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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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Lipner, supra note 12, at 98 (“Arbitrators just recite the denials that the broker offers during the ex-parte expungement hearing.”).

2014] FINRA EXPUNGEMENT PROCESS 1259 existing approach calls for such drastic measures.258 Moreover, this Note’s proposal for a modified Rule 12805(b) favors leniency and common sense with regards to section (b)(3)(C).259 It would be senseless to propose further participation from the customers, and most likely the customers’ attorneys, when their participation is already required during the arbitration.260 Despite FINRA’s recent failures,261 the proposed rule change relies on the arbitration panel to collect all substantial information from each party, which FINRA will then have to review at its disposal.262 Ideally, such information will provide enough of a basis for FINRA to make its determination. However, where any factual inconsistencies or discrepancies arise during the determination process, FINRA must conduct the necessary follow up meeting and not simply adhere to the arbitration panel’s recommendation.263 Considering next the current Rule 12805(c), a proposal to change the current clause must center on deriving clarity from the arbitration panel’s written explanation.264 Under the current rule,265 many explanations are being considered nothing more than formalities, with arbitrators simply identifying the Rule 2080 grounds for expungement and providing no further written explanation.266 Requiring a written explanation from the arbitration panel is a beneficial idea in concept, but more detail must be provided within the rule to ensure that the arbitration panel can not turn the explanation into a short formality granting expungement.267 The following additions would not only provide greater clarity to arbitrators drafting the explanation, but would also ensure that FINRA, under the proposed Rule 12805(b) discussed above,268 has a more accurate report on the panel’s recommendation:269

258. See supra Part III.A.

259. See supra text immediately following note 254.

260. See Lipner, supra note 12, at 88 (discussing why a customer has no desire to be part of the process after receiving compensation); supra text immediately following note 254.

261. See supra Part III.A.1 (identifying the high rate of expungements granted under FINRA’s current guidance).

262. See supra text accompanying notes 241-42 and text immediately following note 254.

263. See supra Part III.B.

264. See supra notes 170-72 and accompanying text (identifying the issue with arbitrators rubber-stamping their written explanation).

265. FINRA MANUAL R. 12805(c) (2011).

266. See In re Barker v. Sec. Am., Inc., No. 12-01305, 2013 WL 595840, at *3 (FINRA Aug.

15, 2013) (Connett, Arb.) (granting expungement on over thirty separate claims in one session);

Lipner, supra note 12, at 99 (granting all Barker expungements in one hearing). In another claim, In re York v. Morgan Stanley Smith Barney, the arbitrator’s grounds for expungement was a word-forword recital of the stipulation submitted by the party. No. 11-03966, 2012 WL 4847068, at *2-3 (FINRA Oct. 2, 2012) (Knotter, Arb.); see Lipner, supra note 12, at 98 n.276.

267. See supra notes 170-72 and accompanying text.

268. See supra text immediately following note 254 (identifying rule proposal).

1260 HOFSTRA LAW REVIEW [Vol. 42:1227 (c) Indicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement award and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2080 grounds for expungement applies to the facts of the case. All explanations of findings must provide the following information displayed in subparagraphs (1)– (3), along with any additional information deemed beneficial by the arbitrator(s) [all written explanations of claims involving settlement agreements must be labeled as ‘recommendation’ and be made

pursuant to the guidelines in Rule 12805(b)]:

(1) Evidence or testimony supporting the Rule 2080 ground(s) specified; and (2) In claims involving settlement agreements, agreed upon settlement figures and justifications as to why such a claim should be dismissed when the party seeking the expungement is providing the customer monetary compensation; and (3) Explanation of why non-cited Rule 2080 ground(s) did not support an expungement award.

Providing such detail to the written explanation will serve the purpose of deterring arbitrators from seeing the written explanation as a mere formality.270 Moreover, requiring the arbitrator to assert the specific evidence or testimony on which the decision was based builds on that same purpose.271 A more detailed explanation will help to deter the current practice of arbitrators simply following the written explanation provided by the broker seeking expungement.272 The final clause in the current Rule 12805(d), requires one additional subsection to make it more effective under the proposals outlined in this Note.273 FINRA’s original inclusion of a clause assessing forum fees is essential.274 However, with the addition to section (a) requiring customers, or their attorneys, to be present for a hearing,275 the

269. Modifications and additions to the current clause are indicated in italics.





270. See In re Hyman v. Sec. Am., Inc., No. 12-02969, 2013 WL 2368505, at *2 (FINRA Aug.

5, 2013) (Connett, Arb.) (granting six expungements in one hearing); In re Gilliam v. SagePoint Fin., Inc., No. 12-03717, 2013 WL 3963949, at *3 (FINRA July 19, 2013) (Meyer, Arb.) (arguing that the current process requires the panel to play “devil’s advocate” with ex parte evidence); In re Miller v. Sec. Am., Inc., No. 11-03509, 2013 WL 1933872, at *1 (FINRA May 1, 2013) (Loss, Gray & Pleiss, Arbs.) (showing the mere formality of the current process as eleven separate expungements were granted).

