FINRA Seeks to Rein In a Common Expungement Tactic

FINRA’s paper noted that from January 2016 to December 2021, an arbitrator or panel issued awards containing expungement relief in response to 58% of requests made during a customer arbitration versus 84% of straight-in requests.

PIABA Weighs In

The Public Investors Advocate Bar Association, or PIABA, has maintained that brokers continue to “game” BrokerCheck with various tactics, including straight-in expungements.

Michael Edmiston, president of the Public Investors Advocate Bar Association, told ThinkAdvisor Monday in an email that FINRA’s plan “to require a unanimous finding by a panel of three arbitrators to grant an expungement is welcome news as it requires three decision-makers to consider and decide whether to alter state records and remove information that investors and others use in working with brokers.”

FINRA’s plan to alert state securities regulators of expungement requests “will allow earlier review of expungement requests by regulators and protection of state records,” Edmiston added.

For straight-in requests, “FINRA acknowledging states want to protect state records contained in the CRD at the level of the original expungement request is a game changer,” Edmiston said.  “This is a step forward from the flawed assumption customers would voluntarily fill such a role.  It opens the door to PIABA’s and the PIABA Foundation’s May 2021 proposal for an ‘Investor Advocate’ to be appointed by a state regulator on straight-in expungement cases to represent and protect the state’s interest.”

Specifically, FINRA explains that its proposed rule change would:

1. require that a straight-in request be decided by a three-person panel that is randomly selected from a roster of experienced public arbitrators with enhanced expungement training;
2. prohibit parties to a straight-in request from agreeing to fewer than three arbitrators to consider their expungement requests, striking any of the selected arbitrators, stipulating to an arbitrator’s removal, or stipulating to the use of pre-selected arbitrators;
3. provide notification to state securities regulators of all expungement requests and a mechanism for state securities regulators to attend and participate in expungement hearings in straight-in requests;
4. impose strict time limits on the filing of straight-in requests;
5. codify and update the best practices in the Notice to Arbitrators and Parties on Expanded Expungement Guidance applicable to all expungement hearings, including amendments to establish additional requirements for expungement hearings, to facilitate customer attendance and participation in expungement hearings and to codify the panel’s ability to request any evidence relevant to the expungement request;
6. require the unanimous agreement of the panel to issue an award containing expungement relief; and
7. establish procedural requirements for filing expungement requests, including for on-behalf-of requests. The proposed rule change would also amend the Customer Code to specify procedures for requesting expungement of customer dispute information during simplified arbitrations.