If there is a complaint against a broker or a brokerage firm, that information is normally made public through BrokerCheck, a service provided by the Financial Industry Regulatory Authority ("FINRA"). However, brokerage firms often include expungement of information from the public record as a bargaining point when settling disputes with investors. The Securities Exchange Commission ("SEC") does not want expungement to be a point of discussion when bargaining for a settlement because it can negatively affect public investors' access to information.1 The new SEC Rule 2081 no longer allows expunging a broker's wrongdoing from the record. The Commission, which established Rule 2081 from a proposal by the Financial Industry Regulatory Authority (FINRA) believes that the rule will benefit all investors and regulators.
The issue regarding expungement came to the forefront when the Public Investors Arbitration Bar Association produced a study showing that expungement requests were granted in 97% of settled cases.2 This occurred because brokerage firms wanting to protect their image would bargain with complaining investors, offering them more money in exchange for expungement from the public record of the complaint against the firm. The investors would normally accept more money in exchange for expungement because their personal financial gain was, typically, more important to them than public record of their complaint. Allowing wholesale expungement of complaint information, however, hurts future investors that are looking for a brokerage firm that is trustworthy and has a positive history with clients.
Arbitrators presiding over settlements were previously not concerned about expungement as a part of an agreement. Because brokerage firms would usually never make explicit to arbitrators that expungement was a condition of the settlement, arbitrators would often ignore it. The SEC and FINRA have ensured that arbitrators now inquire as to whether expungement is part of a settlement.3 While substantially curtailed, expungement is still allowed in a limited number of cases, namely those where "the expunged information is unfounded and has no meaningful regulatory or investor protection value."4
Some believe that the new rule is not ideal, and that it may have negative consequences. For example, Robert Banks Jr., a plaintiff's attorney, argues that the new rule will not curb the number of expungement requests or how many are eventually accepted.5 Other counter-arguments include the likelihood of higher costs for all parties involved - because settlements will be more difficult to reach - and the argument that investors will receive smaller settlements overall since brokerage firms can no longer bargain for expungement of information by offering more money.6
The SEC and FINRA believe that Rule 2081 will force expungement to be decided only on the investors' dispute and will stop its use as a bargaining chip to avoid the merits of the investors' complaint. Rule 2081 is brand new and no one knows how it will work just yet, but the SEC is hopeful that the investing public will be better served by increased information.
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Shepherd Finkelman Miller & Shah, LLP is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, Pennsylvania and Wisconsin. SFMS also maintains an affiliate office in London, England and is an active member of Integrated Advisory Group (www.iaginternational.org), which provides us with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe. For more information about our firm, please visit us at www.sfmslaw.com.