FINRA Moves Forward with Plans on “Expungement” and Arbitrator Classification

FINRA, the Financial Industry Regulatory Authority, is moving forward with plans on two little-noticed fronts that could offer substantial improvements to mandatory arbitration of disputes over investment losses. In a venue many think is stacked against investors, these changes are both long overdue and very welcome.

First, FINRA announced that it would file with the SEC a proposed rule change that would prohibit brokerage firms from requiring customers to agree to allow stockbrokers’ licenses to be wiped clean—“expunged”—in exchange for paying settlements to resolve the customers’ claims of fraud, unsuitable recommendations or other misconduct. There is plenty of disagreement within the securities and legal communities about this issue—and all sides raise valid points—but I come down on the side of openness and disclosure, and against unfair pressure exerted on investors.

When investors suffer substantial losses due to the misconduct of their stock brokerage firms, they are required to submit any legal claims to binding arbitration through FINRA. Often a dispute is resolved by the firm paying the investor to drop the claim. And many times, the firm will require the customer to agree not to oppose it when it goes to the FINRA arbitration panel and asks that the license of the broker involved in the misconduct be “expunged.” Frequently the customer will agree to the request just to recover some of his or her losses and put the dispute to rest, even though if expungement is granted, it leaves the mistaken impression that the investor’s claim was frivolous or without merit. If the proposed rule change goes through, customers will no longer be placed in this position, and that can only be a good thing.

And second, FINRA is poised to change the rules on arbitrator classification. Right now, as long as five years have passed, an arbitrator who worked for decades as a Wall Street broker, or made a career representing broker-dealers as an attorney, can be classified as a “public” arbitrator. This classification gives the impression of impartiality, no matter how deep the arbitrator’s ties to the securities industry are. Under the proposed rule, those arbitrators would have to be classified as “non-public” or “industry” arbitrators. This proposed change, while esoteric, could actually be a real improvement to the fairness of the FINRA arbitration process.

Caitlin Mollison touched on both of these changes in Investment News. And Mason Braswell focused on the arbitrator-classification issue in the same publication.

Many investors and their attorneys feel that the FINRA arbitration process is stacked against them. While I don’t necessarily subscribe to that view, any effort to increase neutrality and transparency—to really give investors a fair shake when they have disputes with their brokerage firms—is welcome.

If you have suffered a loss as a result of your brokerage firm’s fraud, unsuitable recommendations or other misconduct and want to explore whether filing a FINRA arbitration is the right step, please contact The Galbraith Law Firm at 212.203.1249 or kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.