Advisors are lining up to say expungement procedures for erasing online customer complaints and disciplinary records are already an "extraordinary remedy" that needs no further tightening.
The Securities and Exchange Commission ceased taking
But the advisors who commented on FINRA's proposal said that expungement is already so extraordinary as to be almost non-existent at times. Of particular concern is FINRA's practice of adding customers' complaints of advisor misconduct to its database without first investigating if the allegations have merit.
"As an advisor, the deck is already stacked against us and FINRA already behaves biased against advisors," wrote John O'Bannon, a financial advisor at West Des Moines, Iowa-based Diversified Financial Group, in
FINRA's proposed reforms are generally meant to keep advisors and brokers from "forum shopping" to find the arbitration panels that they believe would be most likely to grant their expungement requests. The changes would also set time limits on how long after an initial complaint advisors could wait to ask for expungement. And they would require that the customers who have made allegations against particular advisors always be invited to attend hearings seeking to have their complaints expunged.
Supporters of the changes point to studies finding that expungement is frequently granted when requested. The
Advisors and their advocates say there's a simple reason why expungement requests are granted at such a high rate: Because FINRA places complaints in its public database without subsequent investigation, a good deal of the allegations that make it into BrokerCheck records are meritless.
"Consequently, we see many FINRA arbitrations result in awards of zero against the financial advisor, and yet the associated customer complaint often remains on the advisor's (record) for his or her career," wrote the Securities Industry and Financial Markets Association, a trade group for brokers and investment bankers, in comments submitted on Dec. 7.
O'Bannon wrote that many customers unfairly file complaints against advisors for a huge variety of reasons. Sometimes it's because they didn't take the time to understand a particular investment option they put money into, despite their advisors' best efforts to explain it to them. At other times they simply want to back out of a contract. O'Bannon predicted complaints against advisors would become only more common after a year of faltering stock and bond markets.
"Taking away the only option advisors have to stand against invalid complaints and even broker-dealers that throw the advisor under the bus to save their own hides is infuriating," O'Bannon wrote.
FINRA's reforms seek to eliminate forum shopping in expungement cases in several ways. For starters, the new rules would insist that the officials who make up the three-person panels that oversee these cases be randomly selected from a pool of public arbitrators with training in expungement proceedings. The proposal comes in response in part to concerns that arbitrators in these cases are now sometimes too closely tied to the financial industry. FINRA's reforms would also prevent advisors or brokers from requesting that individual arbitrators be removed from the panels and from withdrawing their expungement requests after the proceedings had begun.
In a proposal drawing particular opposition from advisors and their advocates, FINRA would stipulate that expungement could only be granted by a unanimous decision. Critics complain this could allow a single arbitrator to bring the proceedings to a halt. The Financial Services Institute, which represents independent financial firms and advisors, argues a simple majority vote should be enough.
"We are concerned that if unanimity is mandated, expungements will not be granted even where appropriate," the institute wrote in a
FINRA's 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 is also proposing to bar any advisor or broker who has been found liable in a customer complaint case from even seeking expungement. Proponents of the change have noted that most allegations are settled before going through formal arbitration proceedings. In cases that do go before arbitration panels, the decisions are meant to be binding and not subject to further appeal.
FINRA would also require that customers who have submitted complaints be invited to any subsequent hearings to have their allegations expunged 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. State regulators would also have to receive notice when expungement requests have been submitted.
FINRA initially submitted its proposed expungement reforms to the SEC in September 2020 but withdrew them in May 2021 in response to criticism that they didn't go far enough. Its latest proposal was submitted in August and was scheduled for approval by the SEC on Nov. 11. But that was again delayed in response to further criticism.
