Off the record: Brokers have until Dec. 7 to comment on FINRA expungement proposal

Brokers have until Dec. 7 to comment on an amended rule that would make it harder for them to have customer complaints expunged from the online database BrokerCheck and other records.

FINRA calls expungement an "extraordinary remedy, " to be used when customer complaints are "clearly inaccurate," and notes that only 4% of the 35,000 customer complaints that were entered into its records between 2015 and 2020 were removed. But a May 2021 study from investor advocacy group Public Investors Advocate Bar Association found that FINRA arbitrators were granting it in 90% of the cases that came before them. In other words, according to PIABA, when people go to the trouble of seeking expungement, they have a strong chance of success. 

FINRA's recent proposed amendment seeks to make expungement an even more extraordinary remedy by preventing anyone found liable in a customer complaint case from even seeking it. The proposal would also require that customers who have submitted complaints or other professionals be invited to any hearing on expungement proposals; and it would prohibit the arbitration panels charged with granting or rejecting expungement requests from giving any "evidentiary weight" to a customer's failure to appear at a hearing.

Hugh Berkson, president of PIABA, said the proposals are commonsense. He noted that most cases arising from customer complaints are settled before any liability is assigned.

"Remember, this is a remedy that's supposed to apply only in very limited circumstances," Berkson said. "So for someone to come in after being found liable, it really is extraordinary and it would be wildly inappropriate to grant that request."

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FINRA's amendment says the ban on expungement requests would apply to anyone found liable by "a panel or court of competent jurisdiction." It says that since its arbitration decisions are meant to be final and binding, the only remedy for an error in one of them is to "file a timely motion with an appropriate court to vacate, modify or correct the award."

Berkson said the other two changes FINRA has put forward to its original expungement proposal also make sense. Of course, he said, if a broker wants to have a complaint removed from his record, the customer who made the complaint should also be able to have a say before FINRA arbitrators. And of course, Berkson said, a customer's absence on such an occasion shouldn't be taken as a sign that the initial complaint was without merit.

Records of customer complaints are not only published on BrokerCheck but are also held in FINRA's Central Registration Depository, a database that is regularly consulted by the Securities and Exchange Commission, state regulators and other oversight groups. FINRA conducts no regulatory reviews of complaints before adding them to BrokerCheck and the CRD. That lack of checking, according to many brokers and their advocates, makes expungement an essential means of preventing false accusations from lingering online and tarnishing professionals and their careers.

But PIABA is not the only group that has found the current system too lax. The North American Securities Administrators Association, for instance, told the SEC in a letter dated Sept. 6 that it "has long taken the position that expungement hearings are largely one-sided and supports requiring brokers to make their request to arbitrators that have had the opportunity to hear the customer's side of the story."

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Even before the amendment, both PIABA and NASAA were generally supportive of FINRA's proposed revisions to its expungement procedures. In general, those changes are intended to prevent "forum shopping" for arbitrators who are likely to treat an expungement request favorably, stipulate that all expungement requests can be granted only unanimously by a three-person arbitration panel and make sure state regulators are informed of expungement requests.

The proposal also seeks to set limits on how long broker-dealers have to make expungement requests. If the changes are adopted, brokers could wait no more than three years after the filing of a customer complaint or two years after the close of arbitration or civil litigation. FINRA has said some expungement attempts have been made as many as 20 years after the fact.

FINRA initially submitted its expungement changes to the SEC in September 2020 but withdrew them in May 2021 in response to criticism that the proposal didn't go far enough. Its latest proposal was submitted to the SEC in August and was scheduled for approval by the SEC on Nov. 11. But that has been delayed now with FINRA's latest amendments.

After the initial comment period on the amendments ends on Dec. 7, interested parties will have until Dec. 21 to review what has been said and make rebuttals.