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

Recent FINRA Awards for Defamatory Statements on Form U-5’s

In the last few years, broker-dealers have seen a recent trend by its regulatory authority, FINRA, in cracking down on the high standard of accuracy and fairness that brokerage-dealers must adhere to in terminating registered representatives.

Broker-dealers that are members of the FINRA are required to file a Form U-5 when terminating their relationship with a registered representative.  Broker-dealers must also describe the specific reason(s) that the rep was discharged or permitted to resign.  Publishing the reasons or causes for a rep’s discharge or resignation can be troubling if the reasons disclosed on the U-5 were false, exaggerated or misleading. 

A black mark on one’s U-5 can make it extremely difficult, and in some cases, impossible, to find another job in the industry.  Therefore, the potential damages against the broker-dealer for defamatory statements on one’s U-5 can be exponential, especially if the false statements were intentionally or recklessly published.  In addition to compensatory and punitive damages, the statements on the U-5 can be ordered to be expunged and amended to reflect the truth.

In July 2011, a Philadelphia FINRA Panel awarded Gregory Kipple, a former broker of Wells Fargo, $6.83 million for wrongful termination and defamation ($4.3 million for lost earnings; $1 million for defamation; $1 million in punitive damages for violation of New Jersey’s Conscientious Employee Protection Act; and $530,000 in cost and attorney’s fees).  Wells Fargo was also ordered to update Kipple’s U-5 to reflect that he was “terminated without cause.”  Kipple was fired in August of 2009 for his “failure to follow the firm’s policies related to ‘know your customers.’”  However, Kipple had no direct involvement or interaction with the specific customer that the statement was in reference to. 

The District Court upheld another FINRA award against Wells Fargo in July 2011 for submitting defamatory statements on a discharged employee’s form U-5.  The claimant, Kenneth Schafer alleged that infractions reported on his U-5 were misleading and pretextual because he was discharged for health reasons.  Schafer was awarded $75,000 in compensatory damages. 

In June of 2011, a FINRA Arbitration Panel awarded a Claimant with a substantial punitive damage award.  In Olsen v. World Equity Group, Olsen alleged defamation, breach of contract, and tortious interference.  Claimant Olson alleged that Respondent WEG had breached its employment contract with him, wrongfully terminated him, and maliciously defamed him on his Form U5.  Olson was awarded $285,000 in compensatory damages, $575,000 in punitive damages, and $282,800 in attorney’s fees.  The Panel also ordered expungement of the defamatory comment from his U-5 which stated, “Disagreement over advertising policy, rules, and advertising protocol.”  The statement was to be replaced with, “FINRA Arbitration Panel ruled discharge was wrongfully administered. FINRA Arbitration Panel questions the appearance of the stated internal review and/or its effectiveness. FINRA Arbitration Panel found no violations of investment-related statutes, regulations, rules or industry standards of conduct.” 

In Perales v. Chase Investment Services Corp., also decided in June 2011, the claimant sought damages for defamation and expungement of the statements on her U-5 which alleged that she committed fraud and wrongfully took property. Chase was ordered to pay Perales $75,000 in compensatory damages and FINRA ordered expungement of the defamatory statements and recommended replacement language. 

Charles Schwab was punished in 2010 with a substantial punitive damage award by a FINRA Panel.  In that case, Claimant Timothy Leahy, who was a registered representative with Charles Schwab, was awarded $1.8 million in total damages, of which $1.5 million was comprised of punitive damages, as well as expungement of the defamatory statement from his U-5.  Leahy’s U-5 stated that he was terminated for “failure to adhere to HR related policies.”  The Panel found that Schwab conducted an inefficient human resources investigation, stated false violations as reasons for his termination, and found that Schwab had the “specific intent” to harm the Leahy. 

In 2009, FINRA found that Questar Capital Corporation included misleading information on John Saldutte’s U-5 after terminating him as a registered rep.  Saldutte was awarded $68,000 in compensatory damages and the Panel ordered expungement of the information contained on his U-5 regarding his termination and recommended Questar replace the defamatory statement with the following language: “After conducting a deficient investigation, the firm wrongfully terminated representative based on erroneous, misleading, and unjustified conclusion that representative knowingly participated in unregistered person’s submission of business in representative’s name.”     

If you’re a registered representative and feel you have been harmed by false or misleading statements published on your Form U-5 or to third parties, Cosgrove Law, LLC has substantive experience representing reps and advisers in such matters.