What Is Expunge?
Expunge is the act of eliminating a formal customer complaint lodged against a securities broker from the Financial Industry Regulatory Authority's (FINRA) public records. These records on brokers are held in the Central Registration Depository (CRD) system as a way to monitor the professional conduct of brokers.
A broker who feels that an unfair complaint has been registered in CRD against them may take action to have the black mark expunged. Any broker would want to have a clean record to help carry out their business affairs.
- To expunge is to formally clear one's record of a complaint, infraction, or conviction.
- For registered financial advisors, FINRA has a mechanism to expunge customer complaints or regulatory actions, although it is rare.
- FINRA rules 12805 and 2080 pertain to customer disputes against financial representatives and possible expunging.
How Expunging Works
Customer complaints that have been submitted to FINRA about unethical broker conduct are entered into the CRD system, placed in FINRA's public BrokerCheck website, and recorded on the broker's Form U-4. Whether these claims are made unfairly or not, complaints against brokers are disclosed regardless of whether it has been determined that the broker has actually committed any wrongdoing.
Even if a complaint is later dropped or FINRA arbitrators conclude that a complaint lacks merit, the complaint will still appear in FINRA BrokerCheck. It will remain there unless the broker successfully gets FINRA to expunge the complaint. This is often easier said than done.
Hurdles to the Expungement Process
The process to expunge a complaint is governed by FINRA Rules 12805 and 2080. FINRA calls expungement an "extraordinary measure," so a broker starts off by staring at a high wall to climb. The broker must hold an in-person or telephonic session with an arbitration panel to plead their case; this panel then must agree to pass on the case to another set of adjudicators, and if they concur the broker then must return to FINRA to seek the removal of the undesired record. The entire process can take up to 10 months.
As of February 2018, FINRA had proposed amendments on the table for expungement. These amendments, if passed, will make it even more difficult for a complaint to be expunged. Among the new rules are the following:
- In-person only hearings (no hearings by teleconference)
- Payment of a fee of at least $1,575
- Time limit of one year to bring an expungement request
- Requirement of a unanimous decision as opposed to the current majority decision
- Need to convince the arbitration panel that a customer complaint "has no investor protection or regulatory value." The vagueness of this description only adds to the height of the wall.
In FINRA's defense, brokers chasing money for a living have demonstrated that they do not always act ethically. Potential long-lasting (or even permanent) entries in BrokerCheck that would reflect poorly on them serve as deterrents to unprofessional conduct. This is perhaps the reason that the expungement process for a broker is already daunting, and FINRA aims to make it even more so.