In today’s digital age, transparency in the financial industry is crucial. Investors have unprecedented access to detailed information about brokers through platforms like FINRA’s BrokerCheck. This level of transparency helps maintain trust between investors and financial professionals. However, it can also harm brokers who face unfounded allegations. At Bakhtiari & Harrison, we understand the importance of maintaining a clean record in the Central Registration Depository (CRD) system. We advocate for brokers to seek expungement through the FINRA arbitration process. This helps protect their professional reputation and career.
Understanding the Expungement Process
Expungement is the process of removing customer dispute information from a broker’s CRD record. This information includes customer complaints, arbitrations, and civil litigations. FINRA Rules 12805 and 13805 specify the narrow circumstances under which expungement is appropriate:
- The claim, allegation, or information is factually impossible or clearly erroneous.
- The associated person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds.
- The claim, allegation, or information is false.
To achieve expungement, an independent arbitrator or a panel of arbitrators must determine that one of these grounds is met.
The Role of BrokerCheck
FINRA’s BrokerCheck is a free tool that provides the public with access to registration information, including customer dispute information. FINRA encourages investors to use BrokerCheck to make informed decisions about financial professionals. However, this transparency can cause situations where people judge brokers based on unverified allegations. This makes the expungement process crucial for those wrongly accused.
New Enhancements to the Expungement Process
Effective October 16, 2023, FINRA implemented significant enhancements to the expungement process to ensure its integrity and fairness. Key changes include:
- Special Arbitrator Roster: A panel of three specially trained public arbitrators must decide straight-in requests for expungement.
- Unanimous Decision Requirement: All arbitrators must unanimously agree to grant expungement based on the specific rules.
- Customer Participation: Customers can take part in the entire expungement hearing, either in person or by video conference.
- State Securities Regulators Involvement: State securities regulators are informed of expungement requests and can attend and participate in the hearings.
Statutes of Eligibility
The revised rules impose strict time limits for seeking expungement:
- Expungement requests must be filed within two years after the customer arbitration or civil litigation related to the dispute ends.
- If the customer complaint does not turn into arbitration or litigation, the request must be filed within three years from when the complaint was first reported in CRD.
Filing an Expungement Request
Under Rule 13805, an associated person may request expungement by filing a statement of claim against the member firm at which they were associated when the customer dispute arose. The request must include:
- The applicable filing fee.
- The CRD number of the party requesting expungement.
- Each CRD occurrence number that is the subject of the request.
- The case name and docket number associated with the customer dispute information, if applicable.
- An explanation of whether expungement of the same customer dispute information was previously requested and how it was decided.
Expungement Hearing
A three-person panel, selected pursuant to Rule 13806, must hold an expungement hearing to consider and decide the expungement request. At the end of the hearing, the panel must issue an award in accordance with Rule 13805(c)(9). If the associated person withdraws or does not pursue the request, the panel shall deny it with prejudice.
Notifications
To Customers: The associated person must serve all relevant customers with a copy of the statement of claim within ten days of filing it with the Director. The Director must notify customers of the time, date, and place of any prehearing conferences and the expungement hearing.
To State Securities Regulators: The Director must notify state securities regulators of an expungement request within 15 days of receiving it. Regulators have access to all relevant documents and may attend and participate in the hearing.
Customer and State Securities Regulators’ Participation
Customers and state securities regulators are entitled to attend and participate in all aspects of the prehearing conferences and the expungement hearing. They may provide their positions in writing, introduce evidence, cross-examine witnesses, and present opening and closing arguments.
Panel Decisions and Awards
The panel must issue a unanimous decision to award expungement. The decision must be based on one of the following grounds:
- The claim, allegation, or information is factually impossible or clearly erroneous.
- The associated person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds.
- The claim, allegation, or information is false.
The panel must provide a written explanation of the reasons for its finding and identify any specific evidence relied upon. The panel shall not give evidentiary weight to a decision by a customer or state securities regulators not to attend or participate in the hearing.
