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SAC Awards Mini-Survey – 2014 Customer-Member Expungements
Posted on Categories Securities Arbitration, Statistics & SurveysTags , ,

Starting in the fall of 2013, concerned that arbitrators were “rubber stamping” stipulated expungements, FINRA encouraged its arbitrators to examine expungement requests in general, and stipulated expungement requests in particular, with more care (see SAA 2013-38 and 2014-01). In this survey, we examine the current state of play to determine the “new normal” and to try to discern what factors affect the success rate of requests for expungement relief.

FINRA’s concern was raised by the Public Investor Arbitration Bar Association (PIABA), which reported that stipulated expungements reached a success rate of 96.9%, warned that this easy erasure of customer complaints could jeopardize investor protection, and demanded that FINRA ban the practice of requiring investors to agree to join in or not to oppose expungement requests as a condition of settlement (see SAA 2013-38). Among other things, FINRA instructed its arbitrators that expungement is “an extraordinary remedy” and that they should make sure that claimants did not waive their right to object to expungement as a condition of settlement, eventually adopting Rule 2081 (approved July 22, 2014) to make the latter point mandatory.

Sample and Methodology

Like PIABA’s 2013 Study, our survey focuses exclusively on expungements in Customer –Member cases (Although brokers may also file separate arbitrations for the exclusive purpose of obtaining expungement relief, those Awards do not always explain the circumstances of the underlying case, such as whether it was settled or whether the expungee was named as a respondent, and therefore do not provide a clear basis for studying the relevant factors). We included only 2014 Awards, because those issued in the last two months of 2013 – directly after the FINRA guidance -- were atypical: as we reported in mini-surveys back then, the success rate for stipulated expungements sank to 57% in the first two weeks (see SAA 2013-44) and then it popped back to 83% six months out (as of 4/30/14, see SAA 2014-19).

Stipulated Awards (those issues as a result of the settlement of the entire case) accounted for 224 of the 341 Customer-Member Awards featuring requests for expungement relief. For purposes of clarity and contrast, we did not survey all non-stipulated Awards, but only (a) cases decided on the merits, (b) in which there were at least two hearings, and (c) the claimant recovered nothing -- there were 60 Awards in that group.

Award Results

The success rate for all 2014 Customer-Member Awards reflecting expungement requests was 73% (248/341). The rate for stipulated expungements was 85% (191/224), while those in cases decided on the merits, where the customer recovered nothing, was only 63% (38/60). However, it made a significant difference whether the broker was named as a respondent in the case or not. In Stipulated Awards, when a non-party broker sought expungement, the rate rose to 90% (118/131), as opposed to those in which all of the brokers requesting expungement were named -- there the rate was 78% (73/93). In the second group, where the cases were decided on the merits, the rate for non-party brokers was 77% (17/22) – a hefty rate, though still not as high as stipulated expungements – as opposed to only 55% (21/38) when the brokers were named respondents.

An even more important factor surfaced in the 60 merit cases -- whether the claimants were assessed more than two-thirds of the hearing fees. In those 17 cases – where the claimant not only lost, but was hit with the bulk of the fees -- the rate of expungement grants jumped to 88%; that contrasted with the remaining cases, in which grants occurred in only 53% of the cases.

(ed: *What accounts for the 57% success rate for stipulated Awards in early November 2013? FINRA’s new teachings on stipulated expungements followed quickly on PIABA’s criticisms. If FINRA was right, then, perhaps, a number of respondents’ attorneys were caught by surprise, leaving them with previously-obtained expungement stipulations in settlement agreements with the broker-dealer that suddenly proved to be white elephants. Another possible factor – more likely, we think -- is an initially strong reaction (over-reaction?) from arbitrators, who relaxed once they became more comfortable with their new duties. **Our take on the lessons from this survey: (1) customers rarely object to stipulated expungement requests, even now that they have the “right” to do so; the absence of any contrary evidence or voiced objections makes it much easier to defend the broker and win relief. (2) Not surprisingly, it is even easier to convince the panel of one’s entitlement to expungement, when the customer fails to name him/her, even if one’s employer notes the customer’s complaint in one’s CRD record (note, however, that claimants’ counsel may not name a broker for tactical reasons). (3) It seems, though, that the presentation of evidence in support of customers’ complaints, even when it is not convincing enough to prove liability, still frequently creates enough doubt to dampen the case for expungement (whether the broker is named or not). (4) When panels assess the hearing fees primarily to claimants, we believe, they generally either believed that the claimants failed miserably to make their case or created unnecessary difficulties in the course of the arbitration. Therefore, it does not surprise us that panels are more likely to be sympathetic to expungement requests in those cases.)

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