«NOTE WHAT YOU DO NOT KNOW CAN HURT YOU: HOW THE FINRA EXPUNGEMENT PROCESS IS ENDANGERING FUTURE INVESTORS THROUGH A LACK OF INFORMATION I. ...»
1254 HOFSTRA LAW REVIEW [Vol.
216. The current Rule 2080(c) remains unchanged and becomes 2080(e) in this proposal.
217. See supra notes 197-211 and accompanying text.
218. See Ilgenfritz, supra note 3, at 362 (explaining FINRA’s current process of receiving a motion for expungement relief, not reviewing it, and sending a copy to the arbitration panel).
219. See id. at 363 (arguing FINRA does not currently play an active enough role and must make itself more knowledgeable); Lipner, supra note 12, at 103 (arguing FINRA must insert itself into the dispute earlier to become more knowledgeable).
220. See supra Part III.B.
221. See supra Part III.A.1.
222. See supra Part III.A.
223. See supra note 212 and accompanying text.
224. Ilgenfritz, supra note 3, at 362 (suggesting similar review from FINRA to return expungement to an extraordinary remedy). The recently submitted proposal to the SEC is a step in the right direction. See Proposed Rule Change to Adopt FINRA Rule 2081, supra note 119; see also Jean Eaglesham & Rob Barry, U.S. Aims to Fix Broker Records, WALL ST. J. (Apr. 16, 2014), http://online.wsj.com/news/articles/SB30001424052702303887804579503653564597512?.mg=ren o64wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle$2FSB3000142405270230388780457950 3653564597512.html (indicating that FINRA may propose a rule change that will require firms to 2014] FINRA EXPUNGEMENT PROCESS 1255 The purpose of narrowing the guidelines under which FINRA may excuse itself is to provide further clarity.225 It is important for all parties involved to understand under what circumstances FINRA may remove itself as a party.226 Moreover, it is important for FINRA to consider whether monetary compensation was given, as firms do not typically pay out sums of money where claims are clearly erroneous or factually impossible.227 The desire to get further understanding out of FINRA is aided by the addition of Rule 2080(d), which requires a written explanation.228 As FINRA requires the arbitrator to provide a written explanation, FINRA should not be exempt from the same practice.229 Providing a written explanation—supported by factual evidence— further protects against the rubber-stamping of awards.230 The proposed modifications to Rule 2080 serve the initial purpose of gaining more extensive FINRA participation in the expungement process.231 FINRA’s current lack of participation has resulted in the absence of guidance and thoroughness within arbitration panels.232 A modified Rule 2080 can not change the process on its own, though; thus, a modification to the current Rule 12805 instituting stricter guidelines to grant expungements is necessary as well.233 B. Modifying Current Rule 12805 Along with the current Rule 2080, its companion Rule 12805 must be adjusted as well, to ensure that the expungement process is further improved.234 As it currently stands, the guidelines of Rule 12805 do not provide enough significant concrete direction for an arbitration panel to follow.235 While certain aspects of Rule 12805 will remain in the perform background checks on all brokers to ensure better accuracy of information on the CRD).
225. See supra text accompanying notes 208-16 (outlining the text of the proposed rule).
226. See supra notes 174-81 and accompanying text (discussing the issue of unclear guidelines).
227. See Ilgenfritz, supra note 3, at 362.
228. See supra text accompanying note 216.
229. FINRA MANUAL R. 12805(c) (2011) (requiring a written explanation from the arbitrator).
230. See Ilgenfritz, supra note 3, at 361 (identifying rubber-stamping as an adverse effect on the current CRD system); Lipner, supra note 12, at 62 (acknowledging the current issue with rubber-stamping awards).
231. See supra text accompanying notes 197-200 (outlining the issues with FINRA’s current participation in the expungement process); see also supra text accompanying notes 208-16 (outlining the proposed rule).
232. See supra Part III.B.
233. See infra Part IV.B.
234. See infra text accompanying notes 240-79 (proposing new provisions of Rule 12805).
235. See Ilgenfritz, supra note 3, at 362 (showing the widespread sentiment that arbitrators are not adequately following the procedures outlined in FINRA’s rules, and thus, not affording the proper level of importance to what they decide to expunge and take off the CRD); Lipner, supra 1256 HOFSTRA LAW REVIEW [Vol. 42:1227 proposed role,236 the general rule must be restructured in order to ensure that investor safety remains FINRA’s number one priority.237 The need for change stems from the initial clause’s lack of requirement for both the claimant to be involved in the hearing, and the claimant not being required to testify.238 The following is a proposed re-draft of Rule 12805(a):239 (a) Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement,240 where both the party seeking expungement and the customer responsible for the original claim, or the customer’s attorney, are present. This paragraph will apply to cases administered under Rule 12800, even if a customer did not request a hearing on the merits. The recorded hearing must be conducted pursuant to each of the following
(1) The arbitrator(s) must question each party under oath regarding the potential expungement award and record all testimony;241 and (2) If the claim involves an agreed upon settlement between the parties, the arbitrator(s) must question the customer, or the customer’s attorney, as to why expungement was agreed to and, if applicable, why the customer’s attorney agreed to dismiss the claim.242 Requiring customers, or the customer’s attorney, to be present for all hearings, even if they did not request such a hearing, prevents the party seeking expungement from dominating the fact-finding process.243 Further, the addition of required testimony will allow arbitrators to delve further into the facts of the case.244 This additional information will ideally uncover any situation where the expungement-seeking party note 12, at 103-04 (going as far as suggesting that the current system with arbitrators is so flawed, arbitrators should be removed entirely).
