SEC Sends FINRA Expungement Back to the Future

A quarter of a century ago in 1998, two public customers sued a New York Stock Exchange member and one of its registered persons. In 2020, the registered person sought to clear his name and filed a FINRA Arbitration Statement of Claim seeking expungement. His FINRA Arbitration moved forward. Until it didn't. FINRA pulled the plug on Christmas Eve 2020. In the midst of the onslaught of the Covid pandemic. The registered person appealed to the SEC. And, now, in 2023, we're moving backwards. Or sideways. Or who knows -- perhaps we're headed back to the future.

Case in Point

Waaaaay back on June 4, 1998, public customer Claimants David M. Treadwell and Gloria Treadwell filed a New York Stock Exchange Arbitration in which they demanded $5,000 and asserted mismanagement, failure to follow instructions, and the unauthorized sale of Blackrock Insured Municipal 2008 Term Trust Inc. 
In the Matter of the Arbitration Between David M. Treadwell & Gloria Treadwell, Claimants, v. Prudential Securities, Inc. & Ryan Mummert, Respondents  (NYSE Arbitration Award / June 4, 1998)
https://www.finra.org/sites/default/files/aao_documents/1998-006968-Award-NYSE-19980604.pdf

A sole NYSE Arbitrator authored the 1998 NYSE Award, which, in part, stated:

Respondents shall deliver to Claimant 189 shares of Blackrock Insured Municipal 2008 Term Trust Incorporated ("Blackrock"), plus a sum in cash equal to .441 times the value of one share of Blackrock on the date the 189 shares are acquired by Respondents (or the date of delivery to Claimants if the shares are delivered from Inventory shares) and an additional $185 for lost earnings on the Investment: furthermore, that the costs of this hearing, $75 are assessed against the Claimants. 

A Rip in the Space/Time Continuum

Jumping forward in time about a quarter of a century from 1998 to 2023, the SEC issues an Opinion addressing a 2021 appeal that Mummert filed about the 1998 NYSE Arbitration and a 2020 FINRA Arbitration. That's one hell of a leap in time! I'll tie it all together in a bit, but for now, just go with the flow, okay? Don't get too confused by the next few citations to a 2023 SEC Opinion because things will fall into place as we go back to the future.

April 2020: FINRA Expungement Arbitration Filed

In a FINRA Arbitration Statement of Claim filed in April 2020, Ryan Mummert (the Respondent in the 1998 NYSE Arbitration) sought to have the Treadwells' complaint expunged from his Central Registration Depository record ("CRD"). 
In the Matter of the Application of Ryan William Mummert For Review of Action Taken by FINRA (Opinion, SEC, '34 Act Rel. No. 97680, Admin. Proc. File No. 3-20210 / June 9, 2023)
https://www.sec.gov/litigation/opinions/2023/34-97680.pdf

Prudential Ceased Operations

Interesting thing: When Mummert filed his 2020 FINRA Arbitration Statement of Claim, Prudential was a FINRA Member Firm that once was but at the time of the FINRA arbitration filing no longer existed:

According to its answer, since the 1998 decision, Prudential was renamed Prudential Equity Group, LLC, withdrew as a FINRA member, and ceased operations. Prudential’s answer noted that the underlying customer dispute “occurred over 20 years ago” and that it had “been over 12 years since [Prudential] was a member of FINRA.” But Prudential’s answer took “no position” as to Mummert’s expungement request. 

at Page 4 (Footnote 14) of the SEC Opinion

In seeking the recommended expungement of the Treadwells' complaint, Mummert alleged that:

the underlying customer dispute resulted in a “settlement” and attached a copy of the NYSE arbitrator’s decision. Mummert also alleged that the prior “case did not proceed to a hearing on the merits.” Finally, he contended that the customers’ allegations in the underlying customer dispute were “patently false,” “clearly erroneous,” and “factually impossible” and therefore should be expunged from the CRD under FINRA rules. 

at Page 4 of the SEC Opinion

Not sure if you caught that nuance: Mummert alleged that the Treadwells 1998 NYSE case had settled before a hearing on the merits.

Movin' Along at FINRA DRS

After Mummert had filed his FINRA Arbitration Statement of Claim with FINRA's Dispute Resolution Services ("DRS"), several events transpired:

• FINRA DRS accepted Mummert's April 2020 Statement of Claim;
• FINRA apparently cashed Mummert's filing fee;
• the parties selected a single FINRA arbitrator; and
• the sole FINRA Arbitrator conducted a prehearing conference.

