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By: Leo Kogan
Federal law mandates that the Financial Industry Regulatory Authority (FINRA) collect and maintain information about the qualification, employment and customer complaint histories of brokers and other registered financial services professionals. To that end, FINRA maintains the Central Registration Depository (CRD), the Securities and Exchange Commission (SEC), FINRA, other self-regulatory organizations (SROs), state securities regulators and securities firms can access such information about hundreds of thousands of active registered professionals. To help keep the information in the CRD current, FINRA requires registered to professionals disclose changes to information to their broker-dealer, and the broker-dealer is in turn required to disclose the change to FINRA.
The information maintained in the CRD includes, among other things, customer complaints and other disputes be disclosed on a registered professional CRD record. For example, when a customer sues or simply makes a written complaint to the broker, the broker must disclose the dispute to his broker-dealer, which in turn must update disclose the information on CRD. What frustrates many registered professionals about this process is that customer disputes must be disclosed and made a part of the professional’s permanent CRD record irrespective of the merits of the customer’s claims. What’s worse, these disclosures are made available to the public via FINRA’s BrokerCheck database.
Expungement To the Rescue
To mitigate what many registered professionals have historically seen as an unfair disclosure regime, FINRA has for years allowed registered professionals to get disclosures expunged from their CRD records under certain circumstances, including when the claim or allegation is factually impossible or clearly erroneous, the registered professional was not actually involved or when the claim or allegation is false.
For years, this expungement process was relatively straightforward, but over time FINRA has imposed additional hurdles over the years. Examples including requiring that an arbitrator (or a panel) hold a hearing on the appropriateness expungement before making a decision on expungement requiring that a court of competent jurisdiction to confirm the arbitration award (or issue its own order) before information is removed from the CRD.
Expungement typically requires the use of FINRA Dispute Resolution Services (the regulator’s arbitration forum) in one of two ways. One option is to make a request for expungement in the course of a customer arbitration, which will then be granted or denied the as part of a merit-based arbitration award or a stand-alone arbitration order (in the event the parties settle before a hearing takes place). The other route, commonly known as a “straight-in” arbitration, involves the filing of separate arbitration claim before an entirely separate arbitrator or panel. Such “straight-in” arbitrations are typically filed after resolution of any customer arbitration or complaint with the broker-dealer which made the disclosure at issue named as a respondent.
FINRA’s Proposed Rule Changes
Over the years, FINRA and other commentors have expressed concerns about the perceived ease with which registered professionals have been able to get CRD disclosures expunged. In December 2015, FINRA’s Dispute Resolution Task Force issued a “Final Report and Recommendations” that, among other things, attempted to offer possible solutions to such concerns. FINRA offered for comment certain proposed rule changes based on the Task Force’s report. FINRA then submitted those rules for approval with the SEC, but later withdrew the proposal “in response to concerns raised by SEC staff and commenters.”
On July 29, 2022, FINRA sent the SEC a new set of proposed changes that established even more stringent requirements that must be met before expungement can be obtained. Some of most notable requirements in FINRA’s most recent proposal include:
According to FINRA, these proposed rule changes “are responsive to the concerns that have been identified with the current expungement process and would help protect the integrity” of the CRD system. The SEC has requested public comment on the proposed rule changes, which it can modify before making a final decision. If approval is granted, the new rules would likely go into effect sometime in early 2023.
If you have any questions or would like more information, please contact Leo Kogan at firstname.lastname@example.org.