Expungement Process for Financial Advisors
Are you a financial advisor with an unfair blemish on your CRD record? Is that blemish hindering your chances to find another job in the securities industry? If so, the securities attorneys of The White Law Group may be able to help you with the FINRA expungement process.
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The following is an overview of the FINRA Expungement Process.
A. The Central Depository Registry
The Financial Industry Regulatory Authority (“FINRA”) operates and maintains the Central Depository Registry (“CRD”) pursuant to its rules, and by agreement with the North American Securities Administrators Association (“NASAA”) and other securities regulators. The CRD is a registration and licensing system that contains disclosure and administrative information about registered securities firms and registered representatives.
The CRD system is used by different organizations and individuals for a variety of important purposes. Some of the important uses of the system include:
- Investors use the CRD system through FINRA’s BrokerCheck system (discussed below), when deciding whether to do business with a particular broker-dealer or registered representative;
- Regulators rely on the CRD system to assist with their regulatory responsibilities;
- Regulators also use the CRD system to help identify trends and potential threats to investor protection; and
- Broker-dealers rely on the CRD system when deciding whether to hire registered representatives and other licensed individuals.
B. FINRA BrokerCheck
Public investors are unable to access the CRD system directly; however, most of the information in the CRD system is available to the public through FINRA’s free BrokerCheck system.
BrokerCheck allows investors to look up the professional backgrounds, business practices, and conduct of both current and former FINRA member broker-dealers, registered representatives, and other registered individuals.
The information that is available through the BrokerCheck system comes from the CRD system. However, not all of the information in the CRD system is made available publicly through BrokerCheck. Some information is only available to regulators and/or FINRA member broker-dealers through the CRD system directly.
C. Reporting Requirements
The CRD system is populated with information from the Uniform Registration Forms that are submitted by broker-dealers and regulatory authorities. The most common forms are Form U4, Form U5, and Form U6.
Form U4 is the Uniform Application for Securities Industry Registration or Transfer. Form U5 is the Uniform Termination Notice for Securities Industry Registration. Form U4 and Form U5 are submitted by broker-dealers and are designed to report information about registered representatives. Form U6 is the Uniform Disciplinary Action Reporting Form and is filed by regulators. Typically Form U6 is filed to report actions taken by the filing regulator.
There are several types of information that broker-dealers and regulators report to the CRD system. Some of the types of information reported include:
- Civil Judicial Actions;
- Criminal Matters;
- Customer Disputes (e.g. customer complaints, arbitration and court actions);
- Employment Terminations;
- Internal Reviews (i.e. a review of a registered representatives conduct at his or her prior broker-dealer);
- Financial Matters; and
- Regulatory Actions.
D. FINRA Dispute Resolution Expungement
Registered representatives may seek to expunge information from their CRD record (e.g. customer dispute information and employment termination information). For example, when a registered representative is named as a respondent in an customer arbitration proceeding, or is even named in it, the event must be reported to the CRD system on the registered representative’s Form U4 and is recorded on his or her CRD record. The process of removing the information from the CRD record is called expungement and it is accomplished by initiating an arbitration proceeding through FINRA Dispute Resolution.
Expungement is considered an “extraordinary remedy” and arbitrators are told that they should only recommend it under appropriate circumstances. For example, they are only supposed to recommend expungement of customer dispute information when it has no meaningful investor protection or regulatory value. There are three competing interests that must be balanced when considering expungement from a CRD record:
- The interests of regulators and states in retaining access to customer dispute information for the purpose of meeting regulatory requirements and investor protection;
- The interests of the broker-dealer community; and
- The interests of investors in having access to complete and accurate information about registered representatives with whom they may conduct business.
FINRA’s solution to these competing interests is to use the arbitration process to adjudicate expungement requests. Once expunged, the information is permanently deleted and is no longer available to investors, regulators, or broker-dealers.
