Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, October 18, 2007

FINRA and NASAA Discuss Expungement at PIABA Meeting

I have the honor of being a speaker at the Public Investors Arbitration Bar Association (PIABA) Annual Meeting currently underway on Amelia Island, Florida.  This morning George Friedman, Executive Vice President, FINRA Dispute Resolution, reported on recent developments and answered a number of questions put to him by PIABA attorneys.  Of particular interest is the track record on motions to expunge from the CRD records of arbitration claims filed by customers against registered representatives.  A recent PIABA study examined all settled customer awards issued by FINRA panels in 2006 that were subject to the restrictions on expungement under NASD Rule 2130.  It found that in over 71% of the stipulated awards arbitration panels recommended expungement of customer complaints without any evidence that an evidentiary hearing had been conducted, and that expungements were granted in more than 98% of the stipulated or settled awards where the expungement relief had been requested.

Mr. Friedman began his remarks by stating that clearly something needs to be done to address the problem and that he expects (without giving specifics) that something will be done soon.  He did note that expungements have gone down since the new rule took effect, from 907 in 2005 to 516 in 2006 and, for the first half of 2007, 166.  Since the rule has taken effect, NASD/FINRA has been named a defendant in 69 post-award judicial expungement proceedings and has opposed expungement in 56 of those instances.  The SRO has received 440 requests for waiver of the rule's requirement that the SRO be named as a defendant, and it has granted 386 waivers.  Mr. Friedman also noted that the rule does not require that the arbitrators conduct an evidentiary hearing on the grounds for expungement, although FINRA does encourage hearings.  He also noted that all arbitrators were required to receive training on the operation of the new rule.  He acknowledged that there have been disagreements between FINRA and NASAA about the expungement process-- a topic that a later NASAA panel addressed in greater detail.  Finally, Mr. Friedman said that failure was not an option for this rule.

During its panel session, NASAA, for its part, noted that NASAA and FINRA were interpreting the three findings of the rule differently.  NASAA reviews all requests for expungement and transmits the information to all states where the registered representative is registered.  Some states are fighting expungement proceedings aggressively; the New York AG, for example, is opposing expungement in every case.  NASAA's website has further information on the cases.

I will report in later posts on other "hot" topics addressed at the meeting, including FINRA's proposed rule limiting motions to dismiss.

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