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FINRA Amends Expungement Procedures to Prevent Broker Abuses

The process for removing customer complaints from broker records is as simple as erasing pencil traces off paper. It’s also invisible to the public. The Financial Industry Regulatory Authority is sharpening their regulatory pencil and rewriting rules to make this harder for brokers.

The new rules are set to take effect on 16 October and aim to prevent abuses. Changes include the requirement that a broker have a certificate. “straight-in” The arbitrators are randomly chosen and have all undergone training. “enhanced expungement training,” Brokers have a time limit in which they can make these requests.

But will they be enough to stem this tide of expungements? Or will these changes be just a drop of water in a sea of customer disputes.

The process of expungement is somewhat like a courtroom play, where the customer is the plaintiff and broker is the defendant. The arbitration panel will hear evidence from the broker and then make a decision on whether or not an expungement would be warranted. The broker will then need a court order in order to confirm the expungement. However, it is not uncommon for this step to be seen as just a formality. In fact, judges are rarely willing to overturn the arbitrator’s decision.

New rules will add layers to the process. State securities regulators now receive notification of expungement requests sooner in the process. This gives them more time to respond.

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Will it be enough to change the tide? Will this be enough to prevent customer complaints from being swept under a rug?

Public Investors Advocate Bar Association PIABA certainly hopes that is the case. According to a PIABA report for 2021, FINRA arbitration granted expungement requests 90 percent of the time. “straight-in” Cases skyrocketing, from 59 in 2018 to 545 cases in 2019.

This is an alarming trend. It’s like a wildfire spreading in a dried forest. As wildfires can do lasting damage, unchecked expungement can also damage the reputation of financial institutions.

But the new rules do not work like magic. According to the North American Securities Administrators Association, the ability of state regulators to participate in this new process will be restricted by “resources and state-specific procedural hurdles.”

The new rules may be a positive step, but it is yet to be seen if they are enough to stop the expulsions. Will they be sufficient to ensure that disputes between customers are not swept beneath the rug but instead dealt with in an honest and transparent way? Time will tell.

It’s obvious that, in the interim, the financial sector needs to do more about this problem. A reputation is fragile, and can be easily damaged. It’s also hard to restore. In an industry that relies on trust, the power to delete customer complaints from broker records is not something to be taken lightly.

Warren Buffett: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” We hope that the financial sector takes to heart these words.

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