(EDITOR’S NOTE: The FINRA expungement process changes described in this post will soon take effect. When they do, it will be even more difficult to remove meritless disclosures from BrokerCheck.
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FINRA’s Imminent Changes to Expungement
Last year, FINRA moved closer to finalizing several proposed rules to change the FINRA expungement process under FINRA rule 2080. For years, FINRA has tried to limit the frequency that financial advisors win expungement of customer complaint information from BrokerCheck. FINRA uses information drawn from the Central Registration Depository (CRD) to populate the information on BrokerCheck. Firms must report written customer complaint information (typically through filing the U4 Form and/or Form U5) under FINRA rule 4530. Advocates of more stringent rules cite a high success rate among those who seek expungement as evidence that financial advisors improperly clear their records at the expense of investors who are kept oblivious to their “checkered” pasts.
The changes made to the process up to this point haven’t “worked.” Financial advisors continue to win their expungement cases far more often than they lose. This success comes despite several previous changes to the process designed to reduce the success rate. Past changes include:
- An increase in fees.
- Ensuring three arbitrators (the individuals responsible for the decision) hear expungement cases as opposed to one.
- Mandatory arbitrator expungement training.
- Guidance directed to FINRA arbitrators about the “extraordinary” nature of granting expungement.
- Requiring brokers to give customers formal notice of a their expungement attempt so the customer may participate to oppose it.
FINRA added these measures in the face of its preexisting rules, which already place a heavy burden squarely on the financial advisor to prove they deserve an amended BrokerCheck record.
FINRA’s Proposed Rule Changes
None of this, it seems, is enough. Under FINRA’s latest proposed rule changes, the following notable modifications to the process will likely take place:
- Financial advisors will have no input on the three arbitrators selected to hear the case—FINRA will randomly select them.
- FINRA will notify state securities regulators about expungement attempts and invite them to participate in the proceedings to oppose them.
- The three appointed arbitrators must unanimously agree to award expungement.
- FINRA will implement additional measures designed to promote customer participation in the proceedings to oppose a financial advisor’s effort.
- FINRA will place more stringent time limitations on when financial advisors may seek expungement.
FINRA’s Rule Changes Fail to Address Why Brokers Win
These proposed changes will not change the rate that FINRA arbitrators order removal of customer complaint information from BrokerCheck.
Through its attempts to apply more stringent rules, FINRA and expungement reform advocates, continue to attribute the success rate to a combination of: (1) arbitrator ignorance in how to apply FINRA’s expungement standards, and (2) rules that are too lax. FINRA has used this logic as the central justification behind every previous amendment to the process, which have all failed to reduce the success rate.
The continually overlooked cause is the broad standard for what constitutes a “customer complaint” that FINRA requires employing broker-dealers to disclose on BrokerCheck. FINRA requires BrokerCheck disclosure of essentially any written complaint involving, “allegations of theft or misappropriation of funds or securities.” This includes a formal lawsuit that involves a financial advisor. But it also includes informal written complaints set out in emails, letters, text messages, or even tweets. FINRA provides a specific example on its website where a tweet from a customer who alleges a financial advisor sold them unsuitable securities would constitute a reportable event worthy of appearing on BrokerCheck.
A complaint may never amount to formal litigation; a complaint could be meritless; the financial advisor’s firm could deny the complaint entirely or settle it for nuisance value without the financial advisor’s input. And in each instance, the complaint would appear on the financial advisor’s BrokerCheck record.
To be clear: FINRA is correct to apply a broad standard for what constitutes a customer complaint that warrants disclosure on a financial advisor’s BrokerCheck record. But these broad reporting requirements (which continue to broaden) have created an influx of financial advisors who have customer complaints on their records that legitimately meet FINRA’s expungement standards.
FINRA’s Broad Reporting Rules have Created an Influx of Meritless, Reportable Customer Complaints
Predictably, when these financial advisors pursue expungement, they win far more often than they lose. FINRA arbitrators—who are overwhelmingly well-versed on the FINRA Rules—understand this dynamic better than anyone. But across the breadth of negative commentary about the expungement process over the last decade, few (if any), it seems, are willing to consider FINRA’s broad BrokerCheck reporting rules as the source of (or at least a substantial contributing factor to) the high success rate in expungement cases.
Ultimately, if you treat every formal or informal expression of discontent about a financial advisor as a complaint that requires BrokerCheck disclosure, you must acknowledge that a substantial proportion of those customer complaints might be legitimately meritless. Financial advisors who have their records tarnished from a meritless complaint often take exception to an attack on their reputation. Unsurprisingly, when these brokers pursue expungement, they win more often than they lose. Successful expungement cases therefore do not confirm lax expungement rules, or arbitrator ignorance. To the contrary, successful expungement cases more likely confirm a deluge of customer complaint information on BrokerCheck that legitimately meets the expungement standards. FINRA conveniently ignores this possibility.
(Please review our BrokerCheck “How-to” Guide for instruction on using this online tool).
If FINRA maintains broad BrokerCheck reporting rules, financial advisors (who can afford it) will continue to overcome FINRA’s obstacles because they will continue legitimately meeting the expungement standard. This is the tradeoff that comes with the requirement to disclose essentially every written criticism of a financial advisor that relates to securities on BrokerCheck. FINRA should simply acknowledge this. Instead, it continues trying to reduce the success rate (to cure what it undoubtedly views as a bad optic) by complicating the process. It hasn’t worked before, and it won’t work this time.
Sources:
1. See: SR-FINRA-2022-024, “Proposed Rule Change to Amend the Codes of Arbitration Procedure to Modify the Current Process relating to the Expungement of Customer Dispute Information,” available here: https://www.finra.org/rules-guidance/rule-filings/sr-finra-2022-024;see also: FINRA’s Letter to the SEC RE SR-FINRA-2022-024, dated November 10, 2022, available here: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/ https://www.finra.org/sites/default/files/2022-11/FINRA-2022-024-Response-to-Comments-11-10-2022.pdf
2. See FINRA Regulatory Notice 20-25, available here: https://www.finra.org/rules-guidance/notices/20-25
3. Id.
4. See Expungement Training (Module 16), the mandatory nature of which is referenced here: https://www.finra.org/arbitration-mediation/basic-arbitrator-training-module-16
5. See “Notice to Arbitrators on Expanded Expungement Guidance,” available here: https://www.finra.org/arbitration-mediation/notice-arbitrators-and-parties-expanded-expungement-guidance
6. Id.
7. See FINRA Rule 2080: Obtaining an Order of Expungement or Customer Dispute Information from the Central Registration Depository (CRD) System, available here: https://www.finra.org/rules-guidance/rulebooks/finra-rules/2080
8. See Note 1 supra FINRA’s Letter to the SEC RE SR-FINRA-2022-024, dated November 10, 2022, at pages 1-2.
9. See FINRA Rule 4530(a)(1)(B) and 4530(e): Reporting Requirements, found here: https://www.finra.org/rules-guidance/rulebooks/finra-rules/4530
10. See FINRA Rule 4530: Frequently Asked Questions at Section 2.1 found here: https://www.finra.org/filing-reporting/regulatory-filing-systems/rule-4530-reporting-requirements/faq#2-1