Thereafter, Mummert's claim moved along at FINRA DRS:

[I]n June 2020, the named respondent in the arbitration, Prudential, filed an answer to Mummert’s statement of claim and agreed to arbitration. The parties selected a single arbitrator who held a prehearing conference.

In September 2020, Mummert’s counsel sent a letter to the FINRA arbitrator, with copies to Prudential’s counsel and the FINRA Case Administrator, explaining that Mummert and Prudential had engaged in “good faith searches” to locate the settlement agreement that Mummert believed had resolved the customer dispute. But neither Mummert nor Prudential were able to locate the document, nor was Mummert’s counsel able to locate “the original attorney on the case.”¹⁵

= = =

Footnote 15: It is unclear whether Mummert’s counsel was referring to Mummert and Prudential’s attorney in the NYSE arbitration, the customers’ attorney, the NYSE arbitrator, or someone else. Mummert also separately filed an affidavit of service stating that his claim had been served on one of the customers involved in the underlying dispute, but the other had passed away.

at page 5 of the SEC 2023 Opinion

December 10, 2020, FINRA Arbitration Hearing

So . . . we got a dissolved FINRA member firm and some dead lawyers, but, undaunted, the sole FINRA Arbitrator moved Mummert's case forward eight months after the Claimant had filed his claims in April 2020 [Ed: footnote omitted]:

On December 10, 2020, the arbitrator held a telephonic hearing regarding Mummert’s expungement request, at which only Mummert testified and submitted evidence. Among other hings, Mummert testified that he believed that the underlying customer dispute had been resolved through a mediation, although he did not recall the customers being involved in the mediation. He also testified that ultimately Prudential had reached a settlement with the customers by agreeing to reverse the contested trade of Blackrock securities. Mummert testified that he did not have an original or copy of the settlement agreement, as he did not believe it had been provided to him, and he did not recall whether he had signed it.

At the hearing, Mummert submitted and the arbitrator admitted as exhibits the NYSE arbitrator’s decision and recreated copies of the relevant customers’ account statements. One such statement reflected that the customers’ account had “[r]eceived” 189 shares of Blackrock on August 27, 1998, with the notation “ADJ ARBITRATION SETTLEMENT.” 

at Page 5 of the 2023 SEC Opinion

NYSE Arbitration Award? Settlement??

As to whole mediation, settlement, award confusion that manifested itself at the December 2020 FINRA Arbitration telephonic hearing, additional information was developed:

[P]rudential and the NYSE reported information regarding the arbitration decision involving Mummert in FINRA’s CRD. Prudential reported that the “Disposition” of the customer dispute was “Award to Customer,” whereas NYSE reported that the “Resolution” was “Other,” but also reported under “Disposition [D]etails” that there had been an “award against” Mummert and Prudential. 

at Page 4 of the 2023 SEC Opinion

Dead in the Water at FINRA DRS

If you were to look at a calendar at this point in Mummert's expungement case, it would tell you that it is now eight months after he had filed his April 2020 FINRA Arbitration Statement of Claim. Also, the calendar would reflect that two weeks had passed since the FINRA Arbitrator held a telephonic hearing. Finally, it's December 24, 2020 -- Christmas Eve. And just how did FINRA convey its season's greetings to Mummert? Consider this:

On December 24, 2020, two weeks after the hearing but before the arbitrator issued an award, the FINRA Case Administrator sent a letter to Mummert, which stated in pertinent part:

FINRA has determined that your request for expungement of [the customer dispute disclosure] in your Statement of Claim is not eligible for arbitration as it arises from a prior adverse award. Therefore, pursuant to the Industry Code Rule 13203(a), the forum is denied as to [the claim].

That same day, the Case Administrator sent the arbitrator a letter attaching this denial letter. Mummert subsequently filed this application for review of FINRA’s denial with the Commission.

at page 5 of the 2023 SEC Opinion

Back to the Present

As I had promised earlier, the rift in the Time/Space Continuum is now repaired and we pick up the narrative in nearly real-time. On Christmas Eve 2020, the FINRA Case Administrator apparently assigned to Mummert's arbitration sent a letter informing Mummert that "FINRA has determined" that his claim was ineligible for arbitration because of a "prior adverse award." On that same Christmas Eve, Mummert petitioned the SEC to review FINRA's action that prohibited his access to its arbitration forum. Merry Christmas to all and to all a good appeal to the SEC. And now . . . we're back to the future that is 2023!

