Finra adopts reforms to make it tougher for brokers to clear their records

Attorneys who represent investors in actions against brokerages and registered representatives are hopeful that expungement reforms Finra enacted late last week will make it harder for reps to clear their records of disputes.

The Financial Industry Regulatory Authority Inc. on Friday adopted amendments to its expungement procedures, which allow reps to remove customer complaints from the Central Registration Depository system and their BrokerCheck profiles.

The new rule establishes a special roster of arbitrators to hear so-called straight-in expungement requests, or those that are filed by a registered representative separately from a customer arbitration. It also requires brokers to file a straight-in requests within two years of the closing of a customer arbitration or civil litigation. Other changes include requiring earlier notification of customers and state regulators when brokers seek expungement and allowing state regulators to participate in straight-in requests.

The Securities and Exchange Commission approved the reforms in April. The regulatory notice Finra posted Friday said they will go into effect Oct. 16.

Finra has been wrestling with expungement reform for years. The rulemaking process for the latest reforms began in September 2020 and included a withdrawal of the proposal in July 2021, after securities attorneys and state regulators questioned whether they were tough enough to stop what they assert is a too permissive expungement process. Finra re-proposed the rule in July 2022.

One of the leading proponents of expungement reform — the Public Investors Advocate Bar Association — said Finra is going in the right direction.

“This rule is a good start,” said PIABA President Hugh Berkson. “Let’s see it work well.”

A former PIABA president endorsed the Finra reforms.

“It’s a good day for Finra and an even better day for investors,” said Andrew Stoltmann, a Chicago securities attorney. “This expungement issue has vexed Finra for over a decade.”

The revised expungement process requires a three-person arbitration panel to hear an expungement request, as well as a 3-0 vote to approve one.

“The unanimous agreement of the panel to grant expungement will go a long way to eliminating non-meritorious expungement requests,” Stoltmann said. “You can fool some of the people some of the time, but you can’t fool all the arbitrators all the time.”

The time limit set on straight-in arbitration requests, as well as allowing state regulators to participate in the expungement process, will make it harder for brokers to clear their records, Stoltmann said.

Even though the reforms give state regulators a bigger role in expungement, they resisted the proposal as late as April, when the SEC approved it. The North American Securities Administrators Association, the umbrella organization for state regulators, declined to comment on Finra’s adoption of the new expungement rules.

Securities lawyers caution that this latest mile marker may not represent the end of the expungement-reform journey.

“I applaud Finra for doing the right thing and taking the first step to change expungement procedures, but there’s still a long way to go,” said Adam Gana, managing partner at Gana Weinstein.

For instance, he said, Finra should change the rule that requires investors to participate in the expungement procedure, which includes going to court.

“Until that happens, the system is flawed,” Gana said.

Whether the Finra reforms work depends in part on how well arbitrators follow them.

“I’m hoping the special [arbitrator] roster and the special training they will receive help the arbitrators understand the crucial role they play,” said Berkson, a partner at McCarthy Lebit Crystal & Liffman. “After these rules go into effect, if expungement remains a rubber-stamp process, more reform will be necessary.”

Berkson also wants Finra and other regulators to be more hands-on when it comes to protecting the Central Registration Depository system from inappropriate expungements.

“This is a regulatory role,” he said.