Expungement is a funny thing, and here’s why: for years, claimants’ counsel have complained loudly to FINRA that expungement was being granted too frequently, that legitimate customer complaints were disappearing from CRD, resulting in an unfair, sanitized representation of brokers’ records that put unsuspecting customers at risk. As Andrew Stoltmann, PIABA’s president, put it so colorfully in a recent quote, because of expungement, “retail mom and pop investors walk unsuspectingly into the arms of a financial predator all under the nose of FINRA.”
Yikes, that sounds bad. But, let’s get to the truth of things. In reality, and completely opposite from what PIABA is telling FINRA and the media about rampant grants of expungement and the dangers that supposedly creates, by and large, claimants – and their counsel – have historically shown that they could care less about expungement.
In the old days, parties to an arbitration were allowed simply to bake into a settlement agreement a stipulation to having the complaint expunged. PIABA didn’t like that, I guess. But, unless I am really, really mistaken, any claimant that was truly unhappy with such a stipulation had the right simply to say no, and not agree to the settlement. The choice was always claimant’s to make.
The same was true in the next era of expungement history, namely, settlements that did not contain a stipulation to expungement, but, instead, a clause that recited the claimant’s agreement not to oppose a request by respondent for expungement. Again, claimants always had the right simply not to agree to settle if there was such a clause involved and they found it to be offensive. I don’t know about you, but I never had a settlement fall apart based on a claimant’s refusal to agree to such a clause. Nevertheless, PIABA flexed its impressive lobbying muscle and convinced FINRA that, shockingly, respondents were the problem, not claimants, and these agreements were also nixed.
So, for PIABA, it came down to this: rather than advising their clients that they could simply choose not to settle if they were unhappy about stipulating to expungement, or agreeing not to oppose expungement – which would, of course, result in no settlement (and, more importantly, no contingent fee being collected by claimant’s counsel) – PIABA took a different approach. Not just an easier approach but the one that allowed its members to collect their fees on settlements: it conducted its study and used it to bully FINRA into changing the rules. As a result, FINRA has declared that expungement is an “extraordinary measure,” and it is a violation of FINRA’s disciplinary rules for a respondent to condition a settlement on claimant’s agreement not to oppose expungement.
Now, by rule, all expungement requests must go to hearing. And, as a matter of FINRA protocol, the complaining customer must be advised of the respondent’s request to expunge their complaint, and the hearing particulars, i.e., date, place and time, and invited to participate. Well, guess what? Claimants don’t show up. They can simply pick up the phone, if they don’t want to appear in person, but they don’t even do that. Nor, of course, do their lawyers. Once claimants receive their settlement money, they lose any interest in their case, to the extent they ever had any true interest in the first place in anything other than collecting some money.
I realize I am painting with a broad brush, but what I have described is the universal experience for respondents’ counsel. I am not saying that expungement is never contested – indeed, when expungement is dealt with in a case that doesn’t settle, and the hearing panel rules on expungement at the same time as it deals with the underlying issues of liability and damages, it is fair to say that expungement can be hotly contested. But, in cases that settle (and, statistically speaking, the vast majority of arbitrations settle) – which means that the only aspect of the case that goes to hearing is the request for expungement – claimants and their counsel just don’t choose to participate.
So, we all agree that PIABA’s professed resistance to expungement is at odds with reality, right? Well, it’s only going to get worse. The comment period just closed on FINRA’s proposed tweaks to the expungement process, none of which serves to make it easier to obtain. Among other things, the proposed rule changes:
- Limit to one year the time within which a request for expungement must be filed (vs. the six years that the Code of Arbitration provides claimants to file their statements of claim);
- Require a unanimous decision by the hearing panel (while a claimant’s claim only requires a majority decision);
- Add as an additional prerequisite finding, i.e., in addition to the three potential bases for expungement outlined in Rule 2080, a determination that “the customer dispute information has no investor protection or regulatory value” (putting aside the fact that this standard is vague, undefined and utterly subjective, how could a claim that is subject to expungement because it is “false” or “factually impossible” or “clearly erroneous” – the Rule 2080 standards – possibly have any “investor protection or regulatory value?”); and
- Require that the panelists (1) complete enhanced training; (2) be lawyers; and (3) have five years’ experience in either litigation, federal or state securities regulation, administrative law, service as a securities regulator, or service as a judge (as opposed to customer claims, which require none of these things of their panelists)
It is utterly unsurprising that FINRA received a lot of comments to the proposed rules, with the industry firmly lining up against them. Given FINRA’s historical penchant for doing whatever PIABA advocates, however, I, for one, would not expect those comments to be taken seriously.