A nearly 10-year campaign by investor advocates to prevent widespread erasure of consumer complaints from regulator databases has made recent marked progress, but surveys still find nearly 90% of broker records are expunged on request.
That may be changing thanks to new rules that went into effect this month that, among other things, allow state regulators to participate in broker/customer arbitration proceedings, set more strict timelines, and call for a randomly selected panel of arbitrators to make final decisions. The new rules could reduce the expungement rate by perhaps 50%, according to the Public Investor Arbitration Bar Association (PIABA), which has spearheaded calls for reform since 2013.
“The new changes have the potential to solve long standing problems with expungements of brokers’ records,” said Joseph Peiffer, incoming PIABA president. “Affected participation by state securities regulators is critical to the success. For our part, we’re volunteering to do everything we can to ensure that arbitrators treat expungements as an extraordinary remedy. The new rule should be a massive improvement that will better serve investors and regulators.”
‘Long-standing problem’ cited
That “long-standing problem” Peiffer referenced comes from PIABA Foundation studies done over the years that found brokers have been allowed to erase valid and meritorious complaints from their publicly available professional histories, most notably an accessible database maintained by FINRA, the Financial Industry Regulatory Authority. For example, a 2019 PIABA Foundation study found that expungement requests were almost always granted, and brokers, agents and their firms were allowed to subvert the process by conspiring to select arbitrators who were more likely to grant expungement requests. The data largely meant that complaints about brokers and their firms were shielded from members of the public who were searching for a broker or investment advisor.
Subsequent studies showed modest improvements in the process and this week, PIABA released its 2023 study that for the moment shows little change in the data but hope that the new rules will change things.
“The changes to the expungement process are significant and should make it
more difficult for brokers to expunge valid customer complaints,” the report said. The new rules took effect Oct. 16th.
‘Straight-in expungements’ monitored
For years PIABA has monitored and analyzed a particular type of expungement request called “straight-in expungements,” which is where brokers file federal arbitrations against their own brokerage firm, seeking relief.
“The investor is not a party to these arbitrations and not surprisingly, brokerage firm respondents named in those cases virtually never oppose the brokers requests, which makes trading and expungement requests more akin to an unopposed motion, than an adversarial process, which was what it was intended to be,” said Jason Doss, a past PIABA president and one of the authors of the 2023 report. “Not surprisingly, arbitrators who have decided those types of requests are only presented with evidence in support of expungement. And as a result, our 2019 and 2021 studies showed that straight-in requests were being granted about 90% of the time, even though expungement is supposed to be treated as an extraordinary remedy.”
Training program announced
PIABA also announced is joining with the Alabama Securities Commission in offering a new training program for state securities regulators. The training will encourage and help facilitate collaboration among states and assist them in effectively participating in FINRA arbitrations.
PIABA executives said they noticed a significant rush by brokers to get their records expunged between the time the new rule was announced earlier this year and before it took effect last week.
“It makes total sense,” said Peiffer. “Because if you could get your record expunged with no one opposing it, that’s way better for you than when the state regulators or a pro bono PIABA lawyer come in to oppose an expungement for a full and fair hearing on whether that customer complaint should remain on the broker’s record or should be expunged. If we’re not there and the states aren’t there, then expungements are granted 90% of the time, so I think there was a rush at the end and I really do hope this rule makes it better.”
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at email@example.com.
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