On December 6, 2017, FINRA issued Regulatory Notice 17-42, Expungement of Customer Dispute Information. Pursuant to this Notice, FINRA seeks comments on proposed changes to rules concerning seeking expungement of a customer dispute from an advisor’s Form U4/CRD Record. The proposal would significantly change the manner in which an advisor could obtain expungement of a customer complaint or arbitration claim that is reported on his or her CRD record. The deadline for submitting comments in response to the notice is February 5, 2018.
Firms and advisors should review the notice, and consider submitting comments. In our view, this proposal, if adopted as proposed in the notice, would make it more difficult for a financial advisor to expunge a meritless customer complaint or arbitration claim from his or her record. Additionally, it would likely make the process more expensive, and the financial advisor would have a much shorter time period in which to seek expungement.
Importantly, for an advisor to obtain an expungement order from an arbitration panel, the panel would consist of three persons, and there must be a unanimous ruling in favor of expungement – keep in mind that the panel would not be required to be unanimous to make a financial award to any party in the customer case. I’m not sure that this unanimous requirement advances FINRA’s goal of maintaining accurate and meaningful information in the CRD system, and one could argue that the unanimity requirement may place the advisor’s record in the hands of a biased arbitrator.
For the arbitration panel to order expungement, the panel would have to find (unanimously, as noted above), that the “customer dispute information has no investor protection or regulatory value.” That may sound good and look good on paper, but what in the world does that mean? And is that an objective standard, or does it leave the advisor’s fate in the hands of a vague and subjective standard?
Finally, I’ll note that FINRA seems to state that the reformation of the expungement system is needed because after a customer settles a case the “Claimants and their counsel may not have the incentive to participate in expungement hearings” and that the panels may therefore receive one-sided information from the side seeking expungement. FINRA asserts that the proposed changes would “provide for an increased opportunity for customer participation in expungement decisions…” I’m not sure that is necessarily true, as customers generally can participate in an expungement proceeding now, as they are often served with information on the request and afforded the opportunity to comment or testify, though they may choose not to do so. With this in mind, is this a compelling reason to modify the rules?
At the conclusion of the notice, FINRA seeks comments on several specific questions concerning the proposal, and it appears to me that firms and especially individual advisors should consider submitting comments. It is the advisor’s professional record and reputation at issue here, after all.