FINRA Expungement

In the fiercely competitive securities industry, it is imperative for registered representatives to ensure that their Central Registration Depositary (“CRD”) record is free from customer complaints and other negative disclosures. CRD is an online registration and licensing system that public investors routinely consult through FINRA Brokercheck. The CRD system contains administrative information (e.g., personal, organizational, employment history, registration, and other information) and disclosure information (e.g., criminal matters, regulatory disciplinary actions, civil judicial actions, and information relating to customer disputes. Customer complaints and other negative disclosures can encompass everything from customer complaints filed with FINRA that did not result in arbitration, arbitration claims, court filings made by customers and the arbitration awards or court judgments that may result from those claims or filings, in house supervisory review, or any internal review that the broker dealer decided to filed with FINRA. For registered representatives who have derogatory information in their CRD record FINRA offers a procedure through which derogatory information in the CRD database can be removed.

Under FINRA Rule 2080, registered representatives with derogatory information concerning disputes between customers and member firms or their associated persons reported in the Customer Complaint/Arbitration/Civil Litigation Disclosure sections on Forms U4 or U5 in their CRD record may attempt to remove this information from their CRD record through a procedure known as expungement. Expungement provides registered representatives the opportunity to wipe clean, derogatory information in their CRD record, thereby permanently deleting the derogatory information, thus no longer making it available to investors, regulators, or broker-dealers in the CRD system.

Expungement is a two-part process. Firstly, a registered representative initiates the expungement process by filing for arbitration through the FINRA Dispute Resolution Process requesting expungement of a derogatory entry in the CRD system. A hearing will be held to review the merits of the expungement request based on whether the evidence provided by the registered representative establishes that one or more grounds for expungement applies to the facts of the case. Arbitrators considering a request for expungement are required to hold a required hearing session by phone or in person, review any settlement documents, and conclude by offering a written statement citing the grounds for granting or denying the expungement request.

In cases involving settlements, whether the matter was settled in state court or through mediation or arbitration, the panel must consider the amount paid to the Compliant. The language for FINRA Notice to Members 08-79 is broad and any documentation from the settlement is fair game to a panel considering expungement. Per FINRA Notice to Members 08-79, the panel must also consider “any other terms and conditions of the settlement that might raise concerns about the associated person’s involvement in the alleged misconduct before awarding expungement.”

In addition to the filing fees which are $15.75, forum fees for hearing sessions considering the request for expungement will also be assessed against the party request expungement relief. Expungement hearings on average are 1-3 hours in duration.

Rule 2080 outlines three narrow grounds or standards on which an expungement may be granted:

1. The claim, allegation, or information is factually impossible or clearly erroneous;

As the description implies an expungement under would involve facts in which the Arbitrator finds Claimant’s version of the events, not credible based on the evidence presented, and therefore, are factually impossible. An example of expungement on the grounds that the claim is factually false one in the context of a customer dispute would be challenging the narrative used by the complaining customer with any exhibits showing contradictory facts.

2. The registered representative was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or

Under this category, the claimant requesting expungement would be required to present credible evidence that the registered representative was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. For example, naming a registered representative in a complaint when he or she was not employed by the brokerage firm in which the transactions at issue in the complaint. Another illustration in customer dispute cases is naming a registered representative in a complaint, when he inherited or was assigned the account at issue and was not responsible for the asset allocation or trading strategy created by the departing broker. For example, the registered representative took over a file from a registered representative who did commit a violation. However, the claimant conducted him or herself properly and therefore was not involved in any wrongdoing.

3. The claim, allegation, or information is false.

Under the third category, expungement would be warranted if the complaint involved information that is false (contradicted by credible information presented by the registered representative). For example, a customer complaint alleged that a broker made unauthorized trades, the broker provided credible evidence that the customer authorized the alleged unauthorized trades in writing.

If the claimant is successful in the arbitration stage, the claimant must file a petition with a local state or federal court, naming FINRA as a defendant, requesting that the court confirms the arbitration award granting the expungement. Upon reviewing the petition, the court will then order FINRA to comply with the expungement order by expunging the record in question from the CRD system. However, it is important to note that this second is necessary in that FINRA will not voluntarily expunge information, even if it is the product of a settlement agreement, absent a court order directing expungement of the record in question from the CRD system.

Expungement is treated by FINRA as an “extraordinary remedy that arbitrators should recommend only under appropriate circumstances.” As such one should not assume that expungement is a simple ministerial matter that FINRA will simply rubber stamp if a claimant takes the time to request expungement. Rather, FINRA has established a rigorous process in which claimants must present evidence that falls squarely within the boundaries of the three narrow grounds for expungement.

After reviewing the FINRA expungement process, the natural question that would arise for any registered representative seeking to clear his record and obtain expungement is can FINRA be avoided? Can a motion for expungement be filed and granted exclusively in state court? CRD information can potentially be expunged under State law. See our post on State Court Expungements to find out if you’re eligible for this option or contact the lawyers of Lubiner Schmidt and Palumbo for a consultation.