Finra sends expungement rule to SEC; plaintiff's lawyer says won't have an impact

If approved, rule would prohibit investor complaints from being contingent on clearing a broker's record

Apr 14, 2014 @ 8:43 pm

By Mark Schoeff Jr.

A rule that Finra sent to the Securities and Exchange Commission on Monday that would prohibit investor-complaint settlements made contingent on clearing a broker's record of wrongdoing won't improve the regulator's database, according to a securities plaintiff's lawyer.

The measure, which the Finra board passed at its Feb. 13 meeting, would take effect about 90 days after SEC approval. During its deliberation process, the SEC can open the proposal for public comment, modify it or approve it intact.

Finra proposed the rule in response to concerns about Finra's database, known as BrokerCheck, raised last year by Sen. Jack Reed, D-R.I., and Sen. Charles Grassley, R-Iowa

In a letter last December, the lawmakers questioned the broker-dealer regulator's policy toward so-called expungement and whether the process was removing information that would protect investors from delinquent brokers. The two were reacting to a study released last 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.

A former PIABA president said Finra's proposal will not stem expungement requests nor will it change the outcomes of expungement hearings, where brokerage firms and brokers seeking expungement are usually the only witnesses.

“I predict it's not going to have any meaningful impact on the number of expungement requests or the number granted,” said Robert Banks Jr., owner of Banks Law Office PC.

Mr. Grassley said that he and his colleague will follow up on the new rule.

“Sen. Reed and I plan to check back with Finra at the end of the year to see if this rule has made a difference in causing expungements to go down,” Mr. Grassley said in a statement. “The rule is a good start, and it's good for investors that Finra seems to be taking the problem seriously.”

In its rule proposal, Finra noted that it had tightened the expungement process over the last several years. But it said more had to be done.

“Despite previous steps to discourage the practice of firms and associated persons conditioning settlement agreements for the purpose of obtaining expungement relief, Finra continues to have concerns regarding such conduct,” the rule proposal states.

“By removing the ability of the parties to a customer dispute to 'bargain-for' expungement relief as part of a settlement agreement, or otherwise, the proposed rule change would help ensure that information is expunged from the [central licensing and registration system] only when there is an independent judicial or arbitral decision that expungement is appropriate,” it said.

A more effective approach would be for Finra to prohibit expungement but allow brokers to post their responses to claims on BrokerCheck, Mr. Banks said. Alternatively, Finra should change the expungement standard to one in which the presumption is it won't be granted unless there is “a showing beyond a reasonable doubt that the claim was factually impossible.”

Finra did not solicit public comment on the rule but the SRO did note that some financial industry players suggested that the rule might reduce the number of customer disputes that settle, as well as the number of settlements offered by financial firms and their brokers.

“Finra believes such impacts are likely to be small,” the rule proposal states. Finra said that some firms already prohibit expungement conditions in settlement agreements.

Almost all broker-client contracts include a mandatory-arbitration clause for dispute settlements.

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