E. FINRA Rules
FINRA rules provide the framework arbitrators are supposed to follow when considering whether to expunge customer dispute information. They are intended to ensure that expungement is only recommended when the information has no meaningful investor protection or regulatory value.
Rule 2080. Grounds for Expungement
FINRA Rule 2080 (formerly Rule 2130) is a conduct rule that establishes the procedures for broker-dealers and registered representatives to obtain expungement of customer dispute information. The procedures it establishes are meant to ensure that one of three narrow grounds are found and documented before expungement occurs:
- The claim, allegation, or information is factually impossible or clearly erroneous;
- The registered representative 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.
Rule 2081. Prohibited Conditions Relating to Expungement
FINRA Rule 2081 states that “[n]o member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to consent to, or not to oppose, the member’s or associated person’s request to expunge such customer dispute information from the CRD system.”
FINRA has had concerns about the practice of firms and associated persons conditioning settlement agreements for the purpose of obtaining expungement and, thereby, potentially removing from the CRD system information that helps protect investors for some time. Over the years, FINRA has taken numerous steps towards addressing these concerns, including creating Rule 2081.
Customer Code of Arbitration Procedure Rule 12805 and Industry Code of Arbitration Procedure Rule 13805. Expungement of Customer Dispute Information under Rule 2080
FINRA Rules 12805 and 13805 establish the procedures that must be followed by arbitrators before they may recommend expungement of customer dispute information under Rule 2080. The arbitrators must:
- Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement. This requirement also applies to cases administered under Rules 12800 and 13800 (Simplified Arbitration) even if a customer or claimant did not request a hearing on the merits;
- In cases involving settlements, review settlement documents, consider the amount of payments made to any party, and any other terms and conditions of the settlement;
- Indicate in the award, which of the Rule 2080 grounds for expungement serves as the basis for recommending expungement and provide a brief written explanation of the reasons for the panel’s finding; and
- Assess all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief.
It should be noted that FINRA Rules 2080, 2081, 12805, and 13805 do not apply to requests in cases between industry parties based on defamation.
F. Awards and Expungements
If a panel decides that expungement is appropriate in a customer dispute, the record will be expunged from the CRD system only if the panel clearly identifies and documents in the award one or more of the grounds under Rule 2080, and the award is confirmed by a court.
F. Stipulated Awards
If the parties to an arbitration proceeding settle the case and request that expungement relief be incorporated into the stipulated award, the arbitrators must still ensure that expungement meets the standards under Rule 2080 and Rule 2081, and that the procedural requirements under Rule 12805 and Rule 13805 are met before making an expungement recommendation.
Stipulated awards cannot contain an offer that violates Rule 2081 and arbitrators are not supposed to accept awards that contain documentation of such an offer. An arbitrator who is not comfortable signing a stipulated award containing an expungement recommendation is not required to do so.
G. When Expungement Is Not Appropriate
There are many circumstances when expungement is not appropriate. One such example, adverse arbitration awards against the registered representative.
H. Disclosure Events That Cannot Be Expunged
Registered representatives sometimes attempt to expunge an event from a category that is not eligible for expungement from the CRD system through arbitration. The disclosure categories that cannot be expunged include:
- Civil Judicial Actions;
- Criminal Matters;
- Financial Matters;
- Investigations; and
- Regulatory Matters.
I. The Effect of Dismissal on an Expungement Request
The arbitrators might dismiss a registered representative early in an arbitration proceeding and recommend expungement relief before the underlying case has concluded. In this situation, the panel can order that a new case be opened, before the same arbitrators as the underlying case, to address the expungement request. If the panel recommends expungement, a signed award will be issued to the dismissed broker who can seek confirmation of the award in court. The award remains subject to the standards of Rule 2080, Rule 2081, Rule 12805, and Rule 13805, and the underlying arbitration case will continue to proceed as usual under the original case number.
