FINRA's Expungement Rules Just Got Tougher

The Securities and Exchange Commission has approved a Financial Industry Regulatory Authority rule that makes it tougher for brokers to clear client disputes from their records.

The FINRA rule modifies a “straight-in expungement,” a tactic FINRA says presents inherent difficulties since these requests are granted at a higher rate than other types of expungement petitions. The newly approved rule sets up a special roster of arbitrators to hear straight-in expungement requests.

The regulatory group also approved amendments to a rule establishing a special roster of arbitrators for expungement request in May 2022.

FINRA’s new rule, approved by the SEC on Wednesday, also requires brokers to appear in person or by video conference at the expungement hearing and eliminates phone-based appearances.

FINRA has noted that with a “straight-in expungement,” the broker files an arbitration case against their current or former brokerage firm requesting the expungement of a client complaint. However, the client is not made aware of the request, nor are state regulators.

Under the new rule, state regulators  as well as clients would be informed of an expungement request.

New time limits have also been put into place for when brokers can make straight-in expungement requests.

The new rule states that brokers cannot file a straight-in expungment request more than three years after the date the customer complaint was initially reported in the CRD system — if the customer complaint does not evolve into a customer-initiated arbitration or civil litigation; or more than two years after the close of the customer-initiated arbitration or civil litigation associated with the customer dispute information.

FINRA said in a statement Friday that it “believes the amendments approved by the SEC address the concerns that have been identified with the current expungement process and will help protect the integrity of the Central Registration Depository — the central licensing and registration system used by the U.S. securities industry and its regulators — by making substantial improvements to the current expungement process.”

FINRA said it looks forward “to continuing to work with the SEC, state securities regulators and other stakeholders on this important topic.”

The changes under FINRA’s newly approved plan:

• Require that a straight-in request be decided by a three-person panel randomly selected from a roster of experienced public arbitrators with enhanced expungement training;
• 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;
• 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;
• Impose strict time limits on the filing of straight-in requests;
• Codify and update the best practices in the Notice to Arbitrators and Parties on Expanded Expungement Guidance applicable to all expungement hearings;
• Require the unanimous agreement of the panel to issue an award containing expungement relief; and
• Establish procedural requirements for filing expungement requests, including for on-behalf-of requests.

Problems With ‘Straight-In’ Requests

FINRA has stated 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,” it says.

The regulatory group 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.

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