Financial advisors and brokerage firms recognize that the Financial Industry Regulatory Authority (FINRA) allows them to pursue an expungement request to remove customer dispute information from the Central Registration Depository (CRD) system, which provides information about these issues to the public through a free tool known as BrokerCheck. FINRA’s central goal is to protect consumers and the public from individual brokers and larger firms who have exhibited a history of misconduct. To this end, FINRA typically discloses customer dispute information without conducting a comprehensive review, meaning that inaccurate or downright false customer dispute information may appear on a broker’s profile. However, FINRA offers financial advisors a way to pursue an expungement request to remove any erroneous information. In recent months, FINRA announced a few substantial rule changes to the expungement request process. Here’s what you need to know about the reasons behind these proposed changes and the potential consequences they may carry if enacted.
FINRA’s Existing Expungement Request Process
Under FINRA’s current system for handling expungement requests, FINRA will remove customer dispute information from the CRD only after it receives a court order to execute the expungement. Essentially, there are two paths to obtaining a court order. One way is for a firm or individual broker to initiate a request for expungement using FINRA’s panel of independent arbitrators. The panel will evaluate the request and determine whether to recommend expungement in their award. It’s important to note that FINRA does not influence this process or decision in any way. Should the arbitration panel recommend expungement, the individual must still seek an order from a court of competent jurisdiction that confirms the arbitration award and serve this document on FINRA.
Alternatively, a firm or broker pursuing expungement may elect to initiate a proceeding directly in a court of competent jurisdiction without participating in the arbitration panel process beforehand. Once FINRA receives a court order confirming an arbitration award that recommends or compels expungement, FINRA must honor this order.
FINRA Voices Concerns About the Existing Expungement Process
FINRA released a document entitled “Discussion Paper—Expungement of Customer Dispute Information” in April 2022, which provides an overview of the current expungement request process, identifies concerns about the existing process, and proposes rule changes to address these concerns. FINRA’s primary concern about the current expungement process pertains to straight-in requests, which involve older customer dispute information that was reported to the CRD record several years before the expungement request was initiated. In these instances, any documents or information associated with the customer dispute information may be stale or no longer available. For example, approximately two-thirds of straight-in requests were filed more than six years after the customer dispute information was first entered into the CRD system.
Concerns About Customer Representation
Another prominent concern with the existing expungement process relates to a customer’s ability to participate in expungement arbitration. Although arbitrators are instructed to ensure the customer has ample notice and opportunity to participate in the expungement arbitration, most customers and their representatives do not participate in hearings involving straight-in requests. As a result, the panel of arbitrators may only receive information from the firm or individual requesting the expungement. FINRA has specified that it is actively seeking ways for customers to become more actively involved in these arbitration proceedings.
Cracking Down on Repeated Expungement Requests
The third key concern about the existing expungement request process involves brokers or financial advisors who make repeated attempts to seek expungement of the same customer dispute information. According to FINRA, some financial advisors pursue straight-in expungement requests after withdrawing an expungement request in the customer-initiated arbitration. FINRA has labeled this tactic “arbitrator shopping,” and it has identified this concern as a primary area of focus in introducing proposed rule changes.
Expungement-Related Proposed Rule Changes
In April 2022, FINRA published proposed changes to improve the current expungement process. These potential changes include the following actions:
- Establishing a roster of public chairpersons who have received additional training and experience from which a panel would be selected to oversee and decide straight-in requests
- Imposing time limits on when a financial advisor may request expungement in a straight-in request (the proposal is to enforce a 3-year period from the date the complaint took place during which an advisor may pursue a straight-in expungement request)
- Codifying a party’s ability to request expungement on behalf of an unnamed financial advisor and establishing procedures for these types of requests
- Applying a minimum fee to expungement requests
Overall, FINRA maintains that its mission is to protect the integrity of the information available in the CRD system and BrokerCheck. FINRA is increasing its efforts to protect investors, but financial advisors who have been unfairly targeted by inaccurate or false customer dispute information should recognize how these proposed changes may impact their ability to obtain an expungement. If you need help exploring your options for pursuing an expungement request, enlist the guidance of a trusted securities law attorney today.
Call Judex Law LLC today at (303) 523-4022 to discuss your options with a dedicated and friendly securities law attorney.