Finra to Modify Some Expungement Restrictions
The Financial Industry Regulatory Authority is modifying some of the stringent restrictions it proposed two years ago for expunging complaints from brokers’ regulatory records.
There is currently no time limitation on when associated persons of Finra member firms can file to clean their records (and Finra will continue to have a six-year eligibility rule for customers to file claims).
The claim-filing extension will apply only to brokers who are not named in an underlying arbitration (but have complaints in the Central Registration Depository). Finra is sticking with its plan to require brokers named in customer complaints to file for expungement during the underlying arbitration.
“If it settles, you have two years,” Berry said at the New York State Bar Association’s annual securities arbitration conference. “If it does not settle, you must seek expungement at the time [of the arbitration]. You cannot bring it at a later date.”
Finra is also retreating from its plan proposed in December 2017 that would have required three arbitrators on expungement panels to be unanimous in their rulings. As in other three-person panels, a majority decision will be sufficient to grant expungement.
A final change highlighted by Berry will no longer require arbitrators to find that customer dispute information that would be expunged would have no value to regulators. Existing Finra rules and procedures are sufficient to ensure that expunged information will not deprive regulators of important data about brokers, he said after his presentation.
Finra’s plan to toughen expungement rules in the interests of investor protection triggered alarm among some brokers and lawyers when first proposed, and some are still concerned.
“Two years from settlement doesn’t help with the wacko letter filed years ago that are in the CRD,” said Seth Lipner, a law professor at Zicklin School of Business with a private practice. “More important is the fact that some firms pressure brokers not to seek expungement and they can’t seek it (because of the time limit) when they move to a new firm.”
“I think the changes are pretty good, but there’s no question that it’s tougher to get expungements than it used to be,” said James Yellen, an arbitrator and mediator who co-chaired the conference.
Finra has already filed with the Securities and Exchange Commission a rule that will raise fees for expungement filings (by eliminating a loophole that permits low-cost single-arbitrator hearings). The SEC is currently accepting comments on the proposal.
Finra is sticking with its plan to create a special roster of expungement arbitrators, and will send it in combination with the other changes to its arbitration code to the SEC for approval by the end of this year’s third quarter, Berry said.
“We want to make sure that expungement employs the fairest process possible,” he said.