With oversight from the Securities and Exchange Commission, the Financial Industry Regulatory Authority is preparing revisions to its rules aimed at amending the process for expungement filings and hearings. FINRA believes its new rules will increase the level of scrutiny on licensed brokers and financial advisors seeking to erase customer complaints from their regulatory records.
By way of background, in order to promote market transparency to the public, FINRA maintains the Central Registration Depository (“CRD”), a robust database that stores information concerning licensed brokers and financial advisers and member firms, including brokers’ employment history, education, licensing and professional certifications, as well as any grievances, complaints, arbitrations, and regulatory enforcement actions that may have been filed against them. Much of the data found in the CRD is made readily available to the public online via the FINRA website in the “BrokerCheck” program.
Because individuals licensed in the securities industry are regularly named as respondents in customer complaints, these professionals often seek to have their records “cleaned up” through the filing of expungement proceedings. These actions typically are filed against their member firms (i.e., the employer). According to the Public Investors Advocate Bar Association, a customer/investor advocacy group that recently published a study of the 1,078 expungement arbitration cases filed by brokers since 2015, there has been a dramatic uptick in the number of filings, from just 59 cases filed in 2015 to 545 in 2018. PIABA’s study reveals that in 98 percent of these expungement arbitrations, the requested relief is unopposed by the named respondent, typically the brokerage firm. In other words, there is little to no resistance to the broker’s requested expungement relief. Further, PIABA contends that because FINRA does not have a process to ensure complaining customers have notice of these expungement filings and an opportunity to be heard, PIABA is calling for FINRA to suspend all such expungement hearings until some safeguards advocated for in the study – designed to further involve the customers – are adopted. PIABA points out that complaining customers appear in only 13 percent of these expungement arbitrations.
Ultimately, PIABA argues that FINRA member firms and their brokers are “systematically gaming, exploiting, and abusing” FINRA’s expungement arbitration process and muddying the intended market transparency behind FINRA’s maintenance of BrokerCheck. PIABA is demanding that BrokerCheck contain a disclaimer warning the public that the database does not include expunged customer complaints. PIABA also demands that FINRA establish an investor advocate who would be present in every expungement proceeding.
Similarly, Sen. Elizabeth Warren, D-Mass., also expressed to FINRA in a letter written in March 2019 that FINRA’s expungement rules need to be made stricter.
In response to such public pressure, FINRA’s board recently approved changes to its expungement process by, among other things: (1) instituting a time limit requiring that expungement requests be brought within one year, (2) raising the standard for granting expungement, and (3) creating a roster of specially qualified arbitrators to hear such cases. However, the proposed amendments must still be approved by the SEC.
We will provide additional updates on the proposed revisions to the expungement process as they become available.
Troutman Sanders regularly represents financial services institutions and their associated licensed persons in FINRA arbitration disputes and regulatory matters involving customer, employment, and intra-industry claims.