Finra Proposes Changes to Expungement Process

• Posted on: Jan 22 2018

The Financial Industry Regulatory Inc. (“FINRA”) recently proposed establishing a roster of arbitrators specifically qualified to adjudicate expungement cases, a concept that was initially recommended by FINRA’s regulatory task force in December 2015.

What is an expungement?

The expungement process allows a customer complaint regarding a broker to be removed from FINRA’s online database known as BrokerCheck. By relying on arbitrators with the necessary background and training to oversee expungement cases, FINRA hopes to address concerns that the process grants expungement requests without considering the merits of a case.

Critics contend that this alters a broker’s online profile and hides disciplinary problems. In particular, the Public Investors Arbitration Bar Association contends the FINRA arbitration system has granted expungement requests far too often. On the other hand, proponents of expungement say that it clears the record of a broker who has been accused of wrongdoing unfairly.

FINRA’s New Expungement Panels

Under the proposal, a three-person panel would be selected from the list of arbitrators to handle expungements of settled cases. The panel would also hear cases requested by a broker, provided the request for a hearing is made within one year of the close of an underlying case. Brokers would be required to appear at a hearing, and the panel must vote unanimously to grant the expungement.

It is worth noting that in FINRA arbitration cases in which an award is granted, the panel that presided over the dispute would also hear the expungement case. Arbitrators from the special roster would hear matters that are settled by other means.

“The proposals help address concerns related to arbitration panels granting expungement requests without hearing the full merits of the underlying case,” Richard Berry, FINRA executive vice president and director of its Office of Dispute Resolution, said in a statement.

Finra also believes the proposed changed will make it easier for customers to participate in expungement hearings and that information about underlying cases will be more readily available to the arbitration panels.

The Takeaway

Ultimately, the proposal is designed to provide more structure to the expungement process, regularize it, and make it more predictable. Previous FINRA guidance to arbitrators advises that  expungements should be granted only in “extraordinary circumstances.”

Whether the proposed changes to the expungement process will provide enhanced safeguards to investors remains to be seen.  The proposal is open for public comment until Feb. 5. 2018.