Thursday, January 23, 2020

Expungement Notice Problems

For some time, FINRA has allowed stockbrokers to suppress complaints from their record through an expungement process.  I've written about this here before and about how recent research shows that brokers who have procured expungements may be more likely to attract more complaints than other brokers.  Another relatively recent report revealed that the pace at which brokers now procure expungements has accelerated, moving from brokers seeking to expunge just 102 complaints in 2015 to attempting to suppress 1,036 complaints in 2018.  Remarkably, brokers succeed over 80% in their attempts to suppress and expunge complaints from the public record.

Yet we do not have a robust understanding about why brokers tend to win at such high rates in the FINRA forum.  One reason might be problems with how customers receive notice about an attempt to expunge their complaint.  Consider one recent news report.  Ron Carson, a former stockbroker currently affiliated with Cetera Advisor Networks secured the expungement of a customer dispute in an arbitration award released last week.  Carson filed an arbitration proceeding against his former firm on February 28, 2019.  Over nine months later, on or about  December 11, 2019, Carson "submitted a copy of the letter sent to the customer related to [the Customer complaint], providing the Customer with a copy of the Statement of Claim, the expungement hearing date and time, and notice of the opportunity to participate in the expungement hearing. Claimant also submitted proof of FedEx delivery for the aforementioned letter."  The hearing was held on January 6, 2020.  Neither the customer nor the respondent, Carson's former firm, participated in the hearing.  The arbitrator ultimately granted the expungement request.

The arbitration award does not make clear exactly how much time the customer had to obtain counsel and decide whether or not to participate in this expungement hearing.  If the letter giving notice was sent around the time it was submitted to the arbitrator, it would have given the customer less than thirty days to get ready and show up at this hearing.  Commenting on the lack of opposition, Lisa Bragan├ža explained that she did not "have confidence in this [award] because nobody showed up to oppose it."

From personal experience, I've seen letters go out advising former customers about their right to show up and oppose an expungement request.  They have been sent out with less than thirty days before the hearing--leaving very little time for customers to find assistance or to prepare.  A short notice period over the winter holidays seems particularly likely to reduce the odds that a customer would actually show up in one of these hearings. Many people travel over that period, making it even less likely that they will be in a position to respond.

One-sided expungement hearings raise significant concerns.  Arbitrators deciding these matters make decisions affecting the public's interest without a complete record before them.  BrokerCheck ultimately draws its information from the CRD Database--a public records repository jointly owned by FINRA and the States. When expungements result in the removal of information from the database, it effectively removes the institutional memory of state regulators.

If we want this system to function effectively to preserve important information, we need to take a much closer look at how the expungement process operates.

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