• California Appeals Court Opinion Highlights Brokers' Ability to Seek Judicial Expungement on Equitable Grounds
  • September 12, 2012 | Authors: Scott E. Rahn; Jennifer Tomsen
  • Law Firms: Greenberg Traurig, LLP - Los Angeles Office ; Greenberg Traurig, LLP - Houston Office
  • A California court of appeals recently reversed a trial court’s dismissal of a broker’s expungement petition, finding that even if the broker had not met the grounds set forth in FINRA Rule 2080 for granting expungements, the broker had stated a cause of action for expungement on purely equitable grounds. See Lickiss v. FINRA, 2012 WL 3605785 (Cal. Ct. App. Aug. 23, 2012).  The decision is important for registered persons who previously had considered the grounds in Rule 2080 as their exclusive avenue to obtaining expungement of their CRD records. The decision is especially important given increasing amounts of information disclosed to the public as well as efforts to encourage investors to use FINRA’s BrokerCheck system to obtain information about financial advisors’ records, regardless of its accuracy.

    FINRA Rule 2080 provides that members or associated persons seeking expungement relief arising from disputes with customers must obtain a court order either “directing such expungement or confirming an arbitration award containing expungement relief.”  Rule 2080 also provides that FINRA must be named as a party to any court proceeding seeking expungement unless 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 sales practice violation, forgery, theft, misappropriation or conversion of funds; or (c) the claim, allegation or information is false.  If a court or arbitrator makes one of these findings, FINRA may (and typically does) waive the requirement that it be named as a party to the expungement proceedings. 

    The broker in Lickiss sought expungement in California state court of 17 old customer complaints, most of which related to his sale of a single security to customers who filed arbitration claims after hiring the same claimant’s attorney.  Lickiss moved the court for expungement under Rule 2080 but also under the court’s equitable powers. FINRA was a party to the proceedings and objected to the expungement on the grounds that there were no Rule 2080 findings.  FINRA moved to dismiss Lickiss’s petition, contending that Rule 2080 provided the exclusive grounds for expungement and that therefore the court should apply the Rule’s standards in determining the motion to dismiss.[1]  The trial court ultimately adopted FINRA’s argument.

    The court of appeals reversed and reinstated Lickiss’s petition. The court found that Rule 2080 was procedural, not substantive. While the Rule 2080 findings were necessary for FINRA to waive its right to participate in the proceedings, they did not establish the sole avenue for expungement.  This finding is notable since FINRA appears to consider Rule 2080’s findings requirements for expungement.  The appeals court examined the history behind Rule 2080, including the SEC’s position that the Rule 2080 standards “would be most effectively applied at the waiver juncture,” and concluded the rule was merely procedural.

    The appeals court held that because Lickiss had invoked the trial court’s inherent equitable powers to do justice, it should have recognized those powers as an independent ground upon which expungement could be granted. The trial court erred when it adopted Rule 2080 as the exclusive standard for expungement.  According to the appeals court, “[t]he choice of a very narrow, rigid rule to assess the legal sufficiency of Lickiss’s petition — a choice that closed off all avenues to the court’s conscience in formulating a decree and disregarded basic principles of equity — was nothing short of an end run around equity.”

    The ultimate decision whether expungement will actually be granted in equity has not yet been made, although the appeals court noted grounds on which it could be based, including the age of the complaints (some more than 20 years old), the fact that most were based on the sale of a single security, and Lickiss’s unblemished record since then. FINRA will have an opportunity to advance its equitable arguments against expungement before the trial court and appeal the decision if it does not prevail.

    The opinion highlights a path to expungement that has always been available but historically has been rarely utilized for any number of reasons, including privacy and cost considerations that favor arbitration. More importantly, the opinion shows that FINRA believes that satisfying Rule 2080 requirements is the exclusive avenue to expungement, despite the express provisions of its own rules and courts' inherent equitable authority.  The appellate court finding that Rule 2080 requirements are procedural, not substantive, reinforces the notion that expungement can be granted on other grounds. Thus, judicial expungement may be possible even where an arbitration panel has denied expungement on the grounds that Rule 2080 has not been satisfied.  It appears certain, however, that anyone pursuing a judicial option can expect stiff opposition from FINRA.  Due to the continually increasing scrutiny of advisors' CRD records — by regulators, employers and customers alike - any financial advisor considering pursuing expungement of active or historical CRD complaints is encouraged to seek professional advice while all these options remain available.

    [1] FINRA’s position regarding Rule 2080 is curious in light of the fact that the National Association of Securities Dealers (“NASD”) — FINRA’s predecessor — had expressly rejected requests that the grounds for expungement be limited to the three grounds identified in Rule 2080(b)(1):

    Some commenters suggested that the burden of complying with the three proposed standards should be placed squarely upon the NASD's members.  Such a rule would require that NASD members only seek expungement of data from the CRD system, if such data fits within one of the three standards.  NASD noted that it does not believe such an approach is necessary to achieve the objectives of the proposed rule.

    SEC Release No. 34-48933, 68 FR 74667 at 74670, 2003 WL 23004907 (SEC Dec. 24, 2003) (emphasis added). FINRA’s position also seems to run counter to the plain language of Rule 2080. See FINRA Rule 2080(b)(2) (“If the expungement relief is based on arbitral findings other than those described above [i.e., in Rule 2080(b)(1)], FINRA . . . also may waive the obligation to name FINRA as a party . . . .”) (emphasis added).