Investor Protection Clinic - Student Blog

The Alarming Rate of FINRA Expungements

To address potentially inaccurate information within the Central Registration Depository (CRD), the Financial Industry Regulatory Authority’s (FINRA) Rule 2080 allows brokers to challenge and sometimes remove customer dispute information from his or her CRD and thereby, from BrokerCheck, removing potentially vital information from the public.

 

 FINRA’s expungement rule provides arbitrators with grounds to consider these requests and specifies that an arbitrator may only grant expungement in limited circumstances. To remove customer dispute information from the public, the broker must prove that the customer’s claim was factually impossible, clearly erroneous or false, or that the associated person was not involved in the alleged investment-related sales practice violation. Because of the potential removal of public information, arbitrators must carefully evaluate the evidence and award expungement relief only in extraordinary cases.

 

The policy behind the enactment of FINRA’s rule is to protect the interests of regulators and investors. By only allowing accurate public information about a broker’s misconduct, regulators are able to successfully regulate the industry while providing a fair process to protect brokers’ reputations where appropriate. Most importantly, FINRA’s rule protects the interest of investors in having access to accurate and meaningful information in order to make an informed decision on who to allow to handle their investments.

 

Professor Colleen Honigsberg of Sandford University conducted an empirical analysis of 6,600 expungement request from years 2006 to 2017. From the expungements studied by Professor Honigsberg around 70-75% of requests for expungement were granted. Further, the Public Investors Advocate Bar Association released a study in 2015 showing that expungements are no longer a rare relief. The study showed that in 460 arbitration cases resulting in stipulated awards or settlements between 2012–2014, expungement was granted 87.8% of the cases.

 

The high rate of expungement raises concerns. It is especially concerning because expungements are only meant to be granted as an extraordinary remedy. Only expunging indisputably inaccurate information allows regulators, firms, and customers to perform more effective monitoring. Thus, as FINRA notes, expungements should be granted for no other purpose and should no longer be granted in such a high volume.

 

 

 

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