broker expungement

FINRA Under Fire - Expungement & Climbdown on Broker Bonuses

When the New York Times runs an article about how “murky” and unfair certain aspects of the arbitration process that decides virtually all disputes between retail investors and broker-dealers, you know things have gotten bad. Just the other day, the Times published a highly critical piece exposing how brokers who have been slapped with complaints by aggrieved investors can and often do get these complaints expunged from all public records.

For those of you who don’t know already, the Financial Industry Regulatory Authority (FINRA) watches over the US securities industry, and adjudicates, after a fashion, disputes between investors and brokers through its idiosyncratic arbitration process. Because nearly all retail investors, wittingly or unwittingly, must sign binding arbitration agreements with broker-dealers before those B-Ds will accept them as clients, when things go bad, investors must turn to FINRA for resolution. In other words, as an investor, if you believe your financial placed you in unsuitable investments or otherwise engaged in fraud or misconduct, you cannot take them to court and have your case decided by a Judge or a jury of your peers. Rather, you must first take them to arbitration. The bias obtaining in FINRA’s process has been the subject of much outrage and hand-wringing by plaintiffs attorneys and investor advocacy groups alike--for many years. In the aftermath of the financial crisis of 2008-9, however, the flaws in this “murky” system seem more intolerable than ever. A unique historical opportunity for reform appears to be evaporating as quickly as it materialized.

In the past few weeks, FINRA has been skewered for its climb-down on forcing brokerages to disclose any bonuses or incentives offered to financial advisors for bringing clients with them during a broker-dealer transfer. Instead of making disclosure obligatory, FINRA has decided that investors should bear the burden of discovering any bonuses or incentives. (For more on this subject, click here). Of course, FINRA has promised to provide these investors with an information packet on what questions to raise and so on, but do we really believe that most retail investors will feel comfortable grilling their financial advisor about fees? Hardly. And now, we have the New York Times registering its bewilderment and consternation at the ease with which brokers may be able to make the complaints blighting their professional records just, well, disappear. Interestingly, the piece also zeroes in on the way in which investors themselves--the ones involved in the complaint--are typically sidelined during expungement hearings. We wish we could say that this lack of regard for the investor is restricted to the expungement process only; but sadly, the problem runs much deeper than that. Overall, the picture painted by the Times for ordinary investors hoping for transparency and resolution is bleak. FINRA’s BrokerCheck database, which stores records of all FINRA-registered brokers, including their complaint history and any negative employment events, like getting fired, is a powerful and admirable tool. But FINRA seems poised to diminish its potency by too easily vanishing the information contained within it. If investors are to trust BrokerCheck and put their faith in FINRA, brokers’ records will have to be complete and transparent, and the arbitration process will have to be unquestionably equitable and transparent. Unfortunately, FINRA has a long way to go to get there. Let’s hope all the negative attention forces some much-needed positive change.

If you or anyone you know has been the victim of investment fraud or broker misconduct, please contact us immediately for a free consultation at 1-855-462-3330 or via email by clicking here.