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Financial advisors can too easily erase customer complaints from official records, but new regulatory reforms may finally add safeguards to a process that has been abused, says an association of attorneys who represent investors.
The reforms may help ensure Main Street investors can rely on the accuracy of official records, the Public Investors Advocate Bar Association says in a new report.
“We want investors who look up brokers to have comfort that their broker doesn’t have any complaints,” says Joe Peiffer, incoming president of Piaba. “We don’t want that to be a false comfort.”.
Advisors are able to remove complaints through a process known as expungement, which is overseen by the Financial Industry Regulatory Authority (Finra), a private self-regulatory organization.
Expungement is intended to be an extraordinary remedy for advisors to remove erroneous or false complaints, according to Finra. Piaba and investor advocates have criticized Finra’s expungement process for rubber-stamping advisor requests to erase valid customer complaints. Such complaints would otherwise be visible on BrokerCheck, a public database maintained by Finra.
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Ninety percent of advisor requests to remove complaints made via so-called “straight-in” expungements were granted, according to the Piaba report, which reviewed data on 2,506 expungement awards from January 2019 to Aug. 31, 2023.
In a straight-in case, an advisor files an arbitration against their own brokerage firm requesting expungement of customer complaints. The requests are typically unopposed because the investor who made the complaint isn’t present to challenge the request, according to Piaba, which has conducted three studies of expungement data.
Expungements “erode the credibility of Finra’s database,” Peiffer says.
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Finra recently changed the expungement process to enable greater participation by investors and state securities regulators, who also rely on advisors’ official records.
Among other changes, Finra’s new rules require that three arbitrators rather than one review expungement requests. They also require notification to be provided to state securities regulators of requests to remove customer complaints and they place limitations on advisors’ ability to excise old complaints from their records. Finra’s changes took effect Oct. 16.
Piaba, which had been sharply critical of Finra’s previous proposals to change the expungement process, says it welcomes the reforms.
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“The new rules are the result of the hard work of the attorneys over the years who contributed to this effort, as well as Finra’s responsiveness,” says Richard Lewins, president of the Piaba Foundation and a Texas-based attorney. “We applaud Finra for taking constructive criticism in the spirit of cooperation in our common goal of serving investors.”
Piaba is joining with the Alabama Securities Commission to offer training for state securities regulators to more effectively participate in Finra arbitration proceedings.
“Finra’s discovery process is different from the court system,” says Joe Borg, former director of the Alabama Securities Commission. “For example, depositions are generally not permitted under finra rules.”
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In addition, the Piaba Foundation is expanding its pro bono legal program to represent investors in expungement cases. Those combined efforts should help ensure valid complaints remain visible on official records, according to Piaba.
“Investors are encouraged by the SEC, Finra, and consumer groups to do their homework before they invest their money,” says Jason Doss, one of the Piaba report’s co-authors and an Atlanta-based attorney. “One of the ways to do that is to ask for a broker’s record.”
Write to Andrew Welsch at andrew.welsch@barrons.com
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