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FINRA Issues New Expungement Guidance

By George Miller  of Shustak Reynolds & Partners, P.C. posted on Saturday, March 16, 2013.

FINRA recently issued new guidance to arbitrators further tightening the already limited grounds under which brokers may obtain expungement of customer information from their CRD record. The move follows a recent tide of criticism against FINRA and the SEC for, critics say, looking the other way when member firms, registered representatives and their attorneys require customers to agree not to oppose expungement requests as a condition of settling FINRA arbitration claims.

Under FINRA Rules, arbitrators generally cannot order expungement unless they hold an evidentiary hearing and conclude that: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the registered person was not actually involved in the alleged investment-related sales practice; or (3) that the claim, allegation or information is false. Arbitrators also must issue a written decision explaining the reasons for awarding expungement if they choose to do so.

FINRA’s new guidance instructs arbitrators to inquire and fully consider whether a party conditioned settlement of the arbitration upon an agremeent not to oppose an expungement request. The implication is that if settlement is conditioned on expungement, arbitrators should be even more careful in deciding whether to order expungement. The new guidance also indicates that expungement of customer information is an “extraordinary remedy that should be granted only under appropriate circumstances”–e.g., when [the information] has no meaningful investor protection or regulatory value.”

While the new guidance does not change FINRA’s actual expungement rules, it is a clear sign that FINRA may view expungement claims with increasing scrutiny in the months ahead.

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