The Securities and Exchange Commission (the “SEC”) recently approved FINRA Dispute Resolution’s new expungement rules. The new rules apply to any expungement order issued on or after January 26, 2009. The new rules are contained in the Codes of Arbitration Procedure for Customer and Industry Disputes Rules 12805 and 13805, respectively. The text of FINRA Rules 12805 and 13805 are identical, with the exception that Rule 12805 references Rule 12800 and Rule 13805 references Rule 13800. See Rule 12805; Rule 12800; Rule 13805; and Rule 13800. Both Rule 12800 and Rule 13800 are captioned “Simplified Arbitration” and also have almost identical text. For the purposes of this memorandum reference will be made to Rules 12805 and 12800 as those are the rules that apply to customer disputes.
Rule 12805 states as follows:
In order to grant expungement of customer dispute information under Rule 2080, the panel must:
(a) Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement. This paragraph will apply to cases administered under Rule 12800 even if a customer did not request a hearing on the merits.
(b) In cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement.
(c) Indicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2080 grounds for expungement applies to the facts of the case.
(d) 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.
FINRA Rule 2080 sets forth the grounds for expungement:
(a) Members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.
(b) Members or associated persons petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents unless this requirement is waived pursuant to subparagraph (1) or (2) below.
(1) Upon request, FINRA may waive the obligation to name FINRA as a party if FINRA determines that the expungement relief is based on affirmative judicial or arbitral findings that:
(A) the claim, allegation or information is factually impossible or clearly erroneous;
(B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
(C) the claim, allegation or information is false.
(2) If the expungement relief is based on judicial or arbitral findings other than those described above, FINRA, in its sole discretion and under extraordinary circumstances, also may waive the obligation to name FINRA as a party if it determines that:
(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.
(C) For purposes of this Rule, the terms “sales practice violation,” “investment-related,” and “involved” shall have the meanings set forth in the Uniform Application for Securities Industry Registration or Transfer (“Form U4”) in effect at the time of issuance of the subject expungement order.
See Rule 2080. Rule 2080 superseded NASD Rule 2130; however, the texts of the rules are identical.
Expungement can be pursued after one of three events: (1) a panel dismisses a claimant’s claim against the broker and makes an affirmative finding of expungement; (2) the parties settle and the settlement is reduced to a stipulated award including expungement, or (3) a full arbitration hearing is held and a panel concludes expungement is proper. These steps are adapted from FINRA Notice 04-16 (the “Notice”) and FINRA Rule 2080 (Formerly NASD Rule 2130) Frequently Asked Questions (“FAQ”). While the Notice was issued in connection with the promulgation of Rule 2130, superseded by Rule 2080, as the language of the two rules is the same and the text of Rule 2080 refers readers to the Notice, there is nothing to indicate the analysis from the Notice is not applicable to Rule 2080. The steps are as follows:
1. Seek expungement in the broker/respondent’s prayer for relief;
2. If the panel finds in favor of the broker either on a motion to dismiss, or after the arbitration hearing, the panel would then decide whether to affirmatively grant expungement on one of three bases in Rule 2080(b)(1):
(A) Claimant’s claim, allegation or information is factually impossible or clearly erroneous;
FINRA states that “[t]his standard, for example, would provide a basis for expungement for an individual who has named in an arbitration claim but was not employed or associated with the member firm during the relevant time.”
(B) The broker was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds;
FINRA states that “[t]his is an objective standard based on CRD reporting requirements. This standard would require an affirmative arbitral finding that the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. Under this standard, dismissal of a claim, by itself, would not be a sufficient basis for ordering expungement.” See id. (emphasis added).
(C) Claimant’s claim, allegation or information is false.
FINRA states that “[u]nder this standard, the adjudicator will assess the evidence in the case, make an affirmative finding that the claim, allegation, or information is false, and order expungement relief.” See id.
The Panel can also grant expungement based on Rule 2080(b)(2), but only under “extraordinary circumstances.”