A Denial Letter But By Whom?

As to who at FINRA made the decision to deny Mummert's access to its DRS forum, FINRA's Christmas Eve 2020 "Denial Letter" only states that "FINRA has determined." That amorphous assertion just doesn't fulfill the requirements of FINRA's rulebook and prompted the SEC to order the following in response to Mummert's appeal [Ed: footnotes omitted]:

[W]e remand this proceeding to FINRA because we are unable to determine the basis for FINRA’s action and therefore cannot determine whether FINRA’s action complies with these requirements.

FINRA Rules 12203(a) and 13203(a) provide that the Director of DRS (the “Director”) “may decline to permit the use of the FINRA arbitration forum if the Director determines that, given the purposes of FINRA and the intent of the [relevant FINRA Arbitration] Code, the subject matter of the dispute is inappropriate.” “Only the Director may exercise” this authority.

The denial letter does not indicate whether the Director made the decision to deny Mummert access to the arbitration forum, as required by FINRA Rules 12203(a) and 13203(a). As noted, the December 24, 2020 letter, issued by a FINRA case administrator, stated only that “FINRA” had determined that Mummert’s claims were ineligible for arbitration. The letter did not mention the Director. 

at Page 6 of the 2023 SEC Opinion

Prior Adverse Award?

Having expressed its disdain for the undisclosed authorship of FINRA's Denial Letter, the SEC then goes for the jugular:

Moreover, the letter states that Mummert’s expungement request is ineligible for arbitration because it relates to “a prior adverse award.” But the letter does not explain why FINRA concluded that the underlying customer dispute was resolved by an adverse award on the merits. Notably, although Mummert alleged that the underlying customer dispute was resolved with a settlement and introduced evidence in support of that conclusion at the hearing, the letter does not cite any evidence or other basis for reaching a different conclusion. Nor does the letter address the fact that it was sent after DRS had already accepted Mummert’s claim for arbitration -- indeed, after the arbitration hearing had already taken place. 

at Pages 6 - 7 of the 2023 SEC Opinion

We Do Declare

Having failed to disclose the critical "who" and "what" in its Christmas Eve 2020 Denial Letter, FINRA exacerbated matters by offering a series of inadequate explanations [Ed: footnotes omitted]:

In an attempt to support its decision to deny Mummert access to the arbitration forum, FINRA filed a motion with the Commission to adduce as additional evidence two declarations. The first is by a Regional Director in DRS, stating that DRS learned during Mummert’s arbitration hearing that the underlying customer dispute had ended with an award rather than a settlement, which had not been “readily apparent to DRS” before the hearing began. The second declaration is by a retired Associate Director of DRS who previously worked for the NYSE arbitration forum as a Chief Arbitration Counsel, stating that NYSE arbitration decisions “would explicitly state that the dispute was resolved by settlement” if applicable—which the decision involving Mummert did not—and that “[t]he language ‘in full and final settlement of all claims’ was embedded in the standard award form used by the NYSE in 1998.” 

Even if we admitted these declarations—and Mummert opposes FINRA’s motion to adduce them—they still do not adequately explain the basis for FINRA’s decision.  Among other things, they do not explain why FINRA found unpersuasive Mummert’s allegations and evidence that the underlying customer dispute was resolved with a settlement. Nor do the declarations explain how FINRA’s denial of access to the arbitration forum comported with FINRA Rules 12203(a) and 13203(a), given that FINRA had previously allowed access to the forum and allowed the arbitration hearing to take place. In addition, as explained above, FINRA’s decision to deny use of the forum had to be made by the Director himself. We therefore remand this proceeding for the Director to explain in the first instance whether he believes it is appropriate to deny Mummert use of the FINRA arbitration forum.

at Page 7 of the 2023 SEC Opinion

Accordingly, the SEC ordered the proceeding remanded to FINRA.

Bill Singer's Comment

Before I launch into a more full-throated diatribe, let me reiterate my position on expungement. I believe that FINRA's expungement process is misguided and inappropriate. FINRA channels the industry's expungement claims into a non-regulatory forum involving arbitration and providing FINRA with filing and hearing fees. Pointedly, I believe that expungement is a regulatory matter and should not be punted to mere arbitrators. Further, the costs and delays inherent in FINRA's cumbersome expungement process serve as a disservice to those industry professionals whose reputations have truly suffered as a result of false allegations and defamation. Additionally, FINRA's expungement process frequently works as a disservice to the investing public when negative information is vacuumed from a registered person's or member firm's public records of disclosure. In reality, many of FINRA's expungement arbitrations are not truly adversarial but involve absent customers or disinterested member firms. 

