The Public Investor Arbitration Bar Association (PIABA) rolled out a follow-up to its influential 2013 study of expungements in stipulated Awards in a press teleconference on Monday, October 19, 2015. PIABA’s conclusion: the reforms FINRA adopted in response to the earlier report have failed and it must now adopt an entirely new set of procedures.
The earlier report, which analyzed expungement requests after settlement in cases filed between January 1, 2007 and December 31, 2011, found that expungement requests made in cases resolved by settlement or stipulated Award were granted more than 90% of the time (see SAA 2013-38). At the time, PIABA blamed this phenomenon at least partly on settlement provisions that required customer claimants either to endorse or remain neutral with respect to expungement. In response, FINRA promptly adopted two of PIABA’s recommendations: (1) it educated its arbitrators on the “extraordinary” nature of the expungement remedy and the “critical importance of accurate customer claims information with respect to investor protection,: laying out these teachings in “Expanded Expungement Guidance;” and (2) instructing arbitrators, as part of that education, to beware of settlement provisions that curtailed customers’ rights to oppose expungement relief, eventually adopting Rule 2081 (eff. 7/30/14) to outlaw the practice. (ed: We covered FINRA’s initial responses in, e,g., SAAs 2013-38 and -40 and 2014-01 and Rule 2081 in, e.g., SAAs 2014-19, -21, -22 and -27.)
Latest Survey: PIABA’s Methodology and Findings
To test the effect of these efforts on expungement requests in stipulated Awards (i.e., Awards issued after settlement), PIABA analyzed Awards requesting expungement relief in cases filed between January 1, 2012 and December 31, 2014, inclusive, reporting the results separately for each calendar year, as well as the full period. For each year, PIABA separately reported the results for “Stipulated Awards/Settlements” and “Cases Tried on the Merits,” finding an 87.8% expungement success rate (404/460) in the former set of cases, a 59.7% rate (142/238) when the respondent prevailed on the merits and a 13.6% rate (17/125) when the claimant prevails on the merits. The success rate for stipulated Awards was 86.5% (250/289) in 2012 cases, 89.8% (132/147) in 2013 cases and 91.7% (22/24) in 2014 cases.
The teleconference featured remarks by Joseph C. Peiffer, of Peiffer Rosca Wolf Abdullah Carr & Kane, New Orleans, LA, outgoing president of PIABA; Scott C. Ilgenfritz, of Johnson Pope, Tampa, FL, Peiffer’s predecessor as PIABA president and author of both reports; and Hugh D. Berkson, of Hermann Cahn & Schneider, Cleveland, OH, the incoming president. All expressed disappointment at the continuing high rates of expungement success. Peiffer opined: “The bottom line from our new data is clear: FINRA’s efforts have failed to assure that expungement relief is an extraordinary remedy granted only in cases in which the customer dispute information requested to be expunged has no meaningful investor protection or regulatory value.” Ilgenfritz, who reported the findings, reiterated Peiffer’s point. Berkson called for “[a] wholesale change [that] needs to occur with respect to the handling of broker requests for expungement relief in settled customer cases” and offered the Report’s recommendations to achieve that goal.
And what are those changes? PIABA proposes that FINRA hearing officers, not arbitrators, decide expungements in all settled cases and have enforcement attorneys investigate and, where appropriate, oppose the requests. Customers should be allowed to present evidence in opposition to the request, if they so desire. FINRA should give notice of the request to state regulators and allow them to oppose it. Brokers should bear the cost of the proceeding and must bring their request no more than one year from the resolution of the customer’s claim. In addition, FINRA should either establish a rebuttable presumption that the facts alleged in the customer’s statement of claim are true or require brokers to meet a “clear and convincing evidence” standard of proof.
PIABA proposes that arbitrators continue to have the authority to award expungement relief in cases decided on the merits, but proposes a single standard for deciding whether to grant relief, applicable to all expungement proceedings: “that the information sought to be expunged has no meaningful investor protection or regulatory value,” in place of the current three standards set by Rule 2080. Finally, PIABA recommends that FINRA should continue its efforts to provide expungement education and guidance to arbitrators.
(ed: *SAC provided the data used in both the 2013 and 2015 reports, but did not participate in the analysis of that data or in the preparation of the report. **As PIABA explained in the teleconference, the reason for the small size of the 2014 sample is that it takes time for arbitration cases to proceed to resolution and relatively few cases filed in 2014 had time to settle and result in an Award (especially since the sample included no Awards issued after May 2015). ***Although we express no opinion about the merits of PIABA’s specific recommendations (at least at this time), we have found that, whether or not customers are free to object to expungements, they almost never do; therefore, expungement proceedings in settled cases are, in effect, almost invariably ex parte proceedings under the current rules.) (SAC Ref. No. 2015-39-02)
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