In the summer of 2022, the Financial Industry Regulatory Authority (FINRA) submitted proposed rule changes to the Securities and Exchange Commission (SEC), many of which aim to make expungement requests more selective and difficult to obtain. Right before the SEC was set to weigh in on whether to adopt the proposed rule changes, FINRA filed an amendment with the SEC, proposing three additional modifications to the previous rule change proposals. In light of these announcements, the Securities Industry and Financial Markets Association (SIFMA) released a letter to the SEC urging it to deny FINRA’s proposed rule changes. This letter highlights several concerns about the consequences these proposed changes may have on member firms and financial advisors throughout the industry, restricting their ability to expunge inaccurate or misleading customer dispute information from the CRD and BrokerCheck and causing significant damage to their professional reputations. Below is an overview of FINRA’s proposed changes and SIFMA’s concerns about the impact of such amendments to the expungement request process.
Understanding FINRA’s Proposed Changes
FINRA has proposed several restrictions to the expungement request process, which can be distilled into seven discrete changes:
- Requiring that straight-in requests be decided by a three-person panel of randomly selected public arbitrators with enhanced expungement training
- Prohibiting parties from agreeing to fewer than three arbitrators to handle their expungement requests, striking any of the selected arbitrators, stipulating to an arbitrator’s removal, or stipulating to the use of pre-selected arbitrators
- Providing notification to state securities regulators of all expungement requests and encouraging these parties to attend and participate in expungement hearings
- Imposing strict time limits on filing straight-in requests
- Updating and codifying best practices for arbitrators, such as requiring the arbitrators to facilitate customer attendance and participation in expungement hearings
- Requiring the panel to unanimously agree before issuing an award containing expungement relief
- Establishing procedural requirements for filing expungement requests
After FINRA received feedback from the public about these proposed changes, it issued an amendment that specified three additional proposed changes. The first proposed change would add language to FINRA’s rules to clarify that a party cannot request expungement if the party had previously been found liable for this matter by a panel or court of competent jurisdiction. Second, the amendment would alter the rules to specify that customers whose complaints are the subject of an expungement request are entitled and encouraged to participate in all aspects of the hearing process, including prehearing conferences. Third, the amendment would instruct arbitrators to give “absolutely no evidentiary value” to a customer’s decision to not attend or participate in an expungement hearing.
SIFMA’s Primary Concerns About FINRA’s Proposed Changes
In early December 2022, SIFMA issued a letter to the SEC addressing FINRA’s proposed amendments and raising several concerns about the impact these changes would have if adopted. SIFMA expresses its position within the first few sentences: “The Proposal is inconsistent with the Exchange Act because it improperly attempts to amend existing rules and strictly limit the grounds for granting expungement without providing adequate notice, opportunity for comment, or due process generally.” The letter continues to critique FINRA’s actions, arguing that it “fails to solicit any public comment about a Rule 2080(b)(1) limitation, thereby effectively silencing any meaningful opportunity to be heard and to present the case against the propriety of such a limitation.” SIFMA’s letter expresses concern about the proposed changes and the method by which FINRA has proposed and submitted such sweeping changes.
Long-Term Consequences of FINRA’s Proposed Changes
SIFMA also expresses concerns about the potentially devastating consequences FINRA’s proposed changes could have on broker-dealers and firms if adopted. It states, “A mere sales practice allegation is sufficient to trigger CRD reporting. There is no requirement to show that the customer’s complaint has substantive merit, or is not inaccurate or misleading. Consequently, we see many FINRA arbitrations result in awards of zero against the financial advisor, and yet the associated customer complaint often remains on the advisor’s CRD for his or her career.” These concerns highlight how the changes, if adopted, could prevent several financial and securities advisors from expunging false and damaging customer dispute information, causing permanent reputational harm.
What’s Next For FINRA’s Amendment Proposals
For now, industry experts expect the SEC to announce its decision on these proposed rule changes in the Spring of 2023. In the meantime, organizations like SIFMA and members of the industry will likely continue to voice their concerns and reactions to the proposed changes in the hopes of dissuading the SEC from adopting them. If you have questions about how these procedural changes could affect your ability to pursue an expungement request, or if you need help moving forward with this process, contact an experienced and knowledgeable securities law attorney as soon as possible to discuss your options.
Reach out to Judex Law, LLC today by calling (303) 523-4022 to discuss your needs with a trusted and experienced securities law attorney.