The better expungement protocol would be to implement a "protest" period that contemporaneously affords a firm or associated person a fast track appellate process involving a regulatory panel. Thereafter, if a non-contemporaneous expungement application is filed, it should be with the proviso that the arguments will be adjudicated by a regulatory panel and the costs and fees held in abeyance and waived if the petitioner is a prevailing party; however, should the petitioner fail to prevail, then appropriate costs and fees should be assessed and required to be fully paid before any registered activity may resume. Clearly, I am no fan of any quick-and-easy expungement; and I certainly am a critic of FINRA's process.

Having set out my opposition to FINRA's expungement-by-arbitration process, let me return to Claimant Mummert's case. I am not going to pull my punches. I find FINRA's conduct to be reprehensible. In the parlance of the schoolyard, FINRA's Christmas Eve denial of Mummert's arbitration comes off as "dickish" -- there's just no way about that coarse characterization.

FINRA fired off its salvo on Christmas Eve 2020, of all days. If for no other reasons than faux decency or calculated optics, you'd think that FINRA might have gotten its Denial Letter out on December 23rd or held off until December 26th. Making matters worse, FINRA's callous blindsiding of Mummert was undertaken in the throes of the 2020 Covid Pandemic. 

Where the hell was FINRA's DRS Director was on Christmas Eve 2020?

Why did the FINRA Case Administrator fail to specify in the Denial Letter that the denial was ordered by the Director?

FINRA's Christmas Eve 2020 Denial Letter stinks on two levels. One, I believe that it was carefully worded to avoid asserting that the FINRA DRS Director had personally denied the forum, which is required by FINRA's Code. Second, to issue such a denial eight months after accepting the Statement of Claim, two weeks after a hearing, and on Christmas Eve 2020 is simply disgraceful. After all, FINRA knew what the world was like in December 2020. Lest you forget, we were locked down amid the Covid pandemic in December 2020 To place the 2020 Christmas Eve Denial Letter in proper context, consider this quote from "FINRA Seeks Comment on Lessons From the COVID-19 Pandemic" (FINRA Regulatory Notice 20-42 / December 16, 2020)
https://www.finra.org/rules-guidance/notices/20-42 [Ed: footnote omitted]:

The COVID-19 pandemic has brought rapid and unprecedented changes to member firms’ business operations. Given the exigent health and safety concerns and the significant impacts of the pandemic on member firms, investors and other stakeholders, FINRA has provided guidance and temporary regulatory relief to firms, associated persons and other individuals through the issuance of FINRA communications, frequently asked questions (FAQs) and temporary rule amendments, without compromising critical investor protection measures or fair processes.In addition, FINRA has launched several initiatives to respond to issues and questions that have arisen during the pandemic. 

Here we are June 2023 -- over three years removed from Mummert's April 2020 filing of his FINRA Arbitration Statement of Claim. Mummert did nothing to engender that three-year delay (and still counting) on his right to obtain a timely adjudication of his expungement claims from FINRA. In remanding his matter back to FINRA Arbitration, the SEC placed the blame squarely with FINRA: "[W]e are unable to determine the basis for FINRA's action . . . " That is not Mummert's fault. That is FINRA's fault.

Which brings us back to yet another institutional failure at FINRA -- the unwillingness of FINRA's lackluster Board of Governors to intervene when equity and fairness demand such an intrusion.

Is no one at FINRA to be held accountable by the Board for the misconduct presented in this abortion of an expungement proceeding?

Will no Governor propose the necessary reforms to FINRA's abysmal expungement process?

How nice it must be for each Governor to draw a six-figure honorarium for service on FINRA's Board but never quite find the zeal to advance meaningful reform that furthers the interest of the investing public without sacrificing the legitimate needs of the industry and its financial professionals.

If this is the best that FINRA can offer by way of self regulation, then it's time to clean house. In May 2020, I called for the boycott of all FINRA elections for 2023; and I take this opportunity to reiterate that request:

• FINRA
• Prudential
• NYSE
• Arbitration
• Expungement
• SEC
• BrokeAndBroker
• Bill Singer