Financial Advisor (October 7, 2019) - Finra's board of directors advanced for public comment a proposal that will allow brokers to clear their record of customer disputes.
The self-regulatory organization also advanced a proposal to reign in the ability of brokers to become the beneficiary or executor of a customer's will.
Depending on who you ask, expungement by a broker of his or her disciplinary record is either a fair process that allows the rep to eliminate complaints that have no material bearing on investors or a tool that allows bad brokers to cover their tracks.
The expungement proposal would amend Finra arbitration rules to create a roster of arbitrators who have special training or expertise to adjudicate expungement cases. A three-person panel selected from the list would handle all requests related to settled cases, as well as those requested separately by a broker.
“It is significant in that it means Finra is moving forward on the proposals," said Christine Lazaro, president of the Public Investors Arbitration Bar Association said.
“Arbitrators who hear expungement cases will have to have certain types of experience and training," added Lazaro, who is also professor of clinical legal education and director of the Securities Arbitration Clinic at St. John's University School of Law in New York City. "This is what the notice contemplates. That will likely mean a significantly smaller pool of arbitrators qualified to hear expungement cases, but theoretically the arbitrators will be better positioned to determine if the complaint has any regulatory value.”
Through expungement, a broker can have a customer complaint removed from his or her profile in BrokerCheck, a public, online database of broker records maintained by Finra.
Proponents of expungement say that it clears the records of brokers who are unfairly accused of wrongdoing. Critics say that it alters a broker's profile to hide disciplinary problems.
One critic of the expungement proposal is Democrat presidential contender Sen. Elizabeth Warren (D-Ma.), who wrote to Finra President and CEO Robert Cook earlier this year, citing a Stanford University study that indicated a broker who receives expungement is more likely to commit another offense than a broker denied expungement.
The study looked at 6,700 expungement attempts between 2007-2016 and found that brokers attempted to expunge 12% of the allegations of misconduct reported by customers and firms. Of these attempts, 70% were successful. “We show that successful and, to a far greater extent, unsuccessful expungement attempts, are a significant predictor of future misconduct,” the Stanford researchers said.
The study also found that “by contrast, there is only limited evidence that successful expungements improve career prospects.”
Said Warren, “Given Finra's crucial role in promoting safe markets and regulating the securities industry, it is of utmost importance that the organization consider the impact of broker expungement on the future misconduct of industry brokers.”
The board voted to file the expungement reform proposal with the Securities and Exchange Commission, which must approve Finra rules.
The Finra board also approved releasing for public comment a proposal that would require registered representatives to obtain permission from their firms before they become a beneficiary, executor, trustee or receive power of attorney for a customer.
To be on Finra's expungement arbitrator roster, an arbitrator would be required to have these additional qualifications:
• Completed enhanced expungement training.
• Admitted to practice law in at least one jurisdiction.
• Five years experience in any one of the following disciplines: litigation, federal or state securities regulation, administrative law, service as a securities regulator or service as a judge.