Update Regarding Broker Expungement of CRD Records

Aug. 27, 2015
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Thomas Frost

Brokers who seek to expunge, or remove, negative disclosure information from their CRD record and, consequently, from public disclosure through FINRA’s BrokerCheck website, may face an increasingly uphill battle.  At the end of 2014, FINRA clearly stated its position on this matter in FINRA Notice to Arbitrators and Parties on Expanded Expungement Guidance, December, 2014:

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. Once information is expunged from the CRD system, it is permanently deleted and thus no longer available to the investing public, regulators or prospective broker-dealer employers.

http://www.finra.org/arbitration-and-mediation/notice-arbitrators-and-parties-expanded-expungement-guidance.

Brokers should carefully consider the following rules and practice pointers before hiring a lawyer pursuing expungement claims in Court or FINRA Arbitration.

FINRA Rule 2080 applies to claims for expungement of customer complaints and customer initiated arbitrations, and provides that brokers seeking to expunge such information from the CRD system to obtain a court order directing expungement or confirming an arbitration award recommending expungement.  Rule 2080 also sets forth the three limited grounds for ordering expungement of customer disputes:

  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.

Before ordering expungement under Rule 2080, the arbitrators must state one of these three grounds for expungement in their order.  If the arbitrator’s award does not state one of these three grounds for expungement, the broker must name FINRA as a party in the subsequent court proceeding to confirm the arbitration award.  FINRA will not expunge any CRD information related to a customer dispute based solely on an arbitration award.  Rather, any FINRA arbitration award ordering expungement must first be confirmed as an enforceable court order.  If the arbitrator’s award does state one of these three grounds for expungement, FINRA must be notified of the court proceedings to confirm the award, but FINRA may waive its right to be named as a party in the confirmation proceedings.

Expungement of information which is not related to a customer dispute, however, may be expunged based solely on the order of expungement contained in an arbitration award.  In addition, Brokers seeking to expunge non-customer dispute information from their CRD records are not required to establish one of the foregoing three bases for expunging customer related information.  While there is no specific regulatory guidance regarding specific bases for expungement of non-customer related information, FINRA instructs it arbitrators specifically not to order the following information from a broker’s CRD records: (1) Certain investment related court actions; (2) criminal felony convictions and certain misdemeanors involving fraudulent misconduct; (3) bankruptcies within the previous 10 years; (4) bond violations and unsatisfied judgments or liens; (5) investment related regulatory actions and investigations; and (6) certain suspensions or revocations of professional licenses.

Given FINRA’s stringent approach to arbitrations claims seeking expungement orders, brokers may also consider filing a complaint for expungement directly in Court, particularly given a recent California appellate court ruling, which expands a broker’s ability to expunge customer-related information for equitable reasons, rather than strict adherence to the Rule 2080 criteria.