As most in the industry know, under the Financial Industry Regulatory Authority’s (Finra) current reporting structure, a customer complaint appears on a financial advisor’s public record as soon as it is made. That complaint stays on the advisor’s record indefinitely, unless he or she, by taking affirmative legal action, is able to get the complaint expunged by Finra-appointed arbitrators. In today’s litigation-happy world, more and more brokers find their records blemished by customer complaints—whether valid or not. As Finra has made a concerted effort to crack down on expungements over the past few years, and most recently, last month, these complaints have become increasingly harder to remove by brokers seeking to keep their reputations clean.
The basis for expungement is governed by Finra Rule 2080. Under Section (b)(1) the conditions under which expungement may be granted are as follows:
(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.
Finra Rule 2080 Section (b)(2) sets forth an alternative basis for expungement where “the expungement relief and accompanying findings on which it is based are meritorious,” and “the expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.”
It is no secret that Finra has pushed for closer scrutiny over expungements during the past few years. In October 2013, Finra issued a “Notice to Arbitrators and Parties on Expanded Expungement Guidance.” This guidance is circulated to arbitrators for review prior to ruling on any expungement request and promotes Finra’s position that “expungement is an extraordinary remedy that should be granted only under appropriate circumstances.” It instructs arbitrators that, contrary to the full text of Rule 2080, expungement should be granted “only when the arbitrators find and document one of the narrow grounds” set forth in (A) through (C) above. The notice makes no mention of the alternative grounds for expungement found in Section (b)(2), attempting to limit Rule 2080 as it exists. The notice continues to advise arbitrators to request any evidence they think may be relevant to the expungement, review the financial advisor’s BrokerCheck report, provide a detailed explanation if expungement is granted and to inquire as to whether any settlement was conditioned on an agreement by the customer not to oppose the expungement request.
Last month, Finra expanded this guidance even further. Effective September 2015, the updated notice circulated to Finra arbitrators adds discussion concerning the importance of allowing customers to participate in the expungement hearing and instructs that expungement must be denied if it has previously been denied by another arbitrator. The modified guidance also refers arbitrators to Finra Rule 2081 which, created in 2014, prohibits any firm or broker from conditioning, or attempting to condition, the resolution of any dispute upon the customer’s agreement to consent to, or to not oppose, an expungement request. Finally, the notice newly addresses expungement cases in which the customer is not a named party—that is, where a broker has named his or her employer as a party for the purposes of obtaining expungement. In these cases, the guidance directs arbitrators to order the financial advisor to provide a copy of his or her request for expungement to the customer to (a) ensure that the customer is aware of the request, and (b) to provide the customer with the opportunity to give their input on the request, whether in writing or through participation in the expungement hearing.
There are certainly cases in which complaints against a broker are valid and should be disclosed on his or her record. And it is of course imperative that Finra put in place appropriate standards in order to keep investors both safe and informed about the persons to whom they entrust their money. As set forth in Finra’s guidance, “ensuring that CRD information is accurate and meaningful is essential to investors,” and to the CRD system as a whole.
The increased scrutiny on expungements, however, without any corresponding reform in reporting customer complaints in the first place, creates an imbalanced system prone to distortion. The latest additions to Finra’s expanded expungement guidance further increase the hurdles for brokers looking to clear their name in the wake of a customer complaint. This is especially true, given Finra’s recently approved proposal to amend the current expungement rules to incorporate this guidance. While it is unclear whether tightening the lid on expungements will fairly accomplish the goal of accurate and meaningful disclosures to the public, or will instead frustrate that purpose, it is sure to leave many brokers with limited opportunities to clean their record following a complaint.