The "expungement" process stockbrokers use to delete complaints from their records has been drawing more and more attention.  Colleen Honigsburg and Mathew Jacob found that brokers who win "expungements are 3.3 times as likely to engage in new misconduct as the average broker."  As I wrote before, this result may indicate that the process suppresses the investor protection signals sent by customer complaints.  In a paper forthcoming in the Washington and Lee Law Review, I dug into why the purportedly adversarial process for expungements generates these results.  (Shameless plugs: the paper has also been covered by the Business Scholarship Podcast and Ipse Dixit.)  In essence, many of the arbitrations underlying expungements cannot be fairly characterized as approaching adversarial.  A report from the PIABA Foundation found that about 98% of the time, the brokerage firm respondents in these cases did not oppose the request.  This raises real questions about whether we have any reason to believe that the expungement hearings reliably surface information relevant to deciding whether to recommend that a customer complaint be expunged.

Many of these expungement proceedings follow a similar pattern now.  A stockbroker will sue a current or former employer alleging that a customer (who is not a party on these straight-in or expungement-only arbitrations) made a false complaint against them.  The parties will select their arbitrator from FINRA's list, set all hearing times, and then (often with roughly thirty days or less notice) send a letter to some address where the complaining customer may or may not be advising them of their ability to participate in the hearing which will determine whether or not they submitted a "false" complaint.  There are many reasons why we should not have confidence that this process produces informed decisions by the arbitrators, and I detail many of them in my article.

But we should have other concerns about how this process may, over time, increasingly bias arbitrators against customers.  These expungement-only arbitrations have been rapidly increasing in volume.  The PIABA Foundation found an over 900% increase in these cases from 2015 to 2018.  While we have considered what this process now does to the reliability of BrokerCheck, and the public's access to information, we have not considered how these unopposed expungement cases may affect arbitrator perceptions about investors.  Consider the information environment for an arbitrator who has consecutively served on five unopposed expungement-only cases.  In each instance, the arbitrator will be told that a complaining customer simply lied, didn't have their facts straight, or otherwise filed an improper complaint. No one will rebut any of these claims. Most of time, the arbitrators agree and grant the expungement request.  What does this mean for the next investor to bring a customer claim before an arbitrator whose views about investors have been marinated in unopposed, expungement-only proceedings?  Investors may fear that these arbitrators will see investors as liars because they have been exposed to unopposed expungement hearing after unopposed expungement hearing.  Although I haven't developed the data skills to figure this out on my own, outcome statistics could possibly help answer this question.  It may be that arbitrators who have been exposed to a good number of unopposed, expungement-0nly arbitrations become more hostile to investors over time.  It might also turn out that these prior hearings don't seem to impact future rulings.  Without good data in hand, I wouldn't want to blindly trust an arbitrator who had been told time and time again that people like me were liars.

Fortunately, there seems to be a growing consensus that we should retool the expungement process to increase overall confidence in it.  The North American Securities Administrators Association will be discussing it at their Annual Meeting in a few weeks.  These regulators have a real stake in a trustworthy process because expungements delete information from their record system.  If the deleted information would have been useful to spot developing trends, it hurts public enforcement and protection.  Hopefully we'll see more reforms in the near future.