The Financial Industry Regulatory Authority’s recently enacted reforms to its expungement process are an improvement to the system but do not go far enough, according to two industry experts.
FINRA’s new rules are aimed at making it more difficult for brokers to expunge client disputes from their records. They were the topic of an opinion published in Financial Planning by Benjamin Edwards, a professor of law at the William S. Boyd School of Law at the University of Nevada, Las Vegas, and Joe Peiffer, the founder of the national law firm Peiffer Wolf Carr Kane Conway & Wise. Peiffer has represented thousands of investors, is a published author, and is currently the president of Public Investors Advocate Bar Association (PIABA), a nonprofit international bar association whose members represent investors in disputes with the securities industry.
FINRA’s reforms, which took effect on October 16, 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.
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.
In their article, Edwards and Peiffer said the reforms “offer some meaningful improvements to a long-broken procedure. But they fail to address the larger issue: The expungement process deletes public information without a good system in place to ensure informed decisions.”
They asserted that the reforms are not likely to provide an adequate check on brokers’ ability to delete public records, adding that “state regulators may struggle to stand up the necessary resources to review and respond to expungement requests, and state legislatures must appropriate additional funds to staff up state regulators in response to this need.”
The article cites the results of a PIABA study showing that requests for the expungement of customer complaints against their investment brokers were still being granted by FINRA arbitrators at a rate of 90%. Brokerage firms stood idle and mounted no opposition in 92% of these cases; and customers whose complaints were expunged appeared at only about 10% of the expungement hearings.
The PIABA has said that until now expungement has “seemingly been an automatic process”, adding that it should instead be treated as “an extraordinary remedy.”
Edwards and Peiffer wrote that under the current system, expungement decisions are being outsourced away from FINRA and onto independent contractor arbitrators, shifting costs and responsibility away from FINRA. They recommend that the expungement issue should be taken out of arbitration and that the Office of Hearing Officers be tasked with decisions about which matters merit expungement. This would allow for corrections of errors because they can be appealed to FINRA’s National Adjudicatory Council, its board of governors, the SEC and the federal courts.
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.
