FINRA Resumes Plans to Dismantle its Expungement Process

Further supporting the notion purported by PIABA and NASAA that FINRA’s expungement process is far too forgiving to advisors, FINRA released a discussion paper on May sixth to address the supposed issues with its expungement system for customer complaints. In the paper, titled “Discussion Paper – Expungement of Customer Dispute Information,” FINRA is brazenly hostile regarding expungement of customer complaint information, in particular to what it refers to as “straight-in” expungement arbitration hearings — those in which financial advisors seek expungement by naming the broker-dealer as respondent. Those proceedings typically take place following the settling of a customer arbitration.

An amendment passed by FINRA that became effective on September 14, 2020, as described in Regulatory Notice 20-25, established an increased minimum filing fee for expungement arbitrations. The discussion paper boasts the amendment’s success by citing the 37% reduction in the number of straight-in expungement actions from 2019 to 2020 — making evident the fact that FINRA’s objective is not to ensure the merit of the claims in the CRD system and on BrokerCheck. Rather, FINRA seeks simply to reduce the number of expungement claims sought by advisors.

Initially, FINRA’s discussion paper takes a defensive stance, making sure to spell out how few expungements are actually awarded each year. About eight percent of FINRA-registered advisors had a customer dispute disclosure on their records between January 2016 and December 2021, and only one in ten advisors succeeded in getting customer dispute information expunged during that time period. But if expungement of customer dispute information is such a rare occurrence, why has FINRA “engaged in longstanding efforts with NASAA and state securities regulators to explore a redesign of the current expungement process”? 

When a FINRA arbitrator grants expungement, the disclosure is not automatically removed from the advisor’s records. Advisors are required to have arbitration awards confirmed by a court order before the disclosures can actually be expunged. In that court proceeding, the advisor is required to either name FINRA as a party or request that FINRA waive that requirement. When FINRA receives a waiver request, it sends that request and all accompanying documentation to all of the state regulators in every state in which the advisor is registered. At that point, the possibility for the state to intervene, oppose the confirmation of the award, and seek to vacate the award is introduced. 

If the state does determine that it wants to intervene and attempt to stop an expungement from being confirmed, the state will likely set its sights on the arbitrator who granted the expungement and make serious allegations against that individual. The risk then lies in arbitrators becoming deterred from granting expungements — instead of basing their decision on the merits of the case and FINRA rules, arbitrators may begin to deny expungements simply out of self-preservation, in order to avoid personal attacks from state regulators. 

---

Do you have a meritless disclosure on your BrokerCheck, IARD, IAPD, or CRD record?
Give us a call today at (303) 952-4025 or contact us for a complimentary consultation.

---

Recently, the Alabama Securities Commission (ASC) intervened in an expungement award confirmation proceeding. The ASC accused the arbitrator of being corrupt, engaging in fraud and partiality, refusing to hear evidence, and exceeding his powers. Beyond that, the ASC harshly criticized FINRA’s “straight-in” expungement process as a whole, calling it “illusory,” because the broker-dealers typically do not oppose the expungements, and the customers typically decline to participate. Considering the ASC’s actions and the subsequent release of FINRA’s discussion paper, it’s likely that regulators in other states are just as displeased with FINRA’s current system.

Further illustrative of FINRA’s efforts to make expungement of customer dispute information more difficult is the new rule it proposed with the SEC in September of 2020 — the “Special Roster Proposal.” The Special Roster Proposal includes numerous measures to hinder advisors’ ability to achieve expungements, including:

• creating a roster of arbitrators with specialized training;
• requiring a three-member panel;
• prohibiting strikes and stipulations to remove an arbitrator;
• setting time limits to prevent expungement after more than six years from the complaint or more than two years from the close of a customer arbitration;
• providing notice to state regulators upon the filing of an expungement request; and
• when an arbitration has been filed, requiring financial advisors to seek expungement from the same panel that heard the arbitration.

The Special Roster Proposal was withdrawn by FINRA from SEC consideration on May 18, 2021, with FINRA purporting to have done so “in response to concerns raised by the SEC staff.” The discussion paper makes no indication as to the nature of those concerns, but it does state FINRA’s intent to keep pursuing the Special Roster Proposal and to continue discussions with NASAA about a “more fundamental redesign of the current expungement process”.

Among the numerous potential changes to FINRA’s existing expungement process raised in the discussion paper are various suggestions, such as raising the standards of FINRA’s Rule 2080 — the standards by which expungements may be granted. Additionally, there is consideration of changing the requirements for what firms and advisors are obligated to disclose, which most likely includes expanding the events that are required to be reported. FINRA indicates its desire to implement the Special Roster Proposal in the near future, presumably after addressing the SEC’s concerns.

---

Do you have a meritless disclosure on your BrokerCheck, IARD, IAPD, or CRD record?
Give us a call today at (303) 952-4025 or contact us for a complimentary consultation.

---

Down the line, FINRA intends to overhaul and redesign its current expungement process by potentially getting rid of customer dispute expungement arbitrations entirely and instead leaving it up to FINRA and state securities regulators to decide which disclosures can be expunged. There are many questions raised in the discussion paper about how that process would be designed and how it would play out. Implementation of that process will require SEC approval and potentially even congressional action. Regardless of the details, FINRA’s desire is clear — it wants administrative control over expungement.

For advisors, the harshest and most formidable of the measures proposed in the discussion paper are:

• the six-year exemption;
• the involvement of state regulators in the expungement process; and 
• the inability to strike arbitrators. 

Just as FINRA proposed in Regulatory Notice 17-42 that associated persons be required to request expungement of customer disputes during the underlying customer case, the six-year exemption currently proposed would substantially limit the time frame within which the advisor may choose to seek expungement. As the process currently stands, advisors may seek expungement of disputes from any number of years in the past, and while Rule 13206 can sometimes be employed to prevent expungement of older disputes, AdvisorLaw has succeeded in securing expungements of disclosures that date back decades. The concept of ultimately leaving expungement decisions up to state regulators is frightening, as well, because it not only avails the advisors to a second round of opposition from yet another source, it adds a hindrance to the likelihood of obtaining expungement by considering the state regulator’s opinion, even when a disclosure has been found to meet FINRA’s standards for expungement.

To make matters worse, removing the ability to strike arbitrators essentially exposes advisors to “Russian roulette” when it comes to their chances of successfully expunging customer dispute claims — regardless of how absurd or unfounded the allegations may be. 

Any way you look at it, it’s clear that FINRA does not intend to back down and intends to continue working to make expungements increasingly more difficult for advisors to achieve. If you have disclosures on your record, there will never be a time in the future where your chances at winning expungement are better — it will only become less attainable.

The time to seek expungement of disclosures is now.

Call us today at (303) 952-4025, or fill out the form below for a complimentary consultation.