The
SEC has approved FINRA Rule 2081 that would disallow brokers from conditioning
settlement of a customer dispute on a customer’s consent to the broker’s
request for expungment from the Central Registration Depository (“CRD”). The
CRD is the licensing and registration system used by all registered securities
professionals. The system enables public access to information regarding the
administrative and disciplinary history of registered personnel, including
customer complaints, arbitration claims, court filings, criminal matters and
any related judgments or awards. Because of the open nature of information
available to its investors, registered professionals would like sensitive
matters, such as customer complaints, expunged from the record.
The purpose of Rule 2081 is to make sure that
full and reliable customer dispute data remains available to the public,
brokerage firms, and regulators to prevent concealment by prohibiting the use
of expungement as a bargaining chip to settle disputes with a customer.
Furthermore, it allows
regulators to make informed licensing decisions about brokers and dealers and
improve FINRA’s transparency on broker-dealer complaint histories. This prohibition applies to both written and oral agreements
and to agreements entered into during the course of settlement negotiations, as
well as to any agreements entered into separate from such negotiations. The
rule also precludes such agreements even if the customer offers not to oppose
expungement as part of negotiating a settlement agreement and applies to any
settlements involving customer disputes, not only to those related to
arbitration claims.
On one hand, Rule 2018 will make it more difficult for brokers
to sanitize their CRD report from a past claim, ensuring that future investors
can more accurately assess the quality and integrity of a registered securities
professional, ensuring protection from potential
fraud and abuse. On the other hand, settlements are a
significant part of resolving FINRA claims in a timely manner. If more
FINRA claims reached arbitration, then the average FINRA claim would take
substantially longer to adjudicate. Ultimately, Rule 2081 could dissuade
broker-dealers from settlement prior to arbitration because they may want to
take their chances in arbitration, making an already potentially slow moving
process, slower.
When investigating historical use of expungement in
arbitration, pursuant to SEC Release No. 34-72649, the SEC found “despite the
very narrow permissible grounds and procedural protections designed to assure
expungement is an extraordinary remedy…, arbitrators appear to grant
expungement relief in a very high percentage of settled cases.” In order to even
seek expungement, FINRA Rule 2080 requires a showing that (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.
In approving Rule 2081, however, the SEC cautioned FINRA that the new rule
should not be the last word on the subject of expungement and that FINRA should
continue to consider making improvements to the expungement process. In this
regard, even though “the proposed rule change is a constructive step to help
assure that the expungement of customer dispute information is an extraordinary
remedy that is permitted only in the appropriate narrow circumstances
contemplated by FINRA rules,” the SEC nonetheless remains concerned about “the
high number of cases where arbitrators grant brokers’ expungement requests.” SEC Release No. 34-72649
Official rule language:
2081. Prohibited Conditions Relating to Expungement of Customer
Dispute Information.
"No 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. See Regulatory Notice 14-31."
Cosgrove Law Group, LLC has
experience with financial industry disputes including representing investors in recouping their losses and registered
representatives seeking expungement. We also provide training, information, and
compliance for registered professionals through the Investment Adviser Rep Syndicate.
Authored by Mercedes Hansen
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