FINRA wants to make it harder for brokers to erase their records

What do you want to know

  • FINRA is moving forward with an overhaul of its delisting process.
  • An attorney for the investors says too many delistings are still being granted.
  • A FINRA proposal, filed last year, that would create a special list of disbarment arbitrators is still in effect.

As the Financial Industry Regulatory Authority moves forward with an overhaul of its delisting process – which has come under growing criticism – its arbitrators are allowing too many brokers to clean up their records, industry experts say.

In a just-released working paper, FINRA says it plans to continue reforming its debarment process “so that it works as intended – as a remedy that is only appropriate in limited circumstances under to the narrow standards of FINRA rules”.

FINRA’s working paper, Expungement of Customer Dispute Information, which focuses on erasing customer dispute information from the licensing and registration system of the Central Records Repository and BrokerCheck, reports that 78% of all requests by brokers to clear a dispute from BrokerCheck “that go to award are granted by arbitrators,” said Michael Edmiston, attorney at Jonathan Evans & Associates.

“The percentages of disbarments granted between 2016 and 2021 are still too high for what is supposed to be an extraordinary remedy,” Edmiston, president of the Public Investors Advocate Bar Association, told me in an email message.

PIABA is a group of lawyers who represent investors in disputes with brokers.

“NASAA’s position on delisting is clear,” Melanie Senter Lubin, Maryland Securities Commissioner and president of the North American Securities Administrators Association, told me in an email on Wednesday. “Expungement is an extraordinary remedy that should only be granted in limited circumstances. Despite the best intentions of almost everyone, the current system of referee-granted strikes does not work within these parameters. »

NASAA, Lubin continued, has “worked closely with FINRA and encouraged it to fill gaps in the existing process and initiate steps toward more meaningful radiation reform. We look forward to continuing our commitment and our discussions with FINRA about how to reform the delisting process.”

For a broker to have a client complaint or arbitration disclosure expunged through FINRA, Edmiston explained, “there must be an arbitration award” granting relief.

“Only two numbers matter when looking at the frequency with which arbitrators decide on expungement requests: awards rendered in which expungement is sought and awards granting expungement,” he said. “Any introduction of factors beyond the control of arbitrators (eg, a broker dropping a claim) is a dilution of the disappointingly high rate at which write-offs are still awarded.”

The FINRA report indicates that less than 1% of FINRA-registered professionals have removed a client dispute disclosure. About 10% of brokers have a dispute in their file.

Edmiston points out that “less than 1% of representatives have[ing] a radiation, … does not change the fact that radiations are granted 78% of the time. Worse still, the 1% argument minimizes the harm many reps cause to investors after receiving a debarment. »

FINRA, Edmiston said, “does not report the recidivism rate, the likelihood that a representative with a disbarment will generate more client complaints. The key numbers missing from FINRA’s statistics are the number of client complaints generated afterwards and the sums of money allegedly lost after a representative received a disbarment.

Protecting the integrity of information in the CRD and BrokerCheck program, FINRA said, “is critical to FINRA’s mission to protect investors.”

FINRA said in its article that it “has engaged in long-standing efforts with NASAA and state securities regulators to explore an overhaul of the current delisting process.” The document, FINRA said, “is intended to inform and encourage ongoing dialogue regarding potential changes to the process used to resolve requests to erase client dispute information.”

Edmiston argued that “delisting is a matter of transparency for informed investor choice. FINRA consistently tells investors to review their broker’s BrokerCheck report before investing. Deletions remove information from BrokerCheck. »

Knowing that a broker has a history of misconduct, Edmiston argued, “allows a client to make an informed choice whether to take the risk of working with that broker or go down the street to the 92% of brokers which have blank folders. A troubled broker with a delisting sanitized record creates a trap for even the most wary of investors.