When considering an appeal questioning FINRA's denial of an expungement request, the SEC seems to have approached its deliberation as a cat toying with a dead mouse. There seems no rush in the effort and not much accomplished beyond playing with a dead-on-arrival case. Shamefully, the SEC took 50 months to deny the appeal.
As to Occurrence #1454693, the FINRA Arbitration Award asserts that the customer (identified as "Ms. J") had been served with the Statement of Claim but did not contest the requested expungment or participate at the FINRA Arbitration hearing. The sole FINRA Public Arbitrator recommended the expungement of the unsettled customer complaint based upon a FINRA Rule 2080 finding that the "claim, allegation, or information is factually impossible or clearly erroneous." The Arbitrator offered this rationale:
Ms. J inherited, from her parents, a trust whose portfolio consisted exclusively or almost exclusively of high quality, investment-grade California municipal bonds.
Her parents had “laddered” the bonds and reinvested upon maturity, using Claimant as their broker. Ms. J did likewise which suited her investment objectives. On April 24, 2009, Ms. J complained to Respondent, alleging “misrepresentation and unsuitable investment recommendations” during the period between July 1998 and April 2009.
The complaint did not specify any particular misrepresentations made by Claimant. Claimant credibly testified that he provided thorough explanations of the bonds and how Ms. J’s parents handled them over time. Given the history of Ms. J’s portfolio and Claimant’s testimony, I find Ms. J’s vague allegation of “misrepresentation” not credible and therefore clearly erroneous.
Similarly, Ms. J did not specify how the bonds she purchased or the strategy she pursued was “unsuitable.” Both appear well-suited to someone with her investment objectives and lack of investment sophistication. This appearance was reinforced by the fact that for 11 years Ms. J bought “laddered” high quality California municipal bonds and reinvested upon maturity. I find Ms. J’s general
allegation of “unsuitable investment recommendations” clearly erroneous.
I therefore recommend that this occurrence be expunged from Claimant’s CRD records and BrokerCheck® Report.
As to Occurrence #170892, the FINRA Arbitration Award asserts that the customer had been served with the Statement of Claim. Notiwithstanding the above, the FINRA Arbitration Award asserts that:
On October 9, 2018, FINRA Office of Dispute Resolution (“ODR”) advised the parties and the Arbitrator that the Director of FINRA ODR determined that Claimant’s request for expungement of occurrence number 170892 is not eligible for arbitration as it arises from a prior adverse award. Accordingly, pursuant to Rule 13203(a) of the Code of Arbitration Procedure (“Code”), the forum was denied as to occurrence number 170892. The letter further advised that the case would proceed as to occurrence number 1454693.
Although Claimant requested that the Sole FINRA Arbitrator reconsider the denial of the requested expungement of the arbitration case, the Arbitrator denied that application, and offered this rational:
This occurrence was the subject of a FINRA arbitration case which resulted in an award in favor of the customer and against Claimant and Respondent, jointly and severally. Accordingly, the Director of FINRA ODR determined that this forum was unavailable for a request to expunge this occurrence from Claimant’s CRD records and BrokerCheck® Report. If recommending expungement in light of this determination were ever appropriate, it would require a compelling justification. Even absent such a determination, second-guessing an arbitrator who heard or read all of the evidence would itself require a compelling justification. No such compelling justification exists here.
On November 14, 2018, in an appeal filed with the Uniteed States Securities and Exchange Commission, Prentice challenged FINRA's determination that Occurrence #170892 was ineligible for arbitration. In the Matter of the Application of Thomas Christophe Prentice For Review of Action Taken by FINRA (SEC Opinion, '34 Act Release No. 96769; Admin. Proc. File No. 3-18894 / January 30, 2023)
Consider these additional facts as set out in part in the "Background" of the SEC Opinion:
Prentice has worked in the securities industry for more than 40 years. As relevant here, he worked for Merrill Lynch, Pierce, Fenner & Smith Inc. (“Merrill Lynch”) between April 1980 and January 2016. During that time, two customers made complaints about Prentice’s investment recommendations. The first customer filed a statement of claim against Prentice and Merrill Lynch in the arbitration forum of FINRA’s predecessor, NASD, alleging that Prentice made misrepresentations, failed to disclose material information, failed to follow investment goals, and failed to follow the pricing strategy the customer was promised. In July 1996, an arbitrator determined that Prentice and Merrill Lynch were liable and ordered Prentice and Merrill Lynch to pay the customer $6,032.90, jointly and severally. The second customer complained to Merrill Lynch in April 2009 that Prentice engaged in “misrepresentation and unsuitable investment recommendations.” Merrill Lynch investigated the complaint and, in February 2010, took no action because it found the claim to be meritless.
