SEC Approves FINRA-Backed Expungement Rule

By Andrew Coen July 23, 2014, 6:16 p.m. EDT 2 Min Read

Purging customer complaints from brokers' public records just got harder.

The SEC approved a FINRA proposal that restricts brokers from arranging for the expungement of customer complaints from the Central Registration Depository system or otherwise compensating customers -- as part of arbitration settlements.

The FINRA-operated CRD system is an online registration and licensing database that feeds information to BrokerCheck. It includes employment history information along with regulatory and disciplinary actions.

The rule, which FINRA proposed in February, prohibits advisory firms and their associates from reaching settlements with customers conditioned on the agreement to consent to, or not oppose, the brokers' request to remove information from the CRD that would otherwise appear on BrokerCheck.

"This rule will prohibit firms and reps from conditioning settlements on a customer's agreement not to oppose expungement, thus protecting the integrity of the CRD system and disclosure of material information to investors," Richard Ketchum, FINRA's chairman and chief executive, said in a statement.

SEC RULING

The SEC's ruling Tuesday stated that it "encourages FINRA to conduct a comprehensive review of its expungement rules and procedures to determine whether additional rulemaking is necessary or appropriate to assure that expungement in fact is treated as an extraordinary remedy that is permitted only where the information to be expunged has no meaningful investor protection or regulatory value."

The SEC also noted that brokers who wish to have customer dispute information removed from FINRA's CRD because they think the complaints are "unfounded" can attempt to do so through court orders pursuant to FINRA Rule 2080.

PIABA SUPPORT

The Public Investors Arbitration Bar Association has pushed aggressively in favor of stricter expungement rules and improved. The investor advocacy group released a study last October showing that advisors faced with arbitration cases were granted expungement relief in 97% of cases resolved by settlement or stipulated awards between May 2009 and the end of June 2011.

"PIABA is very happy with the result and we hope there are more improvements to come," said PIABA president Jason R. Doss.

FINRA says it will announce the effective date of the new rule in a soon-to-be published regulatory notice.

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Andrew Coen