By Erwin J. Shustak, Esq. of Shustak Reynolds & Partners, P.C. posted on Wednesday, December 13, 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]

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

FINRA recently submitted a new proposal to the Securities and Exchange Commission which will greatly narrow, and substantially complicate, the ability of brokers to expunge- or remove- from public records including their FINRA CRD (Central Registration Depository) records and FINRA’s Broker Check, prior customer complaints. The proposal, which the SEC is anticipated to approve quickly following the February 5 deadline for comments, will make it impossible for many brokers to remove customer complaints from their records. We therefore urge anyone with a customer complaint on their record which they are considering expunging, to act quickly before it is too late.

The biggest change is the proposed, extremely short time limitation on when an expungement action can be brought to remove a customer complaint. Under current rules, there is no time limit on when a proceeding can be filed to expunge a customer complaint, regardless of when the customer complaint was filed. Often customer complaints result in the firm denying a written or oral complaint and the customer never pursues a formal complaint through a FINRA arbitration.  Or the customer does proceed to arbitration and the case either is settled, with the firm paying all the settlement, or the claim is denied by the panel. Under current rules, there is no time limit on when an expungement proceeding can be initiated. We have brought expungement proceedings for customer complaints filed long as a decade or more ago. That time limit is about to shrink dramatically.

Often brokers, who may have had the complaints when they were starting out in the industry and, only after they build a substantial book, do they think about cleaning up and expunging older customer complaints.

The new rules, which may go into effect as early as February or March of 2018, contain significant restrictions on expungement actions including:

1. Under the new proposal, an expungement action for a customer complaint-regardless of whether the complaint is not pursued in arbitration or is pursued in a FINRA arbitration but the case either is withdrawn or settled-  must be brought, if at all, within one year of the time the complaint is reported to FINRA’s CRD department by the broker’s firm.  

2. If the customer initiated an arbitration, and if the arbitration is not withdrawn or settled and the FINRA arbitration panel issues an award, the affected broker must submit a request for expungement of the complaint during the underlying case, not after the award is issued;

3. Under the current rules, arbitrators can conduct an expungement hearing by telephone. Under the proposed ruled, the arbitrators must hold an actual hearing, which involved additional time and expense over a telephone hearing; and

4. FINRA proposes having only experienced, expungement qualified arbitrators sit on expungement and all three panelists must agree, unanimously, to order expungement.

It is highly likely the FINRA proposals will be adopted and the entire expungement process will be drastically changed, leaving brokers without the ability to expunge older customer complaints, regardless of how baseless they may be. We encourage anyone with a customer complaint disclosure on their CRD which they have been considering seeking to expunge to contact us immediately as the window on the ability to expunge older customer complaints is about to shut as early as February 2018.

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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