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FINRA Sends New Expungement Rule To The Securities And Exchange Commission

During the February 13, 2014 FINRA Board of Governors (“Board”) meeting, the Board discussed a new proposed rule that would prohibit conditions relating to expungement of customer dispute information. On April 14, 2014, FINRA sent the proposed rule to the Securities and Exchange Commission (“SEC”) for possible approval. The text of the proposed rule is as follows: “No member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to consent to, or not to oppose, the member’s or associated person’s request to expunge such customer dispute information from the CRD system.” The SEC has the ability to open the proposal for public comment, modify it or approve it as is.

In October 2013, the Public Investors Arbitration Bar Association released a study that showed that expungement requests were granted more than 90% of the time in cases resolved by settlement or stipulated awards between 2007 and 2011. In response, Senators Jack Reed and Charles Grassley raised concerns regarding FINRA’s public database, known as BrokerCheck. Specifically, the lawmakers questioned FINRA’s policy on expungement and whether the process was hurting investors by removing material information that would protect investors from brokers with negative disclosures on their records.

In its rule proposal, FINRA addresses these issues and expresses long-standing concerns regarding the practice of firms and associated persons negotiating settlement agreements for the purpose of obtaining expungement relief and therefore removing information from the BrokerCheck system that protects investors. Although FINRA has taken numerous steps to address this issue, it believes the proposed rule will further address its concerns regarding such conduct.

Lax & Neville has extensive experience in successfully obtaining expungements for registered representatives. Additionally, Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.

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