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«NOTE WHAT YOU DO NOT KNOW CAN HURT YOU: HOW THE FINRA EXPUNGEMENT PROCESS IS ENDANGERING FUTURE INVESTORS THROUGH A LACK OF INFORMATION I. ...»

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1240 HOFSTRA LAW REVIEW [Vol. 42:1227 soon after released another notice, which addressed the growing industry concerns about the mistreatment of the expungement process through settlement.99 E. The Use of Affidavits in Connection with Stipulated Awards and Settlements and the Clarification of Arbitrator Requirements The NASD’s notice addressing the use of affidavits in connection with settlements was released in June 2004, shortly after the approval of Rule 2130.100 There were a growing number of instances in the industry where a claimant would receive a monetary award through settlement in return for a customer affidavit absolving the respondent(s) of responsibility for the wrongdoing.101 The NASD conceded that the affidavits submitted with the settlement terms were usually inconsistent with the initial claim that had been filed against the respondent broker.102 Prior to the NASD’s notice, some industry members had already recognized this trend, even before Rule 2130 was implemented.103 Included in the June 2004 notice, the NASD alerted the industry that they would begin taking action regarding the abuse of settlement proceedings by requiring arbitrators to undergo training to help alert themselves of such concerns.104 Further, the NASD required any party requesting a waiver of the NASD’s participation in a court proceeding to also submit a copy of the claim, and all settlement documents and affidavits.105 Finally, the NASD went so far as to threaten potential disciplinary action by the NASD’s Department of Enforcement, but made no indication that any present cases of concern would be reinvestigated and subject to discipline.106 Despite the notice from the NASD, concerns continued to grow as members of the industry observed more and more oral requests to

99. See generally Notice to Members 04-43, supra note 24.

100. Id. at 553.

101. Id. at 554.

102. Id.

103. See Mason, supra note 24, at 96 (“[T]he brokerage industry has taken matters privately into its own hands and for a number of years has been abusing the issue of expungement by using it as a settlement demand.”).

104. See Notice to Members 04-43, supra note 24, at 555 (training advised arbitrators to consider the original claim filed and the settlement terms when assessing credibility). For current arbitrator training materials, see Training, FINRA, http://www.finra.org/ArbitrationAndMediation/ Arbitrators/Training (last visited July 20, 2014) (containing links for required training, advanced training, and the written materials). See generally FINRA Dispute Resolution Expungement, FINRA (Feb. 2014), http://www.finra.org/web/groups/arbitrationmediation/@arbmed/@arbtors/documents/ arbmed/p125419.pdf (providing the written training regarding expungement requests).

105. Notice to Members 04-43, supra note 24, at 555.

106. Id.

2014] FINRA EXPUNGEMENT PROCESS 1241 consent to expungement as part of a settlement.107 These requests come with both practical and legal consequences for a customer’s attorney in future claims.108 As noted by an industry member, agreeing to a settlement is not a matter of negotiation, but instead is a professional responsibility decision.109 After the NASD issued its notice in June 2004 as the initial response to these concerns,110 a new rule outlining additional arbitrator requirements was proposed and received SEC approval in 2008.111 The rule implemented new procedures, taking effect in January 2009, for arbitrators to follow when considering requests for expungement relief.112 Under these rules, arbitrators were required to: (1) hold a recorded hearing session by telephone or in person; (2) in cases involving a settlement, review the settlement documents to examine the amount paid to any party and any other terms and conditions of the settlement; (3) provide a brief written explanation of the reasons for ordering expungement; and (4) assess forum fees for hearing sessions held solely for the purpose of considering expungement against the parties requesting the relief.113 FINRA informed members that these procedures were put into place to add transparency to the process and install even further assurances that expungement relief was only granted under the appropriate circumstances.114 In accordance with the issuance of Rule 12805, FINRA required that arbitrators certify that they had familiarized themselves with the new rules, which was achieved through completion of one of six provided training methods.115

107. See Caruso, supra note 24, at 4 (requesting such action typically came when discussing “a stipulated arbitration award, on the basis of Rule 2130(b)(1)(C)... which states that ‘the claim, allegation, or information is false’”).

