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Industry Spotlight > Broker Dealers

FINRA's BrokerCheck Is Being 'Gamed': Lawyers

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The Financial Industry Regulatory Authority’s BrokerCheck is unreliable as it’s being “systematically gamed, exploited and abused with one-sided hearings, manipulation of arbitrator selection, and deletion of significant customer complaints,” according to a just-released report by the Public Investors Advocate Bar Association.

PIABA’s report, which analyzes the handling of 1,078 FINRA arbitration cases from 2015 to 2018 in which brokers sought to expunge investor complaints from their record, calls for FINRA to freeze all pending expungements until “a complete independent investigation is conducted.”

The report states that there’s been a rise of more than 1,000% in the number of investor complaints challenged in the expungement process. PIABA warns that investors can no longer rely on the BrokerCheck disclosure system to investigate the brokers’ backgrounds.

PIABA is an association of lawyers who represent investors in disputes with the securities industry. “What is supposed to be an extraordinary relief measure is now being sought and granted in roughly nine out of the 10 settled cases that we studied,” Scott Ilgenfritz, the group’s president at the time, said in 2013.

Jason Doss, president of PIABA Foundation and co-author of the report, stated Tuesday: “Take your worst fears about a mandatory arbitration system run by the industry tasked with protecting investors, multiply that by 10 and you are in the territory where these outrageous abuses of the broker expungement process are today.”

Based on the results of the PIABA study, he said, “BrokerCheck can no longer be considered a reliable tool for investors to use when researching the background of brokers.”

Since 2015, there has been an explosive increase in the filing of “expungement-only” cases, which rose 924% from 59 in 2015 to 545 in 2018. An expungement-only case is an arbitration initiated by a broker against their own member firm solely for the purpose of seeking expungement, without naming the customer, PIABA explained.

The 2,194 customer complaints contained in 1,078 arbitration proceedings that brokers requested be expunged increased by 1016% from 102 in 2015 to 1,026 in 2018.

The report pointed to the rise in “$1.00 expungement cases,” which PIABA argues “is evidence of the corruption of the broker expungement process.”

Brokers and brokerage firms, PIABA states, “have been gaming FINRA’s arbitration system by falsely including a bogus $1.00 demand in damages to reduce the number of arbitrators reviewing expungement requests and to make it cheaper for brokers to get customer complaints expunged.”

From 2015 to 2018, the number of cases in which nominal damages were requested in the broker’s statement of claim increased from six to 456 cases, the report states.

In 2018, 84% of all expungement-only cases included a request for nominal damages. “In total, brokers requested nominal damages 780 times and 756 (97%) sought the $1.00 expungement arrangement and then withdrew the request at the evidentiary hearing,” according to the report.

Certain arbitrators are also being “repeatedly selected by the same law firms” representing parties to expungement-only cases, the report states.

For instance, from 2015 to 2018, the number of arbitrators who issued three or more expungement awards in a given year increased by 6,100%.

In addition, the top three arbitrators selected most frequently by parties between 2015 and 2018 recommended expungement in almost every case. “If FINRA creates a roster of experienced and specially trained arbitrators to handle expungement cases, as it has recently proposed, it could institutionalize the problem of high expungement rates by sending all expungement-only cases to ‘expungement friendly’ arbitrators,” the PIABA report maintains.

Further, the report states that brokerage firms “very rarely oppose” brokers’ requests for expungement.

Of the 1,078 cases, the respondent brokerage firm did not object or otherwise oppose the individual broker’s expungement request 1,055 times out of 1,078 — over 98% of the time, the report states.

Brokerage firms objected to these expungement requests in only 21 of the 1,078 total requests — less than 2% of the time.

FINRA said Tuesday in a statement that the broker-dealer self-regulator believes “it is important to ensure that there is an appropriate process for investors to access information that is relevant to them about their financial advisers’ prior experience, while also providing financial professionals the opportunity to address incorrect or inaccurate information.”

In early October, the regulator approved changes to the expungement process, including creating a roster of arbitrators with enhanced training to decide whether to expunge customer complaints. FINRA will file the rule proposals with the SEC.

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