Finra Tightens Noose on Broker Expungement Process
The Financial Industry Regulatory Authority’s new proposal to amend rules regarding brokers’ ability to expunge customer complaints from regulatory and public records is likely to get quick approval, setting off alarms among lawyers who help brokers bring expungement requests.
“I have no doubt that it will go through in some form,” said Dochtor Kennedy, managing attorney and president of AdvisorLaw. “Anybody who has been flagged with something that shouldn’t be there needs to do something pretty quickly because they may have only one shot.”
Chief among the concerns of lawyers representing brokers whose records are tarred by complaints is an expungement time limitation that Finra proposed on Wednesday as part of amendments to its codes of arbitration procedure. Brokers currently can make expungement requests at any time, no matter how old the complaint they seek to remove from their records.
The revised code would limit brokers to seek expungement of complaints that have been settled or withdrawn within a year of the day that their firms report a complaint to the Central Registration Depository, which holds licensing and registration data for the securities industry. Complaints are often settled or dismissed by firms and brokers, but must still be reported to the CRD, which results in their appearance on Finra’s widely publicized BrokerCheck database. If an award is made, brokers would have to submit requests for expungement during the course of the underlying case.
In arguing for the time restrictions, Finra cited critics who say arbitrators considering expungement often do not understand the full merits of underlying customer complaints, in part because years may have elapsed between a complaint and the expungement request.
Although customers can oppose expungement requests, they and their lawyers “have little incentive to participate” once awards or settlements have been made, creating one-sided presentations to arbitrators, Finra wrote in its discussion of the proposed amendments.
Several lawyers who represent customers say they and their clients rarely participate in expungement proceedings because of the additional expenses in time and money that would be involved.
For brokers, an uncomplicated request to expunge a first single complaint generally costs more than $10,000, said Kennedy. The proposed amendments would make the process even more expensive, he said.
For example, Finra wants to eliminate telephonic hearings before arbitrators, meaning brokers in some areas would have to travel to hearing sites. It also has proposed creating a roster of specially trained arbitrators for expungement requests, limiting the pool from which lawyers rank their choices. And expungement requests will be awarded only if the three arbitrators on the special panels unanimously agree.
“The amendments add hurdles for enterprising brokers and their lawyers trying to get these things expunged,” said Andrew Stoltmann, president of the Public Investors Arbitration Bar Association (PIABA), a trade group for plaintiffs’ lawyers that supports the changes. “The saddest lawyers today are the defense lawyers who bring these things.”
The amendments are likely to be “fast-tracked and rubber-stamped” quickly by the Securities and Exchange Commission very quickly, Stoltmann said.
Kennedy agrees, noting that consumer groups, plaintiffs’ lawyers and advocates of self-regulation all support tightening the expungement process. “Individual reps will pay the price because they are going to be restricted in their ability to be proven innocent,” he said.
Finra, which is accepting comments on its proposal until February 5, 2018, does not publish statistics on how many expungement requests are granted, but lawyers on both sides say the number is weighted toward the broker under the current process and requires some change to help investors vet potential advisors.
“Rather than changing a simple rule, they are trying to change the entire process,” Kennedy said, asserting that Finra has come under the gun for being an industry-controlled regulator that has allowed rogue brokers to thrive. “They are trying to take an action that will win wide recognition. They’re tired of getting hung in the town square for being a good old boys club.”
Finra spokespeople did not immediately respond to requests for comment on his remarks.
In its discussion of the amended expungement process, the organization wrote: “It has been FINRA’s long-held position that expungement of customer dispute information is an extraordinary measure.”