Presidential Candidate Requests Information on Proposed Amendments to FINRA’s Expungement Rules

The Central Registration Depository (“CRD”) and the publicly available online portal, BrokerCheck, comprise FINRA’s registration and licensing system.  Via BrokerCheck, customers, employers, and regulators can access information regarding customer complaints levied against an individual broker.  BrokerCheck plays a key role in allowing customers to evaluate their broker’s track record before making investment decisions.  By the same token, adverse claims can have a devastating effect on a broker’s ability to retain their clients.   

As such, FINRA has established rules for the expungement of certain adverse claims from CRD.  Currently, FINRA Rules 12805 and 2080 control customer complaint expungement proceedings.  Rule 12805 requires that a broker file a Statement of Claim requesting expungement of the customer disclosure.  The panel must:

·    hold a recorded session regarding the appropriateness of the expungement;

·   when applicable, review settlement documents and consider the amount of payments made to any party;

·    provide a written explanation which indicates which of the grounds for expungement under Rule 2080 is the basis for the order; and

·    assess all fees for the hearing against the party requesting expungement.[1] 

Under Rule 2080, grounds for expungement include:

·    the claim, allegation or information is factually impossible or clearly erroneous;

·  the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or

·    the claim, allegation or information is false.[2] 

Following an arbitration award recommending an expungement, the broker must then file a petition in a court of competent jurisdiction to obtain an order confirming the award and directing such expungement.

In December 2017, FINRA published Regulatory Notice 17-42, a proposed amendment relating to requests to expunge customer dispute information.  Regulatory Notice 17-42 would create a roster of arbitrators with specific training and experience to handle all expungement requests.  It would also require:

·       the broker to appear at his or her expungement hearing;

·       unanimous agreement of the three person arbitration panel;

·      expungement requests to be brought within one year of the dispute; and

·       minimum fees for filing expungement requests.[3] 

Since publishing Regulatory Notice 17-42 for public comment, FINRA has not submitted it to the SEC.  As such, the proposed expungement rules are not currently in effect.  In a March 2019 letter to FINRA President and CEO Robert Cook, Senator Elizabeth Warren requested an update on FINRA’s proposed rule changes to its customer dispute information expungement process.[4]  If eventually submitted and finalized, the new process for removing customer dispute information from a broker’s CRD will be more onerous on the broker and likely decrease the frequency with which expungement requests are granted.  Senator Warren’s letter requests, among other things, a timeline for when FINRA will submit Regulatory Notice 17-42 to the SEC for approval.

It is unclear if or when the new CRD expungement rules will be submitted to the SEC and put into effect.  FINRA spokespersons have declined to comment on the substance of Senator Warren’s letter, stating, “We have received the senator’s letter and are working to respond accordingly.”[5] 

Given the uncertainty of the status of FINRA’s expungement rules, it is important that brokers seeking CRD expungement select an attorney capable of guiding them through expungement proceedings under the current and any potential future FINRA rules.  Cosgrove Law Group, LLC has represented numerous individuals in CRD expungement proceedings under the current rules and stands ready to represent brokers in proceedings governed by the proposed amended rules.  If you are seeking expungement of customer complaints from your CRD/BrokerCheck, you may wish to consult with experienced counsel at Cosgrove Law Group.

BY: Max Simpson

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[1] FINRA Rule 12805, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=7229

[2] FINRA Rule 2080, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=8468

[3] Regulatory Notice 17-42, http://www.finra.org/industry/notices/17-42

[4]Letter, Sen. Warren to Cook, March 21, 2019, https://www.warren.senate.gov/imo/media/doc/2019.03.21%20Letter%20to%20FINRA%20re%20Broker%20Expungement%20Data.pdf

[5] Financial-Planning.com, Warren presses FINRA for answers on expungement reform, https://www.financial-planning.com/news/elizabeth-warren-presses-finra-for-answers-on-expungement-reform

Overview of FINRA’s Form U5 Reporting Requirements

FINRA Form U5, called the “Uniform Termination Notice for Securities Industry Regulation” is submitted to FINRA when a registered representative is terminated from a firm. A brief overview of Form U5 is contained below:

Currently, there are three different types of Form U5 filings: 1) a full Form U5; 2) a partial Form U5; and 3) amended Form U5. The full Form U5 is utilized when the individual terminates with the firm, while a partial Form U5 is utilized when the individual is terminated from certain jurisdictions or self-regulatory organizations. An amendment to Form U5 is used, for example, when the basis of the individual’s termination has been changed.

