SEC approves Finra rule limiting expungement

Regulator signs off on a rule that stops brokers from including expungement as a term in settlements in customer arbitrations

Jul 23, 2014 @ 2:25 pm

By Mason Braswell

The SEC has signed off on a rule that could make it more difficult for brokers to erase customer complaints from their records in arbitrations cases that are settled, although some attorneys remain skeptical.

On Wednesday, the Commission authorized the Financial Industry Regulatory Authority Inc. to implement Rule 2081, which would prohibit brokers from making settlements of customer disputes contingent on the claimant's agreement not to oppose expungement of the dispute from the brokers' public record.

The aim is to make sure that brokers are only able to erase customer complaints in extreme cases.

A study released in October by the Public Investors Arbitration Bar Association, a group of plaintiff's attorneys, showed expungement requests were granted in 89% of the cases resolved by stipulated awards or settlement from 2007 to 2009. From May 2009 to the end of 2011, the expungement was granted in 96.9% of cases resolved by settlement or stipulated award.

(More: Is it too easy to clear broker records?)

The rule “should help assure that accurate and complete customer dispute information remains available to the investing public, regulators, and broker-dealers,” the SEC wrote in its decision.

“Despite the very narrow permissible grounds and procedural protections designed to assure expungement is an extraordinary remedy, however, arbitrators appear to grant expungement relief in a very high percentage of settled cases,” the SEC added.

While the rule is a step in the right direction, the SEC and some attorneys said that it does not go far enough.

“The commission encourages Finra to conduct a comprehensive review of its expungement rules and procedures to determine whether additional rulemaking is necessary or appropriate to assure that expungement in fact is treated as an extraordinary remedy,” the commission wrote in its decision.

(More: The broker's case for a chance at a clean record)

After Finra submitted the rule to the SEC in mid-April, the agency took an additional 45 days to review the proposal after receiving 15 comment letters. Even for the 12 that were in favor of the rule, five said that brokers would still be able to expunge legitimate complaints once the rule was in place.

Arbitrators have already been instructed to ask if expungement was negotiated as a condition of settlement. Attorneys for brokers and their firms don't mention it as a condition of settlement, and it is almost never done explicitly, according to Seth Lipner, a securities attorney and law professor at Baruch College.

“It's still done with a wink and a nod, and nothing is ever put in writing” Mr. Lipner said in an interview. “I'm not sure it's that pervasive of a problem anyway.”

The primary reason clients don't come back to oppose expungement after a settlement is because they do not want to deal with the extra hassle, Mr. Lipner said.

“They just want to be left in peace,” said Mr. Lipner. “This is a rule in search of a problem.”

In its response to comment letters, Finra said that it would continue to enhance training for arbitrators to make sure they root out both written and oral agreements and that the regulator would continue to look for additional changes that could be made to enhance the process.

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