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FINRA Expungement

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  • Posted on: Nov 24 2021

By: Jeffrey M. Haber

What is Expungement and When is It Granted?

Expungement is the process by which a brokerage firm or registered representative seeks to remove an adverse disclosure event from the Central Registration Depository (CRD®) system. The CRD is the securities industry’s online registration and licensing database. Information in the CRD is obtained through forms that brokerage firms, associated persons and regulators complete as part of the securities industry registration and licensing process.1 The CRD includes information about criminal matters, regulatory disciplinary actions, civil judicial actions, and information relating to customer disputes, such as customer complaints, arbitration claims, and arbitration awards. 

The public can access information in the CRD through BrokerCheck® (here) – a free tool (powered by FINRA) that provides investors with information regarding a broker’s employment history, regulatory actions, investment-related licensing information, arbitrations and complaints.2 FINRA and other regulators depend on the CRD system as a critical source of regulatory information to help inform examinations, investigations, and disciplinary actions to protect investors and safeguard markets.

Expungement is an extraordinary remedy that is awarded only under limited circumstances: (a) the claim, allegation or information is factually impossible or clearly erroneous; (b) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (c) the claim, allegation or information is false. See FINRA Rule 2080 (here). If a party seeking expungement satisfies one of the foregoing grounds, then the record of the disclosure event will be expunged from the CRD – that is, it will be permanently deleted and will not be available to the investing public, regulators or prospective broker-dealer employers.

Information about broker-customer disputes must be reported to the CRD regardless of whether the firm or the broker believes the allegations are false, irrelevant or malicious. There is no proof required before these disputes are reported. In addition, there is no regulatory review of the merits of a reported dispute before it is recorded in the CRD or disclosed through BrokerCheck.

As noted by FINRA (here), the expungement framework seeks to balance the benefits of disclosing information about disclosure events to investors and regulators with the goal of protecting brokers from the publication of inaccurate allegations against them. 

How To Get A Customer Disclosure Expunged

Customer dispute information is expunged from the CRD system only after FINRA receives a court order to execute the expungement. In general, court orders compelling FINRA to expunge customer dispute information may result from one of two separate procedures:

  • A firm or a broker may initiate a request for expungement in the arbitration forum administered by FINRA, often as part of adjudicating the dispute underlying the customer complaint. In this scenario, a panel of independent arbitrators decide whether to recommend expungement in the award. FINRA has no part in the decision. Even if the arbitration panel recommends expungement, the firm or broker must still obtain an order from a court of competent jurisdiction confirming the arbitration award, and then serve the confirmed award on FINRA. 
  • A firm or a broker seeking expungement may initiate a proceeding directly in a court of competent jurisdiction, without first going through any arbitration proceeding.

A court order confirming an arbitration award recommending expungement or compelling expungement is binding on FINRA.

FINRA may oppose requests that a court confirm an arbitration award for expungement or requests for expungement initiated directly in court if it determines that such expungement is not meritorious, not consistent with its mission of investor protection, impairs the integrity of the CRD or adversely affects regulatory requirements. 

FINRA Rule 2080 requires all directives to expunge customer dispute information from the CRD system to be confirmed by or ordered by a court of competent jurisdiction and requires the brokerage firm or associated person to name FINRA as a party in any judicial proceeding seeking confirmation of an arbitration award containing expungement relief. FINRA may, however, waive the requirement to name it as a party if it determines that the requested expungement relief is based on affirmative judicial or arbitral findings. 

Expungement is Not Appropriate The Second Time Around

When an arbitration panel or a court has issued an award or decision denying a broker’s expungement request, the broker may not request expungement in another arbitration case. Thus, if there has been a prior denial, the arbitration panel must deny the expungement request.

Requests for Expungement Prior to the Conclusion of the Underlying Arbitration

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. This means, for example, that if a firm requests expungement on behalf of an unnamed broker during an arbitration filed by a customer, the broker may not file a separate request to expunge the same customer dispute information in a new case while the underlying customer arbitration is ongoing. Additionally, the broker may not file an expungement request in a separate, expungement-only case while the underlying customer arbitration is ongoing, even if neither the broker nor the firm requests expungement of the customer dispute information in the underlying customer arbitration.

