FINRA issues expungement guidance and gets its own rules wrong.

Posted by on Sep 10, 2014 in Marc's Blog | Comments(0)

It has been so long that I can’t remember my first expungement request. If it’s for the client I think it is, he’s still working as a broker. FINRA, the organization that is overseeing the expungement process in arbitration, issued new guidance today regarding expungements. You can find it here.

Expungements, which are, at their core, a removal of disclosures on a broker’s CRD record, have been an issue for quite some time. Early on, it was a simple stipulation between the parties. A Stipulated Award was entered and that was sent to the CRD department for processing. Then NASAA got involved (and maybe PIABA) and started complaining that, since the CRD system was used jointly by FINRA and the state securities administrators, this amounted to FINRA changing a state’s record.

So a new plan was hatched. Brokers would now be required to get a court’s stamp of approval on the expungement and FINRA would require specific findings. This requirement was ultimately codified in FINRA Rule 2080. Rule 2080 says that FINRA may waive its right to object to the expungement if the arbitrator(s) make one of three findings. But the rule also says that FINRA may waive its right to object in one other scenario – “(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.” ¬†Meritorious is not defined.

My example would be this, because this actually happened. My client was named by two separate clients in one arbitration. The total claim was approximately $2.5 million. The broker-dealer was bankrupt so my client was the only pocket. My client settled with each individual client for an amount that, if each client had filed a separate claim, would have been non-reportable. But in the aggregate, the total settlement payment went over the reportable amount. Since it was one claim and not two separate claim, this large claim with a nominal settlement would have been on his record forever. We presented to the panel, and the panel agreed, that the combination of the two claims resulted in a reportable event that was not fair to be reported. The expungement was granted and FINRA waived its objection. I’m guessing this counted as “meritorious”.

So it’s not just the three specified reasons in the first part of Rule 2080 that applies. FINRA arbitrators, sitting in equity, can still decide to do what’s right. FINRA’s new pronouncement on expungement ignores this second part of the rule, which is unfair to brokers seeking expungements. FINRA is under immense pressure from NASAA, I am sure. And then there are the plaintiffs’ lawyers who, for years, were signing off on expungement deals all the time while beating their chests about investor protection. There are a few lawyers out there who refused to agree to expungement deals, but they were rare. FINRA stepped in and made it easy, though, by recently issuing rule 2081 which prohibits a settlement that, basically, requires the customer to agree to an expungement or not oppose it.

So are expungements dead? I don’t think so. It just may take more of a fight to get there. And that’s what lawyers are for.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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