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FINRA Rule Would Prohibit Settlement Conditioned On Agreement Not To Oppose Expungement

By George Miller of Shustak Reynolds & Partners, P.C. posted on Monday, March 3, 2014.

George C. Miller

George C. Miller


Location: San Diego, California
Phone: (619) 696-9500 (Ext. 105)
Direct: (619) 501-8270
Email[email protected]

The Financial Industry Regulatory Authority (FINRA) recently announced a new proposed rule that would prohibit member firms and registered representatives from conditioning settlement on, or otherwise compensating customers for, an agreement not to oppose expungement requests. According to FINRA, the proposed rule will help preserve the integrity of the Central Registration Depository (CRD) system–the database containing, amongst other information, a firm/broker’s compliance and disciplinary history.  Much of the information reported on the CRD is publicly available through FINRA’s BrokerCheck website.

The scenario typically arises when a firm or broker agrees to settle an arbitration claim filed through FINRA’s Arbitration Division.  Under existing FINRA rules, firms generally must report these claims on the CRD system using Form U4.  Once this type of disclosure has been made, however, it generally cannot be removed or changed absent an “expungement” order from a FINRA Arbitration Panel.  To grant expungement relief, an arbitration panel must conclude that a claim was factually impossible or clearly erroneous; that the individual was not involved in the alleged misconduct; or that the claim or allegation was false.

For many years, firms and brokers have conditioned settlement on a customer’s agreement “not to oppose” expungement proceedings.  In effect, firms ask arbitration claimants to agree their claims were “factually impossible” or “false” as a condition of settlement.  The practice enabled firms/registered reps to settle with customers while maintaining clean compliance records, even where they may have been some actual wrongdoing by the firm/advisor.  In fact, based on a study released last October by the Public Investors Arbitration Bar Association (PIABA), over 90% of FINRA arbitration claims that settled between 2007 and 2011 also resulted in expungement.

FINRA’s proposed rule seeks to drastically limit the availability of expungement to firms/registered reps when settling claims.  It remains to be seen whether the proposed rule will cause firms/advisors to litigate claims they otherwise may have settled.  Before taking effect, the proposed rule must be submitted to the SEC for review, comment and approval, a process which can take several months.

If you are a customer who has a prospective claim against a FINRA firm or its representative, or are a FINRA registered representative seeking to obtain expungement relief, please contact our managing partner to discuss your situation.

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