Financial Advisor (April 29, 2022) - The Financial Industry Regulatory Authority is resurrecting an effort to revise its expungement process, citing a variety of ways its reps push the system to eliminate complaints from their public records.
One problem Finra said it has observed is registered financial professionals trying to “vacate arbitration awards that deny expungement relief and then seeking expungement in a new proceeding.” As part of its new effort, the agency wants to create a special roster of arbitrators who would hear broker requests to clean their records of customer and other disputes. Those records are kept in Finra’s Central Registration Depository, or CRD.
Finra tried this before in 2020. But critics including the North American Securities Administrators Association (NASAA) and the Public Investors Advocate Bar Association (PIABA), said Finra’s previous efforts to challenge expungements did not go far enough. Those organizations lobbied the Securities and Exchange Commission for greater reforms last year and shut down the effort: Finra announced last May it was temporarily withdrawing its reform plan.
“Following consultations with the SEC staff, we temporarily withdrew from SEC consideration our rule filing establishing specialized arbitration panels for expungement requests so that we can further consider whether modifications to the filing are appropriate,” Finra spokesperson Michelle Ong said at the time.
A PIABA review found the broker practice of using expungement arbitration to erase all evidence of wrongdoing has exploded by more than 1,000% since 2019. The trade group for investor attorneys argued expungement requests are “rubber-stamped” by arbitration panels 90% of the time.
A broker or rep can seek expungement of customer dispute information in two ways: (1) by requesting expungement during the customer-initiated arbitration; or (2) by initiating a new arbitration claim, separate from a customer-initiated arbitration, as a “straight-in” request.
Finra and others have been concerned with these straight-in requests, which often involve aged dispute information reported on the reps’ CRD record a number of years before the expungement requests were made. As a result, documents or information relating to the dispute may no longer be available.
For example, of 6,476 straight-in requests, two-thirds were filed more than six years after the customer dispute information was initially reported to the CRD system.
Finra’s current proposal for a roster of special arbitrators could “reduce the concerns with straight-in requests … and help ensure that the current expungement process works as intended—with specially trained and experienced arbitrators issuing awards containing expungement relief only in specified circumstances in accordance with the narrow standards in Finra rules,” the agency said.
The agency took a sample of its reps between January 2016 and December 2021, when there were 920,000 reps registered with Finra at some point during the period. During this time frame, 7,400 professionals sought expungement of their records (representing 0.8% of the total). The 7,400 figure was almost 10% of the 75,000 reps that had at least one customer dispute disclosure on their CRD record.
Under the special roster proposal, approximately 90% of the expungement requests would have been considered by a three-person panel, randomly selected from the special arbitrator roster. The remaining expungement requests would have been considered by a panel from the customer-initiated arbitration that heard the full merits of a customer’s arbitration claim, Finra said.
Developing “alternative enhancements to the existing process, or redesigning that process altogether, will take substantially more time than approving the special roster proposal,” Finra said. The agency added, “Failure to adopt the special roster proposal in the meantime may result in expungements continuing to occur in the manner and frequency described above.”
The agency plans “to organize further discussions with other securities regulators, broker-dealer firms and other interested parties to consider the questions raised in this paper,” the regulator said.