This is our second blog on the vanishing FINRA expungement process.
FINRA identifies specific grounds for expungement in FINRA Rule 2080. Rule 2080(b)(1) provided three specific grounds for expungement relief: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or (3) the claim, allegation or information is false.
Although FINRA Rule 2080 does not expressly require that the arbitrators determine that one of the three grounds has been met, FINRA has provided guidance that the arbitrator should find one of these three grounds to grant expungement relief. Sadly, since firms are now required to report allegations of sales practice violations despite the broker not being named a party, the expungement process has been used more often to have unmeritorious complaints expunged.
FINRA has also implemented procedures for arbitrators considering requests for expungement relief in FINRA Rule 12805. Arbitrators must consider a request for expungement relief by: (1) holding a recorded hearing session by telephone or in person; (2) review settlement documents and consider the amount of payments and conditions of the settlement; (3) provide a written explanation of the reasons for ordering expungement; and (4) assess forum fees against the parties requesting relief. FINRA, unfortunately, did not stop here. FINRA was pressured by the claimant’s bar to provide “guidance” to arbitrators. This “guidance” was a kick in the teeth to the expungement process.
FINRA now stated the importance of allowing customers to participate in expungement hearings and explicitly noted that arbitrators should: (1) allow customers (and their counsel) to attend expungement hearings; (2) allow customers to testify at expungement hearings; (3) allow customers to introduce evidence at expungement hearings; (4) allow customers to cross-examine the broker and other witnesses at expungement hearings; and (5) allow customers to present opening and closing arguments at expungement hearing.
FINRA also required that arbitrators order brokers to provide customers with a copy of the expungement request so that they are on notice of the expungement proceeding.
Prior to 1999, brokers could obtain expungement relief solely through arbitration, but, in 1999, FINRA introduced court confirmation of the expungement process. This requirement provides an additional layer of review to the expungement process, increasing the costs and time associated with the expungement process.
However, as will be discussed in our last blog, all hope seems to have vanished for any semblance of fairness in this process.