Expungement Relief for Advisers Keeps BrokerCheck in Check

Posted on July 4th, 2014 at 8:30 AM

From the Desk of Jim Eccleston at Eccleston Law Offices:

FINRA (the Financial Industry Regulatory Authority) is under pressure to improve investor protections, both from investor advocacy groups and its regulator, the Securities and Exchange Commission (SEC). In response, FINRA has proposed numerous rules. One such proposed rule relates to changes to BrokerCheck, an online database containing registration, employment, regulatory, and arbitration/litigation information. In short, FINRA proposes that financial services firms provide an Internet link to BrokerCheck in their online marketing, such as social media and third-party websites where biographies appear. Trade groups and financial services firms are up in arms and vow to continue to oppose that proposal.

Whatever the outcome of FINRA’s BrokerCheck proposal, there can no doubt thatthe investing public increasingly is aware of BrokerCheck. And it seems certain that the trend will continue. FINRA, along with the SEC and the state regulators, have stepped up their public awareness campaigns. The other certainty is that the amount of data on BrokerCheck will continue to expand. Not long ago, for example, there was a time limitation for BrokerCheck searches; that limitation has been removed. And one prominent investor advocacy group is pushing for broader disclosure, including the disclosure of an adviser’s securities licensing examination scores as well as the number of times that he or she took the securities licensing examination. That said, and unquestionably, most of the BrokerCheck information in the database not only is relevant but also should be readily accessible to the investing public.

Given all of the above, financial advisers who are involved in FINRA arbitration actions have a unique procedural option available to them to “expunge” certain BrokerCheck information. On the one hand, the rules and procedures now in effect relating to customer arbitration actions are so narrow as to make it nearly impossible to obtain expungement of customer complaint information. On the other hand, the rules and procedures now in effect relating to employment disputes are not as restrictive.

We often represent advisers who seek to expunge defamatory language that a previous employer has placed on the adviser’s CRD (Central Registration Depository) database, which is the source of information for BrokerCheck. Advisers may have solid grounds to convince an arbitration panel that the CRD information should be amended or removed. Typically, the battle lines are drawn over the explanation for an adviser’s termination, findings, or continuing investigations (“Yes” answers) as to whether certain violations of securities rules and regulations were committed, and the supplemental DRP (Disclosure Reporting Page), which contains additional (possibly defamatory) information.

A recent arbitration award sets forth a helpful road map for advisers and their legal counsel to follow in educating the arbitration panel as to what it will need to order in its arbitration award. First, the arbitration panel must “recommend” that the CRD record be expunged. 

Second, and in connection with the termination explanation, the arbitration panel must proffer (and hence counsel should proffer to the panel during the closing statement) an alternative explanation for termination. Equally important, the arbitration panel must give a reason for its expungement recommendation. Normally, that simply is a finding by the arbitrators that the current CRD termination explanation is defamatory. 

Third, the panel also should identify exactly where one finds the defamatory language.  For example, the panel may state in its award that the expungement request relates to the adviser’s original and amended Forms U-5, any original or amended Forms U-4, or any original or amended answers to certain disclosure questions on such forms (for example, changing a “Yes” answer to a “No” answer).

Fourth, the practitioner should know that the arbitration award in and of itself is not self-executing. In other words, an arbitration award should recite the following language:

“The adviser’s registration records are not automatically amended to include the changes above. The adviser must forward a copy of this Award to FINRA’s Registration and Disclosure Department for the amendments to be incorporated into his registration records.”

As one can see, this is a highly specialized practice area even for seasoned securities arbitration counsel. It remains one of the few ways for BrokerCheck to be kept in check.

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.

Related Attorneys: James J. Eccleston


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