This post first appeared on the Securities Arbitration Alert blog.  The blog’s editor-in-chief is George H. Friedman, Chairman of the Board of Directors for Arbitartion Resolution Services, Inc.

On the heels of the October 16 effective date of a number of rule amendments affecting the expungement of customer dispute information, PIABA and its foundation have issued an updated report on expunging customer dispute information from the Central Records Depository (“CRD”).

As we reported in SAA 2023-15 (Apr. 20), the SEC approved the final version of SR-FINRA-2022-024, which makes substantial reforms to the process for expunging customer dispute information from brokers’ CRD records and profoundly limits the ability of brokers to seek such relief in the first place. When FINRA issued Regulatory Notice 23-12, setting the October 16 effective date for the rule changes, we described which cases will be governed by the new rules and the numerous ways these rules will limit brokers’ opportunities to request expungement through FINRA arbitration (see SAA 2023-31 (Aug. 17)). The main set of rules applicable to expungements under the new regime are: Rule 12800(d)-(f), which applies to expungement requests during simplified arbitrations of customer-initiated cases (involving $50,000 in damages or less); 2) Rule 12805, which applies to expungement of other customer-initiated arbitrations (more than $50,000 in, or an unspecified amount of, damages); and 3) Rules 13805 and 13806, which apply to “straight-in” expungement proceedings, those initiated by brokers for the purpose of expunging customer complaints. See our October 11 feature article detailing the changes.

Updated Report

PIABA announced via an October 24 Press Release publication of a 29-page Study2023 Updated Study of FINRA Expungements: A New Hope to Protect the Integrity of the Public Record. The report updates prior studies conducted in 2012, 2019, and 2021. The Release leads with these findings (ed: repeated verbatim; bulleted format added):

  • Requests for the expungement of customer complaints against their investment brokers were granted at an astonishing rate of 90% according to a new report on FINRA arbitration awards released by two nonprofits, The PIABA Foundation and PIABA (Public Investors Advocate Bar Association).
  • The new study is the third report since 2019 and updates their analysis, which now covers 8 ½ years of arbitration awards issued by FINRA arbitrators in “straight-in” cases, a term to describe a type of expungement request where brokers file arbitrations against their own brokerage firm requesting expungement of customer complaints. Historically, the requests went unopposed because no one was present to challenge the request.
  • Consistent with its previous reports, the new report reviewed data from January 2019 to August 31, 2023 and found that expungements were granted approximately 90% of the time. Out of 2506 awards issued in that time period, expungements were granted in 2259 “straight-in” cases.
  • Brokerage firms continued their practice of not opposing brokers’ expungement requests in 92% of cases, likely because they have an incentive to erase customer complaints as well.

Core Observations

The core conclusions (ed: repeated verbatim):

PIABA and the Foundation have conducted multiple studies analyzing FINRA’s expungement awards for over a decade and the results are clear. The studies have had a positive influence on improving the process.

The data unquestionably leads to the conclusion that the most effective way to reduce the rate of expungements of valid customer complaints being granted is to stop the practice of arbitrators deciding expungement based on one-sided presentations of evidence. FINRA’s new expungement rules are a significant improvement to the expungement process, particularly for straight-in expungement cases.

PIABA and the Foundation are hopeful that the changes will provide a meaningful opportunity for state securities regulators and aggrieved investors to participate and present evidence opposing invalid expungement requests.

The attorneys who represent investors in FINRA arbitration, including the PIABA’s membership and those who work with the PIABA Foundation, are also stakeholders in the outcome of expungement requests, because the integrity of their clients’ claims and the integrity of FINRA’s arbitration forum hang in the balance. One-sided and misleading, and/or incomplete presentations of facts and law by brokers and their firms to chair-qualified arbitrators in straight-in expungements risks leading the arbitrator pool to believe that many, if not most, customers and lawyers representing customers make false complaints. This permanently damages the fundamental fairness of FINRA’s arbitration process in future customer arbitrations.

As a result, PIABA and Foundation volunteers should have a meaningful role in improving what has been a broken system. It is our hope that by continuing to study this issue, volunteering our time representing investors through the pro bono expungement program, and helping state securities regulators effectively and efficiently participate in FINRA’s straight-in expungement arbitration, PIABA and the Foundation can do our part to improve the process to protect the integrity of the regulatory record.

(ed: We’ll keep watch for a FINRA reaction.)