Expungement under FINRA’s Rules: Proposed Rule Changes

By Dylan Donley, Spring 2014 Graduate Research Assistant

Last week, we told you about FINRA’s Notice to Arbitrators concerning expungement. This was not the only step FINRA has recently taken in the expungement arena.

Beyond publishing the Notice, FINRA has been in the process of reviewing its rules and interpretations relating to expungement and will consider making changes to provide clarity to the expungement rules. As part of this process, on February 13, 2014, FINRA released a statement announcing that its Board of Governors approved a rule proposal that would prohibit brokers and brokerage firms from conditioning settlements of customer disputes on, or otherwise compensating investors for, an agreement not to oppose a request to expunge information from the broker or brokerage firm’s CRD record.

During this same meeting, FINRA also proposed and approved a rule barring former stock brokers, securities attorneys and other people who worked in the financial industry from serving on some panels arbitrating customer disputes, which may come into play in expungement relief claims. In wake of this decision, FINRA Chairman and CEO Richard Ketchum stated that “[FINRA will] continually make improvements to the arbitration and expungement process to further enhance investor protections. FINRA feels strongly that expungement of customer dispute information shouldn’t be ‘bargained for’ through settlement negotiations or otherwise.”

While the expungement relief remedy available in “limited” circumstances to brokers has not functioned in the manner originally envisioned, FINRA has taken steps to ensure that the importance of the integrity of the CRD system is emphasized in arbitrator training. It has also suggested areas of inquiry arbitrators should consider during expungement hearings in order to make well-reasoned and meaningful decisions. Moreover, FINRA is looking to clarify its rules and interpretations and address the issues identified by the PIABA study.

Though the customer dispute resolution information of brokers already expunged cannot be recovered, through the efforts of PIABA and FINRA, it appears that progress is being pursued in order to ensure that only the information that has no meaningful investor protection or regulatory value be expunged moving forward.