© 2020 Arizent. All rights reserved.

FINRA may make it harder for brokers to erase past indiscretions

Register now

Brokers may no longer be able to wipe years’ worth of disciplinary marks off their public BrokerCheck records, thanks to changes proposed by FINRA.

The regulator in December released proposed amendments to its controversial expungement process and requested industry comments by February 5, 2018. The proposed changes include a provision that would give brokers just one year to request removal of a disciplinary item from their online records. Current FINRA rules allow brokers to remove years' worth of disciplinary items, in some instances.

A broker named Joseph Karsner IV, for example, formerly of Legacy Financial Services in Petaluma, California, managed to expunge four year's worth of customer complaints from his record. Although his BrokerCheck page shows a single disclosure in 2002, FINRA's arbitration database shows 24 cases involving customer complaints between 2004 and 2007. Karsner, who is no longer registered with FINRA, could not be reached for comment.

FINRA maintains BrokerCheck as a public protection tool, but investor advocates like the Public Investors Arbitration Bar Association have argued that the quality of the database is consistently undermined by FINRA's decision to allow brokers to eliminate evidence of past indiscretions.

"It is a good development if they are trying to rectify this very big problem that they've had for 20 years," says PIABA President Andrew Stoltmann. "I especially like the one-year de facto statute of limitations on the filing because we have been seeing enterprising defense lawyers soliciting brokers going back many years."

The suggested rules also propose training a specialized roster of arbitrators to hear expungement cases. To clear any broker's record would require a unanimous vote of three of these arbitrators, according to FINRA.

The proposed reforms follow a 2015 report by PIABA on the issue, as well as an award-winning investigation into expungement abuses by Financial Planning. The report, which summarized suggested fixes to the system, received awards from The American Society of Business Publication Editors and the Society of the Silurians.

Both FINRA and the SEC say that expungements should be "an extraordinary remedy," but PIABA's 2015 study found that they were frequently granted.

In cases decided on their merits that did not include settlements, expungements were granted in 44% of cases from 2012 to 2014, the study found. Over the same period, in cases in which advisors sought to have their records expunged following settlements with aggrieved clients, 404 of 460 brokers — or 88% — succeeded.

The Financial Planning investigation also detailed instances in which arbitration panels refused to let aggrieved investors or their lawyers speak against a broker's expungement request during arbitration hearings.

Richard Berry, director of FINRA's Office of Dispute Resolution, said in a statement that the proposed changes "would make it easier for customers to participate in expungement hearings."

In its request for comments, FINRA is asking for feedback on 12 questions including the following:

1. What are the costs and benefits of requiring the unanimous consent of a three-person panel to grant all requests for expungement of customer dispute information?

2. Is the one-year limitation on being able to request expungement of customer dispute information appropriate? Should the time period be longer or shorter?

3. Should the associated person who is requesting expungement be required to appear in person or by videoconference, rather than by phone, at the expungement hearing?

PIABA, which is reviewing the proposed changes, is expected to submit its own comments, likely in overall support of the regulator's move, Stoltmann says.

"I can't begin to tell you how many brokerage firms I have sued where the brokers' [public] record is clear yet they were named in multiple complaints in the last 15 years, all of which had been expunged," he says. After complaints such as these are excavated in discovery during the preparation of an arbitration case, Stoltmann says, investors are invariably left "shocked, chagrined and mortified."

With changes such as these in place, he hopes to see fewer investors in such a position.
"Sunlight is the best disinfectant,” he says.

For reprint and licensing requests for this article, click here.