Brokers

Finra Considers Having A Regulator Take Over Brokers’ Appeals Over Records


The Financial Industry Regulatory Authority is considering overhauling its scandal-plagued process for reps trying to erase customer complaints from their records. One of those ideas is to possibly get rid of the arbitration process altogether and have Finra directly (or through some other combination of authorities) oversee the process of expunging blotted records—an idea mentioned by a Finra official speaking at the self-regulator’s annual conference today.


Nathaniel Stankard, a senior vice president and the senior advisor to Finra’s CEO, said there has been a lot of discussion about creating a process outside the arbitration forum: “Something that is administered by Finra and the states or the SEC. So, there is a bunch of different combinations, but what they all share in common is that they require a lot of stakeholders, they require a lot of careful thought. And that is going to require time.”


As a shorter-term fix, Stankard said Finra could keep arbitration but move forward with the creation of a special roster of arbitrators, who will be trained to handle expungements. 


Stankard said Finra got “a lot of great feedback when we first put the proposal out last year and we’ve incorporated that feedback … and we think that we need to move forward with it now while the other process continues.”


Finra first proposed the special roster in 2020, but the Securities and Exchange Commission asked the self-regulator to yank the idea until there was time for further study. Finra floated the idea again this month in a white paper.


One of the things advisors have asked for is a “straight-in process.” In this case, they can start an expungement proceeding wholly removed from the underlying complaint. That’s because very often when a customer complaint has been filed, an advisor’s dented record can sit there for six years or so before he or she has a chance to erase the alleged misdeed. “In fact, our data shows that in two-thirds of cases the expungement arbitration happens more than six years after the underlying complaint or issue occurs,” Stankard said.


“That is a special and peculiar challenge for investor protection. That is why we think very strongly the special roster can provide a way of navigating that today while we continue to work and push forward with this broader process,” he added.


“Straight-in” arbitrations allow brokers to name their current or former broker-dealer as a respondent rather than the customers whose complaints they want to erase. As a result, customers may never get notice of the proceeding or get the chance to testify. Broker-dealers have a different agenda: They want reps’ records cleaned up because it reflects badly on them.


The downside of that is that without the opposition of angry customers, arbitrators have almost no choice but to greenlight expungement requests, which could whitewash reps’ complaints, sometimes en masse, leaving no record for investors or regulators to consider when hiring or licensing.


A review by the Public Investors Advocate Bar Association found the broker practice of using expungement arbitration to erase all evidence of their wrongdoing has exploded by more than 1,000% since 2019. The trade group for investor attorneys argued that expungement requests are “rubber-stamped” by arbitration panels 90% of the time.

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