Information disclosed on Form U5 can have far reaching effects on financial advisors and stockbrokers because it may be made public through FINRA BrokerCheck. Here’s a closer look at the information FINRA is looking for in the submission of the Form 5:

In Question 7A, FINRA requires that the firm identify if the individual is subject of an investigation by a government body or self-regulatory organization having jurisdiction over investment-related business. Question 7B requires the firm to indicate whether the terminated individual has been subject of an internal review for wrongful taking of property, fraud or violating investment-related statutes, regulations, rules or industry standards of conduct. Firms must answer Question 7C in situations where the individual was charged or convicted of a felony while the individual was associated with the firm.

Question 7D of Form U5 concerns the disclosure of regulatory actions. Particularly, the firm is obligated to confirm whether the individual, when associated with the firm, had been subject of a self-regulatory organization or foreign government disciplinary action having jurisdiction over investment-related business. Disclosure is not mandated; however, when the incident was deemed a minor rule violation pursuant to a plan which the United States Securities and Exchange Commission (“SEC”) has authorized.

FINRA’s interpretative guidance further reveals that firms are not required to monitor the associated person to make sure that Questions 7C and 7D are answered correctly. FINRA calls for disclosure to be made by the firm when the firm has been expressly notified about the incident. In other words, disclosure is warranted if an agency contacts the firm’s staff concerning the incident, and the staff member knows, or should know, of the requirement to report the incident on Form U5.

FINRA is also concerned about whether the terminated individual has been the subject of formal disputes. Specifically, the firm is required to indicate whether, during the time that the individual was associated with the firm, the individual had been named in, or the subject of, certain investment-related, consumer-initiated arbitration or civil actions. Reportable actions include those that are pending, resulted in an award or judgment against the individual, or settled for $15,000.00 or more after May 18, 2009. Firms are even obligated to report certain instances when a customer files a complaint concerning the individual’s activities but did not pursue a more formal action.

In addition, FINRA requires the firm to disclose instances where the individual has been terminated after allegations of misconduct arose. Specifically, FINRA requires that the firms disclose when the individual has been discharged, permitted to resign, or even voluntarily resigned from the firm after allegations surfaced accusing the individual of (1) violating investment-related statutes, regulations, rules or industry standards of conduct; or (2) fraud or wrongful taking of property; or (3) failure to supervise in connection with investment-related statutes, regulations, rules or industry standards of conduct.

Form U5 is required to be submitted within 30 days of the registered representative’s termination. Firms also have an obligation to keep the Form U5 current; there is no expiration date on the firm’s duty to amend the Form U5 to address incompletions or inaccuracies.

Cosgrove Law Group, LLC has represented many advisers around the nation in situations where a broker-dealer reported false and defamatory information on a Form U5, helping them obtain settlements and awards ranging from $100,000.00 to $3,500,000.00. If you feel that you have been a victim to Form U5 defamation, call Cosgrove Law Group and speak to our experienced counsel today.

The attorneys of Cosgrove Law Group, LLC represent investment advisors, brokers, and other associated persons nationwide in securities employment and regulatory matters, including U-5 defamation matters. Our attorneys also practice in a variety of other areas of law.  If you have a legal matter or concern, please give us a call and speak directly with one of our experienced professionals.

A Closer Look At Regulatory Action Disclosures On Form U4

Financial advisors who become registered with a Financial Industry Regulatory Authority (“FINRA”) member firm should be knowledgeable about Form U4, as it addresses a broad spectrum of historical events that are required to be reported to FINRA. FINRA has offered some interpretative guidance, some of which is explained below, as it relates to Form U4 actions.

Question 14 of FINRA Form U4 concerns criminal disclosures, regulatory action disclosures, civil judicial disclosures, customer complaints, arbitrations, and civil litigation. To begin with, and perhaps to no surprise, an individual who has been charged or convicted of a felony is required to disclosure that information on Question 14A. Even, an individual who has even been pardoned for a crime must report the conviction, according to FINRA’s interpretive guidance.

Financial advisors should take note that misdemeanors are also required to be reported on Form U4 in certain cases. For example, an individual who has been charged or convicted of a misdemeanor involving investments, fraudulent conduct, or wrongful taking of property would be required to disclose those incident(s).

Question 14C prompts individuals to state whether they have been found to have committed certain types of misconduct by the Commodity Futures Trading Commission (“CFTC”) and Securities and Exchange Commission (“SEC”) including: making false statements or omissions; committing a violation of investment-related statues or regulations; and causing a business to have its authorization to do business revoked or suspended.

individuals are additionally required to report on Question 14C whether they have been found by the SEC or the CFTC to have willfully violated Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, Investment Advisers Act of 1940, Commodity Exchange Act, or Municipal Securities Rulemaking Board (MSRB) rules. Disclosure is also mandated when the individual has been found to have aided and abetted a person’s violative activities, or failed to supervise another person responsible for committing violations in the securities industry.

