A U.S. investor advocacy group argues that the U.S. brokerage industry arbitration system is being abused, undermining the integrity of the primary database for checking brokers’ registration history.
In a new report, the Public Investors Advocate Bar Association’s (PIABA) investor literacy division, the PIABA Foundation, argued that the Financial Industry Regulatory Authority’s (FINRA) client complaint resolution mechanism is being systematically gamed by the brokerage industry and its lawyers.
In particular, the report said that between 2015 and 2018, there has been a huge (924%) increase in the number of “broker expungement” cases filed by brokers against their own firms, in an effort to have consumer complaints erased from the record.
These filings often involve cases that were settled between firms and clients. Yet, firms have no incentive to see these complaints remain on their brokers’ records, and clients do not often oppose expungement requests.
The PIABA Foundation said that expungement “is being granted as a matter of course, not just as an extraordinary remedy,” and that this is undermining the integrity of the data on brokers’ disciplinary histories by eliminating legitimate complaints.
As a result, the group concluded that investors can’t rely on the BrokerCheck system to check brokers’ backgrounds.
“Expungement-only cases are destroying the integrity of the arbitration process and of BrokerCheck, a key tool used by investors to research brokers,” the report said.
The report called on FINRA to carry out an independent review of the problems raised in the PIABA Foundation’s study, and recommended that either the U.S. Securities and Exchange Commission (SEC) or FINRA appoint an independent investor advocate to participate in future expungement proceedings.
“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,” said Jason Doss, president of the PIABA Foundation.
“Based on the results of this study, BrokerCheck can no longer be considered a reliable tool for investors to use when researching the background of brokers,” Doss added.