Broker Expungement in Court

CAN A MOTION SEEKING EXPUNGEMENT OF DISCLOSURES ON A REGISTERED PERSONS’ CRD BE FILED DIRECTLY IN STATE COURT, THEREBY AVOIDING THE FINRA ARBITRATION PROCESS

FINRA Rule 2080 outlines a process for registered persons to request expungement of customer related disputes from their CRD histories. The commonly travelled path for registered persons to expunge derogatory information involves utilizing the FINRA arbitration process. Typically, registered persons obtain an arbitration award ruling that expungement is warranted under the the three narrow grounds listed in FINRA Rule 2080. If successful under Rule 2080, they must then petition a state or federal court to affirm the decision and order FINRA to expunge the targeted disclosure from their CRD history. The majority of registered persons seeking expungement use this method.

However, registered persons may also seek expungement by petitioning a state court directly, with FINRA named as a party. A registered person would most likely directly file an action in court in order to remove customer complaints which never evolved into arbitration claims from her CRD record.

The reason to avoid the FINRA expungement procedures and cut directly to requesting relief from a state court is quite simple. Claimants who use the traditional procedure to request expungement through FINRA and then seek the endorsement of the arbitration ruling from a local state or federal court will spend more time and presumably more money pursuing expungement. Secondly, they will also be forced to argue for expungement under the notoriously narrow grounds under FINRA Rule 2080 which are difficult to satisfy, by design, given that FINRA treats expungement as an “extraordinary remedy” that should be granted liberally.

It is important to note that one should not view the strategy of petitioning a state court directly to obtain an expungement of an objectionable CRD disclosure as a cake walk. Courts are still feeling their way through the process because case law regarding how to analyze these claims is not fully developed. Moreover, FINRA requires in Rule 2080 that it be named as a party to the court action so it can argue to the court that it should apply FINRA’s criteria set forth in Rule 2080 in deciding the expungement motion.

However, one trend that has emerged is that courts have shown a willingness to use their equitable powers to order expungement. In theses instances courts will consider fairness towards the registered person versus the public’s need to access CRD disclosure histories.

One of the groundbreaking cases in this area is a 2012 case, Lickiss v. Financial Industry Regulatory Authority. Lickiss was a broker who directly filed a petition in a California court seeking expungement of customer complaints and a regulatory action. Lickiss asserted that the disclosures on his CRD record were over twenty years old and that he had maintained a clean record since the last reported event Therefore, expungement was warranted based on principles of equity and fairness.

The lower court denied Lickiss’ motion, based soley on the criteria set forth in Rule 2080. On appeal, in determing whether expungement was properly brought before the court and whether it was warranted, the Court of Appeal held that a court could order expungement of a CRD disclosure in the interest of fairness and equity. Contrary to FINRA’s argument, the court ruled that it was not required to rely solely on Rule 2080 in evaluating the expungement request. It is important to note that FINRA did not contest Lickiss’ strategy of bypassing FINRA arbitration. Rather, FINRA asserted that the expungement request should only be decided based on Rule 2080.

In the Lickiss case, the lower court eventually denied his claim for expungement. The denial was based in large part on the substantial nature of the complaints brought against him. Although the claims were 20 years old, they involved allegations of fraud and monetary damages exceeding $1.5 million. The court concluded that the public’s need to know outweighed Lickiss’ desire to expunge these disclosures from his CRD record.

However, most importantly this ruling stands for the proposition that registered persons can directly raise expungement claims in state court and that courts can use their equitable powers to evaluate expungement claims rather than solely apply FINRA Rule 2080. Lastly, the decision here should be taken as a cue for courts in other states, including New York and New Jersey, that a direct route for expungement is available in state court.