271. See supra note 266 (identifying examples that will ideally be resolved under the new proposal).

272. See Lipner, supra note 12, at 98.

273. See supra Part IV.A; text accompanying notes 234-72.

274. FINRA MANUAL R. 12805(d) (2011).

275. See supra text accompanying notes 240-41.

2014] FINRA EXPUNGEMENT PROCESS 1261 rationale behind forum fees must change slightly. 276 A modified proposal of Rule 12805(d) is as follows:277 (d) Assess all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief.

(1) The party requesting expungement relief is responsible for all attorneys’ fees associated with the customer’s presence, or legal representation, at the award hearing.

While it may appear overly detrimental to the expungement-seeking party, requiring that party to cover the customer’s legal fees is the only legitimate way to ensure the customer’s interaction in the process.278 The list of reasons why a customer would be unlikely to participate in an expungement hearing has been described above, and addressing that glaring issue requires a drastic step.279 Although it may appear unfair to require such action from the expungement-seeking party, the proposal justifies itself on the notion that expungement is intended to be an extraordinary remedy, and thus, a party seeking expungement may be required to pay an extraordinary price for such an award.280 C. Addressing FINRA’s Inadequate Training for Arbitrators The current training required of arbitrators becomes less of a dire issue if the modified rule proposals presented above are implemented.281 However, since members of the industry have discussed possible changes to arbitrator training, this Note finds it necessary to at least briefly discuss it.282 Moreover, FINRA needs to provide further direction with regards to significant questions to ask during a hearing to ensure that the most informed decision is being made.283 While the proposed rules above diminish the need for an extensive training overhaul,284

276. See infra notes 277-79 and accompanying text.

277. Modifications and additions to the current clause are indicated in italics.

278. See Lipner, supra note 12, at 88 (identifying the complete lack of incentive for an investor to currently appear at the expungement hearing).

279. See supra notes 243-45 and accompanying text.

280. See Notice to Arbitrators, supra note 7.

281. See supra Part IV.A–B. The more detailed inclusion of FINRA in the proposed solution will mitigate some of the current issues of the arbitrators primarily working on their own. Ilgenfritz, supra note 3, at 362 (describing FINRA’s current practice of not reviewing an expungement motion, and instead, sending it to arbitrators without a prior review).

282. See Ilgenfritz, supra note 3, at 363 (emphasizing the need for more importance to be placed on the integrity of the CRD system); Lazaro, supra note 17, at 98 (receiving effective training is important to fully understand the significance of an expungement request); Lipner, supra note 12, at 101 (arguing that no amount of training will fix the current expungement process).

283. See Ilgenfritz, supra note 3, at 363.

284. See supra Part IV.A–B.

1262 HOFSTRA LAW REVIEW [Vol. 42:1227 addressing arbitrator training through ways suggested by other industry members285 can certainly benefit the expungement process.286

V. CONCLUSION

The current expungement process is not serving its intended purpose of only expunging information that would hold no value to the CRD.287 Under the current system, investors are being encouraged to research registered brokers despite the likely result that they will be reviewing inadequate information of those brokers.288 While such lack of information may not seem like a primary issue of concern, the current guidelines have already caused investor harm and will likely continue to do so.289 This Note’s proposed solutions advocating for more extensive FINRA involvement, as well as more detailed and stricter guidelines for arbitrators, would remove many of the current issues that exist.290 Tilting the scales back toward investor protection will better inform investors and ensure that the information investors currently lack does not end up hurting them.291 James T. Farris*

285. See supra note 281.

286. See supra note 280.

287. See Notice to Arbitrators, supra note 7; supra note 58 and accompanying text; supra Part III.A–B (identifying why the process is not serving its purpose).

288. See Lynnley Browning, Site That Tracks Brokers Questioned on Erased Cases, N.Y.

TIMES, Dec. 17, 2007, at C10 (“BrokerCheck gives you no assurance that you’re dealing with somebody who has a clean record.” (quoting Pat Huddleston)); Eaglesham & Barry, supra note 25 (suggesting investors using BrokerCheck risk wrongfully believing information on a broker’s record).

289. See supra notes 2-6 and accompanying text.

290. See supra Part IV.A–B.

291. See supra Part IV.

* J.D. candidate 2015, Maurice A. Deane School of Law at Hofstra University; B.S., 2010, University of New Haven. This Note is dedicated to my amazing parents, Greg & Linette Farris, who have always set an incredible example of hard work and determination for me to emulate.

Thank you for making me the person I am today. A special thank you to Professor J. Scott Colesanti for his thoughtful insight and advice throughout this entire process, along with Steven Caruso for his invaluable guidance. Thank you to Brian Sullivan; Tyler Evans; Sarah Freeman; Erik Harmon;

Aaron Zucker; Courtney Klapper; Addie Katz; Rachel Summer; and Bilal Chaudry. Last, and certainly not least, thank you to Jennifer Caruso, who without her support, encouragement, and unwavering love I would not have survived this process let alone law school in general.



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