with suitable notification, customers who have already settled their cases could be hesitant to relive a dispute that they have already concluded. Furthermore, customers who do want to oppose expungement could experience difficulty searching for a lawyer to represent them or paying a lawyer.

In the majority of Expungement-Only cases, neither the customer nor the brokerage firm supplies evidence for why the request should be refused. This leaves the arbitration panels without grounds for rejecting the expungement request. The evidence that arbitrators hear is biased and might even be untruthful. Although FINRA informs arbitrators that expungement should be granted solely in extraordinary circumstances, in reality, it is truly only in extraordinary circumstances that expungement is being denied.

The arbitration process and the usefulness of BrokerCheck as a tool for individuals to rely on are both being detrimentally impacted by cases of expungement alone.

In the report co-written by Lisa Bragança for the PIABA Foundation, she commented to Business Wire that while FINRA claims expungement is an “extraordinary” solution, “we have large-scale erasure of broker misconduct taking place.”

What Can Be Done to Resolve This?

What measures can be taken to mend the flawed expungement procedure? Additionally, how can investors once again trust in the accuracy of BrokerCheck?

The PIABA Foundation has suggested that a suspension of expungements be implemented until a thorough investigation is carried out and the correct protocols are put in place to address the misuse of this process.

The PIABA Foundation suggests that the SEC or FINRA should designate an impartial investor representative to take part in all forthcoming expungement proceedings. This individual would be tasked with examining and presenting evidence against expungement.

The PIABA Foundation’s report advises that not only the SEC and FINRA but also all other entities that reference BrokerCheck, should include a caution that the system does not present a complete and accurate record of consumer grievances against a broker.

Despite the fact that no action has been taken by the SEC, FINRA or state regulators, brokers are still managing to have customer complaints settled and then expunged from the CRD, resulting in them disappearing from BrokerCheck. Nevertheless, these same regulators are still advocating for BrokerCheck to be used by investors to examine brokers.

For Those Who Invest Money

Until these issues are addressed, investors should not depend on BrokerCheck to investigate brokers. Even though the SEC, FINRA, state regulators, and others suggest that investors use BrokerCheck to study brokers, it is no longer a reliable source. The records provided by BrokerCheck are not accurate.

Should you think that you have experienced financial losses due to broker misdeeds or deceit, it is wise to consult with a knowledgeable investor protection lawyer to decide if there is a possibility of recouping those losses.

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