Similarly, Question 14(E) requires that individuals report if they have been found by a self-regulatory organization to have made false statements or omissions, violated SEC rules; or caused an investment-related business to lose authorizations to conduct securities business. Any suspensions or expulsions from those self-regulatory organizations are required to be reported. Plus, disclosure is necessitated when there have been any findings of federal securities law violations committed by the individual, or someone who the individual supervised or aided.

FINRA confirms in Question 14G that individuals are required to disclose to FINRA when they are notified that they have become subject of a regulatory complaint or proceeding brought on by the SEC, CFTC, other federal agencies, state securities commissioners and self-regulatory organizations. Investigations, according to FINRA, are signaled by the issuance of a Wells Notice to the individual or the individual being notified from FINRA staff that formal disciplinary action has been recommended by FINRA. However, not all things mean an investigation to FINRA. For example, requests for information, regulatory inquiries and subpoenas, per se, apparently do not constitute investigations.

FINRA’s guidelines further reveal that when an individual has been subject to an order from a foreign regulatory agency that is later vacated, the individual generally has to report the order because of the advisor’s obligation to report the original findings. Exceptions exist, according to FINRA’s guidelines, where the regulatory agency not only vacates the order, but confirms an intent to make that order have retroactive effect.

Individuals who are the subject of a FINRA Acceptance, Waiver and Consent are also required to disclose this information so long as the AWC concerns findings as to the individual’s misconduct identified in Question 14(E). There are some situations; however, where violations of the rules do not have to be reported, including some “minor rule violations” where the fine is no more than $2,500.00 and the individual does not contest the fine.

Financial advisors and stockbrokers often wonder how to go about making disclosures concerning negative events. If you are in a situation that mandates disclosure, such as a pending regulatory investigation, it is best to consult with an attorney. If you need assistance, you may wish to consult with the experienced counsel at Cosgrove Law Group.

The attorneys of Cosgrove Law Group, LLC represent investment advisors, brokers, and other associated persons nationwide in securities employment and regulatory matters, including U-5 defamation matters. Our attorneys also practice in a variety of other areas of law.  If you have a legal matter or concern, please give us a call and speak directly with one of our experienced professionals.

SEC Affirms FINRA’s Findings of EKN Stockbroker’s Form U4 Violations

The Securities and Exchange Commission (“SEC”) affirmed a Financial Industry Regulatory Authority (“FINRA”) Decision in which EKN Financial Services Inc. stockbroker, Louis Ottimo, was assessed a $25,000.00 fine and two-year suspension in all capacities pursuant to findings that he willfully failed to accurately and timely update his Uniform Application for Securities Industry Registration or Transfer (“Form U4”) to reflect judgments, unsatisfied tax liens, and a bankruptcy filing. (In the Matter of the Application of Louis Ottimo, Admin. Proc. File No. 3-17930 (June 28, 2018).

Back on August 22, 2013, FINRA’s Department of Enforcement filed a Complaint against Ottimo alleging that he, inter alia, violated FINRA Rules 2010, 1122, NASD IM-1000-1, and Article V, Section 2(c) of FINRA’s By-Laws by deliberately failing to disclose facts on his Form U4. An Extended Hearing Panel found Ottimo to have committed the violations, and assessed a $25,000.00 fine and two-year suspension; however, sanctions were not imposed in light of Ottimo being barred by the Extended Hearing Panel for a more serious act: committing securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

On appeal, the National Adjudicatory Council affirmed the Extended Hearing Panel’s findings of Ottimo’s Form U4 violations. Ottimo subsequently appealed to the SEC, who sustained FINRA’s findings with respect to Ottimo’s Form U4 violations.

Ottimo became registered with EKN Financial Services Inc. on March 9, 2009. Because he was registering with a FINRA member firm, Ottimo was obligated to submit a Form U4. Ottimo, like any associated person, was obligated by FINRA rules to keep his Form U4 current at all times. Under FINRA By-Laws Article V, Section 2(c), this meant that Ottimo was required to update his Form U4 within thirty days of learning facts or circumstances giving rise to the need to amend the form.

Question 14.M on the Form U4 prompted Ottimo to disclose whether he had any liens or judgments that were unsatisfied, and question 14.K prompted Ottimo to disclose whether he, or any organization that he controlled, filed a bankruptcy petition within the prior ten year period. The findings stated that after Ottimo commenced employment with EKN Financial Services Inc., he continually neglected to accurately and timely report information on his Form U4 concerning a bankruptcy filing, six unsatisfied civil judgments and seven unsatisfied liens.

Specifically, the findings stated that Ottimo failed to report five of the tax liens issued from January 2010 to April 2010 on his Form U4 until September 2010. In addition, a November 2010 tax lien was not reported by Ottimo on his Form U4 until June 2011, and a June 2011 tax lien was not reported until April of 2012. Evidently, Ottimo’s reporting of the liens occurred well after FINRA’s thirty day time limit for reporting. Critically, Ottimo revealed in a FINRA hearing that he was cognizant about FINRA’s requirements – but he obviously disregarded them.

