I have been in a JAMS arbitration the last week or so, so thanks to Chris — Mr. Expungement — for his thoughts about PIABA’s study. – Alan
In a move that surprised nobody, PIABA recently released an updated study on expungement awards from 2019/2020, and, in the most predictable fashion, they continue to complain that the expungement process is rigged and that brokers who seek expungement continue to “game” the system. We’ve blogged about this before, and about the numerous changes FINRA has made to the expungement process recently, and the slew of additional rule changes that are still pending but are expected to be approved by the SEC any day now. Even though FINRA has taken substantial steps to make expungement harder for brokers to obtain, and easier for customers to oppose, PIABA is still not satisfied. Dare I say it – you can’t help but feel a little badly for FINRA here, as it seems none of their expungement rule changes can satisfy the PIABA attorneys. Let’s dive into the study’s findings and PIABA’s erroneous conclusions.
First, the study found that 90% of expungements from August 2019 to October 2020 were granted. According to the study, that number is basically the same as it was in 2015, before FINRA started making significant rule changes to the expungement process. PIABA concludes that this means arbitrators are rubber-stamping the expungement requests, arbitrator training is not working, and the recent rule changes are not working to stop useful disclosures from being removed from CRD.
I suggest that there’s a different explanation for why the number of expungements granted has not changed: there was nothing broken with the expungement process in the first place. For as long as I can remember, FINRA arbitrators have always been warned that expungement is supposed to be an “extraordinary remedy.” But the standard for granting expungement under FINRA Rule 2080 is that the arbitrators must find that the customer’s allegations were false or clearly erroneous. The arbitrators are simply seeing the facts laid before them and calling it how they see it. They either believe the evidence demonstrates that allegations are false, or not. Unlike a true research study which proffers multiple possible explanations to explain data, PIABA’s “study” doesn’t even contemplate the notion that so many expungement requests are granted is because the claims were frivolous in the first place. Speaking from personal experience, I take multiple expungement cases to hearing every year and end up winning (knock on wood), but I receive just as many inquiries about expungement that I never file because I will advise the client if their likelihood of success is low. It is not a secret that attorneys only take cases to trial that they feel strongly about. If it’s a bad case, it will likely never get to a hearing, and may never get filed in the first place. That is why the expungement success rate is so high – not because the system is broken.
Second, the study found that customers only participate in expungement hearings 15% of the time, which has not changed much from 2019 when they only participated 13% of the time. PIABA continues its false narrative that “the current expungement process … does not have safeguards to ensure that customers can participate in a meaningful way.” That is just not true. Since at least as far back as 2017 when FINRA issued its Notice to Arbitrators and Parties on Expanded Expungement Guidance, FINRA has expressly told arbitrators that “it is important to allow customers and their counsel to participate in the expungement hearing in settled cases if they wish to.” The Guidance also contains a laundry list of ways customers are permitted to participate in expungement hearings, including by testifying, introducing documents and evidence, cross examining the broker and other witnesses, presenting opening and closing arguments, and presenting an opposition in writing. And FINRA’s proposed rules – that will likely be approved by the SEC this week – provide for even more safeguards to give customers notice of the expungement hearings and opportunities to participate both in the pre-hearing conferences and the hearings themselves. So, to say that there are no safeguards that allow customers to meaningfully participate is total nonsense. The real issue is that customers do not want to participate in the expungement hearings because there is no incentive for them to do so after their cases settle.
The study concludes that customers’ lack of participation in expungement cases is what causes so many expungement requests to be granted. According to the study, “the data strongly indicates that arbitrators are granting expungement requests 90% of the time because they are being provided with one-sided presentations about the merits of the customer complaints….” However, the study’s own data completely undercuts that conclusion. The study found that arbitrators are more likely to deny expungement requests when a customer opposes the request – not that much more likely.
According to the study, arbitrators denied expungement requests only 9% of the time when the customer did not participate, but they denied 36% of expungement requests when customers did participate. In other words, even when customers oppose an expungement request, the arbitrators still decide their allegations are false almost 7 out of 10 times. The customer participation changes the arbitrators’ minds in only 2.7 out of 10 expungement cases. That tells you two things: 1) customer participation in expungement cases is highly overrated and inconsequential, likely because arbitrators are smart enough to weigh facts and credibility without hearing the customer’s predictable testimony that he/she was wronged, and 2) the quality of customer claims are not very good.
And therein lies the real issue. Any investor can file any complaint at any time, regardless of the merit, and it will live in CRD forever unless expunged. One recent article about the study cited a Stanford Law Professor who acknowledged that FINRA should “impose a higher level of scrutiny” on what’s put on BrokerCheck in the first place. Bingo.
Finally, the study found that the number of “straight-in” expungements filings have “skyrocketed” in recent years. As the study explains, “a straight-in expungement case is an arbitration initiated by a broker against their current or former brokerage firm solely for the purpose of seeking expungement. The customer who made the complaint is not a party.” This differs from the other scenario where a broker involved in a customer arbitration asks for expungement to be granted in the course of that customer arbitration. The study found that in 2015 only 59 straight-in expungements were filed, but that number has increased year after year (2016 – 135; 2017 – 339; 2018 – 545; 2019/2020 – 700). PIABA calls this a “tactic” and suggests that brokers utilize it to limit customers’ ability to participate in the expungement hearing since they will be treated simply as a “fact witness” rather than a party. (p.21) This is simply not true. Even in expungement cases where the customer is not a named party, FINRA requires the broker to provide notice to the customer, and the customer is permitted to participate in many more ways than a fact witness, as described above (opening statement, closing argument, testimony, present exhibits, cross-examine other witnesses).
Furthermore, the study’s authors blatantly disregard the fact that in cases that settle, FINRA is actually in favor of requiring brokers to file a separate “straight-in” arbitration that deals only with the issue of expungement, rather than keeping the arbitration panel from the underlying arbitration in place and having them hear the expungement request. In FINRA’s Sept. 30, 2020 filing with the SEC regarding their proposed rules (which the SEC may approve any day now), FINRA states:
The proposed rule change would provide that if, during a customer arbitration, a named associated person requests expungement or a party files an on-behalf-of request and the customer arbitration closes other than by award or by award without a hearing, the panel from the customer arbitration would not be permitted to decide the expungement request. Instead, the associated person would be required to seek expungement by filing a request to expunge the same customer dispute information as a straight-in request under proposed Rule 13805. … FINRA believes this is the right approach because the panel selected by the parties in the customer arbitration has not heard the full merits of the case and, therefore, may not bring to bear any special insights in determining whether to recommend expungement.
So, while PIABA may not like it, there are going to be many more “straight-in” expungement requests filed. And many more expungement requests granted. And mark my words – when that happens, PIABA will publish another “study” claiming that the system is still broken.
 PIABA is a group of plaintiffs’ attorneys who market themselves as protecting investors, while at the same time lining their own pockets.
 The number dropped to 81% in 2015, 2016, and 2017.
 This is actually the data from the 2019 study. The updated study strangely does not give the exact percentages, but just states that the arbitrators are 4.3 times more likely to deny the request when a customer opposes it – which is about the same figure they cited in the 2019 study.