Brokers and registered representatives who plan to expunge customer and broker-dealer complaints from their record using arbitration will have a steeper hurdle come Oct. 16, when new Finra amendments take effect.
As a result of the changes released on Friday, reps for the first time will need to unanimously convince a three-person arbitration panel that the customer complaints are erroneous or so meaningless that the information itself should be struck from their publicly-searchable BrokerCheck report and the Central Registration Depository—which customers, firms and regulators use to determine whether to hire a broker or grant them a securities license in a given state.
The changes were triggered by a study from Harvard and Stanford universities in 2018 that found that Finra arbitrators granted nearly 80% of brokers’ expungement requests.
The authors said that “expungements significantly predict future misconduct; brokers with prior expungements are 3.3 times as likely to engage in new misconduct as the average broker. Further…we present evidence that brokers who receive expungement are more likely to reoffend than brokers who are denied expungement. We also show that successful expungements improve long-term career prospects.”
The new Finra amendments set stricter limits on when brokers can submit expungement requests and give state regulators and clients greater opportunities to weigh in on the proceedings.
“Straight-in” expungements, which allow reps to file an arbitration case against their current or former brokerage firm requesting the expungement of a client allegation—which most firms are only too happy to erase--are also getting tougher, Finra said.
To toughen the process, Finra is required to create a special roster of arbitrators to hear straight-in expungement requests.
The rule change also requires brokers to file straight-in requests within two years of the close of customer arbitration or civil litigation. Customers and state regulators, who have the right to object to expungements involving them, will need to be notified earlier of straight-in requests, so they can object—something few currently do.
The new reforms have been contentious. While the process to rewrite expungement regulations began in September 2020, Finra withdrew its proposal at the SEC’s request in July 2021 in response to widespread criticism from investor attorneys and the Public Investor Arbitration Bar Association. The community said the expungement process was still too lenient when it comes to allowing reps to scrub their public records of complaints.
Despite changes, the North American Securities Administrators Association declined to comment on the proposal after criticizing it this past spring for not going far enough to halt the removal of important investor protection information from brokers’ publicly-available records.
“These changes are a step in the right direction, however, we remained concerned that the fundamental flaws with [the rule] will continue to result in large numbers of investor complaints being expunged from regulatory records,” NASAA President Andrew Hartnett said in April.