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ThinkAdvisor Washington Bureau Chief Melanie Waddell

Regulation and Compliance > Federal Regulation > FINRA

FINRA Wants to Make It Harder for Brokers to Clear Their Records

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What You Need to Know

  • FINRA is moving ahead on an overhaul of its expungement process.
  • A lawyer for investors says too many expungements are still being granted.
  • A FINRA proposal, tabled last year, that would create a special roster of expungement arbitrators is still alive.

While the Financial Industry Regulatory Authority is forging ahead with an overhaul of its expungement process — which has faced increasing criticism — its arbitrators allow too many brokers to wipe their records clean, industry experts say.

In a just-released discussion paper, FINRA says that it plans to continue to reform its expungement process “so that it operates as intended — as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules.”

FINRA’s discussion paper, Expungement of Customer Dispute Information, which focuses on expungement of customer dispute information from the Central Registration Depository licensing and registration system and BrokerCheck, reports that 78% of all requests by brokers to wipe a dispute from BrokerCheck “that go to award are granted by arbitrators,” said Michael Edmiston, an attorney with Jonathan Evans & Associates.

“The percentages of expungements granted between 2016 and 2021 are still too high for what is supposed to be an extraordinary remedy,” Edmiston, president of the Public Investors Advocate Bar Association, told me in an email message.

PIABA is a group for lawyers who represent investors in disputes against brokers.

“NASAA’s position on expungement is clear,” Melanie Senter Lubin, Maryland securities commissioner and president of the North American Securities Administrators Association, told me Wednesday in an email. “Expungement is an extraordinary remedy that should be granted solely in limited circumstances. Despite most everyone’s best intentions, the current system of arbitrator-awarded expungements does not operate within these parameters.”

NASAA, Lubin continued, has “worked closely with FINRA and encouraged it to close gaps in the existing process and initiate steps toward more meaningful expungement reform. We look forward to continuing engagement and discussion with FINRA on how to reform the expungement process.”

In order for a broker to have a customer complaint or arbitration disclosure through FINRA expunged, Edmiston explained, “there must be an arbitration award” granting the relief.

“Only two numbers matter when looking at how often arbitrators decide expungement requests: the awards issued in which expungement is requested and the awards granting expungement,” he said. “Any introduction of factors outside the arbitrators’ control, (e.g., a broker abandoning a claim) is a dilution of the disappointingly high rate at which expungements are still being granted.”

FINRA’s report states that less than 1% of FINRA-registered professionals have expunged a customer dispute disclosure. That’s around 10% of the brokers who have a dispute on their record.

Edmiston points out that “the less than 1% of reps hav[ing] an expungement, … does not change the fact expungements are granted 78% of the time. Worse, the 1% argument minimizes the investor harm many reps cause after they receive an expungement.”

FINRA, Edmiston said, “does not report the recidivist rate, the likelihood a rep with an expungement will generate more customer complaints. The key numbers missing from FINRA’s statistics is the number of subsequent customer complaints generated and the amounts of money alleged to be lost after a rep received an expungement.”

Protecting the integrity of the information in the CRD program and BrokerCheck, FINRA said, “is essential to FINRA’s mission of investor protection.”

FINRA stated in its paper that it has “engaged in longstanding efforts with NASAA and state securities regulators to explore a redesign of the current expungement process.” The paper, FINRA said, “is intended to inform and encourage a continued dialogue regarding potential changes to the process used to resolve requests to expunge customer dispute information.”

Edmiston argued that “expungement is a transparency issue for informed investor choice. FINRA constantly tells investors to review their broker’s BrokerCheck report before investing. Expungements remove information from BrokerCheck.”

Knowing a broker has a history of misconduct, Edmiston maintained, “allows a customer to make an informed choice to take the risk of working with that broker or go down the street to the 92% of brokers who have clean records. A troubled broker with a record sanitized through expungement creates a trap for even the wariest investors.”

PIABA has maintained that brokers continue to “game” BrokerCheck.

For instance, one tactic involves a “straight-in expungement” in which the broker files an arbitration case against their current or former brokerage firm requesting the expungement of a customer complaint. The customer is not made aware of the request, nor are state regulators.

FINRA’s paper points out that straight-in requests “present inherent difficulties.” Arbitration panels “deciding straight-in requests issue awards containing expungement relief more often than panels deciding expungement requests made in customer-initiated arbitrations.”

Special Roster Plan Still Alive

FINRA noted that it has taken “numerous, meaningful steps to enhance the current expungement process,” and that FINRA will continue to do so.

For instance, FINRA said that its special roster proposal — which was withdrawn in May 2021 — would address “a number of significant issues” related to the current expungement process, and that FINRA intends to continue pursuing that plan.

Last May, FINRA said that it had withdrawn from the Securities and Exchange Commission its rule filing establishing a special roster of arbitrators for expungement requests so that it could think about revising the rule.

PIABA had said at the time that the plan, which would create a roster of arbitrators with enhanced training and experience to decide whether to expunge customer complaints, would not solve the problem of brokers gaming BrokerCheck.

According to the discussion paper, FINRA’s board of governors continues to consider further changes to the special roster proposal. The paper does not, however, provide information on when FINRA intends to refile the proposal with the SEC.

That said, FINRA said that the integrity of the CRD system “should be protected in the near-term by adopting the substantial improvements to the current expungement process that can be readily achieved” with the special roster proposal.

State Regulators’ Role

As the paper noted, FINRA has engaged in “longstanding efforts” with the North American Securities Administrators Association and state securities regulators “to explore a redesign of the current expungement process.”

According to NASAA, the paper stated, “[s]tate securities regulators are often legally obligated to maintain the information in the CRD system as a state record.”

NASAA “has indicated that expungement of customer dispute information potentially implicates the public records obligations of state governments,” FINRA said in the paper.

Edmiston pointed out that “an unexplained part of the expungement process is how and why all fifty states have allowed arbitrators to alter state records with expungement awards.” FINRA, he continued, “wants to address that issue, too. I am hopeful any new process will be designed to comprehensively protect the states’ records.”

New Administrative Process

In its paper, FINRA also said it was contemplating whether to replace the use of arbitration to resolve expungement requests “with a new administrative (non-arbitration) process in which FINRA and state securities regulators would determine whether the standards for expungement have been met.”

Setting up a new administrative process, however, “presents policy issues that will need to be considered more fully, may require action by the SEC and state securities regulators, and may also require federal or state legislation,” FINRA pointed out.

Edmiston said he was “heartened” that FINRA was “taking a top-to-bottom approach in its considerations of reforming the expungement process and announcing a willingness to consider an entirely new process for handling expungement requests.”