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Posts Tagged ‘Broker’

FINRA Seeks to Tighten Rules for Expungement of Customer Dispute Information

Posted on: January 5th, 2018

By: Theodore C. Peters

What once was a relatively simple process of removing outdated or false information on a registered person’s CRD (Central Registration Depository) record has become increasingly complicated (and expensive) over the years.  Bit by bit, securities regulators have tightened the rules and requirements pertaining to expungement of information relating to customer disputes and claims asserted against registered individuals.  If the Financial Industry Regulatory Authority (FINRA) has its way, the road to expungement may become even steeper, resulting in fewer successful challenges.  With investors wanting full disclosure by their brokers on the one hand, and securities professionals understandably seeking to keep their CRDs clear from extraneous and even incorrect information on the other, FINRA finds itself trying to find a happy medium that allows for both transparency and a fair procedure for securities professionals.  Striking an equitable balance is a laudable goal, but can it be done?

The CRD is a database used by FINRA to store and maintain information on securities registered persons and member broker-dealer firms.  Currently, the system contains the registration records of more than 3,700 registered broker-dealers, and the qualification, employment and disclosure histories of more than 634,000 active registered individuals.  When a broker gets sued, he must disclose the claim to his broker-dealer, and he must also update his Form U4, the formal registration information provided to FINRA.  Regardless of the truth of the claims asserted against the broker, and irrespective of whether the broker was errantly named in the action, the claim must nevertheless be disclosed to FINRA, and this disclosure becomes a part of the broker’s permanent CRD record.

Years ago, getting false or inaccurate information removed from a CRD was relatively simple; the broker only needed to obtain an order of expungement from the arbitrator (or panel of arbitrators as the case may be) and present that order to CRD, whereupon the subject information would be removed from the broker’s record.   In 2004, FINRA’s predecessor, the National Association of Securities Dealers (NASD) adopted Rule 2080, which governs the means by which a broker can obtain expungement.  Under Rule 2080, an arbitration order granting an expungement request is not effective unless and until the broker also obtains an order from a court of competent jurisdiction directing the expungement or confirming an arbitration award containing expungement relief.  Further, Rule 2080 requires that FINRA be named in any such court action unless FINRA agrees to waive this requirement (available under limited circumstances).

In 2009, FINRA adopted Rules 12805 and 13805, requiring that there be a recorded hearing (by telephone or in person) regarding the appropriateness of expungement.  Further, in cases involving settlements, the arbitrator(s) are required to review the settlement documents and consider the amount of payment made and any terms and conditions of the settlement.  The arbitrator(s) are also required to indicate in the order the reason(s) supporting a finding that expungement is appropriate.  Most importantly, under an amendment to Rule 2080 and pursuant to Rules 12805 and 13805, expungement became limited to one of three narrow circumstances:

  • The claim, allegation or information is factually impossible or clearly erroneous;
  • The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
  • The claim, allegation or information is false.

In 2014, FINRA further refined expungement proceedings in adopting Rule 2081, which prohibits making settlement contingent upon the aggrieved party’s consent to or agreement not to oppose the broker’s request to expunge that party’s customer dispute information from the CRD system.

Most recently, on December 6, 2017, FINRA published Regulatory Notice 17-42, which requests comment on a proposed amendment to the Codes of Arbitration Procedure governing requests for expungement of customer dispute information.  FINRA notes that “[c]ritics of expungement have raised specific concerns about expungement hearings held after a settlement in the customer’s arbitration case that gave rise to the customer dispute information… critics argue that the panel from the [underlying case] has not heard the full merits of that case… [and that] claimants and their counsel have little incentive to participate in an expungement hearing after the [underlying case] settles and typically do not participate in such hearings.”

The proposed amendments do not directly alter current FINRA rules.  However, if adopted, the new rules will certainly increase the time and expense of meritorious expungement requests.  Among other things, the amendments proposed under Regulatory Notice 17-42 would:

  • Require all associated persons seeking expungement to appear in person (or via video teleconference) at the expungement hearing;
  • Require a three-person panel of arbitrators to unanimously agree that expungement is appropriate under Rule 2080(b)(1);
  • Require the unanimous three-person panel to find that the customer dispute information has no investor protection or regulatory value;
  • Limit an associated person to a single request for expungement, which must be exercised not more than a year after the underlying case has concluded;
  • Specify a minimum filing fee of $1,425 for expungement requests; and
  • Establish a roster of public chairpersons with additional qualifications to decide expungement requests.

