By Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C. posted on Monday, October 23, 2017.

Erwin J. Shustak

Managing Partner

Location: San Diego, California
New York, New York
Phone: (619) 696-9500 (Ext. 109)
(800) 496-5900 (Ext. 109)
Email: [email protected]

Erwin J. Shustak, Esq.
619.696.9500 ext. 109
[email protected]

As FINRA and the SEC make it a priority for the investing public to know as much about their investment professionals as possible, and as more and more investors are searching the FINRA Broker-Check web site (www.finra.org) to learn more about their advisers, expungement is an increasingly significant issue for most brokers.  Expungement is the ability to eradicate, or “expunge” from the FINRA CRD (Central Registration Department) system a negative, “black mark” on a broker’s FINRA records.  It could be a customer complaint; a misdemeanor or other charge for possession of drugs, assault and battery as a college student, DUI or some other infraction; an involuntary termination from a prior firm or something the broker prefers not to have on his or her record.

FINRA recently made changes to “expungement-only” arbitrations involving customer complaints which we describe below.

Recent FINRA Changes Regarding “Expungement-Only” Arbitrations-

Under FINRA expungement rules, a broker seeking to expunge from the CRD system a customer complaint, is not required to name the actual customer in an expungement arbitration.   Instead, the broker names only the firm at which he or she was employed when the customer complaint was filed; not seek any damages or financial recovery from the former firm; proceed to a hearing and try to convince the panel that expungement is warranted under one of the three specified grounds on which a panel can order expungement under Rule 2130, which was adopted in 2004.  The three enumerated grounds are:

1. The information, claim, or allegation is factually impossible or clearly erroneous.

2. The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or

3. The claim, allegation, or information is false.

If a panel determines that the customer complaint falls within one of the three specified grounds, the Panel can order the customer complaint stricken from the FINRA CRD records and, once the arbitration award- if expungement is in fact ordered- is confirmed by a court, the customer complaint is stricken from the CRD system and no longer would be available through the FINRA Broker-Check on-line portal.  Too often, however, brokers seeking expungement of customer complaints never name the actual customer, only the firm where the broker was employed when the complaint was made and reported by that firm on the broker’s U-4.  This has been particularly true if the broker filed an “expungement-only” arbitration and sought only an order of expungement of a customer complaint and did not seek money from the firm nor name the customer in the arbitration.  Firms have little financial incentive to defend an “expungement-only” arbitration where no damages or monetary award is sought against the firm and firms faced with these “expungement-only” arbitrations had little incentive to do anything, leaving it entirely to the Panel to decide if expungement was appropriate and warranted.

To ensure the former customer who filed the complaint has the ability to provide the arbitration panel input, and possibly object to the expungement request, FINRA’s ODR (Office of Dispute Resolution) recently  issued updated guidance to its roster of arbitrators and the public on Expungement-Only arbitrations.  The updated guidance is intended to ensure the actual customer has notice of the expungement proceeding and the opportunity, if he or she wishes, to give input and objections to the Panel.  The updated guidance reads as follows:

“In some instances, an associated person will file an arbitration claim against a member firm solely for the purpose of seeking expungement, without naming the customer in the underlying dispute as a respondent. To ensure that customers know about the expungement request, arbitrators should order the associated persons to provide a copy of their Statement of Claim to the customer(s) involved in the customer's arbitration case that gave rise to the customer dispute information (underlying arbitration).

It is particularly important to note that without this directive from the arbitrators, the customer(s) may not even be aware that an expungement claim is pending regarding their prior dispute. Additionally, notice provides the customer(s) with the opportunity to advise the arbitrators and parties of their position on the expungement request, which may assist arbitrators in making the appropriate finding under Rule 2080. The position of the customer(s) can be made known in writing or through participation in the expungement hearing..."

FINRA also modified the expungement award form so the panel can confirm the required notice was given to the customer involved in the customer complaint.

The specialized Award Information Sheet has analogous language.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, or if you or your company require counsel in these areas, contact us today for a confidential, complimentary consultation.

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