It has often been advised by many financial service industry leaders, including the U.S. Securities and Exchange Commission (SEC), that prior to making any investment decision, investors need to research the broker who is pitching the investment. One of the most popular ways to do that research is by accessing broker information from the Financial Industry Regulatory Authority, Inc. or FINRA, as it’s commonly called. However, in an article published in the Wall Street Journal on November 17, 2018, it was revealed that
FINRA’s BrokerCheck System has a serious flaw when dealing with brokers who have had complaints lodged against them by customers and/or employers.1
The U.S. Securities and Exchange Commission was created by an act of Congress after the stock market crash in 1929 and tasked with a three-part mission to: 1) protect investors; 2) maintain fair, orderly and efficient markets; and, 3) facilitate capital formation.2 Conversely, FINRA is a private, not-for-profit corporation that acts as a self-regulatory organization regulating member brokerage firms and exchange markets. FINRA is “authorized by Congress to protect America’s investors by making sure the broker-dealer industry operates fairly and honestly.”3
While in 2017 FINRA reported bringing more than 1300 disciplinary actions against registered brokers and firms, levying more than $64 million in fines and referring more than 850 fraud and insider trading cases to the SEC and other agencies for litigation and/or prosecution, the Wall Street Journal article casts doubt on the credibility of their efforts to protect consumers from deceptive brokers. In question is a FINRA process known as expungement, which allows brokers to appeal to FINRA arbitrators to have customer and/or employer complaints removed from FINRA’s public BrokerCheck website. According to FINRA’s rules, as reported in the Wall Street Journal article, “arbitrators can only allow a record to be deleted from the BrokerCheck website if an allegation against a broker is factually impossible, ‘clearly erroneous’ or the broker wasn’t involved in an alleged misconduct.”4
The authors of the Wall Street Journal article, Jean Eaglesham and Coulter Jones, cite a research paper, Deleting Misconduct: The Expungement of BrokerCheck Records, authored by Colleen Honigsberg, Robert J. Jackson, Jr. and Matthew Jacob in August 2018.5 Honigsberg is an Assistant Professor of Law at Stanford Law School. Robert J. Jackson, Jr., is a Commissioner of the United States Securities and Exchange Commission and professor of Law, on public service leave, at New York University School of Law. Matthew Jacob is a pre-doctoral research fellow in the Department of Economics at Harvard University. While expungement is meant to be a rare event according to the Wall Street Journal article, in fact, the research found that FINRA arbitrators granted requests by brokers to remove evidence of their disciplinary infractions from the BrokerCheck database nearly 70 percent of the time.
Of the 6,700 request made to FINRA arbitrators from 2007 to 2016, the research revealed 4,572 requests were approved for removal from BrokerCheck.6 Even more unsettling was the research finding that brokers who had disciplinary infractions expunged from BrokerCheck were more likely than other brokers to receive additional complaints or other allegations of misconduct after their records were cleaned.
In a June 3, 2016, article in Investment News, columnist Danny Sarch cited several reasons why the BrokerCheck expungement process is necessary writing, “While BrokerCheck gives relatively up-to-date and accurate information on a given adviser’s record, it also publishes mere accusations, convenient settlements and decades-old misdemeanors side by side with true malfeasance.”7
In summarizing their findings, the BrokerCheck research authors “offer a note of caution to researchers and investors using BrokerCheck data to study misconduct in the industry, as BrokerCheck data reflect cleansed adviser histories rather than a comprehensive sample of all historical adviser misconduct.”8 According to the Wall Street Journal article, FINRA is working to make it harder for brokers to expunge infarctions, but as of the date of the Wall Street Journal article’s publication FINRA had not issued a final rule.
The Law Offices of Peter C. Rageas Detroit MI, is tough on violators and has over 20 years’ experience in all matters related to FINRA Litigation. We take pride in representing securities investors who have suffered financial losses because of Stock Broker and Investment Advisor Negligence, to recover their money by negotiation, mediation, arbitration and securities litigation. We have represented and recovered losses for clients throughout the Tri-County area and beyond. Call 313-334-7767 to learn more about how we can help you.
1, 4, 6 Finra Arbitrators Let Thousands of Brokers Purge Infraction Records, Wall Street Journal, Jean Eaglesham and Coulter Jones, November 17, 2018
2 The Role of the SEC, U.S. Securities and Exchange Commission
3 About FINRA
5, 7 Deleting Misconduct: The Expungement of BrokerCheck Records, authored by Colleen Honigsberg, Robert J. Jackson, Jr. and Matthew Jacob, August 2018.
8 Why Finra Needs to Fix BrokerCheck Now, by Danny Sarch, Investment News, June 3, 2016