The Public Investor Arbitration Bar Association (known as PIABA) is a nationwide association of attorneys who advocate for investors through litigation and arbitration and regulatory reform. In a report prepared by The PIABA Foundation, titled 2019 Study on FINRA Expungements, A Seriously Flawed Process that Should be Stopped Immediately to Protect the Integrity of the Public Record, PIABA called upon FINRA to “halt all expungement proceedings immediately and impose a moratorium on the filing of Expungement-Only cases until procedural safeguards are put in place to correct problems identified” by the study. PIABA also called for other actions, including an independent investigation to determine whether expungements have been grated based upon false or fraudulent information.
FINRA is the Financial Industry Regulatory Authority and, along with the U.S. Securities and Exchange Commission and state securities agencies, regulates the conduct of registered broker-dealers and investment advisors. As part of its statutory duties, FINRA maintains a database, known as the Central Registration Depository, or “CRD,” which contains information on brokerage firms and current and former registered representatives. The information includes records of customer complaints. The public may access information reported in the CRD system through the BrokerCheck program maintained on FINRA’s website. FINRA actively encourages investors to consult BrokerCheck before deciding to hire a broker.
Customer complaint information may be removed, or expunged, from the CRD and BrokerCheck systems. A broker may request expungement in one of two ways—either during a customer arbitration or by filing a separate arbitration case. If a panel of arbitrators agrees that the customer complaint may be expunged, and a court confirms the arbitrators’ decision, FINRA will remove the information from the CRD and BrokerCheck.
On paper at least, expungement should not be easy to come by. FINRA Rules 2080, 12805, and 13805 provide that arbitrators may grant expungement only after conducting an evidentiary hearing and only after they make one or more of the following findings of fact: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false. But despite FINRA’s efforts to make expungement an extraordinary remedy that is available only in the most egregious cases, FINRA’s rules have led to a huge growth in the number of expungements granted.
The reason for this is FINRA’s allowance of “expungement only” cases—arbitrations that are initiated by the broker for the sole purpose of obtaining an expungement. This type of cases usually occurs in one of three scenarios: (1) when the customer who made a complaint but decided not to file an arbitration case, (2) when the customer filed for arbitration and the case was settled, or (3) when the customer named the brokerage firm only in the arbitration. In such cases, requests for expungement are rarely opposed. Although the broker who is seeking expungement is required to notify the customer of the proceeding, customers rarely object. Likewise, brokerage firms that are named as respondents in expungement-only cases almost never oppose the broker’s request. IN fact, oftentimes the brokerage firm is the broker’s employer and thus has an interest in seeing that its broker’s CRD record is cleaned up.
According to PIABA’s study, expungement-only case filings increased by 924% from 2015 to 2108. A small number of law firms specialize in representing brokers in such cases—two law firms represented at least one party in 73% of the cases filed between 2015 and 2018. Arbitrators who have shown a willingness to grant expungement are deemed to be “friendly” and are repeatedly selected. Due to the lack of opposition, expungement requests are being granted based on one-sided presentations of the evidence.
PIABA’s recommendations include the following:
- FINRA should halt all expungement proceedings until procedural safeguards are put into place to correct the problems identified in the study.
- FINRA should hire outside consultants to determine whether expungement requests have been granted based upon false information.
- FINRA’s Broker-Check disclosures should carry a prominent earning that they are unreliable because they do not include all customer complaints because expungement may have resulted in the removal of pertinent information.
- The SEC or FINRA should establish an investment protection advocate who would be named as a party in every expungement proceeding to ensure the integrity of the process.
The PIABA study is well-researched and provides important insights into a system that is clearly broken. Expungement was meant to be an extraordinary remedy. See, e.g., FINRA Regulatory Notice 17-42 (“It has been FINRA’s long-held position that expungement of customer dispute information is an extraordinary measure, but it may be appropriate in certain circumstances.”). Unfortunately, FINRA’s rules have led to an explosion of such requests.
© Andrew Whiteman 2019
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