Finra makes it harder for brokers to expunge tainted records

Latest rule tells arbitrators that expungement should be a 'rare remedy'

Dec 24, 2018 @ 5:57 am

By Jeff Benjamin

The Financial Industry Regulatory Authority Inc. has taken another step toward making it more difficult for brokers to have customer complaints expunged from their public records.

The Finra Board of Governors announced Dec. 21 the approval of enhanced training and guidance for arbitration panelists who rule on expungement requests, 93% of which are currently granted.

The board also approved banning compensated non-attorney representatives, or NARs, from representing clients in Finra arbitration cases, a decision that was applauded by plaintiff's attorneys.

"This is important, because it's Finra's first public disclosure that they want to ban these guys," said Andrew Stoltmann, immediate past president of the Public Investors Arbitration Bar Association.

"These outfits out there aren't attorneys but have been able to represent investors in Finra arbitration claims," Mr. Stoltmann said. "We issued a report on this, saying they should be banned."

The rules, which were initially proposed in September 2017 and were followed by a public comment period, will now be presented to the Securities and Exchange Commission, which will open another public comment period.

"We closed some loopholes in the expungement process and codified our existing web guidance on expungement into rule form," said Rick Berry, Finra's executive vice president and director of dispute resolution.

The rule that deals with the expungement of brokers' online public records promotes enhanced guidance and training for arbitration panelists and introduces additional efforts to get customers to testify at arbitration hearings, including the use of remote video-conferencing.

The rule underscored Finra's push to reduce the high volume of expungements by stating, "Expungement is an extraordinary remedy that should be recommended only under appropriate circumstances."

But that doesn't go far enough for some critics of the arbitration process.

"I'm pleased with what they're doing on the NARs side, but I'm not pleased with what they're doing on the expungement side," said Adam Gana, managing partner at Gana Weinstein.

"These changes are not sufficient to fix an incredibly broken expungement procedure and Finra arbitration process," Mr. Gana said. "Finra needs to fundamentally change the way expungement procedures are handled. Until Finra takes the onus away from investors to fight expungement, the system will remain broken."

Finra responded to the criticism with the following statement: "Finra also shares concerns over expungement. Last year, Finra put forth proposals to clarify when and how expungements are made in the arbitration system. And Finra continues to work with the SEC, state regulators and others regarding expungement matters brought through the courts."

Christine Lazaro, current PIABA president and professor of clinical legal education at St. John's University School of Law, expressed optimism that the rule changes will improve the arbitration process.

"This should raise the burden for expungement by making it clear that expungement is an extraordinary remedy," Ms. Lazaro said. "I expect this rule will ensure that arbitrators consider the impact of expungement on investor protection generally."


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