• FINRA Rule Proposal May Eliminate Using Expungement as a "Bargaining Chip" in Customer Dispute Settlement Agreements
  • March 19, 2014 | Authors: Robert B. Bieck; Erin E. Gilson
  • Law Firm: Jones Walker LLP - New Orleans Office
  • On February 13, 2014, the Financial Industry Regulatory Authority ("FINRA") announced that its Board of Governors had approved a rule proposal prohibiting the practice of conditioning customer dispute settlements on an agreement not to oppose a request to expunge information from an associated person's Central Registration Depository record ("CRD"). The rule proposal will be submitted to the SEC for review, public comment, and approval.

    The CRD system is FINRA's online registration and licensing system containing records on FINRA members and associated persons, including disclosures of criminal, regulatory, and civil actions. A report based on this information is publicly available via FINRA's BrokerCheck system through a simple name search. Typically, following the settlement of customer disputes, the report usually discloses this event as a "final disclosure event" and "settled," noting within the report that a "settled" matter generally represents the disposition of a dispute by the parties' agreement to resolve the matter. The report also typically contains form language indicating that customer dispute settlements may occur because of business or other reasons.

    When a broker is named as a respondent in a customer-initiated arbitration, the arbitration claims and any allegations of wrongdoing are required to be reported on the broker's Form U4, and consequently, the CRD System. Through either a court action or arbitration for expungement, a broker can seek the removal of references to this information in the CRD System's records by making a request pursuant to FINRA Rules 2080, 12805, and 13805. These rules set out both the procedures and the substantive standards required to determine whether FINRA will oppose either a court order or arbitration award allowing expungement relief based on the reason(s) for requesting expungement and supporting evidentiary material.

    Generally, FINRA considers expungement relief to be an extraordinary remedy to use only when the expunged information has no meaningful regulatory or investor protection value. Currently, FINRA Rule 2080 sets out the criteria to meet the substantive standards for expungement. Under FINRA's Customer Code Rule 12805 and Industry Code Rule 13805, FINRA already reviews the terms and conditions of a settlement agreement as part of this process, particularly where they might raise concerns about an associated person's alleged misconduct.