Expungement: an "Extraordinary Remedy"

What are the rules of the road with regard to broker requests to expunge customer claims from their records?  This post surveys the current standards for applicable to broker requests to remove customer complaints from their records (i.e., the Central Registration Depository or "CRD").  According to FINRA, the CRD system is "the central licensing and registration system for the U.S. securities industry and its regulators. The system contains the registration records of more than 3,790 registered broker-dealers, and the qualification, employment and disclosure histories of more than 632,735 active registered individuals."
FINRA describes expungement is an “extraordinary remedy.”  FINRA cautions, “Customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.”  This is because the availability of customer dispute resolution services important institutional interests. FINRA explains, “Ensuring that CRD information is accurate and meaningful is essential to investors, who may rely on the information when making decisions about brokers with whom they may conduct business; to regulators, who rely on the information to fulfill their regulatory responsibilities; and to prospective broker-dealer employers, who rely on the information when making hiring decisions.”

FINRA Rules 12805 and 13805 establish procedures – recently tightened up considerably – that arbitrators must follow before recommending expungement of customer dispute information related to arbitration cases from a broker’s CRD record.  The expungement procedures ensure that it occurs only when the arbitrators find and document one of the “narrow grounds” specified in Rule 2080:

(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.

The burden of proof falls on the party seeking expungement to show that these high standards are met.

To reject expungement on the first prong of the expungement standard an arbitration panel need only find that the claims mare factually “possible” and not “clearly erroneous.”  The second prong of the expungement standard applies to situations of mistaken identity, where the wrong person is named in a claim.  According to FINRA this “standard would require an affirmative arbitral finding that the registered person was not involved . . . .”  The final prong of the expungement standard requires that the panel assess whether the claims or allegations are “false.”  If expungement is sought for this reason, the panel must “assess the evidence in the case, make an affirmative finding that the claim, allegation, or information is false.”

The net result is a strong default rule against expungement.  The fact of a customer complaint, whether or not validated by favorable arbitration award or a settlement, does (and should) typically remain on record.  By the same token, all complaints are not created equal.  Just as a broker without any record of complaints still may be a compliance nightmare, a broker with one or few complaints may not turn out to be a compliance problem.