Importance of Providing an Explanation for Recommending Expungement

FINRA Rules 12805 (here) and 13805 (here) require arbitrators to provide a written explanation of the reasons for finding that one or more of the grounds for expungement apply to the facts of the case before them. FINRA instructs its arbitrators to provide an explanation that is complete, and supported by documentary or other evidence, and not a mere recitation of the Rule 2080 grounds or language provided in the expungement request. 

Settlement Payments Relating to Expungement

FINRA Rule 20813 (here) prohibits firms and registered representatives from conditioning settlement of a customer dispute on – or otherwise compensating a customer for – the customer’s agreement to consent to, or not to oppose, the firm’s or representative’s request to expunge such information from the CRD system.  

Thus, arbitrators will consider whether the party seeking expungement: (a) contributed to the settlement; and (b) conditioned a settlement of the arbitration upon an agreement not to oppose the request for expungement. The latter scenario occurs in cases in which the customer does not participate in the expungement hearing, or the requesting party states that a customer has indicated that he or she will not oppose the expungement request.

Martiak v. Financial Indus. Regulatory Authority, Inc.

In Martiak, the foregoing rules were considered by the Court in confirming an arbitration award expunging a customer dispute from Petitioner’s record in the CRD system. Martiak v. Financial Indus. Regulatory Auth., Inc., (FINRA), 2021 N.Y. Slip Op. 32297(U) (Sup. Ct., N.Y. County Oct. 26, 2021) (here).

Petitioner commenced a special proceeding pursuant to Article 75 of the CPLR, seeking an order confirming the award issued in a FINRA arbitration, recommending the expungement of all references to the FINRA Arbitration contained in the CRD system for Petitioner. 

CPLR § 7510 provides that “[t]he court shall confirm an award upon application of a party made within one year after its delivery to him, unless the award is vacated or modified upon a ground specified in section 7511.” The Appellate Division, First Department, in interpreting CPLR § 7510, gives “the word ‘shall’ its ordinary meaning” and directs the courts “to confirm an arbitration award if a timely application is made whenever the award is not vacated or modified under CPLR 7511.”3 

The Court found that Petitioner satisfied all the procedural requirements of CPLR § 7510. In that regard, the Court noted that Petitioner timely filed the application within one year of receipt of expungement the award.4 Nominal Respondent, FINRA, had ample notice and made no motion to modify or vacate the expungement award and did not contest Petitioner’s efforts to have the award confirmed by the court.5 In fact, FINRA granted Petitioner’s request for a waiver of the obligation to name and serve FINRA.6

Accordingly, the Court granted the petition and ordered the expungement of the Occurrence from the CRD and BrokerCheck records.

Takeaway

Expungement is an “extraordinary remedy that arbitrators should recommend only under appropriate circumstances.” It involves a rigorous process in which claimants must present evidence that falls squarely within the boundaries of the three narrow grounds for expungement. Since the grounds upon which expungement may be granted are narrow, obtaining an expungement order is not easy. Indeed, statistics provided by FINRA show (here) that expungement is rarely granted: only 4% of the customer dispute disclosures in the CRD during the period 2015-2020 were expunged pursuant to a court order as of May 25, 2021.7


Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Footnotes

  1. In general, the information on the CRD is submitted by registered securities firms and regulatory authorities in response to questions on the Uniform Registration Forms, e.g., Form U4 (the Uniform Application for Securities Industry Registration or Transfer) (here), Form U5 (the Uniform Termination Notice for Securities Industry Registration) (here), and Form U6. These forms are designed to elicit and collect administrative and disclosure information that is relevant to regulators in connection with their licensing and enforcement activities. 
  2. It is important to note that public investors cannot access the CRD system. However, most of the information submitted to CRD is made publicly available through BrokerCheck.
  3. Bernstein Family Ltd. P’ship v. Sovereign Partners, L.P., 66 A.D.3d 1, 5 (1st Dept. 2009).
  4. Slip Op. at *2.
  5. Id. at *2-*3.
  6. As noted, FINRA Rule 2080(b) requires a party seeking expungement under Rule 2080(a) to name FINRA as an additional party and serve FINRA with all appropriate documents, unless FINRA waives this obligation upon request of the party. 
  7. During this same period, only 0.2% of registered persons industry-wide had a disclosure expunged (here).
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