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Securities Compliance Sentinel Analysis of cutting-edge securities industry issues

Is This The Beginning Of The End To Expungment Agreements

Posted in Arbitration, Broker-Dealer Regulation, Expungement, Financial Industry Trends, FINRA CRD, Registered Representatives

A frequent tool for settlement was to make a stipulated award that included expungement of the registered representative’s U-4 a condition of settlement.  FINRA recently announced that it is “developing rule changes that would prohibit the practice of conditioning settlements on an investor’s agreement not to oppose expungement.”

It should come as no shock that FINRA is taking the next step to do away with stipulated awards that include expungement as a condition to settlement when considered in the context of FINRA Rule 2080, which requires specific findings by an arbitral body before recommending expungement as part of an award.  Whether this is a good idea will remain to be seen. 

One unintended result may be an impetus to try arbitrations to award rather than settle.  After all, if a registered representative cannot get an expungement without an award (based upon a factual record), then what is the point to settle in the first place.   

Conversely, this change may force the claimant’s bar not to name registered representatives or refer to them specifically in statements of claim in order to avoid the expungement issue altogether and, in turn, promote settlement.  Would that result be a bad thing? 

Having represented respondents for the better part of my career, I can see a distinct possibility that more claims will be tried to an award because there may be little incentive to settle if expungement is not possible without a fully developed record.  At some point, this additional cost would likely be passed on to the consumer.  I suspect that this is not what FINRA intended.