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How Can You Research a Broker’s Background?

Bragança Law LLC
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If you are an investor, how can you research a broker before turning over your hard-earned savings to them? The SEC, FINRA, state securities regulators, and others encourage investors to research a broker before turning over your hard-earned money to that broker to invest. The primary tool that these regulators and others recommend investors use is BrokerCheck. However, as investment loss recovery attorney and PIABA Foundation vice-president Lisa Bragança recently told Barron’s, “BrokerCheck is no longer a reliable record.”

BrokerCheck is a public database generated and maintained by FINRA from its Central Registration Depository (CRD) records. CRD contains information that brokers and brokerage firms are required to submit about their registrations, enforcement actions, regulatory settlements, terminations of brokers, and customer complaints. BrokerCheck contains some, but not all, of the information on CRD. Importantly, BrokerCheck includes customer complaints. The SEC, FINRA, state regulators and others encourage investors to consider customer complaints reported on BrokerCheck in deciding whether to work with a broker. But brokers use a process called expungement to erase perfectly valid customer complaints from their records.

What is Expungement?

Expungement is a process that was created so that brokers could erase false, factually incorrect or clearly erroneous complaints against them from the CRD/BrokerCheck public record. For example, a customer complaint might be reported on the wrong broker’s CRD record. Expungement is the process for the broker to have that improperly reported complaint removed from their record.

The expungement process is handled by FINRA, which delegates it almost completely to arbitrators. FINRA’s rules permit a broker to seek expungement by bringing a “claim” against their current or former brokerage firm in FINRA Dispute Resolution. This is a sham proceeding because the brokerage firm rarely objects or opposes a broker seeking expungement. State securities regulators are not given an opportunity to object in the arbitration proceeding. It is only after the broker gets an arbitration award of expungement and is seeking to have it blessed (confirmed) by a court of law that state regulators are notified. Then, state regulators must decide very quickly and without adequate information whether to object to confirmation of the expungement award. Most of the time, the broker obtains confirmation of the arbitration decision granting expungement in a court of law by misrepresenting that the decision is the result of a true dispute. Courts of law are not informed by FINRA or the parties of the truly collusive nature of the expungement process. As a result, courts routinely confirm expungement awards and FINRA erases the customer complaint from the broker’s CRD/BrokerCheck record.

PIABA and the PIABA Foundation have studied 14 years of expungement data. Attorney Bragança, who is also a former branch chief in the Division of Enforcement of the Securities & Exchange Commission (SEC), is a co-author of the most recent “2021 Updated Study on FINRA Expungements,” released on May 18, 2021. The study is a follow-up to a 2019 expungement report she co-authored and a 2013 expungement report. The study demonstrated that proposed expungement rules that FINRA sought to have the SEC approve would not make an appreciable difference in the process. The study showed that the proposed expungement rules failed to address the fundamental flaw in the process – the lack in almost all expungement proceedings of any opposing viewpoint.

Less than two weeks after the release of the 2021 Updated Study on FINRA Expungements, FINRA announced that it was “temporarily” withdrawing its proposed rules and that it would work with NASAA (North American Securities Administrator Association) to redesign the current expungement process as well as including “stakeholders with insight on the expungement process”.

For the first time, FINRA created a page on its website on expungement of customer disputes.

Now that FINRA has withdrawn its proposal, we hope it will temporarily embed an investor advocate in the arbitration process to make the proceedings more adversarial and less one-sided. But the ultimate goal, as Attorney Bragança told FinancialPlanning.com, is to move expungement away from arbitration altogether and into a regulatory process, where officials from state agencies, the SEC or FINRA would make the final determination of whether to remove a complaint from a broker’s record. “So far, she says, FINRA hasn’t warmed to those ideas. ‘Has FINRA been receptive? In a word, no,’ Bragança says. ‘I’m still waiting for a phone call. I would absolutely welcome the opportunity to work with FINRA on this.’”

Why Can’t Investors Trust BrokerCheck?