Further, from March 2008 to April 2010, a total of six civil judgments had been entered against Ottimo, where Ottimo failed to accurately and timely report those judgements. One of the judgments against Ottimo on June 4, 2009 had been vacated on September 9, 2009. Despite Ottimo having amended his Form U4 on four occasions between June 2009 and August 2009, he failed to report that unsatisfied judgment. Notwithstanding the judgement being vacated, Ottimo was still subject to the reporting requirement.

In addition, Ottimo failed to report a bankruptcy petition for a company he founded and which he served as president, Wheatley Capital Corporation. The findings stated that Wheatley filed for bankruptcy on April 27, 2010, and the bankruptcy petition had been signed and submitted by Ottimo. Ottimo evidently neglected to make the bankruptcy known on his Form U4 until April 19, 2002.

In the Opinion, the SEC confirmed FINRA’s findings that Ottimo’s failure to make timely disclosures of liens, civil judgments and a bankruptcy was violative of FINRA By-Laws Article V, Section 2(c). SEC also found that by way of Ottimo’s Form U4 being misleading and inaccurate, he violated FINRA Rules 1122 and NASD IM-1000-1. And as a consequence of violating FINRA Rules 1122 and NASD IM-1000-1, the SEC confirmed that Ottimo violated FINRA Rule 2010.

Moreover, the SEC concluded that Ottimo was subject to a statutory disqualification because of his (1) willful conduct in neglecting to update his Form U4, and (2) material omissions relating to his Form U4. The SEC turned to Securities Exchange Act Section 3(a)(39)(F), which provides a basis for statutory disqualification when a FINRA member intentionally omits a material fact in applying for association with a member.  Finally, the SEC found Ottimo’s conduct willful given Ottimo’s knowledge of his disclosure obligations and the significance of that information (six unsatisfied civil judgements that totaled more than $440,000.00 and unsatisfied tax liens that totaled more than $260,000.00) to investors, employers and regulators.

Interestingly enough, the SEC reversed a part of FINRA’s fraud findings, and in so doing, set aside the barring of Ottimo and remanded the matter to FINRA to determine what sanctions it deems appropriate. The SEC invited FINRA to reconsider its decision not to impose sanctions against Ottimo for his willful Form U4 violations.

Financial advisors and stockbrokers often question whether to make disclosures concerning negative events. If you are in one of those situations, it is best to be careful versus taking a risk that could possibly end your career in the securities industry. If you need assistance with your Form U4 matter, call (314) 563-2490 today to consult with the experienced counsel at Cosgrove Law Group.

The attorneys of Cosgrove Law Group, LLC represent investment advisors, brokers, and other associated persons nationwide in securities employment and regulatory matters, including U-5 defamation matters. Our attorneys also practice in a variety of other areas of law.  If you have a legal matter or concern, please give us a call and speak directly with one of our experienced professionals.

FINRA’S NEW DISCLOSURE REVIEWS MAY HELP LIFT BURDEN FOR FIRMS AND REPRESENTATIVES

Beginning July 9, 2018, FINRA will conduct an individual public records search on every applicant when a broker-dealer files a form U-4 application for registration.  FINRA currently performs this search for all registered persons—but only annually.  This additional records search—

which will satisfy the requirement to perform a search of records for judgments, bankruptcies, and liens only—will provide added benefit to member firms and registered persons, according to FINRA.  In FINRA’s May 18, 2018 Information Notice, FINRA claims this additional search is “likely to: (1) reduce the costs to firms associated with conducting these public records checks, which often involve finding and hiring a vendor; (2) result in more timely reporting of disclosure information to the benefit of regulators, investors and firms; and (3) result in a significant reduction of late disclosure fees related to judgments and liens[1].”

Numbers (1) and (2) seem like probable benefits to both the member firms and the registered persons.  Saying the same for number (3), however, appears to be a stretch.  Regardless, the burden of these public records searches is real, especially to smaller broker-dealers.  FINRA taking over this requirement is a welcome change and one that makes sense given that it is already performing the annual searches.  Firms and agents will still need to respond to and file any items that are found in these searches, but the searches themselves will no longer have to be performed in-house or by a third-party vender for each registered hire. 

Finally, firms and registered persons are still required to report unsatisfied liens and judgments within 30 calendar days of learning of the event as long as the agent is registered and to report other activity, such as certain criminal matters per FINRA Rules.

Cosgrove Law Group, LLC regularly assists registered persons with disclosure matters, regulatory inquiries, registration matters, and other matters related to industry registration compliance.  We also have experience assisting broker-dealers with regulatory inquiries related to their registration filings.

