Finra's Board of Governors voted on Thursday to move ahead with two key regulatory initiatives for broker-dealers, including one that would amend codes of arbitration to make it tougher for brokers to erase black marks from their public record.
The proposal, which is set to be submitted to the Securities and Exchange Commission for approval, would incorporate
existing guidance and best practices into the rules. The guidance reminds arbitrators that expungement is “an extraordinary remedy that should be recommended only under appropriate circumstances.” It goes on to say that “customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.”
The arbitration panel would also be required to take additional steps such as receiving a copy of the BrokerCheck report when deciding expungement and providing more details of the rationale for granting expungement in arbitration awards.
'IMPORTANT BALANCE'
“This is again an important balance we're trying to hem,” Richard Ketchum, Finra's chairman and chief executive officer, said in a
video posted to Finra's site. “The securities industry really differentiates itself in the amount of transparency it provides with respect to prior issues customers should consider, but at the same time it's important to provide the expungement right when information included in that report is unfair and frankly false.”
The update is latest in a series of developments since a study released in October 2013 by the Public Investors Arbitration bar Association, a group of plaintiff's attorneys, showed expungement requests were granted in as many as 90% of cases resolved by settlement or stipulated award.
Last year, the SEC
signed off on a rule that prevented firms from including an agreement that the claimant would not oppose expungement a part of settlements.
“This has been a source of controversy for a long time,” said Jack Brennan, chairman emeritus of Vanguard Group Inc. Mr. Brennan is Finra's lead governor.
Some PIABA members and its current president, Joe Peiffer, said earlier this week they don't think the rule goes far enough and doesn't solve issues such as clients' not showing up to expungement hearings.
“There's no one there to challenge it,” Robert S. Banks Jr., a member of the National Arbitration and Mediation Committee as well as PIABA, said Tuesday. “It's a good thing that Finra is recognizing and trying to fix the expungement problem, but it's not going to affect the outcome of expungement hearings.”
PREVENTING ELDER ABUSE
Finra's board also authorized the regulator to put a rule proposal out for comment that would help protect senior investors. The rule would require firms to obtain the name and contact information of a trusted person for the customer's account. The new rule would also allow, but not require, firms to freeze funds in accounts of investors 65 and older when there is “reasonable belief” of financial exploitation.
“This is one of the
toughest things that firms have to struggle with,” said Mr. Ketchum in the video. “We've tried to hit a middle ground here that provides that kind of safe harbor.”
Earlier this year, Finra introduced a
senior protection hotline for investors to call. Since its introduction Finra has received over 1,400 calls, Mr. Ketchum said. They often resulted in a “quick resolution” of issues.
“The help line has also brought to light a number of potential fraud or significant sales practice issues that Finra staff is actively pursuing,” said Mr. Brennan on the video with Mr. Ketchum.