J. FINRA Participation in Court Proceedings to Confirm Expungement
Parties seeking expungement of customer dispute information from the CRD system must obtain an order from a court of competent jurisdiction confirming the arbitration award. Upon request, FINRA may waive the obligation to name it as a party if it determines that expungement relief is based on one or more of the arbitral findings under Rule 2080. However, FINRA will generally participate in the court confirmation proceeding and oppose confirmation of the recommendation for expungement if it does not meet at least one of the specified standards under Rule 2080 and satisfy the procedural requirements under Rule 12805 and Rule 13805. To further ensure that the court is aware of the potential investor protection and regulatory implications of an expungement, states may choose to intervene if they have concerns regarding whether investor protection or regulatory issues will be fairly considered.
Although FINRA expects that arbitrators will consider the majority of expungement requests, a judge may also make the affirmative finding required under Rule 2080. However, broker-dealers or registered representatives seeking expungement relief in court as either plaintiff or defendant are required to name FINRA as a party. FINRA determines whether to oppose the expungement request based on the reason(s) for requesting expungement.
K. Expungement in Intra-Industry Disputes
Rule 2080, Rule 2081, Rule 12805, and Rule 13805 do not apply to intra-industry disputes, unless the information to be expunged involves customer dispute information. For example, a registered representative may request expungement of the reason for termination (e.g., failure to meet production standards) reported on his or her CRD record by a former broker-dealer.
As this request does not involve customer dispute information, arbitrators may recommend expungement of this information from the CRD system without addressing the standards set forth in Rule 2080 or the procedural requirements under Rule 12805 and Rule 13805, and FINRA will expunge the referenced information if a court of competent jurisdiction confirms it.
If the arbitrators recommend expungement of non-customer dispute information and also determine that the information is defamatory in nature, FINRA will expunge the information without a court order. When requesting expungement in these situations, parties should present evidence to the arbitrators that demonstrates that the information in the registered representative’s CRD record is defamatory in nature, thereby portraying the broker in a negative light.
If the arbitrators are satisfied that the information is defamatory in nature, they must clearly state in the award that they are recommending expungement based on the defamatory nature of the information in the CRD system. Arbitrators, however, are not required to find or to state explicitly in the award that all elements required to satisfy a claim in defamation under governing law have been met.
L. Latest Rule Changes
Given the general public policy against expungement, FINRA is constantly tweaking the FINRA expungement process and rules to try to limit those items that can be expunged. The latest salvo to that end was Notice to Members 17-42, which proposed sweeping changes to the existing process for expunging reference to a customer complaint from a securities broker’s record on the Central Registration Depository (CRD) system.
The proposal would dramatically limit the timeline for filing a claim for expungement. Often such requests are made as part of an ongoing FINRA arbitration claim. But there are instances where that is not initially pursued for whatever reason. In those situations, FINRA seeks to limit the amount of time an advisor has to make an expungement request.
Overall the practical effect of these proposed rule amendments will be to make it more difficult and costly for a broker to seek expungement relief, particularly when he or she is not named as a party to an existing arbitration case, or when a case is closed as a result of settlement. In such circumstances, the broker will have to (1) pay a fee of at least $1,450 to seek expungement relief, (2) file suit within a compressed time frame, (3) name his or her own firm (or former firm) as a respondent, (4) submit to a different arbitration panel than that which was empaneled to hear the customer’s complaint, (5) show up in person at the expungement hearing, or make arrangements to appear by videoconference, and (7) convince the panel not only that there are grounds for expungement relief, but also that the customer complaint “has no investor protection or regulatory value.”
For these reasons, advisors that have been debating whether to move for expungement should consider whether to move forward sooner rather than later. Regardless of whether this new proposal becomes the standard it is clear that FINRA will continue to try to make expungements more and more difficult.
Free Consultation with a Securities Attorney
If you are a registered representative and would like to discuss your expungement options, please call the securities attorneys of The White Law Group at (888) 637-5510 for a free consultation.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Franklin, Tennessee. The firm represents investors and registered representatives in FINRA arbitration claims throughout the country.
For more information on the firm, please visit https://www.whitesecuritieslaw.com.