GUEST BLOG: FINRA Withdraws Proposed Expungement Rule by Nancy L. Hendrickson Esq

June 2, 2021

Guest Blog by

FINRA Withdraws Proposed Expungement Rule

On May 28, 2021, FINRA announced that it has withdrawn its rule filing regarding new procedures for expungement cases. In the accompanying press release, FINRA described the move as "temporary" so that it could "further consider whether modifications to the filing are appropriate." The release went on to express FINRA's commitment to "working with the SEC and other stakeholders" to develop "fundamental, multi-stakeholder solutions." Whatever that means.


PIABA was quick to claim credit for this development, coming as it does on the heels of PIABA's latest "study" on the expungement process. Among the other key findings in the PIABA study, they report "a 1,000% increase in awards" -- from 59 in 2015 to 545 in 2018 to 700 in the "roughly one-year period from August 1, 2019 to October 21, 2020" -- which is actually roughly a fifteen-month period, but again, whatever. PIABA also decries the "rubberstamping of expungement requests" -- inferred from the fact that arbitrators recommend expungement in 90% of cases -- in addition to other so-called "abuses."


However, FINRA has pushed back on PIABA's claims with a few statistics of its own. In a new webpage under the Key Topics of the Rules & Guidance section of the FINRA website -- published at the same time FINRA withdrew the proposed rule -- FINRA notes the following:

  • between 2015 and 2020, there were approximately 35,000 customer disputes entered on CRD, of which approximately 1,550 were expunged -- about 4%;
  • during that same time period, there were on average 632,500 reps registered with FINRA, of which only 1,300 had a disclosure expunged -- less than 1%;
  • there was a 95% decrease in expungement cases filings starting in Q4 2020. 

I think it is fair to say that the percentage of customer disputes that meet the expungement criteria set forth in FINRA Rule 2080 was far higher than 4%. I think it is also fair to say that the percentage of reps who were the subject of customer dispute disclosures was far higher than 1%. (If the percentage of reps who were the subject of customer disputes really is only 1%, then why does PIABA keep making such a big fuss about expungement?) So while it is worthwhile to examine why arbitrators recommend expungement in 90% of cases, it is equally worth examining why more registered reps don't seek expungement. To anyone who has been through the process, the answer is obvious: expungement is an expensive process, made even more so with the recent amendment to FINRA's Code of Arbitration Procedure that significantly increased the minimum fees for expungement proceedings (thereby leading to the precipitous drop in new expungement case filings). Moreover, the costs of pursuing expungement -- which can easily exceed $10,000 -- in most cases fall solely on the rep, as firms rarely agree to pick up the costs and E&O carriers never do. Given the expenses involved, it is no surprise that such a high percentage of expungement requests are granted -- very few reps are willing or able to undertake the expense unless the facts are heavily stacked in their favor.


Case in point: in a recent post on the Broke and Broker blog entitled "Whistleblower Gets Screwed But FINRA Doesn't Care," Bill Singer highlighted the unfairness of a system that forces reps who did nothing wrong and everything right to bear the cost of clearing their good names. (Full disclosure: the undersigned represented the rep in the featured case.) This case is not an isolated example, as anyone who practices in this area can attest.


As has often been said, there are three kinds of lies: lies, damn lies and statistics. The fact that arbitrators grant expungement in 90% of the relatively small number of cases in which registered reps seek such relief does not mean that the system is being abused or is inherently broken, as PIABA likes to claim. In fact, there is no reason to believe that expungement has been inappropriately granted in a single case. That is, unless you think expungement should never be granted -- which is clearly the end game for PIABA. Here's hoping that if and when FINRA decides to revisit its expungement rule proposal, it makes good on its promise to work with all the stakeholders, including the reps.


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Nancy L. Hendrickson focuses her practice in the area of securities litigation, having prosecuted and defended complex securities fraud, antitrust and fraudulent conveyance cases; matters involving margin, liquidation and market manipulation issues; and customer complaints alleging churning, unauthorized trading or suitability claims. Ms. Hendrickson also represents clients in connection with investigations, disciplinary actions and enforcement proceedings initiated by self-regulatory organizations, state securities commissioners and the Securities and Exchange Commission.

In employment law, Ms. Hendrickson represents employers and employees in wrongful/retaliatory discharge claims, deferred and other compensation-related disputes, and injunction hearings in more than 30 states across the country involving non-compete, non-solicitation and non-disclosure agreements. She has also been involved in the prosecution of several employee raiding cases resulting in multimillion dollar awards, as well as the successful defense of such cases.

Ms. Hendrickson has practiced at several large national and international law firms in Chicago previous to joining O'Hagan Meyer. She has regularly appeared in state and federal courts throughout the United States, as well as before various governmental agencies and arbitration panels.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.