• FINRA Issues "Expanded Expungement Guidance" To Arbitrators And Parties
  • October 18, 2013 | Author: Mark D. Knoll
  • Law Firm: Bressler, Amery & Ross A Professional Corporation - New York Office
  • On October 14, 2013, FINRA Dispute Resolution (“FINRA DR”) issued a “Notice to Arbitrators and Parties on Expanded Expungement Guidance” that FINRA DR mandated arbitrators to read prior to considering expungement requests.  The Expanded Expungement Guidance  (“EEG”) signals a push by FINRA DR to have arbitrators give closer scrutiny to, and more detailed explanations for, grants of expungement relief.  However, the Expanded Expungement Guidance may go too far in grafting onto the relevant expungement rules and procedures additional conditions and requirements that are not in the plain text of the existing rules.  Thus, arbitration practitioners should be cognizant of the increased scrutiny expungement applications will face going forward, but at the same time they should continue to press arbitration panels and FINRA DR to apply the expungement rules as they are written.

    The Notice announcing the EEG states that “[e]xpungement is an extraordinary remedy that should be granted only under appropriate circumstances” and that “[i]nformation should be expunged only when it has no meaningful investor protection or regulatory value.”[1]  While true, FINRA has also been clear in the past that expungement can be a necessary remedy to “provide ... persons with a remedy to seek redress concerning allegations that could impact their livelihoods,” while at the same time balancing that need against FINRA’s desire to “ensure the integrity of the CRD records on which the investing public relies.”[2]  Indeed, NASD Notice to Members 04-16 stated that the expungement rules were designed to take into account three “competing” interests, including (i) the interests of the states and NASD to have broad access to customer dispute information to fulfill their regulatory responsibilities, (ii) the interests of investors in “having access to accurate and meaningful information about brokers with whom they conduct, or may conduct, business,” and (iii) “the interests of the brokerage community and others in a fair process that recognizes their stake in protecting their reputations and permits expungement from the CRD system when appropriate.”[3]

    The EEG additionally asserts  that the “procedures [set out in rules 12805 and 13805] are intended to ensure that expungement occurs only when the arbitrators find and document one of the narrow grounds specified in Rule 2080.”  However, FINRA DR’s new  interpretation of the “narrow grounds specified in Rule 2080[(b)(1)(A)-(C)]” as being the only grounds under which a panel may grant expungement relief is overly narrow and does not follow the text of the rule itself.  Rule 2080 provides, in full:

    (a) Members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.

    (b) Members or associated persons petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents unless this requirement is waived pursuant to subparagraph (1) or (2) below.

    (1) Upon request, FINRA may waive the obligation to name FINRA as a party if FINRA determines that the expungement relief is based on affirmative judicial or arbitral findings that:

    (A) the claim, allegation or information is factually impossible or clearly erroneous;

    (B) the registered person was not involved in the alleged investment-related salespractice violation, forgery, theft, misappropriation or conversion of funds; or

    (C) the claim, allegation or information is false.

    (2) If the expungement relief is based on judicial or arbitral findings other than those  described above, FINRA, in its sole discretion and under extraordinary circumstances, also may waive the obligation to name FINRA as a party if it determines that:

    (A) the expungement relief and accompanying findings on which it is based are meritorious; and

    (B) the expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.

    (c) For purposes of this Rule, the terms “sales practice violation,” “investment-related,” and “involved” shall have the meanings set forth in the Uniform Application for Securities Industry Registration or Transfer (“Form U4”) in effect at the time of issuance of the subject expungement order. [4]

    Despite the EEG, nothing in Rule 2080 requires a finding of any of the grounds set forth in Rule 2080(b)(1)(A)-(C) in order to grant expungement relief.  In fact, the only requirement for an expungement is that a registered person must “obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.”  Rule 2080(a).

    The “grounds” identified by FINRA DR in the EEG  as being required before expungement relief can be granted are actually the  grounds which, if found, FINRA may elect to waive its right to be named in a required confirmation proceeding in state court.  Thus, if an arbitration award finds that the “the claim, allegation or information is factually impossible or clearly erroneous” (see section (b)(1)(A)), or if “the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds” (see section (b)(1)(B)), or if “the claim, allegation or information is false” (see section (b)(1)(C)) FINRA can elect not to require that it be named in a state court confirmation proceeding.  Contrary to FINRA DR’s guidance, nothing in Rule 2080(b)(1) operates to require that an arbitrator find one of the grounds in (A) through (C) prior to granting relief.

    Expungement is an equitable remedy.  Like other remedies, FINRA arbitrators are not bound (within limits) by legal or other precedent in determining whether to grant or deny certain requested relief.  In fact, Rule 2080 expressly recognizes this possibility when, in section (b)(2), it provides that FINRA may also elect to waive its right to appear in a state court confirmation proceeding if “(A) the expungement relief and accompanying findings on which it is based are meritorious; and (B) the expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.”  (emphasis added)  Thus, FINRA’s rules clearly appreciate the fact that expungement relief is not limited to only those matters where the criteria of 2080(b)(1)(A)-(C) are met, but also may be granted under any “meritorious” grounds.

    Further, unlike the EEG, Rule 2080 does not place the burden on arbitrators to determine whether an expungement would have “no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.”  Rather, that determination is, according to the plain language of the Rule, to be made by FINRA when it considers whether or not to oppose confirmation.   

    The above interpretation of the plain language of Rule 2080 is consistent with the procedures outlined in Rule 12805 and 13805.  Those procedures simply provide that, in order to grant expungement relief, Arbitrators must hold a hearing session “regarding the appropriateness of expungement” and review settlement documents.[5]  However, nothing in Rules 12805 or 13805 require, as the EEG asserts, a panel to review a representative’s BrokerCheck record.  And for good reason, because expungement determinations should be based on their own individual merits and should not necessarily be influenced by other potential disclosures on a representative’s record.

    Finally, under Rule 12805(c), a panel must “[i]ndicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2080 grounds for expungement apply to the facts of the case.”  Note that the requirements of Rule 12805 are not that a panel set forth which of the Rule 2080(b)(1)(A)-(C) grounds form the basis for the relief, but rather which Rule 2080 grounds applies.  Thus, by the plain language of the expungement rules, arbitration panels should continue to be free to grant expungement for any “meritorious” grounds, whether or not they are part of the specifically enumerated (A)-(C) grounds (impossibility, broker not involved, or claim is false) of Rule 2080(b)(1).   

    The EEG provides useful reminders to arbitrators to clearly state the reasons for any expungement award.  However, FINRA DR’s narrow interpretation of the applicable rules appears to contradict the plain language of the underlying rules themselves. There is no dispute that disclosure and investor protection are critical and laudable goals that should be fully supported by appropriate rules and procedures.  Indeed, during the last several years, there has been  an increased push for more greater disclosure through changes to the Uniform Forms U4 and U5 and through amendments to FINRA Rule 8312 that expand the information available to be released through BrokerCheck.  However, FINRA should not employ overly restrictive interpretations of its rules to the detriment of registered representatives who have an equally compelling interest in having their public disclosures be fair and accurate.



    [1] See, http://www.finra.org/ArbitrationAndMediation/Arbitration/SpecialProcedures/Expungement/

    [2] FINRA Regulatory Notice 12-18, p. 1 (April 2012).

    [3] NASD Notice to Members 04-16, p. 2 (April 2004).

    [4]  FINRA Rule 2080.

    [5] See, Rule 12805(a) and (b).