In my securities law practice, one of the first things I do after speaking with a new client is run a quick background check of the stockbroker using the BrokerCheck tool maintained by the Financial Industry Regulatory Authority (FINRA). FINRA is the self-regulatory organization that operates BrokerCheck, a publicly available database that is intended to help investors make informed choices when selecting a financial advisor. Individuals interested in obtaining a BrokerCheck report can do so online by visiting FINRA's BrokerCheck website and downloading a report that contains a summary of a prospective broker's professional qualifications, employment history and--most useful of all--a listing of customer disputes or disciplinary actions lodged against the broker. BrokerCheck is a powerful tool and I encourage all financial consumers to conduct a search before dong business with a broker or brokerage firm.
Expungement: BrokerCheck's Dirty Little Secret
What many investors don't know about BrokerCheck is that brokers can get customer disputes "expunged" or removed from their records in certain situations. Brokers that are involved in a securities arbitration claim can request that the arbitrators order the matter expunged. Expungement is given to protect brokers who are falsely accused of misconduct. Any decision to grant expungement must contain written findings specifically stating the reasons why expungement was ordered. The three reasons for which expungement can be granted are:
- The claim was factually impossible or clearly erroneous.
- The individual was not involved in the incident.
- The allegations are false.
I don't have a problem with having false or clearly erroneous claims expunged from a broker's files. However, it is a disservice to the investing public when arbitrators order expungement even if the broker was obviously involved in the incident and the allegations appear to have merit. When in doubt, arbitrators should always err on the side of public disclosure. Here are two examples of how the public can be misled.
In October 2012, an arbitration panel in Pittsburgh, Pennsylvania found that a broker and his employer were jointly and severally liable to the customer in the amount of $97,250. However, the arbitrators simultaneously granted the broker's request for expungement stating that his conduct "was not so egregious as to warrant a permanent stigma" on his record. This begs the question: How can a broker be jointly liable, yet be allowed to hide this fact from the investing public? Incidentally, this arbitration claim still shows up in BrokerCheck, as does a separate complaint alleged by another unhappy customer of this same broker.
In December 2012, an arbitration panel in Los Angeles, California granted expungement in a case that settled before hearing. The brokers requested a hearing solely on the issue of expungement. The investor did not participate in the expungement hearing or file any objections. After reviewing the evidence submitted by the two brokers involved, the arbitration panel granted expungement stating that there was no evidence that the brokers made any material misrepresentations or omissions to the customers. As a condition of settlement, brokerage firms sometimes require investors to refrain from objecting to any expungement requests.
I recently negotiated a settlement on behalf of one of our clients. The amount paid in settlement was significant because, in my opinion, the case had merit. Nevertheless, the investment advisor involved has asked the arbitrators to order expungement on the basis that the claim was "clearly erroneous." We are vigorously opposing the expungement request. I will update this blog post once the arbitrators' decision is received.
Updated April 25, 2013: The expungement request was denied.