Investor complaint settlements could not be conditioned on clearing a broker's record of wrongdoing under a Finra rule sent to the Securities and Exchange Commission late Monday.
The measure, which the Finra board passed at its Feb. 13 meeting, would take effect about 90 days after SEC approval. During its deliberation process, the SEC can open the proposal for public comment, modify it or approve it intact.
Finra proposed the rule in response to concerns about Finra's database, known as BrokerCheck, raised last year by Sen. Jack Reed, R-R.I., and Sen. Charles Grassley, R-Ia.
In a letter last December, the lawmakers questioned the broker-dealer regulator's policy toward so-called expungement and whether the process was removing information that would protect investors from delinquent brokers. The two were reacting to a study released last October by the Public Investors Arbitration Bar Association that showed that expungement requests were granted more than 90% of the time in cases resolved by settlement or stipulated awards between 2007 and 2011.
In its rule proposal, Finra noted that it had tightened the expungement process over the last several years. But it said more had to be done.
“Despite previous steps to discourage the practice of firms and associated persons conditioning settlement agreements for the purpose of obtaining expungement relief, Finra continues to have concerns regarding such conduct,” the rule proposal states.
“By removing the ability of the parties to a customer dispute to 'bargain-for' expungement relief as part of a settlement agreement, or otherwise, the proposed rule change would help ensure that information is expunged from the [central licensing and registration system] only when there is an independent judicial or arbitral decision that expungement is appropriate,” it said.
Finra did not solicit public comment on the rule but the SRO did note that some financial industry players suggested the rule might reduce the number of customer disputes that settle as well as the number of settlements offer by financial firms and their brokers.
“Finra believes such impacts are likely to be small,” the rule proposal states. Finra said that some firms already prohibit expungement conditions in settlement agreement.
Almost all broker-client contracts include a mandatory arbitration clause for dispute settlements.
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