AdvisorHub (November 11, 2022) - The Financial Industry Regulatory Authority has once again revised and delayed a proposed rule change aimed at tightening the process for brokers to expunge customer claims from their records.
On November 10, one day before the deadline when the Securities and Exchange Commission was scheduled to rule on the proposal, Finra filed to amend it with additional restrictions and extend by at least one month the timetable for comments and approval.
The updated proposal would bar brokers from even attempting to erase investors’ complaints if a court or arbitrators previously found them liable in the disputes.
Finra officials also added to the proposal a clause allowing the customers who complained to attend and participate in “all aspects of the prehearing conferences and the expungement hearing.” And it advised arbitrators should not “give any evidentiary weight” if the investors behind the claim opt out of the expungement proceedings.
The industry’s self-regulatory organization had first submitted the proposed rule changes in July after receiving signoff from Finra’s board of governors.
The proposal, which is aimed at curtailing a rate of expungements that investor advocates have said is over 90%, would establish a special roster of arbitrators to hear requests and mandate unanimous approval from three-member panels before a complaint gets cleared. It would also notify state securities regulators of requests to allow them to participate and impose strict time limits for brokers to seek expungement after a customer complaint.
It had broad support from plaintiffs’ lawyers although state securities regulators represented by the North American Securities Administrators Association had raised concerns in its September comment letter that the proposal did not go far enough to ensure expungement was only an “extraordinary remedy.”
A spokesperson for NASAA did not return a request for comment on Friday during the federal holiday.
The July proposal was Finra’s third stab at reforming the process in almost five years. Finra sought comment in December 2017 on a reform proposal that did not ultimately advance to the SEC. In 2020, it promulgated a separate proposal but shelved it in May 2021 after guidance from the federal agency’s staff.
State regulators and investor advocates, including plaintiff lawyers, had expressed concerns that those initial reforms still made it too easy for brokers to clear records of customer complaints.
Finra’s latest amendment to stop brokers from even seeking expungement of an investor’s complaint if they have previously been found liable “seems like common sense,” said Hugh Berkson, the president of the Public Investors Advocate Bar Association (PIABA).
His organization of plaintiff lawyers is generally supportive of Finra’s pending expungement reform efforts, and would like to see it go through soon since they have taken so long to become effective, he said.
Alan Wolper, a partner in Chicago’s Ulmer & Wolper, who regularly represents brokers seeking expungement, and views Finra’s reforms generally as unfavorable, said that its newest amendment was the “least offensive” aspect of the pending proposal.