FINRA’s television commercials extol the need to check out a broker’s employment history and possible customer complaints and arbitrations on its BrokerCheck Report [See http://brokercheck.finra.org/]
- What if, on that public Report, there’s a customer claim or arbitration that contains factually impossible or clearly erroneous assertions?
- What if the broker was simply not involved in the alleged misconduct, but the customer nevertheless named her as a Respondent?
- What if the customer’s allegations are simply false?
Should those assertions be forever on that broker’s BrokerCheck Report for all the world, and I mean all the world to see? The answer should be obvious – No – but the process to get it done is an exacting one.
While many believe the fact that a broker being named a number of times, even meritless cases or complaints, is a reflection on that broker’s professionalism and is something the investing public and potential customers of that broker should be apprised about, I don’t believe that should be the case – and I have successfully represented customers for decades.
The Exacting Expungement Process
FINRA has a special procedure for financial advisors who have customer complaints and arbitrations on their public record that should be deleted and expunged – as if they never occurred. But FINRA, most appropriately, tells its arbitrators that expungement is an “extraordinary remedy” that should not be granted without that financial advisor meeting a very heavy burden of proof. [See https://www.finra.org/arbitration-and-mediation/notice-arbitrators-and-parties-expanded-expungement-guidance ] An “extraordinary remedy” but an essential one for brokers wrongly accused of wrongdoing by customers. This has become such a specialized practice within the securities arbitration field and brokers have only one chance to prove their case, otherwise that “black mark” will remain on the broker’s record for as long as he/she is registered in the securities industry.
In my book, Securities Arbitration Procedure Manual [http://www.lexisnexis.com/store/catalog/booktemplate/productdetail.jsp?prodId=7156 ], I explain the process in great detail. For the purposes of this blog, however, here are the highlights of the FINRA rules and the steps a financial advisor can take to clear his/her name:
Only Three Categories for Expungement – FINRA Rule 2080
A unanimous arbitration panel [two from the public and one from the industry] that had been selected by the parties [the broker is the Claimant and most often his/her brokerage firm is the Respondent] has only three grounds to grant a request for expungement.
- Impossible or Error – The claim, allegation, or information is factually impossible or clearly erroneous. For example, naming the wrong broker as a Respondent.
- No Involvement – The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds. For example, the broker proved to the arbitrators that he or she did not engage in the wrongdoing.
- False – The claim, allegation, or information is false. That is, the arbitrators determine that the claim against the particular broker had no merit. While no Respondent in a customer arbitration has a burden of proof, there is such a burden in an expungement arbitration.
FINRA’s Expungement Rules 12805 and 13805 – A Panel of Arbitrators Must:
- Hold a recorded hearing – by telephone or in person – regarding the appropriateness of expungement.
- For cases involving settlements with the customer – review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement.
- Indicate in the Award which of three grounds for expungement serve as the basis for its expungement Order and provide a brief written explanation of the reasons for its finding that one or more grounds for expungement applies to the facts of the case.
- Assess all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief.
Practical Insights From Our Experience in Expungement Cases
- They are not “rubber stamp” procedures. Practitioners and brokers should expect a “hot panel” of arbitrators who have been trained by FINRA to determine whether the broker’s record should take precedence over the public investors’ right to know about that broker.
- Don’t expect a walk in the park. Even though the customer will not usually be present – the customer must be invited to testify at the expungement hearing – the customer’s allegations will be challenged head-on. Brokers should be prepared to meet a heavy burden of proof. Arbitrators must carefully examine the evidence and consider the interests of the investing public.
- FINRA tells its arbitrators – “The fact that a person prevailed in an arbitration is not – in and of itself – an appropriate ground for expunging information about the proceeding from the CRD system.”
- Costs vs Peace of Mind – It can be a somewhat costly and time-consuming process, but not compared to the importance of a clean record. Since most expungement hearings are conducted by teleconference, there are not the typical travel expenses for the broker, his/her attorney and witnesses that are part-and-parcel of a common customer arbitration.
- The Last Step – If the arbitrators unanimously decide in the broker’s favor, the broker’s attorney needs to then file in court a Petition to Confirm the Arbitrators’ Award. The court must be convinced that the arbitrators followed the protocol for granting such “extraordinary relief.” FINRA requires its arbitrators to set forth their reasons for granting expungement in Explained Awards. Courts look at those reasons to accept or reject Petitions to Confirm.
That said, when the costs are weighed against the ever-lasting expungement of certain customer complaints and arbitrations from a broker’s record, there is no question that it is a process worth pursuing.