Traditional wisdom held that the only way to get an expungement of a customer complaint was from a FINRA arbitrator. Since time immemorial, brokers have sought expungements from arbitrators. We have handled a number of these types of expungements. Frankly, we told brokers with old disclosure items (possibly from firms that were no longer in business) that there was nothing that could be done.

We might have been wrong. A recent case in California has held that FINRA can be properly taken before a court and ordered to remove CRD items. This is a sea change in the way things work. According to the opinion, a court always has equitable jurisdiction and the power to order changes to a CRD record.

This case was an appeal from a trial court ruling that only the FINRA Rule 2080(a) standards could apply and that the court did not have the power to apply them. The California appellate court reversed the trial court and held that the trial court has the equitable authority to expunge matters from a CRD record. This upends decades of common practice.

So, what’s in store. It certainly makes sense to seek expungement of “old” CRD disclosure items through a court and see what the court does. I’m thinking that this is going to create a tidal wave of expungement matters in state court proceedings, at least until FINRA changes the rules.

You see, FINRA makes the rules. FINRA tells a broker what they can and can’t do. FINRA may try to short-circuit this process by suggesting a rule that prohibits a broker from suing FINRA in any court for the purpose of getting an expungement. Whether they will be able to get such a rule passed is another issue.

In the meantime, the expungement window may be open.

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

My friend, Joel Beck, writes his own blog. I read it and commend the three people who read mine to read his as well. 😉

Joel’s most recent posting dealt with run-of-the-mill business organizations. Since a large part of our business deals with stockbrokers, I thought I would add to what he said, but bring it specifically to the broker-dealer world.

Here are some points:

1. What is the purpose of the “partnership”? Is it a coverage partnership, referral partnership or joint business? Is one partner nearing retirement? Or is it some hybrid?

2. What do you expect to get from the partnership? An easier life? More referrals? Increased access to more desirable clients?

3. How will the revenues be split? Each partnership model, with its unique motivations, will result in a different revenue split. In a “retirement” model, the split generally increases for the non-retiring partner. But there needs to be equity towards both partners regardless of the motivation for the partnership.

4. How will a partnership breakup be handled. A few companies have succeeded by forming on the back of a napkin. Compaq perhaps is the most notable (where are they now?). But wise partners have a formal agreement. Many firms have what they call either a partnership or team agreement. Many firms also have policies in place that determine how a team is to break up in the absence of a formal agreement. That agreement may suffice. Or it may be a good starting point. Areas that need to be addressed are the division of clients, communications with clients, compensation to each partner in the event that a perfect split cannot be achieved and, my favorite, dispute resolution.

A word on dispute resolution. I am a big fan of arbitration. It is private and can be much less costly. In the brokerage world, registered representatives would be required to arbitrate their differences. But it would still make sense to have an arbitration clause in the partnership agreement.

5. Liability. Here’s where it gets interesting. I handled a case 20 years ago where there was a fee split between a younger broker and an older one. The younger one was, shall we say, an aggressive investor. His elderly client, who was originally a client of the older broker, was not aggressive and filed an arbitration against the two of them and their employer. One of the theories of liability against the older broker was one of partnership.

So, be careful when forming split numbers, partnerships or teams. Get the agreement in writing and figure out who is responsible for what. It won’t make things perfect, but at least it will give you a framework.

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

You have to be living under a rock to not know about the Protocol for Broker Recruiting. This was an agreement entered into between UBS, Merrill Lynch and Citigroup/Smith Barney/Shearson Lehman Brothers (whatever they wanted to be called then) that specified what a broker could and could not do when changing firms. The Protocol (as it is now called in shorthand) allowed brokers to take a limited amount of information, which was shared with the “losing” firm and the “gaining” firm. In exchange for playing by the rules, these three firms agreed that they would not seek to obtain injunctions against departing brokers for taking the client list. Raiding and other misdeeds were specifically excluded.

The Protocol was open for membership to anyone who agreed to abide by its terms. There are over 500 signatories to the Protocol. Some of the signatories no longer exist, I’m pretty sure. But the protocol has eliminated a lot of litigation. All of the major Wall Street firms have joined in the Protocol and many regional firms. The largest non-signatory traditional broker-dealer that I know of is Robert W. Baird & Co.. As a result of Baird’s refusal to join, Baird finds itself in court and arbitration on injunction and recruiting cases where other firms do not.

Merrill Lynch, as one of the original signers of the Protocol, was formerly one of the most aggressive pursuers of former brokers. For the most part, its litigation is now limited to promissory notes and training agreements. Thomson Reuters reports that Merrill Lynch was able to regain custody of “non-Protocol” data after five brokers left for Morgan Stanley. Three of the brokers were alleged to have done some things that are definitely not allowed in the Protocol, such as taking cost basis data (which is silly, since most of this data is required to transfer when an account transfers via ACATS), and taking data related to customers of other brokers in the office, which has never been allowed.

A Morgan Stanley Smith Barney representative is quoted in the article as saying that these matters are typically resolved without resorting to litigation. But the problem is that after the lawyers swap letters and the business people check out the allegations, the damage has been done. Brokers and their new supervisors should know better. And, by the way, look out for security cameras. They always make for some interesting viewing in a recruiting case.

FINRA has proposed rule amendments to the customer and industry arbitration codes. These amendments would codify procedures to allow registered representatives who are not named in arbitrations to receive an expungement order from the panel. The current procedure is a hodgepodge of common sense and invented procedures to allow for an expungement request.

Most recently, I filed a Notice of Appearance on behalf of a client who was not named in an arbitration for the sole purpose of obtaining an expungement of the customer claim. FINRA procedures are silent on what to do and it took a little bit of work to get the request processed. These new rules would have allowed my appearance, but only if there was compliance with the procedures.

And that’s where the potholes can be found. The procedures require that the broker who is not named, called the “unnamed person” in the proposed rules, to receive notice when the U-4 or U-5 is amended. The broker then has 180 days from receipt of that notice to file a Notice of Intent to seek expungement. The broker can do this on his or her own or a lawyer can do it. The rule seems to contemplate that a failure to file the Notice of Intent within 180 days will result in a lifetime waiver of the right to obtain the expungement.

Then, after the case is closed, either through hearing or settlement, the broker has 60 days to notify FINRA that she or he will be seeking an expungement. If there is an expungement request, then the chairperson will normally handle the hearing. It is unclear whether a new matter is opened for the expungement, but FINRA makes reference to “IN RE:” proceedings, so it appears that this will be the case. There is also a waivable $750 filing fee for the expungement proceeding and a hearing with the chairperson.

If the broker does not request the expungement hearing under these procedures, it appears that there is no opportunity to obtain an expungement in the future. But the rule is not clear on this point. However, what is clear is that a broker who is named as a party will only be able to obtain an expungement within the pending case. This would be obtained as part of the relief in the case, as it usually is accomplished now, but will not be available after the case is over.

As always, brokers need to be vigilant about what is contained on their CRD and Brokercheck records. Any opportunity to obtain an expungement is one more opportunity to reduce the number of, or eliminate, complaints on a registered representative’s record. The regulatory safeguards are in place to ensure that expungements are properly granted.

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