By Jacquelyn Lumb
The Public Investors Arbitration Bar Association (PIABA) has concluded that efforts by FINRA to decrease the number of expungements from brokers’ records of dispute information following settlements for misconduct have failed. PIABA conducted a follow-up analysis to its 2013 expungement study and found that, although FINRA had taken a number of actions, brokers seeking to expunge misconduct from their records continued to obtain relief in nearly nine out of 10 cases. As a result, PIABA now urges FINRA to make its national hearing officers the adjudicators of requests for expungement relief in settled customer cases, and that it improve disclosure, adopt more stringent rules, and further educate arbitrators. PIABA said the standard arbitrators should follow is that the information a broker seeks to expunge has no meaningful investor protection or regulatory value.
Previous failed reform efforts. In a news release announcing its new recommendations, PIABA board member and lead author of the expungement study, Scott Ilgenfritz, said that FINRA’s efforts have failed to assure that expungement relief is an extraordinary remedy that is granted only in cases where the information to be expunged has no investor protection or regulatory value. The results of PIABA’s latest analysis of the statistics regarding expungements continue to raise concerns.
Following initial scrutiny of the expungement issue, FINRA increased arbitrage guidance and training, followed by a proposed rule change to prohibit member firms and associated persons from conditioning the settlement of a customer dispute on the customer’s agreement to consent to, or not to oppose, a member’s request to expunge the dispute information from the CRD system. Since those actions, PIABA reported that the expungement rates remained virtually unchanged.
Call for a wholesale change. PIABA now calls for a wholesale change with respect to broker requests for expungement relief in settled customer cases. First, a FINRA enforcement attorney should review all broker requests for expungement and oppose the request when appropriate. Customers should be allowed to testify and offer documentary support in opposition to expungement relief.
PIABA also recommended that FINRA seek approval from the SEC of amended procedures for handling post-settlement expungement relief requests, which would include prompt notification to the state securities regulators to provide them with an opportunity to oppose the relief. The costs of the proceedings should be borne by the broker seeking relief, in PIABA’s view. There should be a rebuttable presumption that the facts alleged in the customer’s statement are true or brokers should be required to meet a clear and convincing evidence burden of proof to obtain expungement relief. PIABA also believes there should be a time limit for seeking the relief.
Finally, PIABA called for additional training for arbitrators, which should include the meaning and application of the expungement standard—that the information sought to be expunged has no meaningful investor protection or regulatory value.