Court Confirmation
After an arbitration award is issued, it must be confirmed by a court of competent jurisdiction before FINRA will expunge the information from the CRD. This step ensures that the expungement complies with legal standards and provides an additional layer of oversight.
Why Seek Expungement?
Expungement of customer dispute information is essential for several reasons:
- Protecting Reputation: Allegations of wrongdoing, even if unsubstantiated, can severely damage a broker’s professional reputation.
- Career Advancement: A clean CRD record is crucial for career mobility and opportunities within the securities industry.
- Investor Trust: Maintaining a pristine record helps build and retain the trust of current and potential clients.
Detailed Steps in the Expungement Process
Initiating the Expungement Request
The first step in seeking expungement is for the associated person to file a statement of claim against the member firm where they were employed at the time of the customer dispute. This request must adhere to the specific requirements outlined in FINRA Rule 13805. The statement of claim must include all relevant details, such as the CRD numbers and occurrence numbers associated with the request, the case name and docket number, and a comprehensive explanation of any prior expungement requests related to the same information.
Panel Selection and Hearing Process</h3 >
Once the request is filed, a three-person panel is selected from a roster of specially trained arbitrators. This panel is responsible for conducting a thorough expungement hearing. The hearing process involves presenting evidence, examining witnesses, and evaluating the merits of the expungement request based on the grounds specified by FINRA rules.
Customer and Regulator Notifications
Throughout the process, customers involved in the original disputes must be notified and given the opportunity to participate. Similarly, state securities regulators are informed and can also participate in the hearings. This ensures a transparent process where all interested parties have a chance to present their views and evidence.
Conducting the Hearing
The expungement hearing is a formal process where the panel reviews all evidence and hears testimony from both the associated person and any participating customers or state securities regulators. The panel must ensure that all procedural requirements are met, including recording the hearing sessions and allowing full participation from all parties.
Issuing the Award
At the end of the hearing, the panel must issue a written award that details their findings. This award must include a unanimous decision that clearly states the grounds for expungement. The panel must provide a detailed explanation of their reasoning and the evidence that supports their decision. This award is then subject to confirmation by a court of competent jurisdiction.
Challenges and Considerations
Complexity of the Process
The expungement process is complex and requires meticulous attention to detail. Associated persons must ensure that all procedural requirements are met and that their case is presented effectively. This often involves gathering substantial evidence, preparing detailed arguments, and navigating the various stages of the arbitration process.
Importance of Legal Representation
Given the complexity and high stakes involved, it is highly advisable for brokers seeking expungement to engage experienced legal representation. Skilled attorneys can help navigate the process, prepare the necessary documentation, and present a compelling case for expungement. At Bakhtiari & Harrison, we specialize in guiding brokers through this intricate process and advocating on their behalf.
Broader Implications for the Industry
Maintaining Trust and Integrity
The expungement process plays a crucial role in maintaining the integrity of the financial industry. By ensuring that only accurate and verified information remains on a broker’s record, the process helps protect both the reputations of financial professionals and the trust of investors. This balance is essential for the overall health and stability of the industry.
Ongoing Reforms and Improvements
FINRA’s recent enhancements to the expungement process reflect a commitment to ongoing reforms and improvements. These changes aim to make the process more transparent, fair, and rigorous. By continuously refining the rules and procedures, FINRA seeks to uphold the highest standards of accountability and professionalism in the financial sector.
The ability to expunge unfounded customer dispute information from a broker’s CRD record is a vital safeguard for protecting professional reputations and ensuring fairness. The expungement process, governed by stringent FINRA rules, provides a structured pathway for brokers to clear their names of baseless allegations. At Bakhtiari & Harrison, we are dedicated to helping brokers navigate this process and achieve the best possible outcomes.
For more information and personalized assistance, please visit Bakhtiari & Harrison or call us at (310) 499-4732.