Finra halted an effort to reform the process by which registered representatives can remove customer disputes from their records Friday.
The Financial Industry Regulatory Authority Inc. put the brakes on a proposal that would have established a special roster of arbitrators to hear expungement requests while limiting the timeframe for brokers to clear complaints from their profiles in the BrokerCheck database.
Finra had filed the proposal with the Securities and Exchange Commission in September. It "temporarily" withdrew the measure Friday after talks with SEC staff “so that we can further consider whether modifications to the filing are appropriate,” Finra said in a statement.
The SEC must approve Finra rule changes.
The move comes a week after the Public Investors Advocate Bar Association released a report criticizing the Finra arbitration system, which adjudicates disputes between customers and brokers, for being too lenient in allowing brokers to polish their records. The PIABA study asserted that 90% of expungement requests are granted.
“Today is a fantastic day for investor advocacy,” said PIABA President David Meyer. “This is what we’ve been work for for the last six months … [which is] to convince the new SEC that the expungement process is broken and Finra’s proposed changes were not going to fix the problem.”
Meyer said PIABA members had been talking to staff members for SEC Chairman Gary Gensler and at least two of the four other commissioners to persuade them that the Finra proposal would be ineffective.
“They were incremental tweaks,” Meyer said. “We hope [Finra] will go back to the drawing board” and draft “a new proposal that specifically addresses the concerns we raised in our report.”
A former Finra arbitration director praised the regulator for taking a step back on the proposal.
"This is a monumentally important rule, so going back to the drawing board was a better option," said George Friedman, editor in chief of the Securities Arbitration Alert. "Better right than rushed."
In its statement, Finra said it would work with the SEC and other stakeholders on revising the process for reviewing brokers’ background information contained on the Central Record Depository, which populates BrokerCheck.
“FINRA is committed to limiting the expungement process so that it operates as intended—as an extraordinary remedy, only appropriate in limited circumstances when the CRD information is clearly inaccurate,” Finra said. “We continue to take meaningful steps to enhance controls on the existing expungement process in the near term, including our specialized panels proposal, while we work concurrently to support the development of fundamental, multi-stakeholder solutions.”
The broker-dealer self-regulator posted a new page on its website on Friday that outlines the steps it has taken over the last several years to reform the expungement process.
The site emphasizes that Finra only grants expungements that have been affirmed by a court order following approval by arbitrators. It asserts that the number of expungements drops significantly when considered in that context.
“Of the approximately 35,000 customer dispute information disclosures in the CRD system entered between 2015-2020, approximately 1,550 or 4% have been expunged pursuant to a court order as of May 25, 2021,” the site states.
A Finra rule went into effect in September that substantially increased the minimum filing fee for expungement requests. That has led to a precipitous decline in the number of requests, the site says.
Investor advocates have criticized expungement for many years, arguing that it allows brokers to conceal their misconduct and keep important information away from investors as they make decisions on whom to hire as a financial adviser.
“It has been a major dumpster fire for Finra for over a decade,” said Andrew Stoltmann, a Chicago securities attorney and PIABA member. “Finra’s trying to get the expungement issue right — and PIABA deserve some credit for [making] making Finra study it more deeply.”
The environment around reform expungement has improved thanks to the newly constituted SEC, Stoltmann said.
Gensler was confirmed by the Senate last month to head the agency. His arrival gives the commission a 3-2 Democratic majority.
“This move by Finra is in direct relation to someone heading the SEC who’s actually an investor advocate for a change,” Stoltmann said of Gensler.
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