Published by Herskovits PLLC

FINRA VOWS TO LIMIT EXPUNGEMENTS – Rules and Realities

FINRA VOWS TO LIMIT EXPUNGEMENTS – Rules and Realities

“Arbitrators have a unique, distinct role in ensuring that customer dispute information is expunged from the CRD system only when it has no meaningful investor protection or regulatory value.” FINRA (September, 2017)

In a new push for closer scrutiny over expungements, FINRA has just updated its Notice to Arbitrators and Parties on Expanded Expungement Guidance. In the revised document, FINRA zeroes in on expungement-only cases, specifically addressing the issue of customers who may be unaware of the existence of expungement claims.

The regulator's document states that,

“In some instances, an associated person will file an arbitration claim against a member firm solely for the purpose of seeking expungement, without naming the customer in the underlying dispute as a respondent. To ensure that customers know about the expungement request, arbitrators should order the associated persons to provide a copy of their Statement of Claim to the customer(s) involved in the customer’s arbitration case that gave rise to the customer dispute information (underlying arbitration).

It is particularly important to note that without this directive from the arbitrators, the customer(s) may not even be aware that an expungement claim is pending regarding their prior dispute. Additionally, notice provides the customer(s) with the opportunity to advise the arbitrators and parties of their position on the expungement request, which may assist arbitrators in making the appropriate finding under Rule 2080.

The position of the customer(s) can be made known in writing or through participation in the expungement hearing, as set forth in 1-5 above (or both).”

For FINRA, “Expungement is an extraordinary remedy that should be recommended only under appropriate circumstances. Customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.”

However, the number of expungement-only cases has doubled between the first half of 2016 and a similar period in 2017. In most cases, requests to expunge old customer complaints and arbitrations have been resolved favorably for brokers. 

Because customers seldom take part in expungement hearings, the rate of successful expungement requests has historically been extremely high.

FINRA is convinced that a large number of brokers file expungement-only cases with the sole purpose of erasing customer complaints from their records. The new focus on expungement guidance comes as no surprise, now that the Regulatory Authority is requiring brokers with a track record of disciplinary action to make increasing disclosures and when links to BrokerCheck are also a requirement for any financial advisor's online profile.

But if we look at the problem from the point of view of industry professionals, the fact remains that BrokerCheck disclosures are not limited to complaints that have been independently validated.

In fact, any arbitration allegation leads to a visible disclosure unless claims against every named respondent have been denied by an arbitration panel or a settlement was reached for under $15,000.

Thus, in a way, having been accused of a violation that was never proven can mar a broker's record. As FINRA continues to tighten the lid on expungements, this is perhaps one of the most persuasive arguments for securing the counsel of a seasoned securities lawyer. At Herskovits PLLC we focus exclusively on securities industry participants. Call Us 212 897 5410 or Connect by Email

Related topics: FINRA rulings (43)


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