108. Id. (including future cases where it can be indicated that a customer’s counsel has a “track record” of filing false claims based on his history of retracting claims in expungement settlements, while “false” claims filed in an expungement suit could lead to possible sanctions from the respective state bar).

109. See Mason, supra note 24, at 96 (agreeing to an expungement in settlement “means you agree that the claim was baseless, unmeritorious, even frivolous,” thus, you must not agree unless you have made a genuine mistake).

110. See Notice to Members 04-43, supra note 24, at 553.





111. See Order Approving a Proposed Rule Change Amending the Codes of Arbitration Procedure to Establish Procedures for Arbitrators to Follow When Considering Requests for Expungement Relief, 73 Fed. Reg. 66086, 66086 (Nov. 6, 2008).

112. See Regulatory Notice 08-79, SEC Approves Rules Establishing Procedures for Arbitrators Considering Expungement Requests, FINRA (Dec. 2008), at 1-2, http://www.finra.org/web/groups.industry/@ip/@reg/@notice/docuements/notices/p117540.pdf.

113. Id. at 2-3.

114. Id. at 2.

115. Id. at 4 (training methods included: reviewing written correspondence with a question and answer; reviewing a broadcast email with the same content as the written correspondence; listening to the audio workshop on expungement that FINRA broadcasted; reading Regulatory Notice 08-79;

1242 HOFSTRA LAW REVIEW [Vol. 42:1227 FINRA made no further attempts at expungement change until updating the expungement portion of its website at the beginning of

2014.116 The “guidance and reminder” was meant to remind arbitrators of their role in the expungement process, specifically the importance of their unique role in maintaining the CRD’s informational integrity.117 Further, FINRA reiterated how essential accurate and complete information is to investors, as well as the importance of reviewing all appropriate documentation and providing a written explanation.118 Most recently, FINRA’s Board has approved a rule proposal addressing the conditioning of settlements on expungement agreements, and has submitted the rule to the SEC for review.119

III. INADEQUACIES OF THE CURRENT EXPUNGEMENT PROCESS

It would be inaccurate to suggest that FINRA has idly sat by while the industry clamored for expungement changes, as FINRA has made multiple attempts at resolving the deficiencies with the expungement process over the past fourteen years.120 FINRA has implemented these rule changes in an attempt to ensure its overriding expungement purpose, that information only be expunged if it no longer has meaningful investor protection value.121 Despite these attempts though, expungement continues to be a far too ordinary occurrence, and thus, decreases the completeness of the BrokerCheck resource with each accurate dispute that is expunged from a broker’s record.122 Industry experts continue to advocate for changes of the flawed procedures, with the most recent being the incoming President of the Public Investors Arbitration Bar Association (“PIABA”): “The expungement process for taking the revised online expungement training module; and reading an article on expungement published in the arbitrator and mediator newsletter). Arbitrators certified they completed the training through a mailed-in form or online certification. Id. For current training materials, see supra note 104.

116. See generally Notice to Arbitrators, supra note 7.

117. See id.

118. Id. (reminding arbitrators that the written explanation can not be solely a recitation of one of the Rule 2080 grounds, arbitrators need to instead identify the documentation or evidence that was relied upon to make the expungement decision).

119. See FINRA Board Approves Rule Prohibiting Conditioning Settlements, supra note 24 (notifying members of rule approval); Proposed Rule Change to Adopt FINRA Rule 2081 (Prohibited Conditions Relating to Expungement of Customer Dispute Information), File No. SRApr. 14, 2014), http://www.finra.org/Industry/Regulation/RuleFilings/2014/P485127 (proposing rule to SEC).

120. See supra Part II.D–E.

121. See Notice to Arbitrators, supra note 7.

122. See Ilgenfritz, supra note 3, at 361 (suggesting that accurate expungements are adversely affecting the CRD); Mason, supra note 24, at 77 (undermining the CRD’s accuracy by getting accurate material expunged); infra Part III.A.1.