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[1] Firms and registered persons are required to report unsatisfied liens and judgments within 30 calendar days of learning of the event. FINRA determines whether a filing is late based on the date the registered person learned of the judgment or lien and, if it is late, will assess the late disclosure fee based on that date. See Information Notice 8/17/12 (Late Disclosure Fee Related to Reporting of Judgment/Lien Events). Occasionally, an individual is unaware of the existence of a judgment or lien. The public records search facilitates the identification and timely reporting of these events

Financial Advisors Expunging Baseless Customer Complaints in State Court

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. 4^th 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).

  

If you are a FA who has a U-4 scarred by one or more clearly erroneous customer complaints, we would be happy to evaluate your prospects for success in seeking an expungement in state court or arbitration.  Your chances of erasing an unfair or unfounded complaint in a court of law at a reasonable cost might be better than you think.

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[1] http://www.fa-mag.com/news/finra-continues-to-tighten-lid-on-expungements-with-newly-enhanced-arbitrator-guidance-23443.html

http://finra.complinet.com/en/display/display.html?rbid=2403&record_id=15841&element_id=11616&highlight=2081#r15841

FINRA's BrokerCheck Posting Terminations More Quickly, but Firms Still have 30 days to Report

FINRA's RegulatoryNotice 15-39 is getting a little blog time, but sadly some law firms writing about it seem to misunderstand not only the Notice itself, but also the implications of the changes that have been implemented.  

FINRA Rule 8313 governs the body’s public disclosure of the professional history, business practices, and conduct of their security industry member firms, associates, and those affiliated with the Central Registration Depository (CRD). The Notice, issued December 12, 2015, advises of the approved change to this rule that effects the timeframe in which FINRA releases information to the public through its online BrokerCheck report system.

FINRA currently requires firms to report the termination of a representative’s registration/employment with them within 30 days of the termination through the CRD system[1]. In other words, once a representative leaves or is fired from his or her job with XYZ Financial Services, XYZ has 30 days to file a Form U5 regarding that termination. Once the U5 has been processed, it becomes available for FINRA to post on BrokerCheck, and the states to provide in the CRD Snapshot. 

The Notice states that the time FINRA must wait (after processing the filing) before making the U5 available for public access has decreased by 80 percent, from 15 days to three (3).  While this is a big change, and worthy of plenty of blog time, it in no way effects the 30-day window employment firms have to make the U5 filings.  

Now to the real heart of the matter:  Fairness.  

According to FINRA, “a three-business-day waiting period is more reasonable than a 15-day period because it allows investors to more quickly access disclosure information reported on Form U5 while at the same time still providing brokers with the opportunity to comment on the reported disclosure event.” FINRA claims this was necessary for it to fulfill its mandate to, “prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest[2].”  

While FINRA's argument is for prompt disclosure to the public, they miss a key element in this process—the accuracy of the firm's Form U5 filing.  The problem is that firms sometimes have reasons to file improper or down-right false U5s[3]. (See a previous blog titled “How to Terminate,Discredit, and Interfere with a Financial Adviser: the U-5.”) 

Until FINRA member firms are held accountable for improper U5 termination language, the shorter window does little to ensure that fair and accurate information is being provided to the public, much less in a prompter fashion.  The initial 15-day window was selected to provide the representative with at least some amount of time to respond to the filed termination language before it became public.  Changing that window to three days eliminates that opportunity.  While FINRA seems to be trying to make strides to be more transparent and customer-friendly, they once again ignore that their own members are, at least initially, able to wantonly disparage brokers and reap the benefits that an improper, overly harsh, inaccurate, or unfair U5 can bring to them.  

David Cosgrove and Cosgrove Law Group, LLC have handled many U-5 defamation cases over the past several years. If you believe you are a victim of U5 defamation, please contact our firm and speak with one of our qualified attorneys.

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[1] The CRD is an online registration and licensing database that allows for the filing of required forms related to the securities industry that must be submitted for a multitude of reasons, such as “Form U5 – Uniform Termination Notice for Securities Industry Registration.” Regardless of the circumstances surrounding a representative leaving the firm to which they are registered, a U5 must be filed by the firm with the CRD within 30 days of the date of termination, as well as be provided to the representative. FINRA determines what portions of the CRD filings become publicly available on BrockCheck.

[2] Securities and Exchange Commission (2015 September 25). Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Change to Amend FINRA Rule 8312 (FINRA BrokerCheck Disclosure) to Reduce the Waiting Period for the Release of Information Reported on Form U5 (Release No. 34-75988; File No. SR-FINRA-2015-032) [electronic format]. Retrieved from https://www.sec.gov/rules/sro/finra/2015/34-75988.pdf

[3] Most U-5 disclosures, however, are free of defamatory content or tortious intent. In other words, most broker-dealers satisfy their obligation to ensure a full, fair, and accurate reporting. There are, however, far too many times where this is not the case.

