FINRA takes steps to make it harder for brokers to expunge misdeeds

Written on Dec 19, 2017

Brokers may no longer be able to wipe years’ worth of disciplinary marks off their public BrokerCheck records, thanks to changes proposed by Financial Industry Regulatory Authority, Inc. (FINRA).

The regulator released proposed amendments to its controversial expungement process and requested industry comments by Feb. 5. The proposed changes include a provision that would give brokers just one year to request removal of a disciplinary item from their online records. Current FINRA rules allow brokers to remove years' worth of disciplinary items, in some instances.

FINRA maintains BrokerCheck as a public protection tool, but investor advocates like the Public Investors Arbitration Bar Association (PIABA) have argued that the quality of the database is consistently undermined by FINRA's decision to allow brokers to eliminate evidence of past indiscretions.

The suggested rules also propose training a specialized roster of arbitrators to hear expungement cases. To clear any broker's record would require a unanimous vote of three of these arbitrators, according to FINRA.

The proposed reforms follow a 2015 report by PIABA on the issue, as well as an investigation into expungement abuses by Financial Planning. The report summarized suggested fixes to the system.

Both FINRA and the SEC say that expungements should be "an extraordinary remedy," but PIABA's 2015 study found that they were frequently granted.

In cases decided on their merits that did not include settlements, expungements were granted in 44% of cases from 2012 to 2014, the study found. Over the same period, in cases in which advisors sought to have their records expunged following settlements with aggrieved clients, 404 of 460 brokers — or 88% — succeeded.

The Financial Planning investigation also detailed instances in which arbitration panels refused to let aggrieved investors or their lawyers speak against a broker's expungement request during arbitration hearings.

Richard Berry, director of FINRA's Office of Dispute Resolution, said in a statement that the proposed changes "would make it easier for customers to participate in expungement hearings."

In its request for comments, FINRA is asking for feedback on 12 questions including the following:

  1. What are the costs and benefits of requiring the unanimous consent of a three-person panel to grant all requests for expungement of customer dispute information?
  2. Is the one-year limitation on being able to request expungement of customer dispute information appropriate? Should the time period be longer or shorter?
  3. Should the associated person who is requesting expungement be required to appear in person or by videoconference, rather than by phone, at the expungement hearing?

PIABA, which is reviewing the proposed changes, is expected to submit its own comments, likely in overall support of the regulator's move.

 

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