FINRA Takes a Step in the Right Direction


A few months ago, we published an article about the problem of brokerage clients not being able to rely on information about their broker in FINRA’s BrokerCheck because of the ease with which brokers can expunge records of arbitration claims made against them. Today, we are happy to report that the Financial Industry Regulatory Authority (FINRA) has received the needed approval from the Securities and Exchange Commission to implement a new rule prohibiting firms and brokers from conditioning settlement of a customer dispute on—or otherwise compensating a customer for—the customer's agreement to consent to, or not to oppose, the firm's or representative's request to expunge such information from the Central Registration Depository (CRD) system. This press release from FINRA explains it in further detail.

FINRA’s Chairman and CEO Richard Ketchum said, “This rule will prohibit firms and reps [brokers] from conditioning settlements on a customer's agreement not to oppose expungement, thus protecting the integrity of the CRD system and disclosure of material information to investors.”

Now that this new rule is effective (as of 7/30/2014), brokers who wish to have a customer dispute removed from the CRD system and thus from BrokerCheck must obtain a court order confirming an arbitration award recommending expungement relief. Currently, nine out of every ten arbitration cases are expunged according to this study by the Public Investors Arbitration Bar Association (PIABA). We expect that rate to drop substantially.

While we are certainly happy that investors will have a greater ability to rely on FINRA data about their brokers, we believe that investors are better served by professionals that have a fiduciary duty to act solely in their best interests. As we noted in this article, a broker who is not acting as your investment adviser is not held to a fiduciary standard. Instead, he is held to a "suitability" standard which is far more lenient. For example, a broker could purchase "C class" shares of a mutual fund that pay him a 1% annual trailing commission. For an adviser acting as a fiduciary, this would be a conflict of interest and thus forbidden.

If you are currently a brokerage client and would like to learn more about working with a fiduciary for wealth, please give us a call at 888-643-3133.