FINRA’s 2012 Year in Review

FINRA just released its 2012 Year in Review Report.  In its opening remarks, FINRA’s Chairman and CEO, Richard Ketchum, stated, “FINRA fulfilled its role as the first line of defense for investors through a comprehensive and aggressive enforcement program, supported by a realigned and more risk-based examination program and the provision, for the first time, of cross-market surveillance programs that more effectively detected electronic manipulative trading. Protecting investors and helping to ensure the integrity of the nation’s financial markets is at the heart of what we do every day.

Regulatory

FINRA noted that one of its regulatory highlights was the success of its referral program in which the Office of Fraud Detection and Market Intelligence (“OFDMI”) shares regulatory intelligence with the SEC and other law enforcement agencies. Its intelligence stems from OFDMI’s fraud and insider trading surveillance of nearly all U.S. equities markets.  In 2012, FINRA referred a total of 692 matters to the SEC and other law enforcement agencies, of which 347 involved insider trading and 260 involved fraud. 

Disciplinary and Enforcement

In addition to its referrals program, FINRA brought 1,541 disciplinary actions against registered firms and individuals, levied fines in excess of $68 million, and ordered $34 million in restitution to harmed investors.  FINRA expelled a total of 30 firms from the securities industry, barred 294 individuals, and suspended 549 brokers from associating with FINRA-regulated firms. 

Some of the complex products involved in 2012 disciplinary and enforcement actions were non-traded REITs, exchange-traded funds (ETFs), and structured products.  Other enforcement actions involved research analyst conflicts, mispricing, and improper reimbursement fees to lobbying groups. 

Another critical aspect of FINRA is its examinations of member firms and associated persons.  In 2012, FINRA initiated 1,846 routine examinations, over 800 branch office examinations, and 5,100 examinations resulting from customer complaints, terminations for cause, and other regulatory tips.  FINRA’s exam procedures were made more efficient due to advances in technology which has provided FINRA with a modernized framework that allows it to identify and prioritize areas of risk exposure at firms. 

Investor Protection

Of grave importance to investors was FINRA’s new suitability rule that was implemented July 9, 2012.  The rule requires broker-dealers and/or their associated persons “to have a ‘reasonable basis’ to believe a recommended investment is suitable for the customer, based on information obtained through ‘reasonable diligence’ to understand a customer’s investment profile.”  For more investor information on FINRA’s suitability rule, click here.

FINRA also proposed an investor-protection initiative in 2012 that attempts to address conflicts of interest relating to recruitment compensation practices of member firms offering incentives to recruit registered representatives.  Currently these compensation arrangements are not disclosed to the representative’s customers when they are asked to transfer their accounts to a representative’s new firm.  The rule would require the member firm to provide certain disclosures before a customer makes the final determination to transfer an account to the new firm.  The view the text of the proposed rule, click here.

In September 2012, FINRA obtained approval to file proposed rules that would require firms to include a reference and a link to BrokerCheck on their websites to make it easier for investors to obtain information on firms and brokers. FINRA also increased the user friendliness of BrokerCheck by including a zip code search and a combined search function that provides for easier access to the SEC’s Investment Adviser Public Disclosure (IAPD) database. 

In November 2012, FINRA Dispute Resolution released data which reflects the outcomes of cases heard under its all-public panel program that was implemented in February 2011 which allows investors the option of a panel comprised of all public arbitrators versus a panel made up of one arbitrator with securities industry experience (nonpublic arbitrator) and two public arbitrators. The all-public panel option represents an investor-friendly change to the program, designed to ensure a fair playing field for all parties. To date, the data indicates that in cases decided by three public arbitrators, customers were awarded damages 51 percent of the time, whereas in cases decided by a panel including one nonpublic arbitrator and two public arbitrators, investors were awarded damages 32 percent of the time.  For the full data report, click here.

Notably, FINRA and the FINRA Investor Education Foundation have continued to enhance its outreach strategies and investor education by distributing educational brochures, holding live events, and creating an Outsmarting Investment Fraud curriculum.  The Foundation also put  more focus into providing services for military families through their military financial readiness project. 

Crowdfunding

A hot new topic in 2012 was “crowdfunding” since new provisions relating to crowdfunding were introduced in the April, 2012 JOBS Act.  To ensure that the capital-raising objectives of the JOBS Act can be advanced while simultaneously protecting investors, FINRA has requested and solicited comments on specific rules it should adopt for registered funding portals that become FINRA members.  In addition, FINRA has also asked for comments on the application of its existing rules to broker-dealers engaging in crowdfunding activities. 

