Business Law Prof Blog(October 26, 2023) – By Benjamin P. Edwards

PIABA, the Public Investor Advocate Bar Association, and the PIABA Foundation released a new report on FINRA expungement earlier this week. The current report gives a good snapshot of where things stand at the end of an era with a new set of FINRA rules around expungement going into effect on October 16, 2023. FINRA adopted some of these changes after comment letters I sent in on earlier proposals. On the whole, my record remains mixed with FINRA continuing to keep this process in arbitration. James Tierney and I have a forthcoming paper on this contending that an administrative procedure would produce much better results than leaving this outsourced to the arbitration forum. My core view is that the current structure simply fails to generate any real scrutiny, much less adversarial scrutiny, for most of these requests.

To address the scrutiny problem, we have some changes. One of the biggest changes to the rules is a new process for notifying state regulators and allowing them to participate in hearings. On the one hand, this is a good thing. State regulators should be able to take steps to appropriately prevent the deletion of public records. But on the other hand, this puts a new burden on the backs of thinly-staffed state securities regulators. Without new appropriations and support, I don’t immediately expect state regulators to be able to shoulder all of this workload.

The newest PIABA study finds that arbitrators have continued to recommended expungements at high rates in recent years, granting 90% of expungement requests. FINRA has also faced a flood of requests in recent years with many brokers rushing to get expungement requests in before a rules change. Investors also continued to largely sit on the sidelines with only 10% actually participating. It’s always struck me as odd that anyone would expect investors to meaningfully participate. They personally know not to trust the broker they complained about and they get no personal benefit from participating in the expungement hearing. Plus, the hearing will likely be unpleasant as the main point of it is to call the investor a liar and say that her complaint was false.

One of the most interesting findings in the new study concerns the distribution of expungement requests. Over fifty percent of expungement requests come from five states: California, Florida, New York, New Jersey, and Texas. Although any state where a broker maintains registration may be able to intervene, the home state response in these jurisdictions will probably have a significant effect under the new regime. Brokers maintain on average registration in 16 different states.