AdvisorHub (May 29, 2024) - By Miriam Rozen

Lawyers are devising workarounds to avoid stricter Financial Industry Regulatory Authority rules governing brokers’ requests to clear client complaints from their public record.

In some cases, brokers’ lawyers are opting to bypass Finra’s forum, where the new rules took effect in October, and instead seek expungements directly in court or through outside arbitration forums such as JAMS and the American Arbitration Association. 

“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.

A chief advantage brokers gain by going to JAMS and AAA is avoidance of among the most onerous and costly requirements of the new Finra rules: that expungement cases must be heard and decided unanimously by a panel of three arbitrators. Finra arbitrations used to be cheaper than the alternatives but can be more expensive under the new rules, Kennedy said. 

While it’s “premature” to say whether JAMS and AAA have better odds for brokers, arbitrators there seem sympathetic to their defamation claims, Kennedy said. 

Finra rules do not require brokers to obtain an expungement through its arbitration forum, a spokesperson for the industry self-regulator confirmed. 

Brokers must, however, obtain a court order affirming the award for Finra to process an expungement, and when they go to court, the broker must name Finra as a defendant to give the regulator an opportunity to contest the claim. 

The workaround trend still set off alarms for investor advocates and state regulators who raised concerns about transparency as JAMS and AAA do not publish arbitrator decisions in a centralized database. It is also unclear whether customers will have the same opportunity to oppose expungements as they do at Finra’s forum. 

The North American Securities Administrators Association, which represents state regulators, “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. 

Under Finra’s new expungement guidelines, states are notified of expungement requests and have an opportunity to intervene during arbitration. States will not necessarily know about and could be left out of AAA or JAMS proceedings, although a Finra spokesperson said that it will notify states once brokers seek confirmation in court. 

The ability to go to JAMS or AAA could undermine the entire aim of the October reforms, said Joe Peiffer, president of the plaintiff lawyer trade group, Public Investors Advocate Bar Association. 

“It’s just another attempt as an end around the new expungement rules,” added Peiffer, who is also a managing partner at Peiffer Wolf Carr Kane & Conway in New Orleans.

“I’m not surprised that they’re trying some new things,” Peiffer said about the workarounds. “The reformed rules are doing what they’re supposed to be doing, which is stopping people that shouldn’t get expungements from getting expungements.”

Brokers caught a glimpse of the new hurdles they have to overcome in clearing their records when arbitrators earlier this month denied a brokers’ bid to clear a customer complaint from 2010. The decision, which appeared to be one of the first under the new guidelines, reflected several new hurdles, including a detailed explanation of the award by a three-person arbitration panel, intervention from state securities regulators, stricter timelines for notifying customers and a new statute of limitations.