Expungement under FINRA’s Rules: How Often is it Granted?

By Dylan Donley, Spring 2014 Graduate Research Assistant

After introducing the idea of expungement and why it exists, today we are continuing our series on the expungement rule. While the expungement rule seems to be a good balance between the interests of investors and brokers, do we know if it actually works? The Public Investors Arbitration Bar Association (“PIABA”) recently issued a study that has raised some questions about it.

Overview of PIABA Expungement Study

On October 16, 2013, PIABA published its report based on its survey of all securities arbitration awards in cases filed between January 1, 2007 and December 31, 2011 in which the word “expungement” appears in order to determine whether any trends relating to expungements were discernable, and if so, to analyze the trends, identifying any potential issues that may arise and provide potential solutions that may be pursued by FINRA moving forward.

Acknowledging the importance of public records for investors to complete background checks and due diligence before investing with a broker or making important investment decisions, PIABA found that “stockbroker arbitration ‘slates’ [are] wiped clean 9 out of 10 times when ‘expungement’ [is] sought in settled cases.”

What is more, PIABA found in one particular instance that a financial professional was able to bring 40 claims for expungement against investor claims and received expungement of those claims 35 times out of the 40. Of most concern to PIABA was the very high percentage of cases resolved by settlement or stipulated awards in which expungement relief has been granted. Cases resolved by settlement include those cases in which the investor and broker (or brokerage firm) agree to dismiss the pending case generally conditioned on the investor’s agreement not to oppose expungement proceedings to be initiated by the broker or to explicitly agree to such expungement. Cases with stipulated awards include those cases in which the investor and broker actually go through arbitration and the arbitrator grants the investor an award and the broker agrees to pay the award, conditioned on the investor’s agreement not to oppose expungement proceedings to be initiated by the broker or to explicitly agree to such expungement.

The PIABA study found that between January 1, 2007 and May 17, 2009, expungement was granted in 89% of the cases resolved by stipulated awards or settlement, and between May 18, 2009 to December 31, 2011, expungement relief was granted in 96.9% of such cases. This indicates that brokers may be exerting their bargaining power over aggrieved investors by conditioning any money damages that the investor should receive either from an agreed upon settlement or an award granted by the arbitrator to ensure that their reputations are not tarnished and they can continue to work as brokers without raising eyebrows. Further, it means that future investors will have no knowledge of the bad conduct that caused the complaint to be raised in the first instance, and the broker can continue to perform such bad acts with impunity.

Be sure to follow us next week when we’ll discuss why PIABA believes that expungements are granted in so many cases.