Regulatory Notice 17-42 is simply a request for comment (comment period expires on February 5, 2018) at this time, and the proposal will still need approval by the Securities Exchange Commission before any new rules or requirements take effect.  The sweeping changes proposed by FINRA could substantial impair a registered person’s ability to remove incorrect information from his CRD.  On the other hand, the proposed conditions and requirements may benefit the investing public at large by requiring transparency. Regardless of the outcome, one thing is clear; FINRA is encouraging its arbitrators to grant expungement requests in only the rarest of circumstances.

If you have any questions or would like more information, please contact Ted Peters at [email protected].

FINRA Tightens Expungement Requirements

Posted on: October 12th, 2017

By: Brett C. Safford

On September 25, 2017, the Financial Industry Regulatory Authority (FINRA) issued a “Notice to Arbitrators and Parties on Expanded Expungement Guidance” (hereafter, the “Notice”). The Notice continues the recent pattern of FINRA issuing rules and notices which further limit a broker’s ability to expunge his or her Central Registration Depository (CRD) record.

In 2015, FINRA launched an extensive advertising campaign for its BrokerCheck website. FINRA describes BrokerCheck as “a free tool to research the background and experience of financial brokers, advisers and firms.” However, as BrokerCheck becomes an increasingly utilized resource for customers and potential employers, the impact of a broker’s disclosures on his or her career becomes more significant. With the increased impact of a broker’s disclosures, the necessity of ensuring that those disclosures are accurate likewise increases. Consequently, expungement—a legal action which allows brokers to remove inaccurate disclosures—has taken on greater importance.

FINRA’s expungement procedures are governed by FINRA Rules 12805 and 13805. In the Notice, FINRA advises, “The procedures are intended to ensure that expungement occurs only when the arbitrators find and document one of the narrow grounds specified in Rule 2080.” The three “narrow” grounds specified in FINRA Rule 2080 are: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.”

By describing the grounds for expungement set forth in Rule 2080 as “narrow,” FINRA is signaling to its arbitrators that expungements are the exception, not the norm. The Notice further advises, “Expungement is an extraordinary remedy that should be recommended only under appropriate circumstances. Customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.” Yet, FINRA fails to define “appropriate circumstances” or how to assess “meaningful investor protection” or “regulatory value.” Arbitrators are also instructed to request a copy of the broker’s BrokerCheck report and to “carefully review the report when considering whether expungement is appropriate.” Arbitrators are to “pay particular attention to the ‘Disclosure Events’ section of the report.” The Notice, however, is unclear as to what arbitrators should take away from their review the BrokerCheck report. No guidance is offered as to what extent arbitrators should factor a broker’s prior disclosures into their analysis of the pending request for expungement.

The Notice also emphasizes that “[i]t is important to allow customers and their counsel to participate in the expungement hearing in settled cases if they wish to” and instructs arbitrators to allow the customer and their counsel to appear at the hearing; allow the customer to testify (in person, telephonically, or by other method); and allow the customer’s counsel or a pro se customer to introduce documents and evidence, cross-examine the broker and witnesses, and present opening and closing arguments at the hearing. In expungement only cases where an associated person files arbitration claims solely for the purpose of seeking expungement, the Notice advises arbitrators to “order the associated persons to provide a copy of their Statement of Claim to the customer(s) involved in the customer’s arbitration case that gave rise to the customer dispute information (underlying arbitration).”

Finally, the Notice states, “A broker may not file a request for expungement of customer dispute information arising from an underlying customer arbitration until the underlying customer arbitration has concluded.” When the broker is a named respondent in the underlying customer arbitration and he or she can present a defense, this rule prevents inconsistent rulings, i.e., the broker is found liable for claims in the underlying customer arbitration while obtaining expungement of that claims in the expungement-only arbitration, or vice versa. However, this rule also applies to brokers who are not named in the underlying customer arbitration. This means that before bringing an action to expunge a meritless disclosure from his or her CRD records, an unnamed, falsely-accused broker must sit on the sideline and await the resolution of an arbitration which he or she cannot present a defense. As such, a broker’s BrokerCheck report can include a false and erroneous disclosure for years before expungement is obtained—causing significant harm to the broker’s professional reputation.

In sum, the Notice continues the trend of FINRA toughening the requirements for expungement. Public protection against crooked brokers is essential and needed, but FINRA’s expungement guidance is increasingly creating a framework in which innocent brokers may struggle to obtain necessary and justified expungements.

If you have any questions or would like more information, please contact Brett Safford at [email protected].