InvestmentNews (April 14, 2023) - NASAA says Finra's modifications don't do enough to make it harder for brokers to clear customer disputes from their records.
State securities regulators continue to oppose a Finra expungement reform proposal the SEC approved earlier this week, while holding their fire on Finra’s re-proposals for remote inspections for brokerage branch offices.
The North American Securities Administrators Association has been a leading critic of the expungement measure, which was first proposed by the Financial Industry Regulatory Authority Inc. in 2020. State regulators have raised concerns that the rule is not strong enough to reduce what they say is an excessive success rate for brokers in clearing their records of customer disputes.
Finra has modified the proposal a couple times to try to answer criticisms from NASAA and other skeptics. One group that had been in opposition — the Public Investors Arbitration Bar Association — supported the version that the Securities and Exchange Commission adopted Wednesday.
State regulators still aren’t on board.
“NASAA supported many of the changes Finra proposed but believes there is more to be done,” NASAA President Andrew Hartnett said in a statement. “These changes are a step in the right direction however, we remained concerned that the fundamental flaws with Rule 2080 will continue to result in large numbers of investor complaints being expunged from regulatory records.”
Brokers seek expungement through the arbitration system that Finra runs. The Finra proposal establishes a special roster of arbitrators to hear so-called straight-in expungement requests, or those that are filed by a registered representative separately from a customer arbitration.
The Finra proposal also limits the number of years a broker can reach back to expunge a customer complaint, requires notification of customers and state regulators when an expungement request is filed and allows state regulators to participate in straight-in expungement cases.
Hartnett said customers depend on information about a broker’s disciplinary history when they decide which financial advisors to hire. Regulators and firms also rely on it for oversight and hiring, respectively, he said.
“Tightening the procedures surrounding expungements is critical to stopping the continuing and significant threat to the integrity of the information,” said Hartnett, deputy Iowa insurance commissioner. “We look forward to collaborating with Finra on implementing the process by which state securities regulators will receive earlier notice of these expungement requests and further proposals to fix the expungement process.”
Finra is standing behind the expungement proposal.
“Finra believes the amendments approved by the SEC address the concerns that have been identified with the current expungement process and will help protect the integrity of the Central Registration Depository — the central licensing and registration system used by the U.S. securities industry and its regulators — by making substantial improvements to the current expungement process,” Finra spokesperson Ray Pellecchia wrote in an email. “We look forward to continuing to work with the SEC, state securities regulators and other stakeholders on this important topic.”
The SEC did not respond to a request for comment.
FINRA RE-PROPOSES REMOTE-INSPECTION MEASURES
State regulators also have been leading critics of Finra proposals to allow remote inspections of brokerage branch offices and to allow such supervision to take place by firm personnel working at home.
After much pushback from NASAA and PIABA, Finra filed a revised version of its proposal on residential supervisory locations with the SEC on March 29. Earlier this week, Finra filed with the SEC a revised version of a proposal for a three-year remote-inspection pilot program.
Finra’s changes to the remote supervisory location proposal included prohibiting records from being maintained at the location and enhancing criteria for RSLs that would make ineligible firms that have been suspended or locations where a broker is the subject of an investigation.
Finra modified the pilot-program proposal to clarify the frequency of data and information collection from participating firms and to clarify where market-making and trading activities would be prohibited.
The state regulators have not commented on Finra’s latest remote-inspection proposals.
David Adams, counsel at Goodwin Proctor, said Finra is responding to the questions and concerns that skeptics have raised.
“I’d characterize it as a good next step,” Adams said. “It’s going to be interesting to see how it plays out and where NASAA comes down.”
In a recent appearance at a Securities Industry and Financial Markets conference, Finra CEO Robert Cook acknowledged that the broker-dealer self-regulator might have to rethink its approach to remote inspections given the pushback.
AdvisorHub first reported the remote-inspection re-proposals.