If the parties settle Claimant’s claim, the parties can jointly ask the Panel for a stipulated award and request the Panel make affirmative findings and order expungement based on any one of the above three bases set forth in Rule 2080. The Panel is required to follow Rule 12805 in considering expungement requests, i.e., hold a hearing, review settlement documentation, decide which of the Rule 2080 grounds are applicable and assess forum fees against the party seeking expungement. “Parties who plan to seek expungement relief notwithstanding a settlement should immediately advise the FINRA arbitration staff assigned to the case that they plan to do so, so that the case is not closed before the expungement request is considered.” The Panel would then determine whether to grant the broker expungement, and state in the award the basis upon which it granted expungement. A panel can require parties to provide documents or to participate in a brief evidentiary hearing to provide the panel with necessary information to help them with their findings.
If the Claimant’s claims proceed to an arbitration hearing, the eventual written arbitration award would have to state the basis for whether expungement relief, if any, was granted.
The broker would then have to obtain a court order, presumably through a lawsuit for declaratory relief confirming the award with expungement relief, based on the panel’s granting of a respondent’s motion to dismiss, stipulated award (as a result of settlement) or on the Panel’s arbitration award (as a result of a full arbitration hearing). The Notice further explains:
As further discussed below, Rule 2130 will apply to any request made to a court of competent jurisdiction to expunge customer dispute information from the CRD system that has as its basis in an arbitration or civil lawsuit filed on or after April 12, 2004. All requests to expunge customer dispute information from the CRD system arising from arbitrations or civil lawsuits filed before April 12, 2004, including any settlements arising therefrom, will continue to be subject to the terms of the moratorium in effect as of January 19, 1999, as discussed in Notice to Members 99-09 (February 1999) . . . Rule 2130 continues the requirement started with the January 1999 moratorium that a court of competent jurisdiction must order or confirm all expungement directives before NASD will expunge customer dispute information from the CRD system . . . [c]onsistent with the 1999 moratorium, NASD may continue to expunge, without a court order, arbitration awards rendered in disputes between registered representatives and firms that contain expungement directives in which the arbitration panel states that expungement relief is being granted because of the defamatory nature of the information.
The broker must name FINRA as an additional party in the lawsuit and serve FINRA with all documents, unless FINRA waives the requirement. The broker would need to send a waiver request and the award containing expungement information to:
Rule 2080 – Expungement Notice/Waiver Request
FINRA Registration and Disclosure Department – 3rd Floor
9509 Key West Avenue
Rockville, Maryland 20850
When FINRA receives a request for a waiver, FINRA staff will notify the states where the broker is/was registered about the expungement request. FINRA staff will then look at the basis upon which expungement was granted, i.e., those set forth in Rule 2080(b)(1). FINRA will waive the broker’s obligation to name FINRA as a party if the expungement was granted in accordance with the standards of Rule 2080(1). This waiver decision will be in writing. State authorities will make their own determination whether or not to oppose expungement. It is therefore suggested that a broker send the arbitration award to FINRA staff prior to naming it as a party in a separate civil suit.
If FINRA staff determines the grant of expungement does not meet the standards of Rule 2080(1), it will not waive the requirement that it be named as a party and served all documents. FINRA would then oppose the confirmation of the expungement by the court. The broker would have to serve FINRA by serving Corporate Creations in the jurisdiction where the lawsuit was filed.
It is possible for brokers to seek expungement of old customer complaints on a CRD report. For each claim for which a broker seeks expungement, a new arbitration filing would be required, as well as a new Uniform Submission Agreement. The filing fee for a broker as an individual would be $1250.00.
However, FINRA Rule 12206 provides that “[n]o claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule.” Therefore, assuming the occurrence or event giving rise to a broker’s expungement claim would have been the reporting of the customer complaint, the complaint would have had to have been reported within the past six (6) years.
Adverse CRD notations can create difficulties for a broker to move to other brokerage firms. In addition, many times, one of the first thing a claimant will do prior to filing a Statement of Claim with FINRA is to download a broker’s CRD report to look for other customer complaints. Undoubtedly, claimants and their attorneys will raise or bring up other customer complaints against the broker at some point during the arbitration process.
If you believe you have grounds to expunge an adverse entry on your CRD or on your Form U4 or U5 and would like to seek expungement of an old customer complaint from your CRD report, U4 or U5, please contact Robert Mitchell by e-mail only at firstname.lastname@example.org
to schedule an appointment or set up a telephone consultation. Appointments and consultations regarding expungement matters are handled by e-mail only.