FINRA Makes It Easier for State Regulators to Oppose Expungement

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Driven by concerns that it’s been too easy to for brokers to expunge consumer disputes from its records, FINRA is amending its procedures.

Customer disputes and complaints from a broker’s disciplinary history are noted in the Central Registration Depository (accessible for all through FINRA’s BrokerCheck database). FINRA instituted a process through which brokers could expunge those records, but that was always intended to be limited to extraordinary circumstances, according to Michael Edmiston, an attorney with Jonathan W. Evans & Associates and the former president of the Public Investors Advocate Bar Association.

“What’s happened is obviously it’s been anything but,” he said. ‘It’s been very ordinary.”

Edmiston is hopeful the new procedures outlined by FINRA last week and set to go into effect on Oct. 16 will prevent what he sees as abuses in the expungement process. 

One change in FINRA’s new rules includes mandating that a broker’s “straight-in” request (which is when a broker files a claim against their own firm solely to have a dispute removed from their record) is decided by a randomly selected three-person panel of arbitrators with “enhanced expungement training.” Other mandates include time limits on when brokers can file these requests and prohibiting parties from agreeing to a smaller panel or from striking arbitrators.

Expungements are frequently granted, according to PIABA. In a 2021 report, PIABA analysts found FINRA arbitrators granted expungement requests 90% of the time, with “straight-in” cases skyrocketing from 59 cases in 2018 to 545 in 2018 (in these instances, the customer who made the original complaint is not one of the parties).

PIABA found customers appeared to oppose an expungement request in only about 15% of cases, but that opposition can impact the ruling. Arbitrators were more than five times more likely to deny expungement when a broker’s firm opposed it, and more than four times more likely if a customer opposed the expungement during the proceedings, according to PIABA.

Edmiston was particularly focused on changes requiring state securities regulators to be notified of “all requests to expunge customer dispute information,” and requiring FINRA to assist in making it easier for regulators to attend and participate in expungement hearings. 

In the current expungement process, a broker goes before an arbitration panel for an evidentiary hearing, which would result in a ruling based on evidence whether an expungement was warranted. Brokers would need a court order to affirm the expungement, but Edmiston said this step was often a “rubber stamp,” with judges rarely going against the decision made by arbitrators.

Previously, state securities regulators were informed of an expungement request only at this last step, but Edmiston stressed it is very difficult to vacate an arbitrator’s decision by the time it reaches the court level. The new rules mean state regulators would be notified about expungement requests earlier in the process, meaning they’d have more of a chance to oppose an expungement attempt.

“Hopefully, (state regulators) will use these new procedures to get involved and protect state records,” Edmiston said.

According to the changes, FINRA would have to notify relevant state securities regulators within 15 days of the agency receiving an expungement request, and must provide all documents relevant to the request, as well as documents on prior customer arbitrations related to the claim. 

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“Including state securities regulators in straight-in requests provides states the opportunity to satisfy their regulatory obligations, while at the same time increasing the likelihood that the panel in a straight-in request hears evidence from multiple viewpoints, thereby allowing the panel to make informed decisions,” a FINRA summary of the amendments read.

The North American Securities Administrators Association declined a request to comment on the change, but last September the organization sent a letter to the SEC concerning FINRA’s proposed rule changes for expungement. 

While NASAA said it “greatly appreciates” the chance to participate in straight-in expungement proceedings, their role would be limited by “resources and state-specific procedural hurdles.”

“The degree to which such records are preserved for all stakeholders should not turn on the varying abilities of any party – state regulator, authorized representative or customer – to appear to make an argument,” the letter read. “Doing so will continue to lead to inconsistent results that have no relationship to the importance of this information.”

https://www.wealthmanagement.com/regulation-compliance/finra-makes-it-easier-state-regulators-oppose-expungement

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