• July 26, 2018
• Expungement
• Investor Education

The procedure for expungement before the Financial Industry Regulatory Authority (FINRA) has undergone many changes in the last twenty (20) years.  In December 2017, FINRA released FINRA Regulatory Notice 17-42, proposing additional changes to the customer dispute expungement process that, if approved, will make it incrementally more difficult for Financial Advisors to rid their disclosure reports of unwanted or unwarranted customer complaints and financial disclosures.

For a full copy of the rule proposal, click http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-42.pdf

The History Of Reporting And Expungement

Beginning in the early 1980s, the Central Registration Depository (CRD) was established as a centralized system to monitor and report disclosures against registered financial services industry professionals.  The CRD system logs employment information and history, licenses, and disclosures, including customer complaints, liens and judgments.  The development of the CRD system enabled both regulators and litigants to track the history of a registered financial services professional.

In the late 1980s, FINRA established an interrelated and more user friendly system called BrokerCheck, which contained the same or similar information regarding registered financial services professionals.  With the advent of the internet, the BrokerCheck system is currently available to the public online.  FINRA encourages customers to utilize the BrokerCheck system before establishing a relationship with a new Financial Advisor and to continue monitoring their Financial Advisors on a going forward basis.  The BrokerCheck portal can be accessed at https://brokercheck.finra.org/.

The process of expungement is important for Financial Advisors, who are the subject of unwarranted customer complaints that are false, defamatory and have the ability to negatively impact their business.  Conversely, accurate reporting serves an equally important purpose so as to inform the investing public of valid complaints, financial disclosures or regulatory intervention taken against a Financial Advisor so that investors may choose their Financial Advisor with eyes wide open.

Prior to 1999, Financial Advisors could obtain expungement relief solely through arbitration.  In other words, the Financial Advisor could file a new arbitration proceeding or a petition for expungement in an existing arbitration proceeding, requesting that certain disclosures be expunged.  If the arbitration panel granted the expungement, the disclosure item would be removed from the Financial Advisor’s CRD.  In 1999, FINRA began requiring that upon receiving the arbitrator ordered expungement, the Financial Advisor had to take a second step and file a summary court action to confirm the arbitration award.

The grounds for expungement have also evolved over the years.  In 2004, FINRA enacted Rule 2080 in response to concerns that the expungement procedure was too lax and that arbitrators were granting expungements without adequate consideration of the underlying merits.  Rule 2080 provided three specific grounds for which expungement could be granted:

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.

Absent proof of one of these three grounds, an expungement request should be denied by the arbitrators.

In 2008 and 2009, additional changes were made to the expungement process.  First, brokerage firms were now required to report customer complaints against a Financial Advisor even if he/she was not named as a party in the complaint.  In other words, brokerage firms had to now make a determination if the Financial Advisor was implicated, either expressly or impliedly, in the complaint and report accordingly.   Post-2009, the arbitrators were also required to hold a recorded hearing, review all settlement documents associated with the underlying dispute, the Financial Advisor’s CRD and provide a written explanation for granting expungement.

In 2014, in response to increasing criticism by investor advocacy groups, FINRA published new guidance for arbitrators to advise them that expungement is an “extraordinary remedy that should be recommended only under appropriate circumstances.”  There were many reported examples of Financial Advisors with checkered pasts having disclosures expunged, which had the effect of minimizing the threat to the investing public.  FINRA’s new guidance spawned a more comprehensive review of the Financial Advisor’s regulatory and complaint history to determine whether, on balance, expungement was in the best interest of the investment public.  In other words, arbitrators considering expungement requests now considered the Financial Advisor’s entire disclosure history and were not solely focused on the disclosure that formed the basis of the expungement request.

The New Proposed Changes

On December 6, 2017, FINRA issued Regulatory Notice 17-42, which announced a variety of proposed changes, where are now in the comment period.  Among the proposed changes are:

• Increasing the filing fee for expungement requests to a minimum of $1,425
• One year statute of limitation for requesting expungement
• FINRA randomly selects arbitrators from an expungement roster instead of standard party selection
• Brokers who seek expungement outside of an existing customer case must pursue expungement under FINRA’s code for industry disputes
• Brokers are required to request expungement in the underlying customer case prior to the case going to award
• A new standard would be applied requiring that arbitrators determine that disclosure sought to be expunged has “no investor protection or regulatory value”
• The expungement hearing must be held in-person or via video-conference

These proposed changes will increase the cost of filing for an expungement and may make it untenable for many Financial Advisors, who generally pay for the expungements out-of-pocket.  The message is clear, FINRA disfavors expungement and would prefer that customers have the ability to make well informed investment decisions regarding Financial Advisors based on the totality of his/her background.

If you are a registered Financial Advisor, and have unwarranted disclosures, contact the Wolper Law Firm, P.A. at 800.931.8452 or mwolper@wolperlawfirm.com for a free consultation.  The Wolper Law Firm, P.A. offers flat fee expungements for Financial Advisors nationwide.

Matt Wolper, the Managing Principal of the Wolper Law Firm, P.A., is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities.  Prior to forming the Wolper Law Firm, P.A., he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters.  Put his industry experience and knowledge on your side.