Brokers find it harder to wipe slate clean

Public pressure on Finra's expungement process has arbitrators thinking twice about erasing disclosure events, attorneys on both sides agree

May 16, 2014 @ 11:20 am

By Mason Braswell

Finra, BrokerCheck, arbitration, expungement, PIABE
+ Zoom
(Bloomberg News)

Heightened scrutiny of Finra's expungement process is making it harder for brokers to clear their names, according to a survey of arbitration claims in recent months.

After a highly publicized study last November by the Public Investors Arbitration Bar Association claimed that brokers were able to win expungement in as many as 97% of cases resolved by settlement or stipulated award between 2009 and 2011, that number has been on steady decline.

From Nov. 1, 2013, to April 30, 2014, brokers requesting expungement following a settlement or stipulated award were only successful around 83% of the time, according to a review of the 132 requests during that period by arbitration award research service Securities Arbitration Commentator Inc.

"My perception is the arbitrators are taking the issue seriously," said Jason Doss, a plaintiff's attorney and president of PIABA.

Similarly, in cases that were resolved on the merits or were dismissed without settlement, expungement requests were only successful in 31 of 90 cases, a success rate of around 43%, according to Securities Arbitration Commentator data provided to InvestmentNews. That compares to a success rate of around 54% for the first nine months of 2013.

"Prior to last year, I had never requested an expungement that was denied," said Marc Dobin, a securities lawyer with an eponymous firm. "There's a heightened sensitivity to it."

The expungement process has faced a series of additional hurdles in recent months. Shortly after PIABA's study, Finra issued new guidance and training to arbitrators. The self-regulator also proposed a rule to the Securities and Exchange Commission that would prevent parties from making a settlement agreement contingent on a claimant's agreement not to oppose an expungement request. That rule is still open for public comment with the SEC.

More: Finra moves ahead with BrokerCheck, arbitration and expungement efforts

The moves come despite the fact that some attorneys representing brokers have raised concerns that Finra's expungement criteria was already very strict and that PIABA's attacks may have been outsized.

Expungement was requested in a small number — less than 5% — of overall arbitration claims and such requests were held to a high standard of due diligence, according to a Finra press release issued in response to the PIABA study.

To have a complaint removed from the public BrokerCheck record, brokers must first file a claim with Finra requesting a hearing on expungement. Then, if the broker wins an arbitration award in his or her favor, the broker must then have the award confirmed by state or federal court to have an event removed from Central Registration Depository, a database of broker records maintained by the Financial Industry Regulatory Authority Inc.

In cases of expungement, arbitrators must indicate in the award which of three grounds were used in granting the erasure, according to Finra rules. The claim must be factually impossible or erroneous, the registered person must be shown to have not been involved, or the allegation must be shown to be false.

But now arbitrators are also taking more time to write out detailed explanations in cases involving an expungement requests, following Finra's expanded expungement guidance, which reminded arbitrators that that "expungement is an extraordinary remedy."

In recent months, explanations in expungement awards have run several pages in length and list the facts of the case that were considered as well as any dissenting opinions from arbitrators.

At least two awards have cited the language of Finra's guidance, saying that "expungement is an extraordinary remedy."

"We see evidence that the guidance may be having a significant effect on the expungement regime," according to an analysis that appeared in the Securities Arbitration Commentator about a decision last year that used Finra's language in the award.

Mr. Dobin said that in one case he had, an arbitrator approve an expungement because the claimants in the case did not show up to oppose the broker's request, but that was no longer likely.

"They're trying to put more pressure on the arbitrators to look closer," Mr. Dobin said. "I think what Finra is saying to arbitrators is that it is not enough that the claimant doesn't show up."

At least one arbitration panel denied a stipulated expungement agreement because the claimant did not show up to testify at the expungement hearing, according to the Securities Arbitration Commentator.

Some attorneys representing brokerage firms say the heightened scrutiny could make it harder for brokers who win expungements even when it might be justified, Mr. Dobin and others have said.

PIABA's sample size was "invalid," said Thomas K. Potter III, an attorney who represents brokerage firms at Burr & Forman. "The ones that the industry selects are the ones that they have a better chance of winning."

"It's pretty clear that the interest groups are trying to make it a dirty word," he said.


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