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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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174. See Ilgenfritz, supra note 3, at 351 (identifying commentater arguments with the 2014] FINRA EXPUNGEMENT PROCESS 1249 court what it must find or what the arbitrator must find for a court to confirm” an award directing expungement.175 Lipner has recognized that “[t]here’s a certain amount of vagueness in [the] current standards....”176 The lack of guidance provided in the rules affects the court confirmation process too, as a court that denied an expungement confirmation request indicated, the court would have confirmed it if the arbitration panel had provided “amended awards containing specific affirmative factual findings in each case justifying the expungement recommendations, along with the portions of the record on which those findings are based... .”177 A considerable lack of input on behalf of the customer after an award is issued is a further point of contention with the current guidelines.178 FINRA has indicated that it does not believe the absence of the customer leads to any presumption of consent to expungement on the customer’s behalf.179 However, industry lawyers have said that they believe an investor’s testimony could possibly sway an arbitrator to decline the broker’s expungement request.180 One industry attorney felt that, “one-sided hearings inherently lack[ed] the adversarial mechanism needed for fact-finding.”181 Further, the relative ease with which FINRA can remove itself as an additional party limits the involvement it will have with a given expungement claim.182 Take, for instance, the current Rule 2080(b)(2)(B), which allows FINRA to remove itself as an additional party if “the expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory guidelines when the rules were initially passed); Lipner, supra note 12, at 62 (instituting Rule 2080 was supposed to limit expungements but has only acted as rubber-stamping the process).

175. In re Kay v. Abrams, 853 N.Y.S.2d 862, 865 (Sup. Ct. 2008).

176. Jamieson, New Finra Rules, supra note 139 (quoting Seth Lipner).

177. In re Johnson v. Summit Equities, Inc., 864 N.Y.S.2d 873, 901 (Sup. Ct. 2008); see also Lipner, supra note 12, at 81-83 (discussing the reasoning behind the Johnson decision). An arbitrator in a recent decision indicated that few arbitration decisions actually reflect the higher standard of proof required, and any claim supported by some reasonable proof can not be labeled as false. See Award FINRA Dispute Resolution at 4, In re Gilliam v. SagePoint Fin., Inc., No. 12July 19, 2013) (Meyer, Arb.), available at http://finraawardsonline.finra.org/viewdocument/ aspx?DocNB=61402.

178. See Lipner, supra note 12, at 97-98 (considering only broker testimony at hearings).

179. See Regulatory Notice 12-18, FINRA Requests Comment on Proposed New In re Expungement Procedures for Persons Not Named in a Customer-Initiated Arbitration, FINRA (Apr.

2012), at 8, http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/ p125947.pdf (providing the ability for the customer to attend or be represented at hearing).

180. Barlyn, supra note 10.

181. Lipner, supra note 12, at 88 (internal quotations omitted).

182. See Ilgenfritz, supra note 3, at 363 (suggesting FINRA should play a larger role because their current involvement is not enough); Mason, supra note 24, at 84 (suggesting that the NASD would have a lack of involvement in the process).

1250 HOFSTRA LAW REVIEW [Vol. 42:1227 requirements.”183 FINRA has consistently indicated that information should not be expunged from the CRD unless it has no meaningful investor protection or regulatory value.184 Thus, all expungement awards granted by arbitration panels should no longer have any value to the CRD,185 which means in all circumstances FINRA would be able to rely on Rule 2080(b)(2) to remove itself as an additional party, and to describe the claim as an extraordinary circumstance is factually incorrect.186 Rule 2080(b)(2) only adds to the current redundancy and ineffectiveness of both Rule 2080 and Rule 12805.187

IV. MODIFYING THE CURRENT RULES

As this Note has identified, the current FINRA expungement process continues to prove its inadequacy, and will only continue to endanger investors for as long as the current expungement guidelines are in effect.188 Expungement was implemented by FINRA in order to be an extraordinary remedy, one that should be awarded only when the information in question has no meaningful investor protection or regulatory value.189 However, it is time to stop and realize that expungement is no longer an extraordinary remedy, it has become nothing short of an ordinary remedy.190 There are parts of the securities industry that have recognized the existing issue with the expungement process,191 and it is now time for FINRA, and subsequently the SEC, to admit that there is a problem that needs to be fixed.192 This Part will suggest, and succinctly identify, a solution to the current expungement issue.193 Subpart A will provide the first step

