What once was a relatively simple process of removing outdated or false information on a registered person’s CRD (Central Registration Depository) record has become increasingly complicated (and expensive) over the years.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].