By Jonah A. Toleno, Partner of Shustak Reynolds & Partners, P.C. posted on Tuesday, November 29, 2022.

Jonah A. Toleno

Of Counsel

Location: San Diego, California
Phone: (619) 696-9500 (Ext. 104)
Direct: (619) 501-6483
Email: [email protected]

As part of its mission to protect investors, the Financial Industry Regulatory Authority (FINRA) gathers and discloses certain information about registered financial advisors and brokerage firms registered with FINRA, including financial advisors and broker dealers. FINRA houses this information in various databases, including but not limited to its Central Registration Depository (CRD) and its publicly viewable registration information portal, BrokerCheck.[1]

What happens, however, when the information disclosed is inaccurate? FINRA rules provide for a process by which registrants may seek expungement (removal) of inaccurate or false information on their CRD record.[2] Under FINRA Rule 2080, registered firms or advisors may seek to expunge customer dispute information by initiating a FINRA arbitration and presenting evidence supporting their expungement request. If the requester obtains an arbitration award granting expungement, the firm or advisor must obtain judicial confirmation of the award. FINRA arbitrators may award expungement under Rule 2080(b)(1) where (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 (C) the claim, allegation or information is false. [3] Rule 2080(b)(2) also allows for expungement when arbitrators determine that (A) the expungement relief and accompanying findings on which it is based are meritorious; and (B) the expungement would have no material effect on investor protection, the integrity of the CRD system or regulatory requirements.[4]

Once a court of competent jurisdiction confirms an expungement award, FINRA removes the expunged information from the CRD system, and it no longer is available to the public through its BrokerCheck database.

Over the last few years, FINRA has made several changes to its expungement process. Recently, FINRA proposed substantive revisions for expungement requests involving customer complaints, including the following.

For arbitrations filed exclusively for the purpose of expungement:

• If the expungement request involves a customer complaint, the request must be filed no more than three (3) years from the date the complaint was reported in FINRA’s CRD system (if the complaint did not evolve into a customer-initiated arbitration or civil litigation); and
• If the customer complaint did evolve into a customer-initiated arbitration or civil litigation, then the request must be filed no more than two (2) years after the close of such arbitration or litigation.[5]
• Such requests must name, as a Respondent in the arbitration, the broker-dealer firm with which the advisor was associated at the time of the events giving rise to the customer dispute.
• FINRA will permit an authorized representative of state securities regulators to attend and participate as a non-party in prehearing conferences and the expungement hearing to the same extent as customers could attend and participate.
• FINRA will require the request be decided by a three-person panel (as opposed to a one-person panel which historically was allowed in certain circumstances), and it will prohibit the parties from (1) agreeing to fewer than three arbitrators to consider the expungement request; (2) striking any of the selected arbitrators; (3) stipulating to an arbitrator’s removal; or (4) stipulating to the use of pre-selected arbitrators.[6]

For expungement requests considered during a customer arbitration:

• FINRA will require the registered advisor named in a customer arbitration to request expungement during that customer arbitration or forfeit the opportunity to request expungement in any subsequent proceeding.
• The new rule also will condition and limit the ability of a party to a customer arbitration to request expungement during the customer arbitration on behalf of a registered advisor who is the subject of a customer arbitration, but unnamed, so that the advisor cannot later claim they were not aware of the prior expungement made on their behalf.[7]

FINRA-registered firms and advisors should study the expungement rule changes proposed by FINRA, as these revisions will impact expungement requests substantially. Our firm regularly represents individuals and firms in employment matters in the areas of securities and financial services, including expungement claims. If you have a FINRA CRD expungement matter you’d like to discuss with us, give us a call.

Jonah A. Toleno is based in our San Diego, California office.
She practices in securities and financial services law, including employment law.
She acts as trial counsel and outside corporate counsel for numerous financial, business, and individual clients.
She can be reached at (619) 696-9500 or [email protected] with questions.

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