Recently, there has been an increasing reliance by investors on the Financial Industry Regulatory Authority’s (“FINRA”) BrokerCheck system to determine which brokers and investment professionals have been subject to disciplinary action. As a result, brokers and FINRA registered representatives are requesting that customer complaints be expunged from their BrokerCheck report as they do not want red flags alarming existing and potential customers. Since FINRA arbitration proceedings are private and confidential, the way FINRA promotes that public investors can become familiar with a broker’s disciplinary record is through the information available on FINRA’s BrokerCheck system. BrokerCheck provides information to the public regarding customer complaints, regulatory actions, and the brokers’ criminal history and bankruptcies. In very limited circumstances, FINRA Rules permit brokers to obtain arbitration orders recommending expungement of certain information contained on a broker’s BrokerCheck, if the arbitration panel determines that the claim was false or if the broker was not involved in the alleged sales practice violation. See FINRA Rules 2080, 12805 and 13805. If the arbitration panel recommends expungement, the broker must then have the arbitration award confirmed by a court of competent jurisdiction. The court order confirming the arbitration award then directs FINRA’s Central Registration Depository (“CRD”) to expunge the relevant information. When brokers request that information be expunged from their record, state regulators are given an opportunity to intervene and oppose the expungement. According to state regulators, in 2012, they received 519 expungement requests, as compared to 110 requests in 2009. This perhaps, can be attributed to FINRA’s new disclosure rule, which requires that brokers must report all complaints involving them, whether they were named as a party or not in the underlying arbitration. This new FINRA reporting rule may have helped investors gather more information regarding brokers since previously brokers who were not named in the a complaint had no requirement to report it, even if their actions were found to be abusive. There are critics on both sides of the rule. Some critics of FINRA’s new policy for expungement say that brokers can now simply purchase their clean record. If a broker seeks expungement, they can simply enter into a confidential settlement agreement with the customer which is conditioned upon the customer’s cooperation in the expungement process. This means that the customer will most likely not appear at the expungement hearing, making it more likely for the arbitration panel presiding over the expungement matter to be persuaded by the broker that the claims were meritless or that the broker was not involved in the alleged wrongful conduct. There are times, however, when arbitrators are aware that the broker is seeking to purchase a clean record, and will require that the client attend the expungement hearing to ensure that the information expunged actually should not appear on the broker’s BrokerCheck Report in accordance with FINRA rules. Other critics say that brokers are the only professionals that have such a reporting or disclosure system and that even unverified and obviously false complaints are now required to be reported on CRD reports. Many brokers complain that in cases that involve their sale of faulty investments that were created by their firms, or in cases in which the product that was sold, and not the brokers sale of the product, is at issue, the FINRA rules require the reporting of the claim regardless of the brokers lack of real involvement in the complained of actions.
Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation, including representing brokers and financial advisers in expungement proceedings. Additionally, Lax & Neville has extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses. Please contact our team of attorneys for a consultation at (212) 696-1999.