183. FINRA MANUAL R. 2080(b)(2)(B) (2011).

184. E.g., Lee, supra note 9, at 2; Notice to Arbitrators, supra note 7; see also Notice to Members 99-54, supra note 88, at 352 (“[I]nformation should not be expunged without good reason....”).





185. See Mark Schoeff, Jr., Too Easy for Brokers to Clean Records, Lawyers Say, INVESTMENTNEWS (Oct. 16, 2013, 3:31 PM), http://www.investmentnews.com/article/ 20131016/FREE/131019905 (speaking with an attorney who believes FINRA should get rid of expungement, as all information should be on the CRD).

186. See Lipner, supra note 12, at 73-75.

187. See supra notes 169-86 and accompanying text.

188. See supra Part III.A–B.

189. See supra note 184 and accompanying text.

190. See Ilgenfritz, supra note 3, at 360; supra Part III.A.1.

191. See supra note 24.

192. See supra note 119 and accompanying text (identifying that FINRA has begun the process of approving one new rule and submitting it to the SEC for review).

193. See infra Part IV.A–C. As this Note proposes changes to current rules, it is important to have an understanding of the FINRA rulemaking process. See FINRA Rulemaking Process, FINRA, http://www.finra.org/industry/regulation/finRARules/rulemakingProcess (last visited July 20, 2014) (providing an overview of the rule making process from proposal to confirmation).

2014] FINRA EXPUNGEMENT PROCESS 1251 towards fixing the current expungement process with modifications and additions to the current FINRA Rule 2080.194 The proposed solution will continue in Subpart B with necessary amendments that should be made to the current FINRA Rule 12805, providing stricter and more expansive requirements.195 Finally, Subpart C will discuss the possibility of proposing additional training guidelines for current FINRA arbitrators and whether or not they are necessary for the purposes of this solution.196 A. Amending Current FINRA Rule 2080 When considering the current Rule 2080, it must be kept in mind that it serves as the first step of the expungement process, as it allows FINRA to waive its right to be named as an additional party.197 FINRA’s participation in the process should be a priority to an organization tasked with regulating the securities industry, where protecting investors is of primary concern.198 Waiving the right to participate in the expungement process creates a situation where arbitrators are rubber-stamping expungement awards, as there is no real supervision or ramifications for not following guidelines.199 Resolving such an issue begins with ensuring more FINRA involvement than is currently taking place.200 Initially, when considering what aspects of the current Rule 2080 to leave unchanged, section (a) of Rule 2080 should be one of those sections.201 Despite the court system often being reluctant to enter into the details of the process and overturn awards202 (except in rare instances),203 requiring a court to confirm the award still allows for that possibility, which is why section (a) of Rule 2080 is a necessity.204 The

194. See infra Part IV.A.

195. See infra Part IV.B.

196. See infra Part IV.C.

197. FINRA MANUAL R. 2080(b)(2) (2011).

198. See About FINRA, supra note 10.

199. See Ilgenfritz, supra note 3, at 360-61 (reasoning that rubber-stamping occurs when arbitrators issue expungement awards in settlement cases without following mandated FINRA requirements); Lipner, supra note 12, at 62 (allowing for rubber-stamping of awards is a problem with the current rule).

200. See Ilgenfritz, supra note 3, at 363 (suggesting that FINRA play a more active role);

Schoeff, Jr., supra note 185 (“Finra needs to take more action to protect investors.” (quoting Jason Doss)). But see S. Lawrence Polk & Avital Stadler, Expungement Games: A Closer Look at PIABA’s Study and FINRA’s Response, SEC. ARB. COMMENTATOR, Dec. 2013, at 1 (suggesting that more restrictions are unnecessary as there are adequate regulations in place to protect investors).

