Given all the issues facing our country, it may seem surprising that the mechanics by which registered representatives, including securities brokers, may have customer complaints removed from their records has become a topic for discussion as the Democratic primary season begins in earnest. However, given the significant amount of attention given to this issue by investor advocates and the Financial Industry Regulatory Authority (FINRA), brokers should expect to see more headlines like Senator Elizabeth Warren’s recent call for transparency regarding the FINRA expungement process. Below is a quick summary of the current status of the process, how it developed, and concerns moving forward.
Current Expungement Process
Expungement is the process by which securities brokers may have customer complaints removed from their records maintained by the Central Record Depository (CRD). Current requirements under FINRA Rule 12805 obligate arbitration panels to hold a recorded hearing session, analyze issues related to any settlement, cite to applicable grounds for expungement, and assess all forum fees against the financial advisor. Under FINRA Rule 2080, a broker must then obtain an order from a court of competent jurisdiction directing expungement or confirming the panel’s award recommending expungement relief before the CRD will remove the complaint. FINRA has the right to object to the confirmation but typically waives its right to be named a party if one of the three grounds for expungement set forth in Rule 2080(b)(1)(A)–(C) is satisfied. And FINRA Rule 2081 prohibits conditioning a settlement with a customer on an agreement not to oppose expungement.
Developments Leading to Expungement Process
A number of these requirements were implemented by FINRA after substantial criticism of the expungement process by the Public Investors Arbitration Bar Association (PIABA), a bar association whose members represent investors in disputes with the securities industry. In 2013, PIABA released a study that it claimed supported its arguments that the system was “clearly broken” and that expungements were being granted at an “alarmingly” high success rate. Shortly thereafter, FINRA implemented several of the recommendations that accompanied the release of the PIABA study.
Unsatisfied with FINRA’s efforts, PIABA followed up its initial study in 2015 with additional analysis of expungement awards entered after a number of changes in the process had been implemented by FINRA. In a press release accompanying the release of its new study, PIABA asserted that “[b]roker expungement is a longstanding problem[,]” that the changes to the process previously implemented by FINRA were “not working” because the rate of expungement success “remains alarming,” and that “[a] wholesale change needs to occur with respect to the handling of broker requests for expungement relief in settled customer cases.”
On December 6, 2017, FINRA issued Regulatory Notice 17-42, announcing a variety of proposed changes that would dramatically alter the expungement landscape. As drafted, the proposed amendments would significantly increase the burden for brokers seeking to expunge customer complaints. Changes would include increased filing fees, a one-year time bar, a limited expungement arbitrator roster, and a unanimity requirement, among other changes. The proposed changes would increase the cost of the expungement process, shorten the time period for requesting expungement, and restrict the avenues by which brokers may pursue expungement relief.
Upon issuing the proposed changes, FINRA requested comments from interested parties. The comment period expired on February 5, 2018. A number of parties took the opportunity to comment, including PIABA; individual claimants’ attorneys; brokerage firms; attorneys who regularly represent financial advisers; and the Securities Industry and Financial Markets Association, a trade group representing securities firms, banks, and asset management companies. As one might guess, feedback ranged from criticism that the changes did not offer any significant investor protections to complaints that the proposals were too severe and burdensome on brokers. Since the close of comments, FINRA has not submitted the proposed changes to the U.S. Securities and Exchange Commission (SEC) to have them finalized as enforceable rules.
Concerns About Lack of Action
Given the apparent lack of movement on these proposals in the last 18 months, perhaps it should come as no surprise that Senator Warren, a frequent Wall Street critic and candidate for the Democratic presidential nomination, has taken the opportunity to weigh in on the issue. In a recent letter to FINRA leadership, Senator Warren urged FINRA to “consider the impact of expungements on FINRA’s ability to protect investors” and cited the PIABA studies to support her belief that the expungement process “is failing to safeguard information needed for investor protection[.]” Senator Warren also inquired as to when FINRA plans to send its new rule proposals to the SEC and challenged it to consider “rules to strengthen its expungement proceedings” beyond those already contemplated in the proposed amendments.
In response, FINRA declined to comment on the substance of Senator Warren’s letter but noted in a statement to Financial-Planning.com that it was “working to respond accordingly.” With respect to its plans for submitting the proposals to the SEC, FINRA stated in the Final Status Report issued by its Dispute Resolution Task Force in January of this year that it “is considering next steps” after review of the public comments discussed above.
It is very likely that the expungement process will soon be more difficult and more expensive for securities brokers and other registered representatives. FINRA has already notified brokers of its plans and remains under pressure to act. As a result, the chance that FINRA will walk back from the proposed changes seems far-fetched. Instead, it seems much more likely that FINRA will contemplate even more significant hurdles for brokers seeking to have their records cleared. And the outcome of the 2020 presidential election could certainly influence the direction of these serious expungement issues. Stay tuned.
Josh Jones is the managing principal of the Birmingham, Alabama, office of Bressler, Amery & Ross, P.C., and also the cochair of the Section of Litigation’s Audio Content Committee.
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