The Financial Industry Regulatory Authority says that stringent criteria must be met before a broker can have a complaint from a client expunged from his or her record. On August 23, a California court completely upended that requirement.
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The First Appellate District in San Francisco said that a broker can seek to have a complaint expunged simply based on fairness or equity. Other authorities say this could damage the disclosure system in the financial industry.
They expect to see a jump in expunged records as a result of the ruling and say that it could open the floodgates for expungement requests outside the state of California, as well, since brokers would no longer be bound by FINRA rules.
The broker who brought his case before the court claimed that FINRA’s BrokerCheck reporting system damaged his career. He claimed that 13 of the 17 complaints had to do with the same investment and that his clean record since 1997 merited removal of the complaints.
FINRA has fought the broker’s attempts to have the complaints removed and a state court late last year denied his request to do so.
The appeals court ruled, however, that removal was not solely controlled by FINRA regulations. The court sent the broker’s case back to the trial court for another hearing.
FINRA thinks the broker’s record should retain the fact that he defended almost $1.4 million in investor claims against him, even though his clean record since indicates the equivalent of time served.
The expungement question has come more into focus as greater transparency
about broker disciplinary action has been disclosed to the public.
FINRA began disclosing all complaints in August 2010 regardless of how long ago they occurred. The Dodd-Frank Act mandates that information disclosed to the public about brokers should even include their exam scores, any broker termination information, and other historical data on the BrokerCheck system.
In an investor climate that is still reeling from the shenanigans of Madoff, Stanford, and others, it seems ludicrous to think that such records could be discharged simply because a broker cries, 'That's not fair!'