AdvisorHub (August 14, 2023) - Come October, brokers may have a tougher time erasing customer disputes from their public record. 

The Financial Industry Regulatory Authority has adopted a raft of reforms to tighten the expungement process and set an October 16 implementation date, according to a regulatory notice published on Friday. 

The reforms are part of a three-year-old rulemaking package that was approved by the Securities and Exchange Commission in April. Among the changes are a requirement that expungement cases be decided unanimously by a three-member panel of public arbitrators with “enhanced expungement training” rather than the current sole arbitrator option. 

Brokers’ requests will also be limited to two years after the closing of an arbitration or litigation, or three years if the complaint did not result in a formal proceeding, according to the rules. 

The amendments also require that state securities regulators be notified of all expungement requests and have the opportunity to participate when brokers seek to clear their records.

Finra first submitted reforms to the expungement process in September 2020 but withdrew the proposal in May 2021 after criticism from state securities regulators and plaintiff lawyers that it did not go far enough to curb the high rate of expungements. Finra revised and resubmitted the proposal last summer to the SEC and tweaked it again in November 2022.

In a 2021 study, plaintiffs lawyers represented by the Public Investors Advocate Bar Association (PIABA) reported that brokers had had a 90% success rate in the previous 15 months at erasing customers’ complaints from their public records. The group endorsed the final version of Finra’ proposals as a “significant improvement” to prior versions.

“In practice, expungement has not been the ‘extraordinary remedy’ that it is supposed to be, but something that is routinely granted, with troubling consequences for investor protection,” PIABA President Hugh D. Berkson wrote in a December comment letter

State securities regulators had supported some of the reforms but said Finra should go further, including expanding the rule to prohibit expungement of any arbitrations or litigation where the broker was found to be liable. 

A North American Securities Administrators Association spokesperson said he could not immediately comment on Friday’s notice. 

The October deadline could result in a “wave of expungement requests” in the next two months by brokers hoping to have their cases heard under the old rules, according to Dochtor Kennedy, president and founder of AdvisorLaw, a Colorado firm that has represented over 1,000 brokers in expungement cases. 

“It is inevitable that some who have been putting off pursuing expungement will find this change motivating enough to finally pull the trigger,” Kennedy said. However, he anticipated that the reforms, even if not yet effective, will still have a deterrent effect on arbitrators on cases filed ahead of the October deadline. 

Kennedy said that he and his firm have represented brokers in 1,725 expungement cases that have resulted in the erasure of 2,408 disclosures. The success rate is in the upper 80% range, he said.