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PIABA Opposes Expungement of Brokers' Customer Claims

In December 2003, the SEC approved NASD Conduct Rule 2130, ending the moratorium on expungement that had been in effect since January 19, 1999. Under Rule 2130, the Financial Industry Regulatory Authority (FINRA) will not oppose expungement relief in a court confirmation process if the arbitrator makes an affirmative finding that:

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.

The rule was designed to meet the varying and often competing interests of the regulators, the brokerage community, and investors.

Last week the Public Investors Arbitration Bar Association (PIABA) urged the SEC and FINRA to prohibit arbitrators from recommending the expungement of customer dispute information from the Central Registration Depository (CRD). According to PIABA president  Steven B. Caruso, review of more than 200 stipulated or settled customer awards issued in 2006 revealed that in 71% of the stipulated arbitration awards, arbitrators recommended the expungement “without any indication of an evidentiary hearing having been held.” Caruso asserted that critical information investors need to know is being “improperly concealed.”

But must an arbitrator conduct an evidentiary hearing to be able to make an affirmative finding that the claims and allegations are false or clearly erroneous, or that the registered person was not even involved in the alleged wrongdoing? Can’t such an affirmative finding often be determined simply based on the pleadings, the often exhaustive exhibits attached thereto, or the terms of the settlement agreement? Compelling arbitrators to conduct evidentiary hearings before ever recommending expungement will increase arbitration costs, reduce the number of settlements, and force the parties to reach a settlement on the amount of cooperation claimants will give during the evidentiary hearing.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on October 02, 2007 (boomark / email).