Expungement of Customer Complaints – The Securities Lawyer

The problems associated with FINRA‘s CRD Disclosure System are well known to financial professionals – the concept of disclosing every allegation, justified or not, against a registered person, to anyone who cared to ask, is unheard of in our system of justice. The addition of BrokerCheck, where the information is available to anyone with an Internet connection has made the situation intolerable. For that reason, we are often asked to file an expungement request with FINRA, to remove unwarranted items from the CRD system

The interests of investor protection overrode the concepts of fundamental fairness and due process for brokers, and today there is full disclosure of every wart, pimple and untrue allegation made against a broker. Not fair to the broker, but of a theoretical benefit to the investing public.

Part of the problem are customer arbitrations. Customers can file an arbitration against a broker for anything, at virtually no cost to the customer. They can say anything they want, it doesn’t cost them anything, and there is no penalty for making a false accusation, and no sanctions for filing a frivolous complaint.

The problem of course, is that the frivolous complaint goes on a broker’s CRD report, and stays there. For many years, brokers and firms were able, as part of arbitration awards, to obtain an expungement order from a panel of arbitrations, directing that the CRD system remove any references to the dispute.

FINRA changed all of that, making it much more difficult to remove a false customer complaint from a broker’s public record, but it is still possible.

The Standard for Expungement

Under FINRA Rule 12805, an arbitration Panel must comply with four requirements before granting expungement of customer dispute information. The Panel must:

(a) Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement . . . [,]

(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[, and]

(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.

Grounds for Expungement and Written Findings

Subsection (c) of Rule 12805 mandates that the arbitration Panel determine the grounds for granting expungement provide a written explanation of its findings. This subsection refers to FINRA Rule 2080, which provides three possible grounds for expungement. These grounds are:

(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

Hearing Session

The Arbitration Panel is required to hold a hearing on the expungement request. While the rule allows for the hearing to be held by telephone, I usually recommend asking for an in person hearing. When we appear before the Panel it is easier for the Panel to ask questions, to review documents and to assess witness credibility.

Conclusion

I have been handling expungement requests for decades with great success. While FINRA is considering changing the process again, to make it more difficult to remove erroneous reports, for the time being, we will continue to remove these reports from our clients’ records.

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Mark J. Astarita, Esq. is a securities attorney representing investors, brokers and financial firms across the country for three decades. He is a partner in the securities law firm of Sallah Astarita & Cox, LLC. Feel free to call or email with any questions – 212-509-6544 or mja@sallahlaw.com

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