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FINRA's New Expungement Procedure

FINRA’s New Record Expungement Procedure

In the securities industry, it still possible that a tree (i.e., a customer’s arbitration claim) will not be considered to have fallen in the woods (i.e., will not appear on the broker’s official record – the Central Registration Depository) if an arbitration panel decides to expunge the existence of the case from the broker’s CRD. During this past year, removing the existence of a customer case from a broker’s record has become harder and the procedure for doing so has become a FINRA arbitration rule.

When can a broker seek to have a customer case expunged from his or her record and what is the procedure for doing so?

In late 2008, FINRA issued Regulatory Notice 08-79 to explain the expungement procedure rule. Until then, there had been no established guidelines for arbitrators. FINRA’s Notice also described the difficult challenges an individual faces in trying to remove the case from his or her record. There are specific steps arbitrators must take before they may issue an Expungement Order:

1. Hearing - The full panel must hold a recorded hearing by telephone or in person regarding the record expungement’s appropriateness.

2. Settlements – If there has been a settlement, the arbitrators must review the settlement documents and consider the amount paid to any party. They must consider any other terms and conditions of the settlement that might raise concerns about the broker’s involvement in the alleged misconduct before deciding whether to award expungement. For example, if the customer receives hundreds of thousands of dollars in settlement and the Statement of Claim alleged sales practice abuses by the broker, it may very well appear to the arbitrators that the brokerage firm is trying to “pay for” the expungement.

3. Limited Grounds for Ruling - The panel must indicate which of the grounds for expungement serve as the basis for its expungement order. It must then provide a brief written explanation of the reasons for ordering record expungement. What are those limited grounds?

  • 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.

4. Mandatory Fees - The arbitrators must assess against the parties requesting expungement relief all forum fees for hearing sessions in which the sole topic before arbitrators is the determination of the appropriateness of expungement.

Once a record expungement order has been issued by the arbitrators (within their Award), the broker must have the Award confirmed in court as a judgment, giving FINRA an opportunity to intervene. (See last year’s Commentary for a description of this process.) Once the Award has been confirmed as a judgment, the broker must then transmit a copy to CRD so that the existence of the arbitration can be expunged from the broker’s official record.