State securities regulators will put an emphasis this year on reforming the process by which brokers can remove disciplinary information from their online records.
Brokers can request so-called expungement from arbitrators who hear a case against them in a process run by the
Financial Industry Regulatory Authority Inc., the self-funded broker-dealer regulator. If granted, expungement cleans a broker's profile in the online database BrokerCheck.
Critics contend it has become too easy for brokers to get an expungement request approved.
“The overarching issue is that expungement should be an extraordinary remedy,” Melanie Senter Lubin, Maryland securities commissioner, said in an interview Monday at the North American Securities Administrators Association annual conference in Indianapolis. “The way it's being applied now, we've seen too many circumstances where it really isn't treated as an extraordinary remedy, and it's treated as what happens in the normal course of the arbitration proceeding.”
Almost all brokerage customer agreements include a clause that forces investors to take disputes against their broker to Finra arbitration. State regulators have criticized the arbitration process for years.
Earlier this year, NASAA established a group of regulators to tackle the expungement issue. It's also a priority for the NASAA steering committee.
“You will be hearing a lot about expungement this year from NASAA,” A. Valerie Mirko, NASAA deputy general counsel, said during a Monday morning panel at the conference. “It's absolutely one of our top issues.”
One of the concerns for state regulators is that information they need to compile about brokers is removed by expungement. They are considering whether the expungement decision should be made by regulators. Under the current process, expungement is granted by arbitrators and confirmed by a court order.
“We are taking a fresh look at it,” Ms. Lubin said. “It's been tweaked under the existing structure as much as it can be. We're looking at other options to address some of the issues we've seen and our concerns about the direction that expungement is taking. Long term, we need to explore another process for handling expungement requests.”
Recently, the Securities and Exchange Commission approved a Finra rule that would prevent brokers from requiring expungement as a condition of a settlement. Finra recently
established an arbitration task force to consider other changes.
Ms. Lubin said NASAA is working with Finra on expungement improvements.
“The [Finra] reforms are helping,” Ms. Lubin said. “They haven't fixed everything.”