If you’re a FINRA member firm, associated person, or an investor involved in a potential FINRA-related claim, contact the experienced attorneys at Cosgrove Law Group, LLC for assistance. 

FINRA Panel Awards Expungement in Unlikely Case

 A FINRA hearing Panel in Pittsburgh, Pennsylvania recently made an uncommon move when it expunged an arbitration from a broker’s CRD records despite finding the broker jointly liable to the customer. 

In Bordas v. Wells Fargo, FINRA ID # 11-00484, the Claimants, James and Linda Bordas filed an arbitration claim against Wells Fargo Advisors, LLC and Ernest Coffindaffer for unsuitability, unauthorized trading, forgery, misrepresentation, fraud, negligence, breach of fiduciary duty, violations of the Securities and Exchange Act of 1934 and Rule 10b-5, respondeat superior, failure to supervise, and breach of contract.  The causes of action relate to the alleged recommendation and purchase of municipal bonds and variable annuities against the Claimants’ express wishes. 

The Respondents asserted counterclaims for defamation per se, tortious interference with business relationships, and tortious interference with prospective business relationships. 

At the close of hearing, Claimants’ requested a total award of $10 million: $754,765.00 in lost capital; $707,200.00 in lost gain; and the balance in non-economic and punitive damages.  Respondents’ requested $2,000,000.00 in compensatory damages, plus attorneys’ fees of $381,561.60 and $65,564.63 in disbursements. 

The Panel found Wells Fargo and Coffindaffer jointly and severally liable to the Claimants in the amount of $97,250.00.  Since arbitration awards rarely discuss findings of fact, it is unclear which claim(s) the award relates to.  James Bordas was found liable to Coffindaffer for defamation in the amount of $1,000.00.  All other claims against Claimants were dismissed with prejudice. 

Despite finding Coffindaffer jointly and severally liable with Wells Fargo, the Panel made a specific finding of fact that Coffindaffer was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of customer funds.  Even though it is uncertain what claim(s) the award was based on, one can assume that Coffindaffer was probably not found liable for fraud or any claims involving an element of willful intent especially since the Panel found that Coffindaffer’s conduct was “not so egregarious as to warrant a permanent stigma on his CRD.”  

The Central Registration Depository (CRD) is a database used by FINRA and NASAA to store and maintain information on registered securities and broker firms.  CRDs contain qualification, employment, and disclosure histories of registered individuals and can be used like a background check on brokers.  FINRA also pulls information from CRDs for its BrokerCheck program, which provides background information on brokers and firms to investors. 

When a broker is named as a respondent in a customer-initiated arbitration, the claim and any alleged wrongdoing are required to be reported on the borker’s Form U4, which will eventually get recorded in the CRD system and become available to the public through BrokerCheck. Therefore, some information that can be disclosed on one’s CRD could be damaging to a broker’s reputation.   

Brokers may seek to expunge any reference to the allegations or involvement in the arbitration from the CRD system.  However, FINRA provides rules that arbitrators must follow before awarding expungement to a broker. 

FINRA Rule 2080 requires that a court of competent jurisdiction confirm an arbitration award granting expungement.  FINRA must be named as an additional party to these court proceedings.  In most cases, FINRA generally opposes the confirmation of an award to expunge.  However, upon request, FINRA may waive the requirement to be named as an additional party in these proceedings if the award directing expungement contains one of the following findings: (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.

FINRA Rules 12805 and 13805 provide that in order to grant expungement, an arbitration panel must hold a recorded hearing session regarding the appropriateness of the expungement.  If the case involves a settlement, the panel must review the settlement documents and conditions of the settlement to determine whether concerns exist about the broker’s involvement in the alleged misconduct. The panel must also indicate which grounds exist under FINRA Rule 2080 to support expungement.  Finally, all hearing session fees must be assessed against the party requesting expungement for any hearings in which the sole topic is expungement. 

Therefore, although the panel awarded expungement, Coffindaffer will still have to obtain a confirmation of the expungement award by the courts.  While the Panel made a specific finding under FINRA Rule 2080, FINRA may still oppose the expungement since he was sheld jointly and severally liable to the customer.  The Panel’s finding that Coffindaffer’s conduct was “not so egregarious as to warrant a permanent stigma on his CRD” may not be enough.

If you are a broker named in a customer-initiated arbitration and would like to seek expungement of the allegations or involvement in the arbitration from your CRD, contact the experienced attorneys at Cosgrove Law Group, LLC.   

New Broker-Check Disclosure & Dispute Process Begins August 23, 2010

Last month, the Securities and Exchange Commission approved changes to FINRA Rule 8312. The changes will expand the information available in BrokerCheck and codify the dispute process regarding inaccuracies in the disclosed information. The amendments will be implemented in two phases, the first of which goes into effect on Monday, August 23, 2010. This first phase of implementation deals with the changes to historic complaints and the dispute process.

