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Brokers finding alternatives to FINRA forums on expungement requests

On Behalf of | Jun 6, 2024 | FINRA Compliance

The Financial Industry Regulatory Authority’s reforms aimed at tightening the process for expungement have prompted efforts by brokers and lawyers to circumvent the new rules, AdvisorHub reports.

The rules, approved by the Securities and Exchange Commission, took effect last October.  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 to 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 prior option of having a sole arbitrator, and the claims must now be decided unanimously.

But according to AdvisorHub, lawyers for brokers are deciding to bypass the FINRA arbitration forum and instead seek expungements in court or through outside arbitration forums such as Judicial Arbitration and Mediation Services (JAMS) and the American Arbitration Association.  This enables them to avoid the more stringent FINRA requirements, which can also add to the cost of the process.

“We’re using FINRA only as a last resort, if we are unable to find relief elsewhere,” said Dochtor Kennedy, a lawyer in Colorado whose firm has represented brokers in many expungement requests.  Kennedy added that the JAMS and AAA arbitrators have appeared more sympathetic to brokers’ claims of defamation.

FINRA adopted the reforms as a way to make it more difficult for brokers to expunge client disputes from their records.  One study found that FINRA arbitrators grant 90% of all expungement requests.  The new rules require that clients and state regulators be informed of an expungement request and that the regulators be allowed to participate in the process.  Under the previous system, clients and state regulators were not made aware of the expungement petitions.

The North American Securities Administrators Association, which represents state regulators, has been disturbed by what it calls the excessive success rate for brokers in clearing their records of customer disputes.  In light of efforts to work around the rules, NASAA “remains concerned about any attempt to undermine the important safeguards put in place to ensure that expungement remains an extraordinary remedy utilized only in appropriate limited circumstances,” said Melanie Lubin, Maryland Securities Commissioner and past president of the organization.

Also concerned about the efforts to take disputes to JAMS or AAA is the Public Investors Advocate Bar Association, a plaintiff lawyer organization.

“It’s just another attempt as an end around the new expungement rules,” said the group’s president Joe Peiffer.  He added, “I’m not surprised that they’re trying some new things. The reformed rules are doing what they’re supposed to be doing, which is stopping people that shouldn’t get expungements from getting expungements.”  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.”

Brokers are not required to seek expungements through FINRA’s arbitration forum, but in order for FINRA to process an expungement they must obtain a court order affirming the award.  The report notes it is not yet clear whether customers will have the same opportunity to oppose expungements in JAMS and AAA forums as they do at FINRA arbitrations.

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.