Three arbitrators most frequently selected by brokers and firms granted expungement requests over 95% of the time, according to the report. Also, the number of arbitrators who issued three or more expungement awards in a given year increased over 6,000% between 2015 and 2018, the report added.
“Data shows that brokers and firms in expungement-only cases are likely coordinating to hand pick known ‘friendly’ arbitrators who will be more likely to grant expungements,” the report said.
The PIABA report also concluded that brokers are gaming Finra's expungement system by attaching "bogus" damage claims of one dollar to their complaint, which, under Finra rules, allows the case to be heard before one arbitrator instead of three.
The number of cases in which such damages were requested by brokers increased from six to 456 cases between 2015 and 2018, the report said. Last year, 84% of all expungement-only cases included a request for nominal damages.
A handful of law firms are repeat players in these cases, the trade group charged. For example, only two law firms represented expungement-only cases in 785 out of 1,078 cases (73% of all cases) between 2015 and 2018.
Finra is implicated in that “it is essentially subsidizing the most abusive expungements cases with the sham one dollar damage claims,” PIABA said.
Finra lost $8,050.00 per case in revenue in $1.00 cases—more than $6 million in lost revenue in 789 cases, the report said.
A Finra spokeswoman did not immediately respond to a request for comment.
A modest portion of Finra’s $6 million in lost revenues is sufficient to pay for needed reforms, the PIABA Foundation said.
The report had the following recommendations:
• Finra should halt all expungement proceedings immediately and impose a moratorium on the filing of expungement-only cases.
• Finra should commission an independent, outside investigation of whether expungements have been granted based upon false and/or fraudulent information.
• Finra’s BrokerCheck and the state-Finra Central Registration Depository (CRD) should carry a prominent warning that they are unreliable because they do not include all customer complaints.
• The SEC or Finra should appoint an investor protection advocate, who would be named as a party in every expungement proceeding to ensure the integrity of the process.