• FINRA Prohibits Conditioned Settlements
  • August 12, 2014 | Author: Katharine F. Musso
  • Law Firm: Jones Walker LLP - Birmingham Office
  • On July 30, 2014, the Financial Industry Regulatory Authority ("FINRA") adopted a new rule which prohibits brokers from conditioning settlement of a customer dispute on the customer's agreement to prevent the dispute from being made public. New FINRA Rule 2081, entitled "Prohibited Conditions Relating to Expungement of Customer Dispute Information," took effect immediately. In adopting the rule, FINRA noted that it has had a longstanding concern about conditioned settlements preventing important disciplinary information from being posted to the Central Registration Depository ("CRD") for public viewing. Brokers seeking expungement will have to pursue it through the process set forth in Rule 2080.

    The issue of expungement has taken many twists and turns in recent years. In 2012, FINRA proposed a series of related rules in Notice 12-18 which would have the effect of facilitating certain expungement actions. Specifically, if a registered representative is not named as a respondent in a customer dispute yet is the "subject of" allegations of sales practice violation, the registered representative would have a special process "In re expungement proceedings," to pursue expungement. The proposed rules have not been adopted.

    More recently, U.S. Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) sent a bipartisan letter to FINRA asking it to strengthen the standards for expungement. Their December 16, 2013, correspondence noted that FINRA arbitrators had granted 96.99 percent of expungement requests in a recent 18 month period. The Senators expressed concern that investors were being denied important protection by blocking information from the CRD. FINRA Chairman Richard G. Ketchum's response noted the likely adoption of Rule 2081 but also suggested additional rulemaking to clarify the proper standards for granting expungement. Updated training for arbitrators is expected to be released shortly.