2014] FINRA EXPUNGEMENT PROCESS 1243 stockbrokers in arbitration cases is clearly broken today and needs fixing. We have believed for some time now that expungements are a significant investor protections issue....”123 Particularly concerning to industry members is the misuse of settlement negotiations to obtain expungement orders and the subsequent adverse effect it has had on the expungement process.124 Subpart A of this Part will further examine the settlement issues damaging the expungement process.125 Aside from the specific settlement issue, the general expungement guidelines are also not serving their purpose.126 Subpart B will discuss the issues surrounding the general guidelines, most specifically, the lack of defined requirements for arbitrators to follow and the negative effect that the customer’s absence has on an expungement hearing.127 A. The Abuse of the Expungement Process Through Settlement In claims between customers and broker dealers ending in settlement, the broker dealers often provide terms within the settlement agreement to facilitate their expungement request, which has led to multiple issues involving the expungement process.128 The use of settlements as a tool to obtain expungement awards is not a problem that suddenly appeared—it has been a point of constant discussion among industry members for over a decade.129 The primary tactic that has been called into question is a respondent’s offer of monetary compensation in

123. PIABA Study, supra note 12, at 2 (quoting Jason R. Doss, incoming President, PIABA).

Doss continued, “the consequences for the information relied upon by investors and investor confidence in the financial markets must be seen as paramount here. This situation cannot be allowed to go unaddressed.” Id.

124. See Caruso, supra note 24, at 4-5 (misusing settlements creates ethical concerns for investor attorneys); Ilgenfritz, supra note 3, at 360 (arguing expungement has become an ordinary remedy in settlement cases); Lipner, supra note 12, at 95-96 (expunging claims based on settlement agreements risks removal of valuable information from the CRD); Mason, supra note 24, at 77 (inserting expungement demands into settlements is an abuse of the process); PIABA Study, supra note 12, at 2 (“Regulators need to step in and crack down on the granting of expungements particularly in settled cases.” (quoting Scott Ilgenfritz, current President, PIABA)).

125. See infra Part III.A.

126. See infra Part III.B.

127. See infra Part III.B.

128. See Notice of Filing of Proposed Rule Change Relating to Amendments to the Codes of Arbitration Procedure to Establish New Procedures for Arbitrators to Follow When Considering Requests for Expungement Relief, 73 Fed. Reg. 18308, 18309 (Apr. 3, 2008) (providing an example where a customer is required to accept such stipulation); Notice to Members 01-65, supra note 21, at 567 (identifying the concern that brokers will condition settlement awards on expungement agreements); Lazaro, supra note 17, at 94 (requesting expungement through settlements poses ethical concerns).

129. See supra notes 24, 124.

1244 HOFSTRA LAW REVIEW [Vol. 42:1227 exchange for an agreement to not oppose the respondent’s expungement request.130 Such a monetary offer often puts pressure on the customer and the customer’s attorney to accept a deal that grants expungement because, “even if ‘[the attorney] and [his] client thought the guy was guilty as sin [they] would still do it, because [they] wouldn’t get money unless [they] agreed to that.’”131 Therein lies the problem; customers and their attorneys are feeling forced into accepting an offer.132 As industry concern over settlement abuse grew over time, FINRA imposed numerous regulations in attempt to solve the settlement problem.133 FINRA recognized that this type of bargaining in a settlement agreement could result in the “buying of a clean record and would make a mockery of any affirmative determination of one of the three grounds in Rule 2130 by a panel of arbitrators.”134 Prior to instituting Rule 12805, FINRA even admitted that there were flaws in the guidelines.135 However, despite the numerous rule changes, notable flaws regarding the handling of settlements still exist.136 Since disputes generally settle at an early stage in the claim—before a hearing of evidence—it remains unclear how arbitrators make definitive expungement determinations.137 Further, a customer’s oral requests to consent to an expungement award after settlement places all burdens and

130. See Lipner, supra note 12, at 96; Eaglesham & Barry, supra note 25 (“[E]xpungement has gone from being a means to correct genuine errors into a ‘tool for brokers and their firms....” (quoting Bruce Oakes)).

131. NASD Names Itself a Party to Expungement Proceedings in New Rule, SEC. WK., Mar.

15, 2004, at 1 (quoting Kord Lagemann).

132. See Elisofon, supra note 20, at 3.

133. See supra Part II.E. In addressing concerns, FINRA has reiterated to members that they must “observe high standards of commercial honor and just and equitable principles of trade.” Notice to Members 04-43, supra note 24, at 555.



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