Finra aims to prohibit brokers' demanding clean records as a condition of settlement

Practice may interfere with arbitrators' ability to determine appropriateness of expungement, Ketchum says

Jan 24, 2014 @ 4:01 pm

By Mark Schoeff Jr.

+ Zoom

Brokers would not be able to demand that their records be cleared of wrongdoing as a condition of settlement of an investor complaint under a rule being considered by Finra.

The broker-dealer regulator told two lawmakers in a letter released Friday that it intends to reform so-called expungement, the process that allows brokers to sanitize their information in the BrokerCheck online database system.

“We are presently developing rule changes that would prohibit the practice of conditioning settlements on an investor's agreement not to oppose expungement,” Finra Chairman and chief executive Rick Ketchum wrote in a Jan. 6 letter to Sen. Jack Reed, D-R.I., and Sen. Charles Grassley, R-Ia. “While the suggestion to include such conditions in exchange for additional compensation does not always originate with the brokerage firm or broker, this practice may interfere with arbitrators' ability to independently determine the appropriateness of expungement and make the requisite affirmative finding.”

Mr. Ketchum wrote his letter in response to a Dec. 16 letter to Finra from Mr. Reed and Mr. Grassley that questioned its expungement policy. The senators' letter was based on a study released in October by the Public Investors Arbitration Bar Association that showed that expungement requests were granted more than 90% of the time in cases resolved by settlement or stipulated awards between 2007 and 2011.

In his response to the senators, Mr. Ketchum addressed several PIABA recommendations to improve the expungement process. In addition to the settlement rule change, Mr. Ketchum said that Finra is overhauling expungement training for arbitrators. The revised training will be posted on Finra's website next month.

“The training increases the emphasis on the importance of [the Central Registration Depository] and BrokerCheck, and the arbitrator's critical role in maintaining the integrity of disclosure information contained on the system,” Mr. Ketchum wrote.

In recent guidance to arbitrators, Finra underscored the “extraordinary nature of expungement relief” and urged them to consider carefully whether clearing a broker's record could deny important information to investors reviewing an adviser's background, according to Mr. Ketchum.

Mr. Reed and Mr. Grassley, who had pressed Finra on the potential threat to investors posed by expungement, said in a statement Friday that they are happy with Finra's answers.

“Finra was responsive to our inquiry and it appears the organization is taking this problem seriously,” Mr. Reed and Mr. Grassley said. “We will continue to follow up and work closely with Finra to ensure that it follows through on its commitment to improve the expungement system. It is important for consumers to have the unvarnished information they need.”

Although the number of court-approved expungement requests during the period of the PIABA study was only 850, out of 17,635 cases filed, “any inappropriate reduction in the amount of broker disclosure to investors is of serious concern to Finra,” Mr. Ketchum wrote.

In responding to other PIABA recommendations, Mr. Ketchum said that Finra could not participate in arbitrators' proceedings concerning expungement but noted that all expungement requests are reviewed by Finra and must be approved by a court.

Mr. Ketchum said that Finra has the authority to improve the expungement system without congressional intervention.

“At this stage, Finra does not believe a legislative solution is necessary,” he wrote.

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