Kudos to the SEC for signing off on a rule that should make it more difficult for brokers to erase customer complaints from their records in arbitration cases that are settled.
The Securities and Exchange Commission last Wednesday authorized the Financial Industry Regulatory Authority Inc. to implement Rule 2081, which prohibits 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 rule is in response to complaints from plaintiff's attorneys and some members of Congress that too many brokers were getting disciplinary actions wiped from their records by arbitrators.
PACT OF SELF-INTEREST
Indeed, brokers would strike a settlement with a wronged investor contingent on that investor's agreeing not to oppose the broker's application for expungement. Since the monetary award was often more important to an investor than the broker's disciplinary record, investors usually signed off, paving the way for the brokers to have their disciplinary slates wiped clean.
The new rule helps ensure that brokers are only able to erase customer complaints in extreme cases.
That said, there is likely more work to do. In its decision, the commission encouraged Finra to “conduct a comprehensive review of its expungement rules and procedures to determine whether additional rule making is necessary or appropriate to assure that expungement in fact is treated as an extraordinary remedy.”
TAKE A HARDER LOOK
Along those lines, we implore Finra to take steps to strengthen training of its nearly 6,500 arbitrators on the expungement process and to scrutinize expungement requests far more closely than it has in the past.
It is incumbent upon Finra to make sure it has policies and procedures in place that make expungement the exception rather than the rule in cases involving settlements.
Investors have a right to see records of customer complaints involving their brokers. After all, they are entrusting these brokers with their hard-earned savings — not to mention their retirement hopes and dreams.