Arbitrators specifically qualified to determine whether brokers should have customer disputes removed from their online profiles would decide such cases under a Finra proposal.
The Financial Industry Regulatory Authority Inc. would establish a roster of arbitrators with the background and training necessary to adjudicate so-called expungement cases, according to a
regulatory release this week. A three-person panel selected from the list would handle expungements related to settled cases as well as those requested separately by a broker.
A broker would have to appear in person at the expungement hearing, and the panel would have to vote unanimously for expungement to be granted. A broker would have a one-year deadline to request expungement following the close of the underlying case.
If an award is granted in an arbitration case, the panel that heard the dispute would also decide on expungement. If that matter is settled or concluded in some other way, arbitrators from the special roster would be tapped. Finra runs the
arbitration system that handles customer and broker disputes. Mandatory arbitration clauses are included in nearly all brokerage contracts.
The idea of a special roster of expungement arbitrators was first recommend by Finra's
dispute resolution task force in December 2015.
Through expungement, a broker can have a customer complaint removed from his or her profile in
BrokerCheck, an online database of brokers maintained by Finra. Proponents of expungement say that it clears the record of brokers who are unfairly accused of wrong doing. Critics say that it alters a broker's profile to hide disciplinary problems.
"The proposals help address concerns related to arbitration panels granting expungement requests without hearing the full merits of the underlying case," Richard Berry, Finra executive vice president and director of its Office of Dispute Resolution, said in a statement. "The proposed changes also would make it easier for customers to participate in expungement hearings and make information about the underlying case more readily available to arbitrators."
The Public Investors Arbitration Bar Association has criticized the Finra arbitration system for too often granting expungement requests. The new PIABA president, Andrew Stoltmann, gave Finra credit for addressing the problem.
"Anything Finra can do to tighten up the expungement process is a good development," Mr. Stoltmann said. "Finra acknowledges that this is a big problem, and they are trying to solve it. It's a good, incremental step."
But he is reserving judgment on the proposal, which is open for public comment until Feb. 5.
"I have a feeling there's going to be room for more improvement, but we need to study it in depth," Mr. Stoltmann said.
A former Finra official said that the proposal would provide more structure for the expungement process.
"It's good that they're trying to regularize it and give it a little predictability," said Daniel Nathan, a partner at the law firm Morvillo and a former Finra vice president and director of regional enforcement.
He suggested that Finra go a step further.
"Why not have [expungement] considered in every matter?" Mr. Nathan said.
Previously, Finra issued guidance to arbitrators that expungement should be granted only in extraordinary circumstances. Since then, arbitrators have been
discussing in more depth why they grant expungement.
"Finra has cracked down on expungement, and well-meaning arbitrators want Finra and others to know why they ruled the way they did," Mr. Stoltmann said.