236. See infra note 240 (identifying the carried-over text from the original Rule 12805).
237. See infra text accompanying notes 238-79; see also supra text accompanying note 58 (identifying investor protection as primary purpose).
238. See FINRA MANUAL R. 12805(a) (2011); Lipner, supra note 12, at 99 (identifying Barker v. Securities America, Inc., and describing the peculiar absence of testimony, alluding to its necessity but not going so far as to make it a requirement) (citing In re Barker v. Sec. Am., Inc., No.
12-01305, 2013 WL 595840 (FINRA Aug. 15, 2013) (Connett, Arb.)).
239. Modifications and additions to the current clause are indicated in italics.
240. FINRA MANUAL R. 12805(a) (2011).
241. See Lipner, supra note 12, at 97-98 (suggesting the need for testimony).
242. See id. at 98 (agreeing that no ex parte hearing will ever be successful).
243. See supra text accompanying notes 178-81.
244. See Lipner, supra note 12, at 97-98 (noting that the hearing is usually only attended by party seeking expungement, meaning the arbitration panel only hears one-sided evidence, which is insufficient to make expungement decisions).
2014] FINRA EXPUNGEMENT PROCESS 1257 attempted to coerce the customer into a settlement agreement contingent on not opposing the broker’s expungement request.245 There are, understandably, possible issues and concerns, primarily on behalf of the customer and his attorney, with requiring customer participation in the hearing.246 However, action must be taken to prevent the continued practice of brokers attending expungement hearings unopposed.247 It is predictable that no investor would put himself through further hearings or pay more attorneys’ fees in a case where he has already received his compensation.248 A potential solution to the attorney fee issue would be for the broker seeking expungement to pay the portion of attorney fees required by the expungement hearing.249 An arbitrator’s responsibility to hear a full disclosure of evidence is critically important,250 and thus the reason for making the customer’s presence at the hearing a requirement.251 The second clause in Rule 12805 pertains to arguably the biggest issue within the current expungement process—awards deriving from settlement agreements.252 As previously addressed, granting an expungement award based on a settlement agreement between the two parties presents a multitude of dilemmas; most important is the threat of necessary and valuable information being wrongfully expunged from the CRD.253 Keeping with the current structure of Rule 12805(b), this Note proposes the following significant additions and modifications to make the clause more effective in preventing the undeserved expungement of customer dispute information:254 (b) In cases involving settlements, in addition to testimony requirements outlined in paragraph (a), arbitrator(s) must review settlement documents and consider the amount of payments made to any party and any other terms and conditions of settlement.
245. See supra note 119 and accompanying text (identifying FINRA’s recent movement to deter such conduct).
246. See supra text accompanying notes 178-81 (outlining arguments for customer participation).
247. See Lipner, supra note 12, at 97-98 (outlining the consequences of brokers attending hearings unopposed).
248. See id. at 88; see also Elisofon, supra note 20, at 3 (understanding the customer’s mindset—brokers are able to take advantage of customers when offering monetary compensation through settlement).
249. See infra text accompanying and immediately following note 277 (proposing a new section (d)(1) to Rule 12805).
250. See Lipner, supra note 12, at 98 (continuing absence of investor’s attorney under current rules likely leads to the burying of the truth).
251. See infra text following note 254 (identifying text of proposed rule).
252. See supra Part III.A.
253. See supra Part III.A.
254. All modifications and additions to the current clause are indicated in italics.
1258 HOFSTRA LAW REVIEW [Vol. 42:1227 Arbitrator(s) must also coordinate with FINRA on all cases involving settlements pursuant to each of the following
(1) FINRA must receive all settlement documents, testimony, and any other applicable evidence from the arbitration panel prior to the panel confirming any grant of expungement;255 and (2) The arbitration panel must provide FINRA with its recommendation on whether expungement is appropriate and FINRA will control the final determination of whether such a recommendation is confirmed or denied; and (3) FINRA’s review of the case prior to making a final
determination must include:
(A) Review of all documents provided by the arbitration panel, including listening to the recorded hearing; and (B) Speak with the arbitration panel, either in person or telephonically, regarding their rationale behind recommendation and ascertain whether all required protocols were followed; and (C) If determined to be necessary by FINRA, conduct a follow-up meeting, either telephonically or in person, with both parties to discuss relevant evidence and determine whether reason for settlement was coerced during settlement negotiations.
(i) If FINRA determines settlement was obtained through coercion or bad faith during negotiations, FINRA must immediately reject the request for expungement and dismiss the claim.
While the changes this proposal makes to the current Rule 12805(b) are drastic, the current expungement landscape calls for such wholesale changes.256 Requiring that FINRA control the final determination of expungement awards on all claims involving settlements not only removes the possibility of arbitrators rubber-stamping expungement awards, but it also ensures a stricter approach that ideally tips the scales back in favor of investor protection.257 Further, while instituting three separate FINRA requirements prior to making a final determination may appear excessive, the current industry sentiment towards FINRA’s
255. See Lipner, supra note 12, at 103 (suggesting similar disclosure of documents to ensure state regulators have time to object).
256. See supra Part III.A–B.
257. See Ilgenfritz, supra note 3, at 361 (identifying rubber-stamping as current problem);