at Page 2 of the SEC Opinion
In considering Prentice's appeal, the SEC asserts in part that the Sole FINRA Arbitrator [Ed: footnotes omitted]:
considered both FINRA’s determination that expunging the prior adverse award was ineligible for arbitration and, at Prentice’s request, the claim for expungement on the merits. And the arbitrator specifically found that even if FINRA had not found Prentice’s expungement claim regarding the prior adverse award ineligible for arbitration, it would still require “a compelling justification” to second-guess the prior arbitrator and find expungement warranted. But, after assessing the record and Prentice’s arguments, the arbitrator found “[n]o such compelling justification.” Accordingly, the arbitrator denied Prentice’s expungement claim on the merits of that request. As a result, Prentice has already obtained the relief that he seeks: to “be permitted to bring his case to FINRA arbitration.” Moreover, as noted, the arbitrator considered and issued a decision on the merits of his expungement request. That the arbitrator ruled against Prentice does not mean he was denied access to arbitration.
Although he acknowledges that an arbitrator’s determination on the merits of a claim is “final and binding,” Prentice asks that we issue an order enabling him to arbitrate his expungement claim again. But this relief would require us to overturn the arbitration award denying his claim, which we lack authority to do under Section 19(d).
Moreover, Prentice acknowledges that he has “another available path” for relief—moving to vacate, modify, or correct the award in court under the Federal Arbitration Act (“FAA”). Prentice argues that the possibility of relief under the FAA from an adverse arbitration award "does not relieve the Commission of its oversight responsibility.” But, as noted, Congress has not authorized us to review FINRA’s arbitration awards and FAA review remains Prentice’s only potential path for relief.
at Pages 5 - 6 of the SEC Opinion
Accordingly, the SEC dismissed Prentice's application for review.
Let's restate in full this critical paragraph from the FINRA Arbitration Award:
On October 9, 2018, FINRA Office of Dispute Resolution (“ODR”) advised the parties and the Arbitrator that the Director of FINRA ODR determined that Claimant’s request for expungement of occurrence number 170892 is not eligible for arbitration as it arises from a prior adverse award. Accordingly, pursuant to Rule 13203(a) of the Code of Arbitration Procedure (“Code”), the forum was denied as to occurrence number 170892.The letter further advised that the case would proceed as to occurrence number 1454693.
What should we make of that above statement in the Arbitration Award? Clearly, FINRA's ODR "advised the parties and the Arbitrator" that the Director determined that the expungement of #170892 was ineligible for arbitration, and, accordingly, the FINRA Arbitration "forum was denied" as to that matter. There is no way around the determination of ineligibility and the denial of the forum because that's what's stated in the FINRA Arbitration Award.
Notwithstanding the Director's determination of ineligibility and decision to deny the arbitral forum to Claimant, Prentice sought further relief as noted in the FINRA Arbitration Award:
At the expungement hearing, Claimant requested that the Arbitrator consider Claimant’s request for expungement of occurrence number 170892 despite the Director of FINRA ODR’s October 9 decision to deny the forum as to occurrence number 170892.
You may wish to afford some weight to the fact that Claimant Prentice "requested" that Sole FINRA Arbitrator Mark R. Lee "consider" (or re-consider) the previous request for expungement of Occurrence #170892. What I would ask, however, is that you dilute whatever weight you give that request by the critical context that said request was made to the Arbitrator "despite the Director of FINRA ODR’s October 9 decision to deny the forum . . ." Moreover, note that the FINRA Arbitration Award separately confirms that the:
[D]irector of FINRA ODR determined that this forum was unavailable for a request to expunge this occurrence from Claimant’s CRD records and BrokerCheck® Report. If recommending expungement in light of this determination were ever appropriate, it would require a compelling justification. Even absent such a determination, second-guessing an arbitrator who heard or read all of the evidence would itself require a compelling justification. No such compelling justification exists here.
Notably absent from the 2018 FINRA Arbitration Award is an admonition that FINRA now places atop all of its Arbitration Awards:
Awards are rendered by independent arbitrators who are chosen by the parties to issue final, binding decisions. FINRA makes available an arbitration forum—pursuant to rules approved by the SEC—but has no part in deciding the award.
As I have often noted with derision, that above-statement often mischaracterizes FINRA's "part" in many public and intra-industry arbitrations -- a role that may be manifested by FINRA's affirmative intervention into the proceedings; or, in the alternative, may be a byproduct of FINRA providing the very forum where the arbitration is adjudicated. In the case of the Prentice arbitration, however, it would be absurd for FINRA to claim that it had "no part in deciding the award" when the Arbitration Award states that the Director of FINRA ODR determined that the request for expungement was ineligible and that the Director had denied the arbitration forum for the purpose of adjudicating the requested expungement.
In offering his rationale for declining to consider/reconsider the denial of FINRA's forum for adjudication of the arbitration-case expungement, the Arbitrator notes the Director's determination; and the Arbitrator ruminates that "in light of this determination," a recommendation of expungement would require "compelling justification." Clearly, the Arbitrator's judgment has been compromised by the insertion of the Director's determination. Further, having denied Prentice the right to present his case for expungement of Occurrence #170892, it's a bit fanciful for any adjudicator to then posit what justification would have been adduced if such an opportunity had been provided.
