InvestmentNews (September 23, 2019) - Finra spokeswoman: Case staff advise arbitration panels on rules, procedures
This story has been revised to indicate that under Finra rules, arbitrators must review settlement documents before granting expungement.
A leading attorney representing brokers who are trying to clear customer disputes from their records asserts that Finra staff monitoring arbitration hearings have tried to influence the outcome against expungement.
Dochtor Kennedy, president and founder of AdvisorLaw, says Financial Industry Regulatory Authority Inc. case administrators often instruct arbitrators — sometimes in private conversations — about whether and how they can make a ruling.
That guidance can be wrong, according to Mr. Kennedy. He also said the arbitrators should be the ones asking Finra staff for help; the Finra administrators should not insert themselves into the case.
He points to a recent expungement proceeding — John Daniel Quinn v. Chase Investment Services Corp. — in which he 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, wrote to the Finra administrator saying that changing the reason for his departure “is precisely the mechanism by which you are able to grant full expungement of this disclosure.”
In another recent case — Jeff Malcolm Davis v. Merrill Lynch — the Finra case administrator said she would not allow the arbitrator to issue an expungement unless Mr. Kennedy’s staff produced a copy of the settlement agreement between the broker and the investors. He said that the settlement agreement couldn’t be obtained because there wasn’t a formal settlement and that his client was not a party to the settlement agreement.
Finra rules require a review of the settlement agreement when considering expungement requests. But Mr. Kennedy said that is unfair to his clients, who never had a copy of the settlement agreement.
Arbitrators in the two cases ultimately granted expungement to Mr. Kennedy’s clients. But he says the larger problem is that Finra staff interference in arbitration proceedings is tarnishing their integrity. He said he has seen a similar pattern in many other cases.
“If you’re going to provide this forum, it’s got to be what it’s purported to be — a neutral third party, just like a judge in a civil proceeding,” Mr. Kennedy said. “You can’t have someone from Finra in the arbitrators’ ear telling them what they can and can’t do.”
A Finra spokeswoman said Finra staff did not act improperly.
“The case administrator’s role is to advise arbitrators as to procedural matters and provide guidance on Finra’s arbitration rules and procedures,” Finra spokeswoman Michelle Ong said in a statement. “The arbitrators are the sole decision makers.”
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Arbitration panels usually consist of three adjudicators who can either come from the industry or have a nonindustry background. The brokers, firms and clients involved in disputes argue their case before them.
The Finra case administrator manages an assigned docket of cases and “provides interpretations regarding rules and regulations,” according to a job description for the position.
But Mr. Kennedy said that by inserting themselves into the case, Finra staff violate the model standard of conduct for mediators that Finra arbitration proceedings are supposed to follow.
“They’re putting their thumb on the scale of denying expungement,” Mr. Kennedy said. “When they do influence arbitrators, they poison the forum.”
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Usually, the criticism of Finra when it comes to expungement is that expungements happen too often, not that the regulator tries to block them.
Andrew Stoltmann, a Chicago securities attorney and member of the Public Investors Arbitration Bar Association, has long criticized expungement. He said he is not aware of Finra staff trying to convince arbitrators not to grant it.
“I’m not saying it doesn’t happen,” Mr. Stoltmann said. “I just haven’t seen it.”
But Mr. Kennedy said often the interactions between Firna staff and administrators can occur off-the-record over lunch or in other informal settings.
“Those conversations are directly influencing arbitrators’ decisions,” he said.