FINRA, the securities regulatory agency governing all stockbrokers, has announced its approval of a new expungement rule in a press release dated December 14, 2007. This is further evidence of regulatory scrutiny of a long-standing practice of obtaining expungements in the settlement of customer claims.
Many moons ago, when my hair was more plentiful and darker, the warring parties in a securities arbitration could simply agree to have the customer complaint removed from the broker's record, get the arbitrators to sign off on it and the deal was done. NASD got wise to this practice and enacted a series of ever-tightening rules regarding expungements. First time around, the arbitrators had to grant the expungement and the award was required to be confirmed by a court, unless the defamatory U-5 filing was the subject of the arbitration, in which case no court confirmation was necessary.
The NASD then enacted standards that must be met regarding the expungement of customer complaint information. Arbitrators were to apply certain standards in granting expungements. Additionally, NASD was to be notified when a broker sought a court confirmation of an expungement order. It appears that these standards and practices were not enough. Much settlement money changed hands and arbitrators were still granting expungements.
This new rule, as proposed, tightens the noose further. An evidentiary hearing is required and the terms of the settlement with the customer must be disclosed. This raises an interesting question. If the brokerage firm pays the money and the customer gives a separate release to the broker, which release is relevant to the arbitrators' inquiry?
FINRA's concern about expungements is understandable. As the custodian for CRD, which is relied upon customers and regulators as the broker's record, expungements can skew a broker's history. At the same time, a broker should have a right to have frivolous items removed.
That's the view from The Law Planet - Jupiter, Florida. Happy holidays to one and all.