Representing financial professionals, financial institutions and investors in investment loss, employment and disclosure matters, and in regulatory investigations nationwide.

New reforms adopted by FINRA to tighten process for expungement

On Behalf of | Aug 28, 2023 | FINRA Compliance

The Financial Industry Regulatory Authority has adopted reforms making it more difficult for brokers to expunge client disputes from their records, AdvisorHub reports.

In Regulatory Notice 23-12, FINRA said that the new rules, approved by the Securities and Exchange Commission in April, would take effect on October 16.  They were developed in response to concerns that it had become too easy for brokers to clear customer complaints from their disciplinary history contained in the Central Registration Depository

FINRA’s plan 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 rather than the current option of having a sole arbitrator.

Other mandates include prohibiting parties from agreeing to a smaller panel or from striking arbitrators, and setting time limits on when brokers can file expungement requests. FINRA said straight-in requests 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.

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.

“Including state securities regulators in straight-in requests provides states the opportunity to satisfy their regulatory obligations, while at the same time increasing the likelihood that the panel in a straight-in request hears evidence from multiple viewpoints, thereby allowing the panel to make informed decisions,” FINRA said.

Among those who have been concerned about the high rate of expungements was the Public Investors Advocate Bar Association, 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.”

The president of AdvisorLaw was quoted as saying that there could be a wave of expungement requests by brokers hoping to have their cases heard before the new rules take effect in October.

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.