FINRA BrokerCheck: Will New Expungement Guidelines Help or Hurt the Securities Industry?

by Sean McCleary

Despite seemingly rigid rules on granting expungements, arbitrators have been allowing them far too often.  In fact, in mid-October, FINRA sent out a notice to its arbitrators, reiterating the guidelines for granting an expungement, which it considers to be an “extraordinary remedy.” Essentially, expungements cleanse any settlement information from a broker’s record on the Central Registration Depository (“CRD”).  BrokerCheck is the investor resource that allows investors to access certain information from the CRD—specifically, whether there were any past claims against a broker.  Expungements can carry significant implications because it reduces the transparency that potential investors need.

Until recently, FINRA Rules did not expressly prohibit members from conditioning settlements on expungement.  However, on February 13, 2014, FINRA’s Board of Governors moved to file Rule 2081 with the SEC, which will bar broker-dealers from trying to condition customer dispute settlements on the customers not opposing an expungement request.  In settlement negotiations, customers are probably not cognizant of an expungement’s implications—after all, the investor is getting some money back and he probably does not plan on using the broker in the future.  With Rule 2081, brokers will find it considerably harder to sanitize their BrokerCheck report from a past settlement claim.  Further, this will ensure that future investors can more accurately assess the quality and integrity of a broker.

On the other hand, settlements are a significant part of resolving FINRA claims in a timely manner.  If more FINRA claims reached arbitration, then the average FINRA claim would take substantially longer to adjudicate.  Ultimately, Rule 2081 could dissuade broker-dealers from settlement prior to arbitration because they may want to take their chances in arbitration.