Lawmakers this week called on FINRA to explain its policies for expunging investor complaints about brokers from the public record, suggesting that the industry regulator should revisit the extent to which information is removed from the BrokerCheck database.
In a letter to FINRA CEO Richard Ketchum, Senators Chuck Grassley (R-Iowa) and Jack Reed (D-R.I.) cited a study conducted by the Public Investors Arbitration Bar Association that found that arbitrators consented to brokers' expungement requests in 96.9% of cases they reviewed from May 2009 to December 2011.
The sky-high expungement rate in cases that make it to FINRA arbitrators suggests that the BrokerCheck database "may not enable investors to easily obtain all the information necessary to determine whether to hire a particular FINRA-registered broker," Grassley and Reed wrote.
"We share FINRA's view that 'expungement is an extraordinary remedy that should be granted only under appropriate circumstances,' and that it should be permitted 'only when it has no meaningful investor protection or regulatory value,'" they continued. "However, we believe that meaningful investor protection includes the disclosure of whether a customer dispute was settled. Not just for transparency sake, but also to help prospective investors make informed decisions about which individuals or firms with whom to do business."
Grassley and Reed are asking FINRA to respond to each of the recommendations of the PIABA study, which included taking steps to enhance arbitrator education and critically reviewing each motion for expungement relief.
The senators are also asking FINRA to detail the circumstances of each case when it "has questioned or challenged the provision of expungement relief," and to offer any recommendations for legislation that could improve the expungement process. They requested a response to their letter by Jan. 6.
FINRA spokeswoman Michelle Ong says that the organization "shares the senators' serious concerns with respect to the expungement process," but declined to answer specific questions about how it plans to respond to the letter.
Arbitrators, Ong explains, are outside professionals who are "paid an honorarium" for helping to resolve disputes between investors and brokers. FINRA recruits its arbitrators from an array of professional fields, enlisting the services of lawyers, doctors, accountants, educators and others.
"Before serving on a case, arbitrators must first successfully complete a training program," Ong says.
In October, when PIABA released its report on the expungement process, FINRA noted that it had recently updated its guidance for arbitrators, and that it has been working to enhance their training programs with a focus on the integrity of the data that feeds into the BrokerCheck system.
PIABA President Jason Doss praised Grassley and Reed for probing FINRA's expungement process, saying in a statement that the group looks forward to improvements to the BrokerCheck system to better protect investors.
"Clearly the system is broken given that FINRA arbitrators have been granting expungement requests after settlements almost 97% of the time," Doss says. "Consumers need and deserve to have access to all relevant information when selecting a financial professional with whom to entrust their life savings."
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