InvestmentNews Editorials

Better screening by Finra could curb expungements

The real problem? The reluctance to address the volume of claims that don't belong

Jan 12, 2019 @ 6:00 am

No one wants a black mark on their record, especially if you're a broker trying to attract clients and those clients know how to use Finra's BrokerCheck system to research your background.

That reality, especially over the past decade as the Financial Industry Regulatory Authority Inc. has beefed up its public data on brokers, has created a curious conundrum for brokers, lawyers and regulators.

About 10% of the industry's roughly 600,000 brokers have at least one customer complaint or dispute on their record. Of those 60,000 brokers, at least half are saddled with multiple complaints.

Recognizing that some customer claims are bogus or don't hold up through an arbitration process, Finra established specific criteria for having complaints removed from a broker's record. The basic criteria for expungement are that the claim was false or impossible, or that the registered representative was not involved in the alleged investment-related sales practice violation.

Seems simple enough, if you can look past the unintended consequence: the emergence of a cottage industry of lawyers helping brokers clean up their records.

As detailed recently in InvestmentNews, one Denver-based law firm was responsible for almost 60% of the more than 400 expungement requests last year.

The firm, Advisor Law, fueled by the aggressive marketing tactics of founder Doc Kennedy and his team of three-dozen lawyers, boasts a 90% success rate in getting customer disputes expunged.

That 90% rate of getting arbitration panels to approve expungements is in line with expungement requests overall. The figure has some consumer advocates seeing red and pushing Finra to do something about it.

Finra doesn't dispute that the approval rate appears lopsided.

The 90% success rate for expungement requests that's most commonly referenced comes from the Public Investors Arbitration Bar Association, which believes expungement lets brokers hide tainted histories. That's certainly what the data look like at first glance. But the expungement rate only applies to the small percentage of customer disputes brokers are seeking to expunge.

Blind eye

Finra, which trains arbitrators and provides a forum for arbitration, rarely gets involved in the process, and some argue it turns a blind eye to the results.

But in 2013, in response to criticism about the portion of expungements that are approved, Finra calculated that of the 17,635 customer disputes filed against brokers over the prior five years, there were just 838 expungements, which is less than 5% of all customer disputes.

Last month, as part of an announcement on its latest efforts to reduce the high volume of expungements, Finra explained in a statement, "Expungement is an extraordinary remedy that should be recommended only under appropriate circumstances."

The regulator continues to revise and restrict those circumstances. Up until a few years ago, for example, dispute settlements could require customers to agree not to oppose a broker's efforts to have a claim expunged.

The revisions introduced in December include enhanced training and guidance for arbitration panelists. But that's not nearly enough for some consumer advocates, who want Finra to step in and take the other side of each expungement request.

That doesn't make sense for several reasons related to resources and the established criteria for expungement.

The real problem with expungements is perception, and a system that sends all claims directly to a broker's record.

Lawyers like Mr. Kennedy admit to cherry-picking claims that qualify for expungement, thus producing the 90% success rate.

Finra is backed against a wall of its own making, swiping at ways to lower the expungement rate but reluctant to address the volume of claims that don't belong.

A good start would be to better screen claims before they hit BrokerCheck, and then focus on the 95% of customer disputes that aren't being expunged.

Barring that, expect an ongoing bonanza for one set of lawyers and an ongoing righteous fight for another set.


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