March 22, 2019

Warren Calls for Transparency as FINRA Updates Broker Expungement Rules

New Study Finds FINRA Let Thousands of Brokers Scrub Customer Complaint Records, With Implications for Investor Protection

Text of the Letter (PDF)

Washington, DC - United States Senator Elizabeth Warren (D-Mass.) sent a letter to the Financial Industry Regulatory Authority (FINRA) highlighting recent research on the value of strong broker expungement rules that ensure the availability of complete and transparent information and protect investors. The Senator's letter comes as FINRA considers changes to the processes by which brokers can scrub their records of customer complaints.

FINRA, an independent, self-regulatory organization that protects investors from fraud. It maintains records on brokers and broker-dealers to ensure compliance with FINRA rules and regulations. FINRA makes some of these records-including customer dispute information-available to the public. Under current FINRA rules, broker-dealers may take steps to scrub customer complaint information from their records in certain circumstances-a process known as expungement. This process is overseen by FINRA, which is currently considering changes to its rules governing how and when brokers can wipe their records clean.

In her letter to FINRA President and CEO Robert W. Cook, Senator Warren highlighted recent research showing that broker expungements are often associated with broker misconduct-suggesting that FINRA should protect investors by making its expungement process more stringent and increasing the public's access to expungement records. A recent analysis of FINRA expungement records found that 70% of expungement attempts that took place between 2007 and 2016 were successful-but that "successful...and unsuccessful expungement attempts...are a significant predictor of future misconduct." In addition, the study found that "successful expungements increase recidivism." 

"...The study suggests that FINRA's current method of assessing expungement requests-which approves the vast majority of expungement requests-is failing to safeguard information needed for investor protection," wrote Senator Warren. "Given FINRA's crucial role in promoting safe markets and regulating the securities industry, it is of utmost importance that the organization consider the impact of broker expungement on the future misconduct of industry brokers."

The senator's letter asked FINRA a series of questions on the implications of the study for the regulator's efforts to revamp its expungement rules, and requested that the agency respond to her questions by April 4, 2019.

Senator Warren has been leading efforts in Congress to protect investors and enhance transparency at FINRA:

  • In May 2016, she and Senator Tom Cotton (R-Ark.) wrote to FINRA asking about steps the regulator is taking to address misconduct among financial advisers and to protect investors. 
  • In March 2018, Senators Warren, Dianne Feinstein (D-Calif.), and Catherine Cortez Masto (D-Nev.) sent letters to FINRA and the Securities Exchange Commission (SEC) requesting information on the prevalence of sexual harassment within the financial sector.
  • In July 2018, she and Senators Cory Booker (D-N.J.) and Sherrod Brown (D-Ohio) requested that FINRA provide its interpretation of the SEC's proposed standards of conduct rule and expressed concern that the rule would not adequately protect investors or guarantee that brokers put their clients' interests ahead of their own.
  • In May 2018, Senator Warren introduced the bipartisan Compensation for Cheated Investors Act, which would direct FINRA to use its existing authority to compensate investors for unpaid arbitration awards against FINRA members. Senator John Kennedy (R-La.) later joined the bill.