201. See FINRA MANUAL R. 2080(a) (2011); infra notes 202-04 and accompanying text (explaining why the section will be beneficial). But see Lipner, supra note 12, at 101 (suggesting that the court confirmation process provides no additional safeguards).

202. See supra Part III.A.3.

203. See Lipner, supra note 12, at 81-83 (discussing In re Johnson).

204. See supra notes 165-68 and accompanying text (identifying an attempt at court 1252 HOFSTRA LAW REVIEW [Vol. 42:1227 remainder of the current Rule 2080 is where this Note suggests modifications to improve the expungement process.205 Rule 2080 must be altered to include much more diligent involvement from FINRA, both before the claim reaches the arbitration stage, and also throughout the claim as well, including the court confirmation process.206 The following is a draft proposal for a modified Rule 2080, excluding section (a) of Rule 2080:207 (b) Prior to mailing an expungement motion to the presiding arbitrator(s), FINRA must critically review the motion. Based on such review, FINRA may determine that it will interject to make the final decision on whether to award expungement, thus making the decision of the arbitrator(s) a recommendation. A critical review of the motion must include the following:208 (1) An assessment of any monetary award issued to the claimant in the initial arbitration hearing;209 and (2) An assessment of the number of times the moving party has requested expungement award prior to this motion.210 This number must be communicated to the panel when the motion is sent from FINRA.211 (c) Members or associated persons petitioning a court for expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents unless this requirement is waived pursuant to subparagraph (1) or (2) below.

FINRA may not waive its obligation to be named as an additional party in any claim seeking expungement involving a settlement agreement, thus the following subparagraphs are inapplicable to any claim involving a settlement agreement.212 confirmation and how the courts see themselves in such a role). This Note acknowledges the potential issue regarding the court system’s larger role in this matter; however, it is a much larger issue than this Note’s intended purpose and would be better resolved in a separate piece.

205. See infra notes 208-33 and accompanying text (outlining a new rule proposal and the reasons for the proposal).

206. See supra Part III.B.

207. Modifications and additions to the current Rule 2080 are indicated by italics.

208. See Ilgenfritz, supra note 3, at 363 (suggesting similar critical review); Lipner, supra note 12, at 103 (making a similar suggestion for FINRA to receive notice earlier).

209. See supra Part II.B (discussing the arbitration process and its importance).

210. See Ilgenfritz, supra note 3, at 363 (suggesting the assessment of the number of prior expungement requests as aspects to consider for additional arbitrator training); see also Lipner, supra note 12, at 97-98 (mentioning prior awards as something not included in the current system).

211. The following draft of section (c) is a rewrite of the current section 2080(b). See FINRA MANUAL R. 2080(b) (2011).

212. There have been industry professionals who have suggested adjusting the settlement process. See Ilgenfritz, supra note 3, at 362-63 (suggesting stricter penalties for abusing the settlement process along with more expansive arbitrator training); Lazaro, supra note 17, at 98 2014] FINRA EXPUNGEMENT PROCESS 1253

–  –  –

(suggesting expungment is removed entirely from the settlement process); Lipner, supra note 12, at 103-04 (suggesting that arbitrators no longer make decisions and someone other than FINRA should make award decisions instead); Schoeff, Jr., supra note 185 (speaking with an attorney who suggested that arbitrators should not be involved in the settlement process at all).

213. See Lee, supra note 9, at 3 (indicating an example of a factually impossible claim would be “if the registered person was not [actually] handling the customer’s account at the time of dispute and no liability was found” during the initial arbitration).

214. FINRA MANUAL R. 2080(b)(1)(B). Clause (b)(1)(B) is not changed in this proposal, as it serves its current purpose adequately, because preventing brokers from expunging detrimental erroneous claims can adversely affect their careers. See Barlyn, supra note 10 (carrying black marks from unproven claims should not be an industry norm); Mason, supra note 24, at 87 (“Ever try to switch brokerages with such a record? You are radioactive....”).

215. Section (b)(2)(B) was removed as this Note determined it to be redundant. See supra text accompanying notes 183-87.



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