financial industry regulatory authority

The Financial Industry Regulatory Association (“FINRA”) maintains a database of customer complaints about individuals licensed by FINRA as registered representatives. The data can be accessed and used by both securities regulators and the investing public to find out about past complaints made by customers of the registered representatives.

Customer Complaints Can Be Expunged

But records of customer complaints can be expunged from the database through an arbitration process created by FINRA.

So for example, we file an arbitration action against a particular broker alleging misconduct.

Prior to an evidentiary hearing, the brokerage firm agrees to settle the case by paying the customer money.

Thereafter, once the Claimant customer has been paid, and has no legal or other interest in the proceeding, the offending broker seeks to go back to the arbitration panel, often without the consent or participation of opposing counsel, to obtain an order to granting the expungement of the case from the broker’s record.

In many cases, the brokerage firm or the offending broker may agree to pay the client “extra” not to oppose the broker’s efforts to expunge their record, where in which case the lawyer has to determine whose interest is best served: the public interest or the financial interest of their client, or in other cases, as has been the frequent practice, after the case is settled, the broker’s counsel petitions the panel for expungement, as of course, they have every right to do in connection with the zealous representation of their client.

At that point, Claimant’s counsel has no cognizable legal or financial interest in the matter, and other than defending the notion that the complaint was not frivolous, false or erroneous, Claimant’s counsel may decline to participate in these subsequent proceedings.

In these instances, we generally advise the arbitration panel that “because Claimant has settled her claims, Claimant no longer has an interest in the matter, and accordingly, takes no position with respect to the broker’s request. Counsel, substantially without limitation, ought to be able to pursue, any relief to which they may be entitled to the fullest extent provided by the Rules.

Proposed Amendments to the Expungement Rules

In April 2012, FINRA proposed Expungement Procedures for persons not named as parties in arbitration procedures, which contemplates the broker’s submission to a separate arbitration proceeding, not involving the customer or any other party, to be adjudicated by an arbitrator appointed specifically for that purpose. (FINRA Regulatory Notice 12-18). As of even date, FINRA has not approved the proposed amendments to the Expungement Rules.

Whether to expunge the existence of this matter or the parties’ settlement from the broker’s registration is subject to the sound discretion of the Arbitration Panel. FINRA Rule 2080 with respect to Expungement provides that an award directing expungement contains at least one of the following judicial or arbitral findings:

  1. the claim, allegation or information is factually impossible or clearly erroneous
  2. the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds
  3. the claim, allegation or information is false

See, e.g., FINRA Regulatory Notice 08-79.

As stated above, Claimants object to the suggestion that the allegations contained in the Statement of Claim were factually impossible, were clearly erroneous, were false, or were otherwise frivolous. However, whether to expunge the existence of this matter or the parties” settlement from the broker’s registration following an evidentiary hearing by the Panel is subject to the sound discretion of the Arbitration Panel.

Professor Seth Lipner’s Article on Broker Expungements

However, recently, Professor Seth Lipner, a founding member of the Public Investors Arbitration Bar Association, and Professor of Law, Zicklin School of Business, Baruch College, published a law review article on the subject of broker expungements and why the entire process is flawed.

This Article traces the history of that arbitration process, focusing on how it is employed in cases where the investor was paid money to settle a claim. The Article studies FINRA arbitrations in such cases, and reveals that, post-settlement, customer complaints are being expunged at the rate of 93.7%, often in perfunctory ex-parte proceedings where the complainant has agreed not to oppose the application.

Despite FINRA rules, it appears that arbitration panels almost uniformly “rubber stamp” these industry requests, and it also appears that FINRA has in fact encouraged them to do so.

Professor Lipner also shows that since more than 25% brokers in all settled cases seek expungement, which is granted 93% of the time, approximately 20% or 1/5 of all customer complaints against brokers, at least during the period studied, are deleted from the broker’s regulatory record.

Accordingly, the broker you are dealing with may have been the subject of customer initiated investment related legal actions, but you may never know about them.

The Article concludes with a proposal for major changes to the process of expungement that are necessary if the FINRA database is to maintain its integrity.

Guiliano Law Group

If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.

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