FINRA’s New Expungement Rules

by | Jul 14, 2023 | Firm News

In 2023, FINRA’s significant changes to its expungement procedures will be implemented, making the permanent removal of a customer complaint or arbitration from a broker’s record much more difficult to obtain from a FINRA arbitration panel. While the three limited grounds for expungement remain the same – (1) the information to be expunged is factually impossible or clearly erroneous; (2) the person was not involved in the sale practice violations; or, (3) the allegations are false – without a firm grasp of the new requirements, the odds of brokers securing expungement will drop precipitously. This blog will provide a brief summary of these changes and the grounds for expungement.  For more details, give us a call.

The five major distinctions between the new procedures and a normal FINRA arbitration

  • Inapplicability of the six-year arbitrability rule;
  • Elimination of party-selection of arbitrators for certain cases;
  • Requirement of a unanimous decision;
  • Possibility of forfeiting a broker’s right to seek expungement; and,
  • Participation by a state securities regulator at certain expungement hearings.

 The Only Rule 2080 Expungement Grounds of Customer Dispute Information 

  1. The claim, allegation, or information is factually impossible or clearly erroneous.FINRA’s arbitrator training states: “The ‘factually impossible or clearly erroneous’ standard has clear meaning to regulators and public investors. For example, if the evidence shows that the broker was not even employed by the securities firm during the relevant time period, the arbitrators could find that he or she was erroneously named in the arbitration claim, dismiss the claim against the individual and recommend expungement of any mention of the claim from the CRD record under this standard.” And FINRA’s online training module adds: “An example would be if a broker was not employed at the time of issue and was therefore erroneously named.”
  1. The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. FINRA training provides: “The above standard would require an affirmative arbitral or judicial finding that the broker was not involved in any of the activities listed above. This list of activities is taken from Question 14 of Form U4, which specifies the types of customer complaints that registered persons must report. Therefore, if arbitrators make he required finding, no logical basis would exist for keeping the reported claim on an individual’s CRD record.” And FINRA’s online module adds: “These are Form U-4 Reportable Complaints – investment related sales practice violation, forgery, theft, misappropriate or conversion of funds.”[1]
  1. The claim, allegation, or information is false.Here, arbitrators will assess the evidence, possibly make an affirmative finding that the claim, allegation, or information is false, and , if warranted, order expungement relief. This is the ground customer attorneys should have the greatest trouble with since it is diametrically opposed to the allegations of wrongdoing in Statements of Claim. FINRA training states: “This basis for expungement is premised on a finding that the claim, allegation or information given was false. Arbitrators should make such a finding only after considering the merits of the allegations against the broker or securities firm. For example, if the customer alleged that the broker made unauthorized trades and the broker provided evidence contrary to this claim, such as a document signed by the customer directing the trades, arbitrators could find that the claim or allegation was false.” FINRA’s online module states: “Consider the merits of the allegations and evidence contracting the claim.”

If you have a customer complaint or arbitration on your record that you believe should be expunged on the grounds listed above, you need to consult with an attorney with decades of experience in this area of the law.  There is a distinct possibility that you will forfeit your right to seek such relief if you fail to follow the new procedures.  Contact the attorneys at Kaufmann Gildin & Robbins LPP for a complimentary consultation.