DEFENDING YOUR PROFESSIONAL INTEGRITY
Stay current on recent changes in the regulatory environment
FINRA’s Rule 2080 is the pathway for many financial advisors to seek expungement of customer complaints that were filed without merit. The process will never be as fast as many brokers would like, being that it takes 10 months on average to expunge meritless allegations from beginning to expungement. However, based upon language in FINRA’s last report, the process appears to be on a path to slow even further.
In February 2017, FINRA released its latest status report on the progress of the Dispute Resolution Task Force recommendations. One of the finer points that was buried within the 70-page document was that FINRA and regulators from the various states via NASAA (North American Securities Administrators Association) are “in discussions” to alter the current process for Rule 2080 expungements.
The first possible change on the table is to notify state regulators that the broker is seeking expungement through FINRA’s arbitration process. Currently, the states are not required to be notified and routinely have very little say in the outcome of the hearing. If changes are made to introduce another party, and a regulating agency at that, we assume that this will negatively affect both the duration and successful results for financial advisors seeking to clean up their U4.
While added time to obtain expungement can be a mere annoyance, the injection of another voice on the merits of each claim will likely push the currently high win-rate down significantly. States may want to merely “exercise their regulatory muscle” by attempting to oppose a majority of expungements. Even if they do decide to support the expungement, each state’s regulations differ wildly and each will have a vastly difference of opinion on the criteria needed to assuage any possible negative effects to the investing public.
The second option on the table, and possibly the worst outcome for the financial advisor, is that FINRA and the state regulators make good on addressing the, “feasibility of a new regulatory approach…”. Although the current Rule 2080 process has its inefficiencies, at the end of the day, an arbitration panel, typically made up of public arbitrators and outside of the purview of FINRA employees, decides the fate of the advisor. Inclusion of the customer dispute expungement process into a typical regulatory event risks subjecting the broker to the same unbalanced due process that FINRA usually affords its constituents in those circumstances. AdvisorLaw has represented many advisors through investigations and the OTR process (both regulatory events) and has seen first-hand the sheer lack of a fair and balanced procedure.
The takeaway from this report is that financial advisors who are looking to someday clean up meritless customer complaints from their U4, U5, BrokerCheck profile, and CRD need to seriously consider starting the process prior to any rule changes taking effect. Discussions are taking place as this is written and the outcome of these talks could limit, or take away, one of the few opportunities that FA’s have to clear their name and reputation.
EA, Executive Vice President
3400 Industrial Lane, Unit 10A
Broomfield, CO 80020
Veteran financial advisor’s have seen countless examples of the disparate imbalance of power which exists between the regulators and the individual brokers. The regulators are tasked with writing the rules, determining whether such rules were followed or violated, and determining appropriate fines, penalties, sanctions, suspension, or license revocations associated with the perceived violation.
Appealing a determination made by FINRA involves a review by the SEC (who entrusts FINRA with their authority), and in some instances, the right to have the matter reviewed by the National Adjudicatory Council (a FINRA committee) before the matter may be reviewed by FINRA’s Board of Governors. It seems clear that there is no real independent third party review or opportunity for an unbiased consideration. The participants, in varying capacities, are heavily entrenched within the ranks of the SEC or FINRA. As a result, the public-facing BrokerCheck displays a great deal of information which provides no value to the investing public and offers no indication of the rep’s performance as an FA.
Norm Vonnegut, Columnist for The Wall Street Journal, wrote about a broker who set off a fire extinguisher at his school when he was 13 years-old. FINRA’s disclosure requirements resulted in the memorialization of this childhood prank as a “Criminal – Final” disclosure on the rep’s BrokerCheck profile (see Norm’s article here). The absurdity of rules and regulations marring a broker for harmless pranks as a child is abundantly clear. Despite the 51 proposed changes to the regulatory process, FINRA’s Dispute Resolution Task Force remains silent on this effect on licensed brokers.
FA’s looking to put an end to the ongoing harm to their business caused by Disclosure Events currently showing on their BrokerCheck profiles, must pursue expungement of these through the Rule 2080 process. No relief will be provided unilaterally by the regulators. It is up to the individual reps to initiate the process of requesting an expungement award from FINRA.
AdvisorLaw has a dedicated team of attorneys and staff whom specialize in representing brokers marred by disclosures viable for expungement from the CRD system. Contact me today if you or a colleague has disclosures on BrokerCheck that may qualify for expungement.
See our commentary in InvestmentNews here.
President, Managing Attorney
3400 Industrial Lane, Unit 10A
Broomfield, CO 80020
Main Ph: (303) 952-4025
Fax: (720) 452-0613
This blog is my ongoing effort to inform and educate FINRA licensed professionals about the evolving regulatory ecosystem in which we operate.