AdvisorHub (May 23, 2022) - The Financial Industry Regulatory Authority’s board of governors approved on Friday revisions to a previous proposal to initiate “special” arbitration procedures for brokers’ expungement requests.
The Finra board confirmed the revised proposal, which would allow for “new guidelines around expungement,” Jim Crowley, a Finra board member and chief executive officer of Pershing, said in a May 20-posted videotaped recap of a mid-May meeting in Fort Lauderdale, Florida.
Finra officials declined to disclose further details of the revisions or unveil a timetable for when it will submit the proposal to the Securities and Exchange Commission for approval, according to a spokesperson for the regulator.
The board’s nod comes almost one year after the industry’s self-regulatory organization “temporarily” withdrew a prior proposal to reform its procedures to expunge brokers’ public records, which it had submitted to the SEC.
Finra pulled that proposal in late May 2021—the same day as the deadline for the SEC to approve its plan—after “consultations” with the federal agency’s staff, Finra officials said at the time.
The withdrawal followed a report from the Public Investors Advocate Bar Association criticizing the proposed reforms as inadequate and asking the SEC to reject them. PIABA sought to have Finra establish more rigorous procedures to stanch the number of expungement requests that receive approval, including the appointment of investor advocates.
PIABA sought more aggressive reform proposals and had previously asked Finra to put a moratorium on a skyrocketing number of expungement requests. The PIABA report stated that Finra arbitrators had granted 700 expungements over 15 months between August 1, 2019 to October 31, 2020, which translated to a 90% success rate for brokers seeking expungements.
Mike Edmiston, the president of PIABA and a Studio City, California-based lawyer, did not immediately return a request for comment for this story.
In April, Finra posted a discussion paper that covered its prior expungement-relief proposal, which included a plan to establish a special arbitration panel to hear expungement requests.
In the same paper, Finra said that it seeks to advance further discussions among all stakeholders and “identify additional data or analysis that may help inform effective decision-making in this area.”
“It’s sort of hard to gauge what the SEC was concerned with and how Finra has decided to deal with that,” Christopher Seps, a law partner in Chicago’s Ulmer, who represents broker-dealers and brokers, and has blogged about the expungement process, said about the previously withdrawn and new proposals.
While he gave Finra credit for “coming back to the drawing board, Seps said he does not expect “a dramatic overhaul” to be unveiled when Finra discloses the details of its revisions.
Seps has argued on his blog that Finra should create financial incentives for investors to participate in expungement proceedings. Specifically, Seps wants Finra to withhold some of the refunds of investors’ filing fees when they withdraw their complaints against broker-dealers after settling.
Under his proposal, the remainder of the paid fees would then be fully refunded only after the investors participate in any expungement proceedings sought by brokers whose records were marred by the settled complaints.
Prior to the SEC approving the revised proposal and Finra adopting it, both regulators will likely allow for public comments, Seps said.