The SEC is moving forward with changes that will make it harder for brokers to hide misleading customer complaints and other reputational taints visible in easy Internet searches.
The federal regulator of broker-dealers and other Wall Street participants gave its blessing Wednesday to a
Ron Beckner, a financial advisor at Peaks Integrity Wealth Management and Insurance Services in Westcliffe, Colorado, said he recently decided to reach out to a lawyer after realizing that approval of the new expungement rules was imminent. He inked an agreement on Tuesday to work with attorneys at
Beckner said he's tired of explaining to current and potential clients the two disclosures that have appeared on his
"It's caused irreparable harm to my reputation here in my hometown," Beckner said. "It's caused financial distress in my household. And, now that I'm back in my business, I know that I have former clients who have not wanted to move over with me because of what they have seen on BrokerCheck."
The Financial Industry Regulatory Authority, the broker-dealer industry's self-regulator and the maintainer of the BrokerCheck database of complaints and actions against brokers, has long tried to ensure expungement is used solely in cases when a claim or allegation is factually impossible, clearly erroneous or made against a person not involved in disputed activity. The watchdog notes that
Still, groups like the North American Securities Administrators Association, which represents state regulators, have argued that expungement is too readily granted to advisors and brokers who go to the extensive trouble of asking for it.
NASAA President Andrew Hartnett said he and his colleagues are generally supportive of the new rules but think expungement procedures could be stricter still.
"Tightening the procedures surrounding expungements is critical to stopping the continuing and significant threat to the integrity of the information investors rely on when selecting a trusted financial advisor," he said in an email.
"Fundamental flaws," he cautioned, "will continue to result in large numbers of investor complaints being expunged from regulatory records."
But to people like Beckner, the information found on BrokerCheck is too skimpy to be anything but misleading. Beckner said he was fired by Edward Jones in part over allegations that he failed to notify the firm that he had been named as a secondary trustee for a deceased client.
Beckner said that because he was not the primary trustee, he saw no reason to report his appointment to Edward Jones. Later, when the main trustee resigned, Beckner wasted little time telling his employer. But FINRA decided he was too late.
The second disclosure on Beckner's record has to do with his recommendation that clients invest in a local company, Ampio Pharmaceuticals, a maker of drugs for arthritis and other conditions. Some of his investors later suffered losses when the company's stock fell after disappointing clinical studies.
Beckner said he received a letter in February 2021 from FINRA confirming that the worst thing he had done was not report his status as a secondary trustee. He said he's optimistic that finding bodes well for his expungement prospects.
"Still, it's not a slam dunk," Beckner said.
Doc Kennedy, the founder of AdvisorLaw, said the new rules are so strict, he plans to stop taking FINRA arbitration cases after the end of the month.
"Luckily we have other sides to our practice," he said. "Anybody who comes in thinking things are going to be the way they used to be is just going to get slammed."
Garry Stevens, a lawyer at Chicago-based Winget Spadafora Schwartzberg who has represented brokers in expungement cases, lamented that many of the disclosures in BrokerCheck come from clients who are upset about investment results rather than their broker's conduct.
"In the securities industry, a lot of times they are doing a retrospective look," Stevens said. "It's coming from a disappointed investor, and it can almost be a shakedown."
Stevens said representation in expungement proceedings can easily cost upwards of $10,000 and offers no guarantee of success. But leaving an unwarranted disclosure on BrokerCheck, he said, is like "a tacit admission of some sort of fault on behalf of the rep."
Many of FINRA's expungement rule changes apply only to so-called "straight-in" requests. These occur when brokers seek the removal of online records outside of any proceedings that might have resulted from a customer complaint.
The new rules, which don't yet have an effective date, will eliminate brokers' ability to have straight-in requests heard by single arbitrators, instead insisting on three-member panels. The new rules also seek to prevent brokers in straight-in requests from "forum shopping," or exerting influence over which officials will be hearing their cases.
Expungement requestors will no longer be able to have individual arbitrators struck. Instead, they will have to accept panel members selected at random from a pool of people with no ties to the securities industry but with training and experience in arbitration.
Christine Lazaro, the director of the Securities Arbitration Clinic at St. John's University in New York, said the anti-forum shopping provision will combat the perception that the expungement system can be "gamed."
All expungement requests now will have to be granted by unanimous decision; a majority vote by the arbitrators on a panel is no longer enough.
The rule also limits how long brokers have to make expungement requests. They will have to submit a request no more than three years after the filing of a customer complaint, or two years after the close of arbitration or civil litigation. And brokers who do not submit a request for expungement when the proceedings over a customer complaint are still ongoing will be prohibited from submitting one later.
The changes will further require that customers who have submitted complaints be invited to any expungement hearing but will prohibit arbitration panels from giving any "evidentiary weight" to a customer's failure to appear. State regulators will similarly receive notice when expungement requests have been submitted and be invited to take part in the proceedings.
