May 22, 2018

Financial Industry Regulatory Authority set to tighten expungement rules even further

Perhaps the most important arrow in the quiver of broker-dealers, their registered representatives, and other securities professionals when it comes to protecting their livelihoods and reputations is the ability to have negative information expunged from the Central Registration Depository (CRD) system and hence from the Financial Industry Regulatory Authority (FINRA) BrokerCheck website. It appears likely, however, that FINRA is on the cusp of making the already limited and challenging expungement process even more restrictive.

Proposed restrictions are no surprise

In December, FINRA issued a notice to members that set forth a laundry list of proposed changes to its rules pertaining to expungement. The public comment for the suggested amendments closed on Feb. 8, 2018, and are now in the hands of the Securities and Exchange Commission (SEC) for review and approval.

That FINRA would seek to make the process even more difficult is hardly a surprise, as it has long expressed concerns about its use and, as it states in its recent notice, “expungement of customer dispute information is an extraordinary measure.” For example, in 2008, FINRA adopted Rule 12805 to require that arbitrators conduct additional fact-finding before they could order expungement. In 2013, FINRA believed that too many expungements were being granted. Accordingly, it came out with guidance seeking to discourage arbitrators from granting expungement.

The current standard applicable in FINRA arbitration is contained in FINRA Rule 2080. This rule states that expungement should only be granted when the allegation or claim is factually impossible, clearly erroneous and false or if the associated person (AP) was “not involved in the alleged investment-related sales practice.” Additionally, material can be expunged on the vote of the majority of arbitrators and an AP named in a customer complaint does not need to seek expungement immediately.

Unanimous approval and higher standard among the changes

FINRA’s proposed changes, which would have an effective date of June 12, 2018, include modifying all of the foregoing as well as:

  • Requiring that expungement be unanimously approved by a three-person arbitration panel;
  • Raising the standard for allowing expungement by requiring the panel to agree that the customer dispute information “has no investor protection or regulatory value”;
  • Prohibiting APs from seeking expungement in a court of law;
  • Increasing the filing fee for expungement requests to a minimum of $1,425;
  • Limiting the opportunity of APs named in customer arbitration to seek expungement during the hearing of the underlying dispute and not afterwards;
  • No longer allowing the AP seeking expungement to appear by phone but requiring that they appear in person or by video conference;
  • Establishing a one-year limitation period after the underlying customer case closes for an AP to file an expungement request that was not decided during the underlying customer case; and
  • Requiring that expungements sought after the dispute will be decided under the industry arbitration code and that APs must name their former firm as a respondent in such arbitrations.
If you have questions regarding FINRA’s proposed rule changes or the expungement process generally, please contact a Chuhak & Tecson Corporate Transactions & Business Law attorney who will be happy to discuss the issue with you. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Andrew S. May, Principal