Expungement reform advocates taken by surprise as Finra revises proposal

For years, Lisa Braganca has advocated reforming the way that registered representatives can clear their records of customer complaints. But when the Finra board announced last week that it had approved revisions to a previous proposal for doing so, Braganca was caught off guard.

The Financial Industry Regulatory Authority Inc. said in its report about its May board meeting that the board had ratified amendments to an expungement reform proposal that was rejected nearly a year ago by the Securities and Exchange Commission.

The board report didn't provide details about the proposal nor a timeline for when it will be sent to the SEC. The SEC must approve Finra rule proposals.

The original proposal would have established a special roster of arbitrators to hear expungement requests while limiting the time frame in which brokers can clear complaints from their profiles in the BrokerCheck database.

That approach was criticized by the Public Investors Advocate Bar Association and other investor groups. Braganca, president of the PIABA Foundation, is the co-author of two reports that called for an overhaul of the expungement process.

But if Finra went back to the drawing board on its expungement proposal, it did so without consulting anyone from PIABA.

“I don’t understand how the board could have acted on this proposal before Finra got input it said it was going to get from stakeholders,” said Braganca, founder of an eponymous law firm in Chicago.

PIABA president Michael Edmiston said he’s reserving judgment on Finra’s revised rule because it’s a mystery to him.

“There are always ideas being bandied about,” Edmiston said. “But I am not privy to whatever this proposal is.”

Finra said the public will have a chance to weigh in on the revised expungement proposal.

“FINRA remains committed to enhancing the expungement process, and there will be additional opportunities for public comment as the rulemaking process continues,” Finra spokesperson Ray Pellecchia wrote in an email.

Nathaniel Stankard, Finra senior vice president and senior adviser to Finra CEO Robert W. Cook, said at the organization’s annual conference last week that it's proceeding on two tracks on expungement reform.

One avenue is the proposal for a special arbitration panel. The other is a deeper reform that could include establishing an administrative process outside the arbitration system that Finra runs to consider expungement requests. That reform idea is among those outlined in a recent discussion paper.

If the special roster of expungement arbitrators is revived, it will meet with resistance from PIABA. Braganca said arbitrators with the most experience on expungement matters are those who are most likely to grant it.

“This specialized roster will make things worse,” she said. “We’re not against all expungements. But this system is expunging claims that are valid.”

Benjamin Edwards, associate professor of law at the University of Nevada Las Vegas, anticipates the revised proposal will only tweak the expungement process.

“I have strong doubts as to whether these procedural changes will be enough to create confidence in the expungement system,” Edwards said. “Whatever the new proposal is, I don’t expect it will put this issue to bed.”

Finra has been addressing expungement reform for years.

Ultimately, however, regulators, not arbitrators, must make expungement decisions, said Sam Edwards, a partner at Shepherd Smith Edwards & Kantas.

“This is a regulatory issue, and regulators need to own it,” Sam Edwards said. “But nobody will pick it up and run with it.”