The Internet is awash with articles about “bad brokers” with
clean U-4s, and “rouge brokers” obtaining expungements of valid customer complaints. Indeed, studies have been published
ostensibly demonstrating that state regulators poses more valuable information
on their system than what appears on FINRA’s public Broker-Check data base. In sum, there is a consensus that too many
complaints are being expunged. But
whether that consensus is based on fact is subject to debate.
Regardless, FINRA has repeatedly responded to the hue and
cry by making it increasingly difficult for a financial adviser to obtain an
expungement of a customer complaint published on his or her professional
record. But amidst all of this anguish
and gnashing of teeth, a politically incorrect truth has been left in the
shadows. I feel compelled to share it
with you. Here it is: some customer complaints are baseless. There; I said it.
Another often-overlooked fact is that FA’s are able to go
straight to a court of law, rather than a FINRA arbitration, to obtain an
expungement. Almost exactly one year
ago, FINRA issued new guidance to its arbitrators raising ever higher the
procedural bars for a panel to recommend expungement[1]. Should a FA surmount the procedural hurdles
and slim avenues to success, the FA still has to go to court to get the
Award confirmed. And, in that state
court action, he or she still needs to
name FINRA as a party so that they can show up and oppose the FINRA arbitrator’s
recommendation.
But FINRA
Rule 2080 actually reads as follows:
2080. Obtaining an Order of Expungement of Customer Dispute Information from
the Central Registration Depository (CRD) System
(a) Members or associated persons seeking to
expunge information from the CRD system arising from disputes with customers
must obtain an order from a court of competent jurisdiction directing
such expungement or confirming an arbitration award containing expungement
relief.
(b) Members or associated persons petitioning a
court for expungement relief or seeking judicial confirmation of an
arbitration award containing expungement relief must name FINRA as an
additional party and serve FINRA with all appropriate documents
unless this requirement is waived pursuant to subparagraph (1) or (2) below.
(1) Upon request, FINRA may waive the
obligation to name FINRA as a party if FINRA determines
that the expungement relief is based on affirmative judicial or arbitral
findings that:
(A) the claim, allegation or information is
factually impossible or clearly erroneous;
(B) the registered person 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.
(2) If the expungement relief is based on
judicial or arbitral findings other than those described above, FINRA, in
its sole discretion and under extraordinary circumstances, also may waive the obligation
to name FINRA as a party if it determines 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.
(c) For purposes of this Rule, the terms
"sales practice violation," "investment-related," and
"involved" shall have the meanings set forth in the Uniform
Application for Securities Industry Registration or Transfer ("Form
U4") in effect at the time of issuance of the subject expungement order.
It seems as if very few have read the actual rule. I recently read an attorney blog that makes
no mention of the direct-to-court avenue whatsoever! Well, our attorneys are very familiar with both
the state court and arbitration options and procedures.
There is actually some case law out there on a financial
adviser’s right to go to court to seek an expungement. In Lickiss v.
FINRA, 208 Cal.App. 4th 1125 (2012), the California Court of
Appeals reversed a lower court’s dismissal of the FA’s petition. In fact, it held that the trial court abused
its discretion by limiting itself to the criteria set forth in Rule 2080(b),
rather than employing the court’s broad equitable power and discretion. The Court of Appeals stated in part:
FINRA has established BrokerCheck, an
online application through which the public may obtain information on the
background, business practices and conduct of FINRA member firms and their
representatives. Through BrokerCheck, FINRA releases to the public certain
information maintained on the CRD, thereby enabling investors to make informed
decisions about individuals and firms with which they may wish to conduct
business. This data includes historic customer complaints and information
about investment-related, consumer-initiated litigation or arbitration….
The issues surrounding Lickiss's sale of
CET stock occurred more than 20 years ago, and the one regulatory matter
against him resolved 15 years ago in 1997. Since then, his record has been
clear, yet Lickiss attested that he suffers professional and financial hardship
relating to the prior sale of CET stock because current and potential clients
increasingly use the Internet to obtain his BrokerCheck history.
Lickiss petitioned for expungement of his
CRD records, asserting that the superior court had jurisdiction “pursuant to
(1) FINRA Rule 2080(a); [and] (2) the Court's equitable and inherent powers to
effectuate expungements.”…
FINRA removed the action to federal court.
Upon Lickiss's motion, the federal district court remanded the matter back to
the state superior court, ruling that it did not have subject matter
jurisdiction over the case because there is no statute, rule or regulation
imposing a duty on FINRA to expunge….
Had Lickiss merely petitioned the court
for expungement relief under rule 2080, without also invoking the court's
equitable powers, that might be the end of the matter. However, Lickiss
explicitly invoked those powers….
Equity aims to do right and accomplish
justice. (Hirshfield v. Schwartz (2001) 91 Cal.App.4th 749, 770.)…
The equitable powers of a court are not
curbed by rigid rules of law, and thus wide play is reserved to the court's
conscience in formulating its decrees…
This basic principle of equity
jurisprudence means that in any given context in which the court is prevailed
upon to exercise its equitable powers, it should weigh the competing equities
bearing on the issue at hand and then grant or deny relief based on the overall
balance of these equities…
The choice of a very narrow, rigid legal
rule to assess the legal sufficiency of Lickiss's petition—a choice that closed
off all avenues to the court's conscience in formulating a decree and
disregarded basic principles of equity—was nothing short of an end run around
equity…
This is not, as FINRA contends, merely a
request for a remedy. Rule 2080(a) essentially recognizes the right of
members and associated persons to seek expungement of information from the CRD
system by obtaining an order from a court of competent jurisdiction directing
such expungement.
See also Lickiss v. FINRA, Fed.Sec. L. Rep. P.96, 345
(2011). Compare Updegrove v. Betancourt, 2016 WL 3442762 (2016).
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