Also, I am deeply troubled that FINRA is now enunciating through its Arbitrator what amounts to an ad hoc burden of proof imposing a "compelling justification" standard in contrast to the normal civil standard of a "preponderance of the evidence." Notably, FINRA already imposes heightened standards of proof on expungement cases as set out in part in:
FINRA Rule 2080. Obtaining an Order of Expungement of Customer Dispute Information from the Central Registration Depository (CRD) System
[(b] . . .
(1) Upon request, FINRA may waive the obligation to name FINRA as a party if FINRA determines that the expungement relief is based on affirmative judicial or arbitral findings that:
(A) the claim, allegation or information is factually impossible or clearly erroneous;
(B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
(C) the claim, allegation or information is false. . . .
When the Sole FINRA Arbitraton talks about a "compelling justification," is that a further enhancement of the findings set out in (A), (B), and (C) above? And, as I previously noted, given that FINRA's Director determined that the requested expungement was ineligible AND denied the forum for that purpose, how does a Claimant in Prentice's position get to demonstrate any of the considerations noted in Rule 2080?
I am NOT saying that the SEC got it wrong; however, I am saying that it does not appear that the Commissioners and Chair invested sufficient time and energy into a thorough review of the issues raised on appeal. The SEC seems to have approached its deliberation of Prentice much as a cat toying with a dead mouse. There seems no rush in the effort and not much accomplished beyond playing with a dead-on-arrival case. Pointedly, I would ask that you consider that Prentice promptly filed his appeal with the SEC in November 2018, and the SEC has taken some 50 months to deny his application for review -- that delay is disgraceful and a disservice to the investing public and the industry; and all the more so given that the last brief was filed with the SEC on March 24, 2020, which is now nearly three years ago.
Among the most shameful aspects of the SEC Opinion is this lazy and ridiculous syllogism:
[P]rentice contends that his appeal fits within Section 19(d) because FINRA prohibited or limited his access to one of its services—arbitration—by determining that his claim to expunge the prior adverse award was ineligible to be arbitrated. According to Prentice, this determination “caus[ed] the Arbitrator to choose not to decide the claim on the merits.” But the arbitrator did decide Prentice’s claim on the merits, considering whether Prentice’s expungement request should be granted, and ultimately concluding that it should not. We therefore find that FINRA’s action did not prohibit or limit Prentice with respect to access to the arbitration service, and therefore we lack authority to review this action.
at Page 5 of the SEC Opinion
Seriously? As of 2023, theSEC Opinion persists in depicting Prentice's the appeal as one involving his contention that FINRA prohibited his access to its arbitration forum?
There is no mere contention afoot here: It's a given that the FINRA Director declared that the matter at issue was ineligible for arbitration AND the Director DENIED the forum to Prentice of that requested expungement.
Exacerbating the disingenousness of the SEC's "contention" version of events is the SEC Opinion's jaw-dropping assertion that the Sole FINRA Arbitrator "did decide Prentice's claim on the merits . . ." Under the totality of circumstances, no reasonable reader of the FINRA Arbitration Award would or should conclude that there was an unbiased, plenary hearing on the expungement of Occurrence # 170892. Whatever consideration was afforded to the issue by the Arbitrator was tarnished by the FINRA Director's intervention and did not rise to the level of a full and fair hearing on the merits. Whatever the Sole FINRA Arbitrator pronounced as to Occurrence # 170892 does not rise to the level of an independent determination based solely on the merits. As far as I am concerned, the Arbitrator's own rendition of the procedural aspects of the denial of the requested expungement of the arbitration claim paints a toxic picture of FINRA's intrusion the proceeding. Even the SEC Opinion can't get around the fact that the arbitrator considered "FINRA's determination that expunging the prior adverse award was ineligible for arbitration . . "
In closing, I want to make one point very clear: I express NO position whatsoever as to whether Prentice should or should not have been granted the expungement of the arbitration case denoted as Occurrence #170892.
Notably, I have long criticized FINRA's practice of adjudicating expungements within the civil context of a private arbitration fourm because I believe such cases should be adjudicated before a regulatory forum. Further, I have long noted my reservations that far too many customer complaints and other allegations of misconduct are sanitized by FINRA's expungement process to the detriment of the investing public and the industry.
FINRA is a glorified trade group where membership is ONLY afforded to employer-member-firms. As a result of that lop-sided bias, it is incumbent upon FINRA to ensure that expungments are fully and fairly adjudicated in a manner that best serves the public interest of full disclosure and affords fairness to the employee-associated-persons. In Prentice, the intervention of the FINRA ODR Director divested the Sole FINRA Arbitrator of any unbiased opportunity to dispose of the requested expungement of Occurrence #170892. Further, the SEC Opinion comes off as little more than a perfunctory review amounting to sleepwalking.
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