Many wealth managers have spent years, if not decades, of their lives crafting a distinguished image of their practice. Words like “planning,” “trust,” “experience,” “service” and “satisfaction” consume the landscape of a financial advisor’s marketing message. Over their tenure, an advisor’s “brand” can develop significant equity. This equity, embodied through their personal and business reputation, pays dividends as more referrals are received and assets under management increase.
In today’s litigious society, customers can quickly erode an FA’s brand and reputation with allegations that are entirely without merit. These disputes may be alleged by an experienced investor who knows how to game the system to recoup their investment losses. Or they may come from an inexperienced investor being prodded by attorneys looking to take a cut of any eventual settlement. Oddly enough, many frivolous complaints are encouraged by the very firm an advisor leaves in a desperate move to disparage the broker and retain their clients. Either way, there are very real motives for lobbing meritless customer complaints where no sales practice violation ever occurred. FINRA Rule 2080 was designed as a “release valve” for just such occasions.
Six years after the introduction of FINRA Rule 2080, most financial advisors still assume that these disputes are permanent and simply collateral damage to working in the highly regulated financial services industry. Through FINRA’s BrokerCheck portal, any history of criminal activities, civil judgments, financial settlements, tax accruals and customer complaints is required by compliance to be promptly displayed for the investing public.
In reality, most of these disclosures are merely the gathering of public data compiled through “sweeps” by FINRA. The information was already available; FINRA simply retrieves it and repackages it into one simple view for the public. Customer disputes are unique in that the main goal is not to advise of a potential underlying problem (as with a tax lien or criminal record), but to actually manufacture a problem to generate money for the party bringing the claim. This is why many disclosures that just recall old data are indeed on the record for good. Thankfully though, customer complaint disclosures have an entire FINRA arbitration process dedicated to the identification and expungement of these frivolous allegations.
It is not hard to determine why customer disputes receive such special treatment. Simply put, the inclusion of a monetary settlement or “award” for a client significantly alters the motivations of the relevant parties. In 2015, there were 1,498 customer-initiated arbitration cases filed against brokers. Through August 2016, that number had already been eclipsed 1,770 cases filed. Generally, a settlement or award will be issued through arbitration or mediation on roughly 80 percent of these complaints—not a bad gamble for customers attempting to offset market risk.
In general, a complaint must hit at least one of three criteria in order to qualify for expungement under Rule 2080:
- The named representative did not participate in the alleged violation.
- The claim or allegation is factually impossible or erroneous.
- The claim or allegation is false.
Historically, FINRA arbitration panels have interpreted each of these options widely. So much so that PIABA (Public Investors Arbitration Bar Association), the industry collective of attorneys representing the investor side, routinely issues press releases crying foul about the high rate of expungement, which averages over 90 percent.
So the question is, “Why wouldn’t an advisor pursue expungement?”
First, some cases will not qualify. If an advisor has a large arbitration award to which they individually contributed, there may be ample proof that the claim did have merit and is the exact type of disclosure that FINRA wants to keep on the record. Therefore, prequalification is an important part of determining the viability of a particular disclosure.
Second, the process takes time. A Rule 2080 case averages 10–12 months to complete from filing to decision. If an advisor is on their way out of the industry, there may not be enough value in the short term to justify the process.
Finally, the money invested in the venture is the last hurdle for an FA. For nonmonetary arbitration claims, FINRA charges for filings ($1,575) and for the hearings ($1,125). Most cases will require the initial pre-hearing conference as well as the actual hearing (double the hearing fee), so the total can run upwards of $4,000, assuming a straightforward case.
All of this, of course, assumes that the advisor is representing themselves (as your firm is unlikely to carry that burden). Be warned though: The process is obviously legal in nature, and any financial advisor should think twice about going through arbitration without formal representation. One of the caveats of Rule 2080 is that the bullet can only be fired once. If an arbitration panel denies your request for expungement, you will not be allowed to resubmit in the future. Therefore, ensuring that the Statement of Claim, legal notification, evidentiary process and arbitration hearings go smoothly, and more importantly, are done right the first time is of utmost importance.
If applied correctly, FINRA Rule 2080 will give back to financial advisors the brand equity they lose due to meritless or frivolous allegations. A clean BrokerCheck and CRD profile will not only restore their reputation among clients and industry insiders, but will dovetail nicely with fiduciary standards moving forward.
Doc Kennedy is the founder and president of AdvisorLaw, LLC, a firm exclusively representing FINRA-licensed professionals.