Reining in expungements

The vote by the Finra Board of Governors to make it more difficult for brokers to expunge black marks from their public records is welcome, and should improve confidence that the arbitration system is fair to investors. When, as a study by the Public Investors Arbitration Bar Association showed, up to 90% of expungement requests were granted by arbitration panels, something is clearly out of whack. It is unlikely that 90% of brokers who have upset their clients enough to prompt an arbitration award have completely reformed their ways and deserve to have their records cleared. The fact that such a high percentage of expungement requests is granted throws a cloud over the whole arbitration system, suggesting it is biased in favor of brokers. The move by the board of the Financial Industry Regulatory Authority Inc. rightly reminds arbitrators that expungement is an extraordinary remedy that should be granted only under “appropriate circumstances.”

PROVIDING MORE DETAILS

The board said customer dispute information should be expunged “only when it has no meaningful investor protection or regulatory value.” It is appropriate also that an arbitration board should provide more details of the rationale for granting any expungement, and should examine a broker's BrokerCheck report when making the decision. Arbitration panels are supposed to determine if an investor has been wronged by a broker and, if so, to redress the wrong in a fair and expeditious manner. An unspoken responsibility is to help protect other investors from broker misbehavior or carelessness. Therefore, arbitrators must not be too ready to expunge awards against brokers. Such records are important information for investors to have when deciding whether or not to trust their hard-earned savings to a particular broker. Finra's action builds on the protection provided last year when the SEC approved a rule that prevents firms from including in settlement agreements a stipulation that claimants would not oppose expungement. Finra could take one more step: Make more effort to ensure the claimant in a dispute attends any expungement hearing, though if arbitration panels follow the new instructions, this should become less important.