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May 23, 2022


FINRA ADVANCES REVISED PROPOSAL TO REFORM BROKER EXPUNGEMENT PROCESS

by Miriam Rozen
|
News
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FINRA
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Expungement
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Andriy Blokhin - stock.adobe.com

The Financial Industry Regulatory Authority’s board of governors approved on
Friday revisions to a previous proposal to initiate “special” arbitration
procedures for brokers’ expungement requests. 

The Finra board confirmed the revised proposal, which would allow for “new
guidelines around expungement,” Jim Crowley, a Finra board member and chief
executive officer of Pershing, said in a May 20-posted videotaped recap of a
mid-May meeting in Fort Lauderdale, Florida. 

Finra officials declined to disclose further details of the revisions or unveil
a timetable for when it will submit the proposal to the Securities and Exchange
Commission for approval, according to a spokesperson for the regulator. 

The board’s nod comes almost one year after the industry’s self-regulatory
organization “temporarily” withdrew a prior proposal to reform its procedures to
expunge brokers’ public records, which it had submitted to the SEC. 

Finra pulled that proposal in late May 2021—the same day as the deadline for the
SEC to approve its plan—after “consultations” with the federal agency’s staff,
Finra officials said at the time. 

The withdrawal followed a report from the Public Investors Advocate Bar
Association criticizing the proposed reforms as inadequate and asking the SEC to
reject them. PIABA sought to have Finra establish more rigorous procedures to
stanch the number of expungement requests that receive approval, including the
appointment of investor advocates. 

PIABA sought more aggressive reform proposals and had previously asked Finra to
put a moratorium on a skyrocketing number of expungement requests. The PIABA
report stated that Finra arbitrators had granted 700 expungements over 15 months
between August 1, 2019 to  October 31, 2020, which translated to a 90% success
rate for brokers seeking expungements. 

Mike Edmiston, the president of PIABA and a Studio City, California-based
lawyer, did not immediately return a request for comment for this story.

In April, Finra posted a discussion paper that covered its prior
expungement-relief proposal, which included a plan to establish a special
arbitration panel to hear expungement requests.

In the same paper, Finra said that it seeks to advance further discussions among
all stakeholders  and “identify additional data or analysis that may help inform
effective decision-making in this area.”



“It’s sort of hard to gauge what the SEC was concerned with and how Finra has
decided to deal with that,” Christopher Seps, a law partner in Chicago’s Ulmer,
who represents broker-dealers and brokers, and has blogged about the expungement
process, said about the previously withdrawn and new proposals. 

While he gave Finra credit for “coming back to the drawing board, Seps said he
does not expect “a dramatic overhaul” to be unveiled when Finra discloses the
details of its revisions.

Seps has argued on his blog that Finra should create financial incentives for
investors to participate in expungement proceedings. Specifically, Seps wants
Finra to withhold some of the refunds of investors’ filing fees when they
withdraw their complaints against broker-dealers after settling. 



Under his proposal, the remainder of the paid fees would then be fully refunded
only after the investors participate in any expungement proceedings sought by
brokers whose records were marred by the settled complaints.

Prior to the SEC approving the revised proposal and Finra adopting it, both
regulators will likely allow for public comments, Seps said.

FINRA SETS YEAR-END DEADLINE FOR MORE FLEXIBLE WFH RULES

The industry’s self regulator recently advanced four related proposals tied to
remote supervision.

May 17, 2022

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