Why can’t investors trust BrokerCheck to provide reliable customer complaint information about brokers? For years, FINRA has permitted brokers to erase valid customer complaints from their CRD/BrokerCheck regulatory records through the process of expungement. Since 2013, PIABA and the PIABA Foundation have steadily documented how FINRA’s expungement process allows brokers and brokerage firms in the United States to erase legitimate customer complaints from their BrokerCheck records. Many of the customer complaints that brokers have erased from their records have been resolved through confidential settlements of FINRA arbitrations. Brokers or brokerage firms have often paid substantial sums – sometimes more than $1 million – to settle these customer claims.

How Serious is the Problem With the Expungement Process?

How extensive is this abuse of the expungement process? 90% of the time a broker seeks expungement, they are successful. Brokers know this and are bringing more expungement cases and getting more customer complaints erased from BrokerCheck. Each day more and more customer complaints are expunged from BrokerCheck. Arbitrators are still granting broker requests to have claims that were settled for far more than nuisance value — like this claim against a UBS broker that was settled for $165,000 – permanently expunged from CRD and BrokerCheck. The expungement request was filed in March 2021 and by the end of May an arbitrator had heard the “dispute” and granted expungement.

Here is how expungement operates today. A broker may request expungement by bringing an arbitration claim against his or her current or former brokerage firm. FINRA calls this a straight-in expungement. The so-called dispute is between the broker and their own brokerage firm. 98% of the time the brokerage firm does not object to the broker’s request for expungement. The process is more like a consent order than a dispute. Yet it is still run through the FINRA Dispute Resolution process.

Under FINRA rules, the customer whose complaint the broker is seeking to expunge has the right to appear and object. In reality, the customer not given meaningful notice that an expungement hearing is taking place. The customer has no right to see the evidence or documentation that will be considered at an expungement hearing before the hearing takes place. The expungement process is “designed for people not to participate,” according to Jason Doss, president of the PIABA Foundation and a co-author of the 2021 PIABA report.

What is FINRA Doing About the Expungement Process?

FINRA has been aware of abuses of the expungement process for years and taken some steps to rein in brokers. Early on FINRA address the problem of brokerage firms requiring in settlements of customer complaints that the customer agree not to oppose expungement. FINRA adopted a rule that addressed that one particular problem. That merely caused brokerage firms to pivot to get substantially the same result by including non-disparagement and confidentiality provisions in agreements to settle customer complaints. This leaves customers opposing expungement at risk of being sued by a broker or firm for breach of contract.

The proposal that FINRA just withdrew proposed conducting enhanced training of arbitrators on the expungement process and creating a specialized roster of arbitrators to hear expungements, which likely would make things worse. While FINRA proposed a number of changes in its now-withdrawn proposal, the fact remains that expungement cases are rarely disputes. Yet, FINRA forces them to be decided in a dispute resolution forum. This is like forcing a square peg into a round hole.

What Steps Need to Be Taken?

The best answer is to have regulators make the regulatory decision of whether to grant a broker’s request for expungement of a customer complaint. A regulator would decide whether the customer complaint has regulatory or investor protection value or not.

PIABA and the PIABA Foundation recognize that it is unlikely that expungement will be decided by regulators in the near term. As a result, PIABA and the PIABA Foundation propose the creation of a new “independent investor advocate” position to represent the interests of unrepresented stakeholders at expungement hearings. “If FINRA is going to have a monopoly on the expungement process, we need someone that is responsible for minding the store – to make sure that valid customer complaints are not erased from the public record,” states Attorney Bragança.

The 2021 PIABA report suggests that an independent investor advocate in the arbitration process could serve a function comparable to that of a guardian ad litem in a court of law. An independent investor advocate could represent the interests of state securities regulators, customers, and the public in opposing expungement of valid customer complaints that have regulatory and investor protection value.

In a live-streamed video conference conducted on May 18, PIABA Foundation president Jason Doss said, “An investor advocate empowered to intervene to oppose expungements . . . is the only way to fix this system and keep thousands of additional customer complaints from being wrongfully erased from the public records.”

Lisa Bragança will continue to advocate for accurate information on BrokerCheck, for meaningful reform of the expungement process, and for investors seeking to recover their investment losses because of broker fraud and misconduct.

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