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Regulation and Compliance > Federal Regulation > FINRA

FINRA Seeks to Rein In a Common Expungement Tactic

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What You Need to Know

  • In a straight-in expungement request, the broker files a complaint against their firm.
  • Neither the customer nor state regulators are notified of the request.
  • More than 80% of straight-in expungement requests are granted, versus 58% of requests made during a customer arbitration.

The Financial Industry Regulatory Authority has filed a rule proposal to modify a “straight-in expungement,” a tactic FINRA says presents inherent difficulties as such requests are granted at a higher rate than other types of expungement requests.

FINRA’s plan must be approved by the Securities and Exchange Commission.

FINRA released a discussion paper, Expungement of Customer Dispute Information, in early May, in which the broker-dealer self-regulator said 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 noted in the paper that one problematic tactic that brokers use is 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.”

FINRA will only expunge pursuant to a court order. “Thus, a broker can get an award that contains expungement relief, but they still have to go to court to get that award confirmed in order for us to actually expunge the information from the Central Registration Depository,” FINRA states.

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.