Expungement requests by brokers have dropped sharply after the Financial Industry Regulatory Authority adopted reforms in the process, according to AdvisorHub.
The new rules, which were approved by the SEC, were aimed at making it more difficult for brokers to expunge client disputes from their records, AdvisorHub reports. 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 created 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 are now 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.
From the day the rule became effective on October 16, 2023, to December 1, 2024, FINRA said that brokers have filed 143 stand-alone requests for expungement of customer complaints and other disclosures compared to 681 in the same period one year earlier. That is a decrease of 79%.
Among those who had 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.”
Other mandates included in the new rules prohibit 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.
It was noted by AdvisorHub that the number of expungement requests before October 2023 was inflated because brokers filed dozens of claims in the weeks prior to the new rules. Some investor advocates and plaintiff lawyers pointed out that brokers are utilizing less transparent arbitration services with fewer strictures than the FINRA process.
In some cases, brokers are filing for expungements directly in court or through outside arbitration forums such as JAMS and the American Arbitration Association, said Adam Gana, a Chicago-based lawyer and president of the Public Investors Advocate Bar Association.
That allows brokers to avoid the new mandates and additional costs associated with paying for more arbitrators. It also allows them to avoid having state regulators intervene and oppose expungement and potentially avoid having to notify the customer who made the complaint.
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.
