Troubling Trend: Brokerages Negotiate Clean Records

As a securities attorney who represents investors in claims against brokerage firms, I have noticed a recent trend that is troubling — a recent push by brokerage firms to cover up the misdeeds of their brokers. With increasing frequency, I have seen that brokerage firms are now including as a condition of settlement that the customer not fight the firm’s request to have the case “expunged” from their financial advisor’s record.

The vast majority of securities claims involving U.S. brokerage firms are resolved through the Financial Industry Regulatory Authority’s dispute resolution form.  Dedicated to investor protection, FINRA is the largest “independent” regulator of brokerage firms in the US and provides numerous resources and tools to educate investors. One such tool, BrokerCheck, is an online database that allows investors to vet their brokerage firms and individual brokers. One of the best features of this tool is that investors can actually look up whether their financial advisor or prospective financial advisor has ever been sued by a customer.

Of course this tool doesn’t work if all of the claims against a particular financial advisor have been expunged.

Any time a brokerage firm or an individual broker is involved in an arbitration claim the incident is recorded on their BrokerCheck report. In addition to arbitration claims, BrokerCheck reports various disclosure events, such as other lawsuits, criminal history, customer complaints and regulatory actions (all information which is valuable to investors in determining whether to trust a particular advisor with their hard earned money).

It is for this reason that FINRA has established very specific parameters for any request to have information on a BrokerCheck expunged, or removed.  Those specific parameters meant to be extremely limited and include: (1) the claim, allegation or information is factually impossible or clearly erroneous, (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.

Once a dispute is settled or abjudicated, the brokerage firm can request a hearing before the arbitrators to expunge the dispute from the financial advisor’s Broker Check report.

And here comes the rub.  With increasing frequency, brokerage firms are requiring as a condition of settlement that the investor not oppose this request.  This, of course, makes it far easier for the expungement to be granted because the arbitrators deciding the expungement request are only hearing one side of the story.

Without the testimony of the investor or any evidence to support the settled claim, it is much easier for the brokerage firm to argue the dispute was false (one of the requirements for an expungement). With only argument from the side of the brokerage firm or financial advisor, arbitrators are forced to look at the fact put before them in the moving papers (as well as any pleadings previously filed by the investor) and the amount of the settlement to determine whether the claim was false or clearly erroneous – an unenviable task.

The investor, for their part, typically has no objection to the brokerage firm’s condition because ultimately they care about getting a fair settlement for themselves (and not for the potential damage that may be caused by permitting unscrupulous financial advisors to continue on in the securities industry with a “clean” record).

This damage, though, is often catastrophic.  FINRA Notice to Member 03-49 states that 0.71 percent of all registered persons were subject to two customer complaints.  So if a financial advisor continues to operate in the industry with two or more customer complaints that individual is in the bottom 0.71 percent of all financial advisors with respect to this critical measure of effectiveness.

Now what if this same advisor has had each of these claims expunged?  A prospective client of this financial advisor could research this individual and never discover that they are in fact in the bottom of their professional in a category that is likely very important to them — the potential likelihood that the advisor would defraud them.

There is naturally an opposite extreme, which is the hard working and diligent advisors that are wrongly named in a complaint, or named in a clearly erroneous claim, and this is of course why the rule was established.  But the industries use of expungements to keep bad brokers’ records clean (by requiring that investors not object to an expungement request as a condition of settlement) should be an emphasis of securities regulators.  The sea change required in this area cannot be accomplished on a “one-off” by “one-off” basis as clients are always going to be willing to agree if it means resolving their own situation.  And until they are forced to stop this practice of essentially buying the investor’s silence, brokerage firms will undoubtedly continue the practice.

BrokerCheck is potentially the most valuable tool that investors can use in evaluating a potential financial advisor (albeit one the industry does a great job of under-publicizing).  In order to protect investors, there needs to be transparency when it comes to customer complaints and allegations of wrongdoing. The majority of investors that I represent are retired individuals who’ve suffered significant losses because of negligent or unscrupulous brokers.  Perhaps if their financial advisors full record had been known to them before they got involved with that individual, the damage to them could have been avoided.

Here is hoping someone at the SEC is listening, because this is just one more instance where Wall Street is piling on Main Street.

D. Daxton White is the managing partner of The White Law Group, LLC, a national securities fraud, securities arbitration, and investor protection law firm. He has represented investors in virtually every U.S state and litigated over 500 FINRA arbitration claims. Find out more about White at He tweets at @SecuritiesAtty and can be found on Facebook here.

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