Influencing the Expungement Process?

JP Morgan Securities’ WSP Exposure
September 18, 2019
What’s The Cost Of Disclosure Failures? Ask These Firms
October 3, 2019
Show all

Influencing the Expungement Process?

Expungement attorney accuses FINRA staff of trying to influence arbitrators

It is not uncommon for brokers to petition the Financial Industry Regulatory Authority (FINRA) to expunge information involving customer disputes (Rule 2080). FINRA addresses claims regarding:

  • Buy or sell orders – if an investor has a problem with slow execution, execution at an unanticipated price or failure to execute, among other issues;
  • A specific brokerage firm or broker – that might include recommendations to purchase securities unsuitable for that client, unauthorized transactions that may include removing funds from a client’s account, switching a client from one account to another for no “legitimate” reason, failing to disclose material facts, overcharging, misrepresenting risk, etc.;
  • Insider trading involving the purchase or sale of a security in breach of a fiduciary duty or other trust relationship while in possession of material, nonpublic information about the security;
  • Manipulation of security price or volume;
  • An account transfer – particularly in cases of delay that create problems for the investor;
  • 401(k), pension or retirement plans; and
  • A specific investment adviser/financial planner – who is FINRA-licensed.

According to FINRA, arbitrated decisions are based on three standards in Rule 2080:

  • Standard 1: The claim, allegation, or information is factually impossible or clearly erroneous.
  • Standard 2: Lack of involvement. The registered person was not involved in the alleged violation, forgery, theft, misappropriation or conversion of funds; or
  • Standard 3: The claim, allegation, or information is false.

Why are we writing about expungement?

Because InvestmentNews Reporter Mark Schoeff, Jr. recently wrote an article about alleged interference by FINRA staff in the arbitration process. According to Schoeff’s article, the attorney represents brokers trying to clear customer disputes from their records via arbitration. The attorney asserts that FINRA staff monitoring arbitration hearings have tried to influence the outcome against expungement.

According to Dochtor Kennedy, president and founder of AdvisorLaw, FINRA case administrators often instruct arbitrators — sometimes in private conversations — about whether and how they can make a ruling.  He argues that the arbitrators, not the FINRA team, should be asking for help. FINRA should not be inserting itself into a case – even to advise an arbitrator – as, he asserts, that guidance can be wrong.

As an example, he pointed to a recent expungement proceeding — John Daniel Quinn v. Chase Investment Services Corp. — in which, Kennedy says a FINRA case administrator erroneously told arbitrators they could not change the reason for Mr. Quinn’s separation from the firm from “discharged” to “voluntary.” Another lawyer for Mr. Quinn, Michelle M. Atlas, concurred, writing to the FINRA administrator that changing the reason for Quinn’s departure “is precisely the mechanism by which you are able to grant full expungement of this disclosure.”

Requiring a FINRA settlement agreement review unfair?

Schoeff wrote about another case, Jeff Malcolm Davis v. Merrill Lynch, in which the FINRA case administrator refused to permit the arbitrator to issue an expungement unless she received a copy of the settlement agreement between the broker and the investors. FINRA rules do require a review of the settlement agreement when considering expungement requests. However, Kennedy, who was representing Davis, called that requirement as unfair. In the case of Davis,  he said, the demand could not be met as no settlement had been formalized and moreover, his client was not a party to the settlement agreement and never received a copy.

Arbitrators in the two cases ultimately granted expungement to Mr. Kennedy’s clients. Nonetheless, he says he has seen a similar pattern in other cases and this kind of interference tarnishes FINRA staff integrity. This “neutral” forum must be neutral.

FINRA spokesperson Michelle Ong responded in a statement, “The case administrator’s role is to advise arbitrators as to procedural matters and provide guidance on FINRA’s arbitration rules and procedures. The arbitrators are the sole decision-makers.”

In the meantime, who is overseeing your firm’s regulatory compliance exposure?

You and your compliance team our. But you cannot do everything yourself. That’s where Patrina comes in. We’ve built our business based on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive 8-module compliance solution, and compliant data capture & file storage, records archiving, and designated third-party services specifically designed for the financial services community. Be smart. Be covered.