Part 4: FINRA Dispute Resolution Task Force: Enhancing Securities Dispute Resolution One Recommendation At A Time: Explained Awards and Expungement.

By: Alexandra Hughes, Spring 2016 Graduate Research Assistant

alexhughesExplained Awards

Final arbitration awards can be found online at FINRA’s website. Arbitrators are required to make their awards in writing. However, they are not required to explain their awards. Thus, most final awards only contain “certain bare-bones information,” unless requested by both parties pursuant to FINRA Rule 12904(g), which entitles the parties to a “brief, fact-based explanation.” Critics of the current system argue that requiring more explained decisions would promote transparency, improve decision-making, enhance oversight of the system, and increase consistency among awards. Customers especially find it difficult to perceive the current system as fair when they are dissatisfied with an arbitration outcome, whether due to lesser damages than requested or no damages at all, and have no explanation from an arbitrator to explain how or why the arbitrator reached the outcome she did. Conversely, some believe that expanding use of explained decisions will only lead to increased appeals of arbitration awards, which will undermine the current advantages of the arbitration system over regular civil litigation: low costs and more expeditious resolution.

The task force recognized that expanding the use of explained decisions was one of its most important tasks because it would promote transparency and confidence in the system, especially for customers. After considering a number of different approaches, the task force landed on its recommendation—requiring an explained decision unless any party notifies the panel before the initial prehearing conference (IPHC) that they do not want one. Although the task force recommended keeping the current “brief, fact-based” format of Rule 12904(g), it did add that arbitrators should include an explanation for damages, which will undoubtedly help customers understand why they did or did not receive certain damages. Finally, the task force recommended FINRA create a training program for arbitrators on how to write explained decisions to keep overturn on appeal low.

Expungement

The Central Registration Depository (CRD®) is an online registration and licensing database for the securities industry. FINRA’s BrokerCheck® allows individuals to access this database information by entering in the name of an associated person or brokerage firm. BrokerCheck® contains information about: criminal matters, regulatory disciplinary actions, civil actions, customer complaints, arbitration claims and awards, and other background information. However, a member or associated person can obtain an order of expungement of customer dispute information under FINRA Rule 2080, which removes the customer dispute information from the CRD® and BrokerCheck®.

While expunging customer dispute information from the CRD is beneficial for securities firms and associate persons, it isn’t necessarily good for customers. Expungement permanently removes the information from the record, like the complaint never existed—think having a court ordered expungement of a DUI from your driving record. The SEC has made clear that expungement is an “extraordinary remedy that is permitted only where the information to be expunged has no meaningful investor protection or regulatory value.” Thus, FINRA has strict rules on how and when expungement can occur. For more information about the current standards, consult FINRA Rules 2080, 2081, 12805, and 13805. Despite these rules, there are still questions about who should preside over an expungement proceeding. Some commentators have suggested that the responsibility of expungement should reside with state regulators, not FINRA arbitrators. Because considerations of converting the expungement process into a regulatory procedure are still under way, the task force took no position on whether switching to a regulatory procedure would be better. Instead, the task force focused on how to improve the expungement process within FINRA.

The task force recommended the creation of a special arbitration panel. This special arbitration panel would consist of arbitrators, conduct hearings specifically on expungement requests, and then make determinations to grant or deny such requests. The special panel would be especially important in cases requesting expungement where (1) the case has not been heard on the merits or (2) the customer has not named the associated person as a respondent in the claim. In these situations, the customer either has little incentive to participate in an expungement hearing or does not have notice of the expungement hearing. Such circumstances impair the arbitrator from being able to fully consider the facts of the underling claim from both sides. The special arbitration panel would remedy these deficiencies by being specially trained to make a decision about whether grounds exist for expungement and would ensure that customers are notified and have an opportunity to participate in the expungement hearing. Additionally, the task force recommended reviewing the procedures used for notifying state regulators of expungement requests.

The full task force report is available online.