Finra Rule Proposal Could Curb Advisors’ Ability to Erase Client Complaints
Industry self-regulator Finra is taking another crack at revising rules for how brokers can get client complaints erased from their regulatory records.
Finra’s newly filed proposal would make key changes to a process known as expungement, which is intended to allow brokers and advisors to remove meritless complaints from their public regulatory records. In recent years, Finra’s expungement process has come under sharp criticism from investor advocates, who say it’s too easy for brokers to remove valid complaints that should be visible to the public.
Finra’s proposed changes require approval from the Securities and Exchange Commission. Finra is a private organization funded by its member firms. It withdrew a previous proposal in 2020 after facing a backlash from critics.
The organization’s new attempt at revising expungement rules would give state securities regulators a greater role in the process. Finra would notify state regulators of expungement requests and create a mechanism for them to attend and participate in expungement hearings.
“I think that is a positive and very welcome change,” says Jason Doss, an Atlanta-based attorney and past president of Piaba, an association of investors’ attorneys.
The changes could deter some advisors from seeking expungements if it means bringing renewed scrutiny to client complaints. They could also make it both easier and more cost effective for state regulators to oppose expungement requests. Under the current rules, state regulators generally have limited means to learn about and oppose advisors’ expungement requests before they are granted by Finra arbitrators.
Earlier this year, Alabama’s securities regulator filed a complaint in a Florida state court to overturn an expungement award that a Finra arbitrator granted a
advisor after a single hearing. In that case, which is pending, the UBS advisor had asked to have five complaints removed. One of the clients who had filed a complaint tried to participate in the expungement hearing but was allegedly improperly ejected by the Finra arbitrator, according to Alabama’s securities regulator.
Finra’s new proposal would clarify that customers are entitled to attend and participate in expungement hearings and be represented by an attorney. The proposal would also provide customers with access to relevant expungement documents and notify them of the time, date, and place of any hearings.
Finra’s proposal would also require that so-called straight-in expungement requests, by which advisors file claims against their own firms, be decided by a three-person panel that is randomly selected from a roster of experienced
public arbitrators with enhanced expungement training. Public arbitrators are individuals who do not work in the securities industry.
Among other changes, the proposal would impose time limits on expungement requests (meaning advisors can’t erase years-old complaints). Arbitration panels would also have to agree unanimously to grant expungement requests.
A Finra representative declined to comment on the proposal.
The organization’s previous attempt to amend the expungement process would have created a special roster of arbitrators to hear expungement requests. Finra’s critics urged the organization to make other changes, such as creating a kind of investor advocate to participate in expungement hearings on behalf of clients whose complaints were subject to erasure.
Too many expungements have been granted in recent years, undermining the utility of public databases such as BrokerCheck, Finra’s critics say. The number of expungements granted through Finra arbitration soared to 545 in 2018 from 59 in 2015, according to a previous analysis by Piaba.
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