Thursday, October 17, 2019

FINRA's Broken BrokerCheck System

The PIABA Foundation just released a study examining the results of FINRA's expungment processes.   FINRA's expungement rules and dispute resolution process allow brokers to obtain arbitration awards recommending the removal of customer complaints and other information from their regulatory records.  The brokers can then take the awards to court and have them confirmed.  A state court order confirming the award results in the removal of unflattering information from the CRD database

As this happens more and more, you should trust FINRA's BrokerCheck system less and less. In theory, BrokerCheck should allow the public to do meaningful due diligence on brokers by looking them up to see if customers have complained. Sadly, many of the complaints customers and state regulators need to evaluate brokers have been washed away through the expungement process. The PIABA Foundation study found that expungment rates have increased dramatically in recent years.  Brokers sought to expurgate 102 complaints in 2015.  The number rose to 300 in 2016 and rose again to 756 in 2017.  Last year, brokers sought to suppress 1,036 complaints. These requests are generally successful and brokers succeed in these efforts over 80% of the time.

I've written about how to see if complaints have been suppressed before.  Growing evidence indicates that the expungement process is so fundamentally broken that brokers with expunged complaints may actually be more dangerous than others.  You simply cannot rely on FINRA's BrokerCheck alone for due diligence any longer because a clean BrokerCheck may only be meaningful if the broker has not also had complaint expunged.

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