Financial Advisor (October 24, 2023) By Eric Rasmussen:
A new investor advocacy report has arrived criticizing advisors' abuse of arbitration to erase customer complaints, just as the regulatory rules on the matter have been tightened.
The Public Investors Advocate Bar Association released a report today saying that brokers are still abusing the Financial Industry Regulatory Authority’s arbitration system by getting customer complaints stricken from Finra’s BrokerCheck page.
Brokers challenging their complaints end up getting them erased a whopping 90% of the time because no one shows up to challenge them in arbitration hearings, according to the PIABA.
This figure is consistent with two previous studies the association has done since 2019 with the PIABA Foundation, another nonprofit. The groups said that having so much damning material removed from BrokerCheck leaves brokerage customers in the dark about the past bad behavior of reps they’re working with.
The reason there are so many complaints and lawsuits getting blacked out, the association said, is that many times brokers are using what are called “straight-in” requests for expungement, which means a broker files arbitration against their own firms to have embarrassing information removed. They are called “straight-in” requests because they don’t involve the customer but limit the parties to the broker and brokerage.
The association says that in the period it studied from January 2019 to August 31, 2023, expungements were granted in 2,259 “straight-in” cases out of 2,506 awards issued in that period.
The PIABA study found that 54% of the expungement awards were granted in just five states: California, New York, New Jersey, Texas and Florida.
“Brokerage firms continued their practice of not opposing brokers’ expungement requests in 92% of cases,” the association said, “likely because they have an incentive to erase customer complaints as well.”
Joe Peiffer, the incoming president of the PIABA, said in a webinar Tuesday that this should be concerning to “good” brokers.
“If you’re a good broker with no customer complaints on your record and you’re competing for a client with a scumbag broker who had 20 customer complaints and got them all expunged because no one showed up on the other side, that’s a real competitive disadvantage to the good guy. It’s also a harm to investors. It’s also a harm to the regulatory system that disclosed these things.”
Critics lobbied Finra to adopt tighter rules for expungement, something the agency did with a bevy of new stipulations that went into effect on October 16 after getting an approval from the Securities and Exchange Commission in April. Straight-in requests must now be decided by three-person panels made up of randomly chosen public arbitrators. The arbitration parties don’t get to agree to have fewer than three panelists, nor do they get to strike or choose panelists. The panel’s decision on an expungement must be unanimous. There’s also a time limit on straight-in requests to two years after the customer arbitration or civil litigation closes (three years after a complaint was made in Finra’s CRD system) so that advisors are not abusing the system by filing claims years after the fact.
One of the bigger changes is that state securities regulators are now invited to the party: State regulators must be notified about brokers requests to remove customer disputes and there must be “a mechanism for state securities regulators to attend and participate in expungement hearings in straight-in requests,” Finra said.
But even here, there are roadblocks, since state securities regulators have a limited time to weigh in and limited resources, and many state regulators may not be familiar with Finra arbitration procedures.
That’s one reason the PIABA and its foundation are partnering with the Alabama Securities Commission on a new training program for state securities regulators. The program aims to help states collaborate to participate more in the arbitrations since many advisors are registered in multiple states, which means state securities regulators could benefit from coordination.
“State participation is not limited to the home state of the brokers seeking expungement and there is no prohibition on more than one state participating in the same straight-in expungement arbitration,” the PIABA said in its report.