Jim Eccleston: A Primer on the Public Record Expungement of Customer Dispute Information

Posted on September 27th, 2013 at 4:25 PM

Frequently I am asked to review whether a customer complaint or customer dispute information on a broker’s public record can be expunged (removed).  My answer normally is, “Probably not.”  However, there are circumstances under which brokers can and do obtain expungement.  Likewise, and short of expungement, there is other relief that is available.  Let’s overview the expungement process.

           

            Preliminarily, FINRA (the Financial Industry Regulatory Authority) is responsible for regulating its broker-dealer member firms as well as their associates known as registered representatives (or “brokers”).  That responsibility extends to maintaining records of employment, including the Form U-4 (which records information when a broker joins or registers with a member firm), and a Form U-5 (which records information when a member firm terminates a broker’s registration).  Both Forms U-4 and U-5 include information on customer complaints, arbitration claims, litigation complaints, and regulatory and enforcement actions.  FINRA maintains this information in a database known as the Central Registration Depository (CRD).

 

            FINRA operates the CRD for the benefit of securities industry participants, including its member broker-dealer firms, state regulators and the Securities and Exchange Commission (SEC).  Moreover, FINRA statutorily is obligated to make certain CRD information available to the public via the Internet (on FINRA’s BrokerCheck system) and over a toll-free telephone line.  FINRA and the SEC view information on the CRD as vital to investor protection and regulatory purposes.  As a result, FINRA and the SEC consider expungement of information from the CRD to be an “extraordinary remedy.”  Only under limited circumstances and pursuant to a court order, as explained below, will FINRA expunge customer complaint and arbitration claim information from the CRD. 

 

            Rule 2080 and Rule 13805 apply to requests for expungement.  Rule 2080 states the requirement that a court order, either directing expungement or confirming an arbitration award containing expungement relief, is required.  Further, Rule 2080 also states that the broker or broker-dealer firm petitioning the court for expungement normally must name FINRA as an additional party to that proceeding and must serve FINRA, unless the requirement is waived.

 

            Under Rule 2080, the requirement to involve FINRA is waived under two sets of circumstances.  First, upon request FINRA may waive the obligation to be named if FINRA determines that the expungement relief is based upon affirmative judicial or arbitral findings.  Those findings are limited to: a) the claim, allegation or information is factually impossible or clearly erroneous; b) the broker 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.

 

            The second set of circumstances under Rule 2080 extends to judicial or arbitral findings other than those described above but sufficient for FINRA, in its sole discretion and under extraordinary circumstances, to determine that: a) the expungement relief and accompanying findings on which it is based are meritorious; and b) the expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.

 

            In terms of arbitral findings, FINRA Rule 13805 of the Code of Arbitration Procedure outlines the requisite process.  In order to grant expungement of customer dispute information, the arbitration panel must do several things.  First, the arbitrators must hold a recorded hearing session regarding the appropriateness of expungement.  Second, in cases involving settlements of claims, the arbitrators must review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement.  Third, the arbitrators must indicate in the arbitration award which of the Rule 2080 grounds, described above, serve(s) as the basis for its expungement order, and provide a brief written explanation of the reason(s) for their finding. Finally, the arbitrators must assess all forum fees for the expungement hearing session(s) against the party requesting expungement. 

 

            As one can see, there are limited circumstances in which brokers and broker-dealer member firms can expunge customer dispute information from the CRD. 

 

            Under circumstances in which expungement is not possible, there still is some relief. That is, I also counsel brokers as to filing a “Broker Comment” with the CRD.  That filing becomes public information and appears on the broker’s FINRA’s BrokerCheck.  When drafted correctly, the Broker Comment provides information that may serve to deny, explain or minimize the customer dispute information.   

Related Attorneys: James J. Eccleston

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