March 27, 2014
Public customer advocates rightly complain about the unsavory backdoor deals by which bad stockbrokers emerge from sales practices disputes with clean records. On the other hand, those same consumer advocates don't exactly come to the table with clean hands because they are often conspirators in the process that elicits more dollars from brokerage firms in exchange for wiping clean the individual stockbroker's role in the dispute at issue. Similarly the industry endangers its member firms and clients when it supports policies that effectively take offline important anti-fraud alarms about recidivists. There is a sensible middle-ground on which bad stockbrokers should be saddled with the public disclosure of their misconduct; but stockbrokers who are wrongly or mistakenly accused are not caught up in a meat grinder of inflexible regulation. The problem is that FINRA has promulgated an expungement process in which registered persons are made to jump through hoops and over the fires in order to clear their names. Today's BrokeAndBroker Blog reports about one such case.
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2013, registered representative Claimant Diaz sought an expungement from his Central Registration Depository records ("CRD") of references to a previously filed FINRA arbitration in which a public customer had named Merrill Lynch as a respondent but did not name Diaz as a party. Notwithstanding Diaz's absence from the arbitration caption of parties, he was deemed a "subject" of a reportable customer complaint for industry regulatory reporting purposes. In the Matter of the FINRA Arbitration Between David J. Diaz, Claimant, vs. Merrill Lynch, Pierce, Fenner & Smith Inc., Respondent (FINRA Arbitration 13-01525, March 14, 2014).
SIDE BAR: Online FINRA documents as of March 26, 2014, disclose that:
I. Merrill Lynch asserted that the customer dispute at issue in the prior arbitration was based upon the allegation that:
THE CUSTOMER ALLEGES MISREPRESENTATION AND UNSUITABLE INVESTMENT INVESTMENT RECOMMENDATIONS
II. The public customer had demanded $1,886,720 in damages when she filed her FINRA arbitration in June 2009, but she settled the dispute in July 2010 for only $84,000.
III. Diaz submitted the following comment to the customer arbitration:
IT IS MY UNDERSTANDING THAT THE COMPANY SETTLED FOR BUSINESS REASONS/COST OF DEFENSE. I WAS NOT ASKED TO COMMENT, NOR DID I CONTRIBUTE TO THE SETTLEMENT.
Pursuant to the request of the sole FINRA arbitrator hearing the expungement case, Claimant Diaz had sent a letter to the customer in the earlier settled arbitration about the expungement hearing with notice of her right to be heard. The customer failed to respond or appear.
Respondent Merrill Lynch admitted to Claimant Diaz's allegation in his FINRA Arbitration Statement of Claim and the member firm did not oppose the requested relief if expungement and, thereafter, did not appear at the hearing.
The FINRA Arbitrator recommended the requested expungement after reviewing the Release and Settlement Agreement in the customer arbitration, the amount paid, and other terms. As explained in the FINRA Arbitration Decision:
Claimant did not make any unauthorized transactions and complied with the lawful orders of the client and her authorized representative. Claimant testified at the hearing that he and the Customer were in constant communication and that he properly apprised her of all material facts for every transaction including, but not limited to, the risks relating to each investment. Further, Claimant testified that the Customer's accountant had full authority to make investment decisions on her behalf on a day-today basis, and that any decision not made by the Customer was made by the accountant and not by Claimant. Also, proven by documentary evidence and testimony were the facts that the investments were within the risk tolerance of the Customer and in accordance with her stated investment objectives. Finally, the settlement amount compared to the amount of the claim is very little. Claimant testified that he was not consulted about the settlement in any way, nor did he pay any part of the settlement.
Bill Singer's Comment
So . . . howsabout a quick re-cap of the idiocy that required Claimant Diaz to incur the costs and inconvenience of filing an application for an expungement hearing with FINRA? A process that took some 10 months from the filing of his arbitration Statement of Claim to an arbitration Decision that is merely a "recommendation" of expungement -- and beyond which may be an application to the courts for an order confirming that arbitration recommendation. As set forth in the Decision:
The Arbitrator recommends the expungement of all references to the above captioned arbitration from Claimant David J. Diaz's (CRD #1734415) registration records maintained by the CRD, with the understanding that pursuant to Notice to Members 04-16, Claimant must obtain confirmation from a court of competent jurisdiction before the CRD will execute the expungement directive.
Unless specifically waived in writing by FINRA, parties seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents.
Diaz was forced to go through the paces of a FINRA expungement arbitration despite the no-show and non-opposition status of the public customer and despite the admission to the allegations by and concurrence of Respondent Merrill Lynch. Keep in mind that Diaz did not participate in the financial settlement with and was not named as a party by the public customer.
An impartial FINRA arbitrator determined that Diaz did not engage in unauthorized trading and, to the contrary, pointedly found that the registered person had followed the orders of both the public customer and her authorized representative. To boot, Diaz was not consulted concerning the terms of the Merrill Lynch's settlement with the customer and the registered person did not contribute a cent towards that settlement.
I would request that FINRA draft a rule providing for an expedited expungement process for a:
I am well acquainted with the concerns and issues of state securities regulators about FINRA having an unfettered right to go into the CRD system and alter previously filed disclosures. Nothing here is intended to minimize those valid concerns. I am suggesting that FINRA and the states consider the limited circumstances noted in this article (which are not so isolated as to be uncommon) and promulgate a fairer alternative to the present, bulky expungement protocol. Pointedly, I would carve out a limited exception that would divert such applications to an in-house review at FINRA or some FINRA/state panel without:
- non-party registered person,
- who did not contribute to a settlement with a complaining customer, and
- whose request for expungement is not opposed by the customer and industry employer.
- filing fees and costs to the registered person;
- the need to get a waiver from FINRA to name it as a party in a confirmation proceeding in a civil court; and
- the need to go to a civil court to get an order confirming the arbitrator's recommendation.