How frivolous customer disputes can be erased from Finra BrokerCheck

Customer complaint disclosures that are erroneous or without merit are all too common

Aug 23, 2016 @ 2:33 pm

By Doc Kennedy

Danny Sarch's blog regarding Finra's BrokerCheck hit the mark with his assessment of a tool that can be a double-edged sword. Designed with good intentions, BrokerCheck can oftentimes provide a sort of online early warning system for prospective clients looking to place their money with a trusted source. Alternatively, BrokerCheck can raise erroneous red flags on advisers with disclosures that may not be appropriate — or worse — lack merit entirely.

As of June 6, the Financial Industry Regulatory Authority Inc.'s amendment to Rule 2210 took effect requiring all broker-dealer webpages and online profiles of advisers to conspicuously link directly to BrokerCheck. No doubt this measure will increase the use of BrokerCheck as a prequalifying tool for your clients. Finra has spent millions of dollars on advertising and has shown that it is committed to this being the lynchpin of its campaign of transparency to protect individual investors.

Finra will undoubtedly mold this tool to allow the public to exhibit a natural “culling of the herd.” In the same way that Yelp reviews steer new patrons away from a local restaurant with bad service, BrokerCheck inevitably will push clients away from the disingenuous financial adviser. One can imagine that this information will soon power an app similar to Carfax that lets an investor review local advisers' “wreck history” with the swipe of a finger.

As Mr. Sarch pointed out, meritless claims penalize good advisers; worse yet, they can foster an environment in which other clients may feel emboldened to lodge a frivolous complaint in the hopes of a “nuisance settlement.” Statistics from Finra show that in 2016, the number of BrokerCheck arbitrations is up 29% year over year. Moreover, as this extended bull market eventually turns, BrokerCheck will become a beacon for investors who have incurred losses and want to take a swing at recouping them through settlement.

If you're a veteran adviser, you may remember a time when these disclosures would simply fall off after 24 months. Under Finra rules, though, there may be claims dating back to the 1990s. Many advisers we represent are unaware that some of their historical complaints have been revived and reposted on their BrokerCheck profile.

The good news is that there are still remedies for cleaning up and removing meritless complaints. An adviser can file an arbitration claim under Rule 2080 to request expungement. Settled claims where there is no contribution by the adviser, denied or withdrawn claims, and those closed with no action continue to be acceptable scenarios for expungement. As a bonus, these expungements remove disclosures from your CRD entirely. No history will show on BrokerCheck, and compliance departments will see no trace of the issue.

As a matter of practice, expungement requests can be very successful, so much so that industry groups representing investors are crying foul on the success rate, which hovers around 90%.

Although this demonstrates a great opportunity to get meritless claims erased, do not be lulled into thinking this is a process that should be attempted down the road.

A typical arbitration takes around 10 months to complete. You may not be dreaming of transitioning firms today. However, in a year, a lot can change. If you want to make that jump a year from now, or if management starts to turn up the heat internally on advisers with disclosures, you will still be staring down the barrel of a 10-month arbitration with little chance to expedite. The reality is that disclosures of any kind can be a deal breaker for landing at many of the top firms.

Given sweeping changes such as the recent Department of Labor fiduciary rule, it is clear that the regulatory environment can change quickly upon pressure by certain groups representing investors. What seems to be an open window of opportunity today can be quickly closed with a new amendment to Rule 2080.

The best course of action is to strike while the regulation still allows for it. Cleaning up these meritless disclosures from your BrokerCheck profile will ensure that new clients won't equate your business with a one-star Yelp rating. And expunging these customer complaints can erase a long list of perceived wrecks on your Carfax history.

Doc Kennedy is the founder of AdvisorLaw, a firm exclusively representing Finra-licensed professionals.


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