Thursday, May 6, 2021

Amended Expungement Proposal - More Access to Documents for Customers

FINRA has amended its proposal to reform the expungement process again. I've written about this before here and here.  The "straight-in" or "expungement-only" arbitration process can be summarized quickly.  A broker desiring to purge customer dispute information from public records can secure expungement by following an odd process.  The broker first files an arbitration against a current or former employer alleging that the customer who is not a party to the action filed a "false" claim or somehow mistakenly identified a broker who had nothing to do with the matter.  In essence, the arbitration alleges that the non-party customer told lies about the broker.  The broker will then wait until about 30 days before the hearing before sending a vague letter to the customer notifying them of their right to appear at a hearing. (If the amended proposal goes into effect, customers will get notice much earlier in the future.) In my experience, the letters often omit information you'd expect to be included, such as the name of the arbitrator for the case, the time zone for the hearing, or how the customer can dial in to participate.  The process has a lot of problems and statistical evidence indicates that brokers who secure expungements are actually more dangerous to the public than the average broker.

In its letter explaining the additional changes and its response to comments, FINRA recognized that the comments fell into two main veins: (i) incremental suggestions to improve the existing process; and (ii) opposition to continuing to use arbitration to facilitate expungements.  I divided my letter on the amended proposal along this line, breaking down things FINRA could do to improve the existing process while continuing to explain why I believe that arbitration-facilitated expungement is fundamentally broken.  The FINRA response quoted from my letter to categorize the comments:

Some commenters, while expressing general support for the Proposal, expressed their preference for an alternative approach to the current expungement process that would not rely on the FINRA arbitration forum. For example, Edwards 2 stated that “FINRA deserves praise for its attempts to improve the current expungement system and many of the Amended Proposal’s changes would improve the arbitration-facilitated expungement process. The changes it embraced by amending the Proposal will do some real good. Even though the Amended Proposal offers an improvement over the status quo, the changes to the process under consideration do not go far to make arbitration-facilitated expungement acceptable.”

Although making meaningful, changes the second amendment leaves the general framework undisturbed.  FINRA adopted one of my suggestions to allow non-party customers to have access to documents through FINRA's online portal:

Also in response to comments on the Initial Filing, FINRA amended the Proposal in Partial Amendment No. 1 to require that the Director notify customers of the time, date and place of any prehearing conferences, in addition to the expungement hearing, and clarify that customers are entitled to appear at prehearing conferences. Edwards 2 acknowledged that “these changes will reduce barriers to customer participation,” but stated that “FINRA [should also] allow non-parties to access documents through the DR Portal on equal terms as the parties to an expungement request.” . . .

FINRA agrees that customers who seek to participate in a straight-in request should have access to all documents filed in the arbitration that are relevant to the expungement request. Accordingly, FINRA is proposing in Partial Amendment No. 2 to amend proposed Rule 13805(b)(2) to provide that the Director shall provide the notified customers with access to all documents filed in the arbitration that are relevant to the expungement request. 

This will undoubtedly help non-party customers participate in a more meaningful way.  The language does leave me with a lingering concern about how FINRA will determine which documents are "material" to a non-party customer's opposition.  Consider one situation I recently dealt with.  We represented a non-party customer in an expungement hearing where the broker sought to expunge about seven different customer's disputes from the public record in a single stroke.  Although we requested all documents that the broker would use in the hearing, the broker only provide documents from our client's account.  We were able to review those documents and determine that they were not accurate.  Our client, a septuagenarian widow with only a high school education, had been induced to sign a document stating she had twenty years of experience in trading options.  On cross examination, the broker immediately admitted that the account opening forms were plainly inaccurate and that the hand writing on it also indicated that the brokerage had filled the form out for the client.  If we had been able to see more documents, we might have been able to show that the brokerage routinely induced people to sign forms with false information that brokerage employees put on the forms.  Without access to all the documents and a meaningful opportunity to review them, it's hard for us to know whether they would be material or not.

While these changes are good and improve the process, real problems remain.  As the persons being called liars are not parties to the proceeding, any time where FINRA's rules specify that a "party" may do something or have access to something, I expect that non-party customers will continue to struggle to receive fair treatment.

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I notice they haven't seemed to address the cost factor for the clients. Sigh. So far to go. But congratulations on getting some changes made. I also was concerned about which documents FINRA will consider "material."

Posted by: Alisa McAffee | May 7, 2021 9:11:38 AM

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