On Monday, all customer complaints will be publicly available in BrokerCheck. This includes any complaints that had previously been deemed “non-reportable” when the Central Registration Depository (CRD) was implemented (i.e. complaints made after August 16, 1999).

Also to be implemented on Monday is FINRA’s new dispute process regarding inaccuracies in BrokerCheck. Under the new dispute process, only an “eligible party” will be able to bring a dispute. FINRA defines an “eligible party” as any current member firm, a CXO of a former member firm, or any person associated with or formerly associated with a member firm that has a BrokerCheck report. In order to file a dispute under the amended rule, an eligible party must (1) submit a BrokerCheck Dispute Form (which will become available on FINRA’s website), (2) identify and explain the inaccuracy, and (3) provide any supporting documents.

The next (and final) implementation of the new amendments regarding the disclosure period and permanently available information will occur on November 6, 2010.

A complete discussion of all the rule changes and commentary on those changes can be accessed here.

SEC Approves FINRA’s Proposal to Expand BrokerCheck Disclosure

Yesterday, the Financial Industry Regulatory Authority (FINRA), announced in a News Release that its proposal to expand the information made available through its database, BrokerCheck, was approved by the Securities and Exchange Commission.

According to the FINRA News Release, “the changes will increase the number of customer complaints reported publicly; extend the public disclosure period for the full record of a broker who leaves the industry from two years to 10 years; and, make certain information about former brokers available permanently, such as criminal convictions and certain civil injunctive actions and arbitration awards against the broker.”

The changes will be implemented in two phases. The first is slated for August and will add historic complaints. Finally, during the fall months, the full 10-year record for brokers who exited the industry will be made public. The additional information should be fully available to the public by the end of the year.

We have previously contemplated the issues surrounding additional disclosure on our blog. This posting can be accessed here.

IS MORE ALWAYS BETTER? IS LESS ALWAYS ACCURATE?

The Financial Industry Regulatory Authority (FINRA) is a private regulatory body charged with protecting investors and keeping an eye on the financial industry. As part of its services, FINRA offers BrokerCheck, an online database where investors can obtain information about registered brokers. The information made available is known as a CRD Report and contains information about employment and registration history, qualifications, as well as reportable customer disputes, disciplinary, and regulatory events. BrokerCheck allows users to access a full report and a consolidated report. Currently, under Rule 8312, this information is available for two years after a broker’s registration expires.

A recent proposal to amend the rule would make the consolidated reports available for a longer period of time, but the full reports will still be removed after the two year time period. However, this proposed change would only apply to brokers who have had a final regulatory action against them. Full reports would still be available through state agencies as they are now.

A recent Wall Street Journal article discussed the changes being made and the author took the position that the amendment was a step in the right direction, but still insufficient. In the article, the WSJ follows an insurance agent who was a former broker, but was banned from the securities industry after misappropriating $9,000. His CRD report was no longer available, but WSJ obtained it from Kentucky state regulators. After the Journal disclosed his expulsion to his current employer, he was fired from his job even though both he and his company acknowledged he had never provided financial advice in his then-current position.

One of the concerns with the proposed amendments is that only consolidated reports will be available. Consolidated disclosure does not mean better disclosure. The consolidated reports do not disclose the details about customer disputes, disciplinary, and regulatory events. Instead, the report merely states “customer dispute” or “criminal.” Because there is no full disclosure into the details of the criminal action, the information available can be very misleading. Those looking at the CRD will likely develop a bias against that person as they will not know if the criminal action is relevant to the practice of brokering. The Wall Street Journal’s chronicle ironically demonstrates this potential bias in that the former broker was fired from his job after the WSJ author disclosed the man’s CRD report.

Advocates of this amendment claim it will help delineate the “bad” brokers from the “good” brokers and better protect investors. However, this is flawed logic as more disclosure does not mean all the “bad” brokers will turn up. For example, a quick search on BrokerCheck reveals that Joseph Cassano, a former A.I.G. executive who was recently indicted for securities fraud, had a clean CRD report until the Department of Justice filed a complaint against him recently. Until the DOJ suit, there was no evidence on his consolidated report or his full report that suggested he was a “bad” broker. Our firm has also seen where incomplete or inaccurate information in the consolidated CRD report or other “public records” can have misleading results to the detriment of a “good” broker. Because the CRD also requires the reporting of information unrelated to brokers’ ability to perform their jobs well, irrelevant information in little to no context unduly punishes registered persons and does not provide real value to consumer protection.

If consumer protection is truly the goal, this proposed change would not meet that goal and would in fact provide more confusing information to the public. A more comprehensive approach would better serve all parties involved.