After FINRA withdrew its proposal to overhaul the mechanism for erasing complaints from brokers' public records, investor advocates are hoping for a further-reaching revision to a process they say heavily favors brokers trying to clear up their records.
Following discussions with staff at the SEC reviewing the revisions to the expungement process, FINRA withdrew its proposal, saying that it remains committed to improving its system for reviewing complaints from the BrokerCheck database but without offering a reason for the about-face.
A spokeswoman for FINRA declined to comment on the record beyond the group's
One notes that just 4% of the complaints logged in BrokerCheck from 2015 to 2020 have been expunged, while another illustrates that just 1,300 of an average of 632,500 registered individuals over the same time period have had a complaint expunged.
Those figures offer a counterpoint to research from the Public Investors Advocate Bar Association, one of the most vocal critics of the expungement process.
Last month, as the deadline for the SEC to approve FINRA's proposed rule was approaching, PIABA and the PIABA Foundation released their third study of the expungement process, concluding that the number of expungement awards has been soaring in recent years, while the arbitrators who hear those cases overwhelming side with the brokers, granting 90% of requests PIABA examined in its most recent
FINRA’s withdrawn proposal recommended empaneling a specially trained roster of arbitrators to weigh expungement requests, with three assigned to each case. It also proposed to alert state securities regulators when expungement requests were filed with the goal of involving them earlier in the process.
But those changes only nibbled at the margins of a critically flawed system, PIABA argued.
"The proposal was a tiny step in the right direction, [but] it failed to address the fundamental problem with expungement," says Lisa Bragança, vice president of the PIABA Foundation and one of the authors of the expungement report.
PIABA hopes that FINRA will now consider more structural changes, such as embedding an investor advocate in the proceedings to argue in opposition to the broker's expungement request, with an eye toward preserving the integrity of the Central Registration Depository, the data hub that powers BrokerCheck, Bragança says.
The barred ex-rep funneled clients’ money into a shell company he falsely called a sub advisor, according to investigators.
FINRA's proposal "does not address the fundamental problem that nobody is responsible for the integrity of CRD and potentially opposing these petitions," she says. "The main issue is that these events are happening, these petitions are decided without opposition."
The regulator’s framework for a specialized roster of arbitrators and other changes to the expungement process also drew attention from industry groups. SIFMA weighed in with a comment letter expressing broad support for the proposal, but warned against other aspects of the rule such as a limitation on the grounds on which an expungement could be awarded. A spokeswoman for the group declined to comment further, saying that SIFMA's position was "adequately addressed in our
A spokeswoman for the Financial Services Institute, meanwhile, stressed the importance of preserving "access to information about a financial advisor that is pertinent to the advisor-client relationship," while ensuring that advisors "have the ability to reasonably remove claims that are misleading or have no regulatory or investor protection value."
"We hope to work with FINRA to find a balanced solution that maintains investor protection while providing honest advisors with an avenue to expunge false, misleading or inaccurate claims against them," says Allison Kuehner Mutschler of FSI, which represents independent advisors and firms.
The FINRA spokeswoman would not discuss the feedback the group received from the SEC, and a spokeswoman for the commission, reached by email, did not immediately offer any comment.
But some industry observers took FINRA’s move as a reaction to new SEC leadership, and as evidence that Chairman Gary Gensler may be more inclined to prioritize consumer protections when weighing a proposal such as FINRA's expungement revision.
"I think this is an early signal that Chair Gensler is going to take those sorts of concerns from investor advocates very seriously," says Barbara Roper, director of investor protection at the Consumer Federation of America.
"As a practical matter, if FINRA had forced the issue, instead of voluntarily withdrawing the proposal, it wouldn’t have gotten its relationship with the new chair off to a great start, assuming (as I do) that this action was taken in response to concerns raised by his office," she adds.
Bill Singer, a veteran securities attorney and frequent FINRA critic, echoes that view, though he observes that by simply withdrawing the rule, FINRA has preserved a status quo of "a too-facile system whereby fraudsters are offered the troubling ability to clean records that likely should not be redacted from public view."
"Perhaps FINRA sensed a shifting of political and regulatory priorities and thought it prudent to step back from the fray and not engage in what could have proven a damaging bout," Singer says. "Be that as it may, all of this takes on the appearance of punting rather than trying to go for it on fourth down."
Now that FINRA has withdrawn its proposal, PIABA is hoping that it will embrace the idea of embedding an investor advocate in the arbitration process to make the proceedings more adversarial and less one-sided. But PIABA's ultimate goal, Bragança says, is to move expungement away from arbitration altogether and into a regulatory process, where officials from state agencies, the SEC or FINRA would make the final determination of whether to remove a complaint from a broker's record.
So far, she says, FINRA hasn't warmed to those ideas.
"Has FINRA been receptive? In a word, no," Bragança says. "I'm still waiting for a phone call. I would absolutely welcome the opportunity to work with FINRA on this."
