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SEC approves FINRA proposal making it harder for brokers to expunge records

On Behalf of | Apr 20, 2023 | Investment Loss

The Securities and Exchange Commission has approved a proposal that would make it more difficult for brokers to expunge customer disputes from their records, reports Investment News.

The new rule proposed by the Financial Industry Regulatory Authority creates a special roster of arbitrators who will hear so-called ‘straight-in’ expungement requests. These are separate arbitration claims filed by a registered representative against a member firm or the customer. The claims will now be decided by a three-person panel randomly selected from a roster of experienced public arbitrators with enhanced expungement training.

The new rule also requires that clients and state regulators be informed of an expungement request and that the regulators be allowed to participate in the process. Under the current system, clients and state regulators are not made aware of the expungement petitions.

Strict time limits were also proposed for the filing of straight-in requests, with FINRA saying they must be filed within two years of the closing of a customer arbitration or civil litigation, or within three years after the date the customer complaint was initially reported in the Central Registration Depository system if the complaint does not become a customer-initiated arbitration or civil litigation.

In addition, the rule requires brokers to appear in person or by video conference at the expungement hearing and eliminates phone-based appearances.
FINRA’s original proposal was filed with the SEC in September 2020 but withdrawn the following July for revisions when concerns were raised that the expungement process would still be too lenient.

The SEC’s approval of the new rule drew praise from the Public Investors Advocate Bar Associate, which conducted a study finding that FINRA arbitrators grant 90% of all expungement requests. The PIABA’s president said that until now expungement has “seemingly been an automatic process”, adding that it should instead be treated as “an extraordinary remedy.”

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.”

The attorneys at Lewitas Hyman have considerable experience with FINRA’s procedures for expunging false, defamatory and erroneous disclosures from a registered representative’s record. This experience includes seeking expungement in existing FINRA customer and employment arbitrations, as well as filing separate FINRA arbitrations for the sole purpose of seeking expungement. If you have any concerns about problematic disclosures on your CRD record or those that are viewable on FINRA’s BrokerCheck portal, contact Lewitas Hyman at (888) 655-6002 or through our online contact form for a free consultation.