Under the Radar: Researching Financial Professionals With Expunged Records

Under the Radar: Researching Financial Professionals With Expunged Records

Welcome to the November 2018 edition of our newsletter!  In this issue, we’ll examine how changes to the records held by securities regulators could affect due diligence efforts.

Quieted Alarms: Recordkeeping Changes Dampen Ability to Vet Financial Professionals

For most of the last 30 years, researching financial services professionals involved checking with various state agencies and NASD (now FINRA), a self-regulatory group funded in large part by fees paid by the professionals themselves.  This patchwork regulatory system, complemented by litigation and media reviews, could typically help consumers, or their counsel, ascertain the risks involved in hiring someone – or the history to be introduced when litigating against them.

Eventually, many state financial regulators integrated their records into the FINRA database, which then worked them into its own retention procedures (which, in some cases, were not as encompassing as the state regulators whose records they inherited.)  This caused some prior adverse events to essentially be purged from regulatory records.

In addition, FINRA has procedures for expungement of certain records – a practice which recent news articles have said has been on the rise in the last decade, with one study finding that up to 70 percent of such requests were granted.  The threshold for expungement is meant to be very high – an allegation on record being “factually impossible” to prove, or a regulator being accused as part of a group in which he could prove he wasn’t a part, for example.  In practice, a study found that expungements are used much more frequently, sometimes allowing disciplined actors to boast of “unblemished” records because expungement requests are not part of a public record.  Although rule making efforts are underway to make expungement more difficult – and financial representatives can no longer insist on undisputed expungement as part of a settlement – the system as currently constituted allows gaps in a broker’s history to go undetected if expunged.  One possible recourse, — in addition to media searches, litigation checks and interviews with former partners – could be an open records request to the securities regulators (and insurance regulators if appropriate) in each state where someone has lived or conducted business, in the event that they have retained archived records even after integrating with FINRA.  A similar request with a state’s attorney general; could also yield information if an action was taken outside the scope of FINRA arbitration. (FINRA, not being a government agency, does not have to honor records requests made by the public.)  The procedural idiosyncrasies in the self-reported FINRA system create an additional challenge for a diligent researcher and their clients, but one that can be met with an extra effort.