In early August 2022, the Financial Industry Regulatory Authority (FINRA) filed a proposed rule change with the Securities and Exchange Commission (SEC) to amend the codes of arbitration procedure to modify the existing process regarding the expungement of customer dispute information. Under the current process, financial advisors who have received complaints from customers—regardless of whether these complaints are valid—have six years to pursue an expungement request. However, FINRA intends to make expungements even harder to obtain by shortening this window to two years. If this rule is adopted, victims of baseless accusations will have difficulty having this meritless customer dispute information removed from their public record (i.e., BrokerCheck). Let’s take a look at the proposed rule changes and their potential impact on the financial industry.
Understanding the Current Expungement Request Process
In most professional industries, customer complaints are investigated and evaluated by a neutral third party. The target of the complaint also has the opportunity to defend themselves before the accusation becomes public. However, the financial industry does not adhere to this process. Instead, a customer may file a meritless claim, obtain a quick settlement, and move on—leaving the financial advisor with a baseless claim attached permanently to their publicly available record. FINRA allows financial advisors to pursue an expungement request, where an independent panel of arbitrators evaluates the customer dispute information and determines whether to grant the expungement request. If the panel recommends expungement, the plaintiff may obtain the order through the court and present it to FINRA, which will then remove the customer dispute information from BrokerCheck and the Central Registration Depository (CRD). Under the current expungement rules, a financial advisor has six years in which they may pursue an expungement request.
Why FINRA Wants to Change the Current Process
According to the proposed rule change filing, FINRA is concerned “that the current expungement request is not working as intended—as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules.” Since even baseless claims can be entered into the CRD and BrokerCheck, the rate of successful expungement requests remains high. However, FINRA views this high success rate in a negative light, positing that it threatens the integrity of the CRD and BrokerCheck. Ironically, BrokerCheck is supposed to be a conveyor of truth and accuracy, but with no minimum threshold in place to weed out frivolous or baseless claims, the public cannot determine which financial advisors are actually acting in bad faith and which ones were merely the victims of quick complaints and settlements. Unfortunately, FINRA’s proposed rule changes will make the expungement process more challenging to navigate, preventing many financial advisors from having inaccurate customer dispute information permanently removed from their records.
The Implications of FINRA’s Proposed Rule Changes
In its quest to lower the success rate of expungement requests, FINRA has proposed a series of changes to the expungement request process. Below are just a few of the changes FINRA has put forward, as well as how these changes could reshape the expungement request process for financial advisors and institutions.
Time Limits to Straight-In Requests
Financial advisors wishing to remove inaccurate customer dispute information from the CRD system may pursue a straight-in request. However, FINRA seeks to impose strict time limits within which a person may request expungement. According to the proposed rule changes, FINRA Dispute Resolution Services (DRS) “would deny the DRS arbitration forum if the expungement request is made: more than three years after the date the customer complaint was initially reported in the CRD system (if the customer complaint does not evolve into a customer-initiated arbitration or civil litigation), or; more than two years after the close of the customer-initiated arbitration or civil litigation associated with the customer dispute information.” This proposal significantly shortens the expungement request window, making it much more difficult for financial advisors to file successful expungement requests.
Rules Governing FINRA’s Independent Arbitration Panel
In its filing with the SEC, FINRA clarified that it intends to give customers more of a voice in the expungement request process. FINRA stated that it aims to facilitate “customer attendance and participation by notifying customers of the time, date and place of any prehearing conferences and the expungement hearing” and that it will codify “that customers are entitled to attend and participate in prehearing conferences and the expungement hearing and to be represented, if they choose.” These proposed amendments may complicate expungement requests, making it more difficult for financial advisors to prevail in having erroneous customer dispute information scrubbed from the CRD.
Trusted Legal Guidance When You Need It Most
If you have become the target of a meritless complaint, you should discuss your situation with an experienced securities law attorney right away. Together, you can explore your options for addressing this complaint and determining the most appropriate and successful path forward. It’s important to keep an eye on FINRA’s proposed rule changes to ensure you take the necessary steps to obtain your desired outcome.
Call Judex Law LLC today at (303) 523-4022 to discuss your situation with a dedicated and friendly securities law attorney.