RIA Compliance Blog
In late May, FINRA issued a press release announcing the temporary withdrawal of proposed rule changes regarding the process for obtaining expungement of customer dispute information maintained for registered representatives on WebCRD, or “BrokerCheck.”
The proposed rule changes were issued in 2017 for possible SEC approval and have previously been discussed on our blog. Since 2017, FINRA has responded to various SEC requests for additional information, and the deadline for adoption of the rule proposals has been extended. The withdrawal release cites “consultations with the SEC staff” as the basis for withdrawal of the rule proposal and concludes by restating FINRA’s commitment that it will continue to consult with, and solicit input from, the SEC and other interested parties “who share a common interest in revising” the expungement process.
Among other things the proposed rule changes included:
- Establishing a new category of arbitrators trained and qualified to decide expungement cases, and maintaining a roster of those arbitrators who will decides such cases;
- Eliminating the process for ranking arbitrators that are appliable to other industry and customer arbitrations;
- Prohibiting stipulations or agreements to allow the case to be decided by fewer than three arbitrators chosen from the special panel;
- Requiring a broker who is named in the underlying arbitration to seek expungement in that arbitration;
- Imposing stricter time limits within which brokers may request expungement; and
- Limiting situations in which a party to a customer dispute – such as a broker-dealer – can request expungement relief for an unnamed party, such as a registered representative of that broker-dealer.
A more complete summary of the history of the FINRA expungement process and the rule proposals are described on a new FINRA webpage dedicated to expungement issues. That webpage contains additional information, including expungement statistics, that seem to contain refutations of some of the more vocal objections to the FINRA expungement process. For example, the website argues that expungement requests have plummeted since FINRA adopted a minimum filing fee, in September 2020, for those instituting expungement requests. Another statistic claims that only 4% of all customer dispute disclosures entered on CRD between 2015 and 2020 have, in fact, obtained an expungement order from a court of competent jurisdiction, which is the final necessary step to obtain expungement under the current rules.
While the scope of the SEC’s concerns regarding the proposals is not fully available at this point, the proposals are the subject of extensive commentary by interest groups. For example, the Public Investors Arbitration Bar Association (PIABA) issued a report earlier in May criticizing the proposed rules as ineffectual and proposing that any reform include the appointment of an “independent investor advocate” to protect the interests of the complainant parties and investors at large. The PIABA report followed two similar reports or comments issued in 2019 and 2020.
The temporary nature of the rule withdrawal indicates FINRA is committed to issuing new proposals to revise the current expungement process, after taking into consideration SEC comments and those from PIABA and other interested organizations such as the Securities Industry and Financial Markets Organization and the North American Securities Administrators Association.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.