An investors' rights group finds that FINRA arbitration panels are about three times less likely to
But most expungement requests still go unopposed — a situation the Public Investors Advocate Bar Association thinks could change if state regulators coordinated their enforcement efforts a bit more. In a 29-page report released Tuesday, the investor advocacy group PIABA and its sister charitable organization, the PIABA Foundation, found that customers had a say in only 10% of 2,506 expungement decisions made by arbitrators between the start of 2019 and Aug. 31 this year.
When aggrieved clients did express opposition, brokers
In a webinar Tuesday, PIABA, PIABA Foundation and regulatory representatives discussed ways to ensure that expungement — or the purging of customer complaints and other marks from the online BrokerCheck database and other records — is the
It's nonetheless granted at a high rate. Corroborating past studies, PIABA and the PIABA Foundation's latest report found that expungement was awarded in 90% of the 2,506 decisions FINRA arbitration panels made between 2019 and the end of August this year.
"We've confirmed that the historical problem persists," said Joe Peiffer, the incoming president of PIABA and a managing director in the New Orleans office of Peiffer Wolf Carr Kane & Conway.
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While PIABA and the PIABA Foundation dedicate more pro bono hours to representing investors in arbitration cases, Borg's working with his colleagues at the Alabama Securities Commission to help state regulators learn the ins and outs of expungement. Securities watchdogs from across the country are now signing up for training sessions next month, he said.
"FINRA arbitration will be a relatively new concept to many state regulators and their respective staffs," Borg said. "The types of matters litigated in FINRA arbitration are somewhat different than generally pursued by state securities regulators and licensing and registration and enforcement actions."
Lawyers who represent brokers often argue that the frequent expungements seen in the past merely show that it's only people with the best chances of success who are spending the extensive amount of time and money needed to seek expungement. But PIABA contends those arguments are undermined by the 90% approval rating.
Since Oct. 16,
FINRA, in a statement, called the changes "significant enhancements."
Among other things, they call for state regulators to be notified within 15 days whenever an expungement request is filed. They will then have 30 days to inform FINRA of any plans to take part in arbitration proceedings.
Borg said that deadline will tax many state securities watchdogs' "limited resources and limited time."
"So it's important for state regulators to understand the new rules and procedures and basically hit the ground running to be as effective as possible," Borg said.
FINRA's 30-day deadline could prove particularly burdensome for states with large numbers of brokerage registrations. PIABA's report notes that five states — California, Florida, New Jersey, New York and Texas — maintained registrations for more than half of the 620,882 brokers working in the U.S. in 2022. Officials in those places could easily struggle to keep up with the hundreds of purge requests filed in their jurisdictions every year.
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The good news, from state regulators' perspective, is that most brokers are registered in more than one state. So securities watchdogs in Florida, for instance, wouldn't necessarily have had to appear at all 388 of the expungement decisions handed down for in-state registered brokers between 2019 and August this year.
When dealing with brokers registered in multiple states, they could have handed some cases to less-busy regulators. Georgia, for instance, saw only 47 expungement decisioons in the study period.
PIABA and the PIABA Foundation found that most brokers are registered in multiple states — 16 on average. Jason Doss, the founding director of the PIABA Foundation, said in the webinar that state regulators who take the time to coordinate their efforts can ensure they have representation at every single expungement hearing.
"So, in other words, if everyone works together, this problem can be solved," Doss said. "We believe that it can be 100% coverage by the states if they work together and participate and oppose expungement."
PIABA predicts that FINRA's new rules will eventually cause the total number of purge requests filed every year to drop by half.
"My hope and expectation is that going forward, given the time limitations, given all the other important changes that FINRA made to the process, the number is going to significantly decrease," Doss said. "This is a manageable problem that can be managed if everyone works together."
FINRA's new rules mainly apply to so-called "straight in" expungement requests, which are made outside of arbitration hearings initiated directly by customer complaints. Brokers now no longer have the option of having their straight-in requests heard by a single arbitrator rather than a three-member panel. Expungement requests also now have to be granted by unanimous decision rather than a simple majority.
The rule also limits how long brokers have to make expungement requests. They will have to submit a request no more than three years after the filing of a customer complaint, or two years after the close of arbitration or civil litigation.
FINRA's new procedures further attempt to prevent "forum shopping" by putting tight restrictions on a broker's ability to have arbitrators removed or replaced on hearing panels. Expungement seekers will no longer be able to have individual arbitrators struck. Instead, they will have to accept panel members selected at random from a pool of people with no ties to the securities industry but with training and experience in arbitration.
The rules also require brokers to file straight-in expungement requests against the brokerage where they were working when a customer made a complaint. Previously, brokers had been able to submit the requests against their current firm, regardless of whether they had recently changed their employer.
Doss said that meant the brokerages involved in expungement proceedings often had no knowledge of the underlying customer complaint. That, he said, prevented arbitration hearings from being the adversarial proceedings they were meant to be.
Pieffer said he thinks PIABA and the PIABA Foundation will take another close look at FINRA expungement data in a year or two to see what effects the new rules are having.
"The rule change should make a big difference," Pieffer said. "But it won't make a big difference if the state regulators and other attorneys for investors don't do their jobs."
