FINRA moves to toughen expungement rules
Brokers are pushing back against proposed FINRA rule changes that will make it much more difficult to erase customer complaints from their regulatory records.
If the rules go through, brokers must have arbitrators unanimously agree to grant their expungement requests, a tougher standard than the current requirement of a majority agreement. Registered reps will also have to appear at hearings in person or via videoconference and will no longer be allowed to participate via teleconference as they are now able to do.
In addition, they will have a one-year time limitation to file an expungement request if the underlying customer case in which they are named settles.
The proposed changes come amid criticism that FINRA has made it too easy for advisors and registered reps to remove regulatory black marks from their records, thus depriving the public of critical investor protection information. Critics often point to the fact that almost nine in 10 brokers who sought to have their records expunged following settlements with aggrieved clients were able to do so, according to a review by the Public Investors Arbitration Bar Association of arbitration cases from 2012 to 2014.
Without proper disclosures, "retail mom and pop investors walk unsuspectingly into the arms of a financial predator all under the nose of FINRA," said Andrew Stoltmann, president of the Public Investors Arbitration Bar Association.
Brokers, however, see it differently, arguing that they have a right to protect themselves against false or meritless claims. They view the proposed new rules as inappropriate and biased against them, particularly with regard to mandating unanimous decisions. If arbitrators can decide customer complaints by majority rule, so should they be able to decide expungement requests, brokers and their law firms contend.
"If a determination by a majority of a FINRA arbitration panel is sufficient to financially or professionally destroy a registered representative who appears as a respondent before[a] panel, why should a unanimous decision of a FINRA arbitration panel be required to remove a false or erroneous claim from that associated person's registration record?" lawyers G. Thomas Fleming and Kevin K. Fitzgerald of law firm Jones, Bell, Abbott, Fleming & Fitzgerald challenge FINRA in their comment letter.
Brokers also vigorously oppose the one-year limitation on filing expungement requests in instances when their arbitration case is settled rather than resolved. In such situations, brokers will have to file the request as a new claim against the firm, rather than the customer, and will have to do so within one year after the case closes.
Registered reps decried the time limitation, saying that it is unreasonably short, arbitrary and unfair given that customers have six years to file an arbitration claim. They also cited instances when brokers can go years before learning of a complaint.
FINRA's move to make "frivolous claims permanent if not expunged within 12 months" is an "absurdity so manifest that it actually and ironically reduces FINRA's standing as a regulator," Edward Glenn, a Morgan Stanley portfolio manager director, derided the regulator in his comment letter.
FINRA argues that the one-year limitation would ensure that the expungement hearing is held close in time to the underlying customer case when information is fresh and still available and customers are more likely to participate in the hearing, the regulator said.
"Brokers now are going back 15 years to expunge complaints long after the investor is dead or is no longer interested in anything related to the complaint," said Stoltmann.
In addition to being required to open new expungement hearings, registered reps would have to select arbitrators from a new roster of individuals who are licensed lawyers, have advanced training in expungements and have five years' experience in one of several specified disciplines. Currently, arbitrators are not required to be lawyers or meet the standards FINRA now proposes.
The new requirements will help arbitrators better understand the unique nature of expungements and the importance of maintaining the integrity of the public record, FINRA said.
The regulator received more than 40 comment letters from lawyers, arbitrators, recruiters and registered reps from leading wealth management firms during the two-month comment period that ended February 5. It will consider the comments and then file the proposal with the SEC, it said.
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