Record-cleaning rules for registered reps to get Finra tweak

The Financial Industry Regulatory Authority Inc. plans to propose changes in its rules that cover how registered representatives can expunge arbitration claims from their disciplinary records.
Linda Fienberg, president of Finra’s arbitration unit, told a meeting of lawyers last week that the regulator is considering changes in the standards brokers must meet in getting records of customer arbitrations removed from their records.
What those changes might entail isn’t yet clear and the exact timing is uncertain, but Finra is expected to propose changes within the next 18 months. A Finra spokeswoman declined to comment.
Currently, brokers must show to an arbitration panel that a customer’s complaint was false, factually impossible or clearly erroneous, or that he or she was not involved in the matter.
Ms. Fienberg noted last week that Finra is “looking at the issues raised by investors concerning settlement negotiations when an expungement request is involved,” according to a Reuters report.
Attorneys for investors have long complained about the ease with which expungement requests are granted by arbitration panels — especially in cases where a brokerage firm has settled with a customer before a full hearing. Customers usually don’t dispute such a request by the broker or firm, and the money offered gives the appearance that a clean record was purchased.
Seth Lipner, a plaintiff’s attorney at Deutsch & Lipner, who spoke at the meeting last week, reviewed settled cases that included expungement requests over the first six months of 2013 and said that of the 205 cases he found, expungement was granted in 192 of them — a win rate of 93.6%.
“That’s a pretty sure thing,” he said.
Since these are cases that settle before a hearing of the evidence, it’s unclear how arbitrators make determinations to expunge information, Mr. Lipner said.
“Arbitrators do them in less than half a day,” he said. Of the 205 cases, 193 of them were done in half-day sessions, 10 took a full day and only two took more than a full day.
Expungements involve a “very rigorous process,” countered industry defense attorney Bryan Ward, a partner at Sutherland Asbill & Brennan LLP.
Arbitrators must review the settlement agreement, and for brokers, “it’s a high bar and takes a lot of effort to go through the [expungement] process,” Mr. Ward said.
In fact, few brokers make the effort, which could be why those who do seek expungements have achieved a high success rate, Mr. Ward said.
Mr. Lipner figures that brokers seek expungement in 10% to 20% of settled cases.
“There’s a certain amount of ‘friction’ in bringing these proceedings,” Mr. Lipner said.
Separately, Finra continues to work on a set of new procedures, proposed in May 2012, that would allow brokers to expunge information on their records in cases where they were not named in an arbitration complaint.
Finra has not yet filed the proposed new procedures with the Securities and Exchange Commission.
Mr. Lipner thinks the change could increase the amount of expungement requests made by brokers.