So, are hordes of rogue brokers erasing their troubled disciplinary records thanks to Finra arbitrators who are rubber-stamping expungement requests?
It would seem that way after plaintiffs’ attorneys recently came out with a study showing that just about every broker who asks arbitrators for a clean record can get one.
Finra arbitrators are granting expungement requests about 90 percent of the time, according to the Public Investors Arbitration Bar Association (Piaba), which represents plaintiffs’ attorneys.
Expungement is supposed to be an extraordinary measure, notes Piaba president Scott Ilgenfritz, a partner with Johnson, Pope, Bokor, Ruppel & Burns LLP.
The Piaba study “clearly indicates that the current expungement procedures are seriously flawed,” he said.
Plaintiffs’ lawyers and regulators have been concerned about brokerage firms settling with customers in a tacit exchange for those customers not opposing an expungement request -- giving the unholy appearance that brokers are able to buy a clean record.
Industry lawyers, though, don’t see a problem.
Attorneys who represent brokers say registered reps ask for expungements in only a small fraction of cases.
“The only people who [seek expungement] are the ones who know they have a shot” at getting an expungement, said Jeffrey Riffer, an attorney at Elkins, Kalt, Weintraub, Reuben, Gartside LLP in Los Angeles. “So those astronomically high percentages are misleading.”
In a separate study earlier this year, Seth Lipner, a plaintiffs’ lawyer at Deutsch & Lipner, found that 22 percent of the cases that settled in the first half of 2013 involved expungement proceedings. In other words, about 80 percent of the time brokers don’t bother to get their record cleansed.
Indeed, under Finra rules, expungement should be no slam dunk. Brokers must show that a customer's complaint was false, factually impossible or clearly erroneous, or that the rep was not involved with the client.
But in post-settlement expungement proceedings where no one is objecting to a broker’s request, do arbitrators hear enough evidence to make that call?
Critics like Mr. Lipner say no.
“We need to have a process where there is a prosecutor, someone to advocate for the public interest,” said Lipner, who would like to see regulators take a more active role.
Sure enough, days before Piaba released its study, Finra told its arbitrators they needed to do a better job explaining their reasons for granting expungement.
Finra also felt the sting after Mr. Lipner was featured prominently in a May New York Times article about the expungement issue.
Several months later Linda Fienberg, president of Finra’s arbitration unit, said that the regulator was considering changing its standards for expungement.
The expungement studies are just the latest developments involving the expungement controversy.
In 2009, Finra began requiring brokers to publicly report any arbitration in which they were involved, even if they were not part of the case. The change closed a loophole that allowed brokers to avoid disclosing many customer claims.
But Finra’s move created another problem: an increased number of brokers with customer complaints on their records, but with no clear-cut way to seek expungement other than to file an entirely new claim.
Enter Finra once more. In May 2012, it began working on a proposal (called an “in re” procedure) to make expungement easier for these brokers. Last December, Finra's board gave the go-ahead to file the proposal with the SEC, but the industry is still waiting to see it.
The in-re procedures, if approved, are expected to lead to a rise in expungement requests.
Meanwhile, the Securities Industry and Financial Markets Association (Sifma) wants to see the proposed procedures used for the removal of unproven customer complaints.
"Sifma believes that the continued disclosure of denied or unfounded written customer complaints serves no regulatory purpose," the trade group wrote in a comment letter. These complaints remain on a broker's public record as long as the individual is registered, Sifma said.
(Finra began disclosing all historic complaints, regardless of age, in August 2010. Prior to that, unproven allegations were dropped after two years.)
Despite the constant back and forth over Finra’s expungement process, the regulator may find itself increasingly out of the loop.
An August 2012 decision by a California appeals court ruled that brokers could have their records expunged under a principle of basic fairness, or equity, rather than under Finra rules.
The broker who brought the California case wanted to expunge 17 customer complaints and a regulatory action.
Since brokers must get a judge to confirm arbitrator-awarded expungements, they might as well just go straight to the courthouse, Riffer figures.
This summer, in a novel move, he filed an expungement request with a California court on behalf of a “John Doe” broker.
“The idea was, if we win and get expungement, there shouldn’t be a record in the public court system” of the actual broker’s name, Riffer said. Otherwise, it defeats the purpose of an expungement.
So far, the “John Doe” filing looks unusual, but more brokers might try it. Like court cases, expungement decisions are available in Finra’s public arbitration database, even if the customer claim has been removed from the BrokerCheck reporting system.
As more disciplinary information becomes available online, thanks to technology upstarts like BrightScope, which is working hard to aggregate registration data and make it user-friendly, registered reps will increasingly look for creative ways to expunge damaging information.
And that could make the debate over expungement proceedings increasingly testy.