FINRA Publishes New Guidance On Expungement Requests In Arbitration Proceedings

10/13/2014

Continuing its scrutiny of expungement in customer arbitrations, the Financial Industry Regulatory Authority (“FINRA”) recently published updated guidance for arbitrators evaluating expungement requests, including the customer’s ability to testify and allowing the customer’s counsel to introduce evidence and cross-examine the broker.  The move comes nearly one year after a study conducted by an investor advocate group criticized FINRA for what it perceived as lax expungement standards and statistics showing that expungements were routinely granted.  Since publication of the study, FINRA has come under pressure on multiple fronts to consider changes and clarify the circumstances meriting expungement.

In arbitration proceedings exceeding a certain threshold (typically more than $15,000) in which a broker is named or implicated, FINRA rules require the inclusion of that proceeding on the broker’s public record known as the central registration depository (“CRD”).  These records are then made publicly available through FINRA’s BrokerCheck.  A broker seeking to remove reference to a particular proceeding from his or her CRD would seek an order granting expungement from an arbitration panel. The expungement process has evolved over the years.  What was once a straightforward process has been made significantly more difficult through a series of FINRA rule changes.  Each change has been viewed as a further restriction on a broker’s ability to obtain expungement.

In early 2014, following the investor group’s report and after pressure from several U.S. Senators, FINRA published “Notice to Arbitrators and Parties on Expanded Expungement Guidance,” which contained a significant number of new procedures and considerations to be followed by arbitrators when weighing expungement requests.  The Guidance first noted the “extraordinary” nature of granting expungement, and clarified that “customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.”  Perhaps most importantly, FINRA set forth criteria designed to allow customers and their counsel to participate in the expungement hearing, stating that arbitrators should

  1. Allow the customer and their counsel to appear at the expungement hearing;
  2. Allow the customer to testify at the expungement hearing;
  3. Allow counsel for the customer or a pro se customer to introduce documents and evidence at the expungement hearing;
  4. Allow counsel for the customer or a pro se customer to cross-examine the broker and other witnesses called by the party seeking expungement; and
  5. Allow counsel for the customer or a pro se customer to present opening and closing arguments if the panel allows any party to present such arguments.

These new considerations may significantly impact brokers’ ability to obtain expungement going forward, especially where the customers may be opposed to this relief.  Previously, participation by the customer bringing the underlying arbitration was not required and was infrequent.  The ability of the customer’s counsel to now introduce evidence and cross-examine the broker may well curtail both the number of expungements sought and the success rate going forward.

FINRA also encouraged arbitrators to analyze several additional factors when considering expungement requests.  First, arbitrators should carefully review the BrokerCheck report of the broker seeking expungement, including paying particular attention to the “Disclosure Events” section of the report.  Other, unrelated disclosure events may give arbitrators pause as to whether expungement would have any meaningful investor protection or regulatory value.  Second, arbitrators should also consider whether the party seeking expungement contributed to the settlement, as well as whether the settlement was conditioned on an agreement not to oppose the request for expungement. FINRA Rule 2081, which took effect July 30, 2014, prohibits firms and registered representatives 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 expungement request.

The updated guidelines will likely have a significant and immediate effect on expungement proceedings.  For questions related to expungement proceedings or the updated guidance, please contact Jordan D. Maglich at jmaglich@wiandlaw.com or 813-347-5115.