May 7, 2014
FINRA is once again proposing a non-solution to a problem of its own creation in order to present the pretext of regulation while protecting its members from responsibility for fraud and other misconduct.
Expungement should not be allowed under any circumstances. Members can not expunge actions filed in court and should not be allowed to do so in the gentle embrace of its self-protective association. Investors and state regulators (who are actually interested in protecting the individual investor) are denied relevant information. There are dirty brokers out there with over 20 expungements and this rule will do nothing to prevent further abuse.
"No Member or associated person shall condition . . ." But there's nothing to keep outside counsel from doing so informally if the customer wants a settlement. Further, there is no rule against the member seeking expungement without an agreement and the cost to oppose is the same as the cost of proceeding to an evidentiary hearing with the burden of proof on the customer to prove the claim is not frivolous. FINRA demands great deference to its members by anyone wishing to be an arbitrator and the burden of proof (somewhat greater than the "beyond a reasonable doubt" standard) is always on the customer.
If the customer and counsel are unable to bear the cost of defending against expungement after settlement, then the panel will hear whatever delusional version of the facts the member wishes to present without opposition. The panel will be under extraordinary pressure to grant the expungement based on the overwhelming and uncontested faux facts presented at the hearing on the matter. Most arbitrators are only too happy to do so anyway as another way to curry favor with FINRA staff in order to receive more cases.
The only solution to the expungement problem is to forbid expungement. It deprives investors and state securities commissioners relevant information. One can only hope that the senators FINRA is trying to mollify will realize that they are being lied to, as the SEC should and immediately begin the process of barring all expungement.