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Response by: President & Founder, Doc Kennedy, J.D., MBA
AdvisorLaw’s expungement services were created out of a glaring need that I recognized while working with a financial services company in the 2000s. Upon familiarizing myself with BrokerCheck, the Central Registration Depository (CRD) system, and the types of situations that led to ridiculous disclosures landing on brokers’ records, I immediately noticed that there was relatively little help out there for reps when it came to expunging customer disputes. Many didn’t even know that expungement was an option.
Over the past decade, AdvisorLaw has grown from its infancy to earning the nickname of the 800-pound gorilla of the industry. Over that time, we’ve become intimately familiar with FINRA’s rules, its expungement process, and the flaws inherent to that process. I can honestly say that it has been thrilling to watch over 2,300 false and erroneous disclosures disappear from the records of 1,700 individuals who didn’t deserve that kind of libelous language about their character out there on the internet, every day, for anyone to see.
Inspired by what we were able to do for advisors through expungement, we expanded our services to all things advisor-centric. We’re proud of the work we do to protect the good names and livelihoods of financial industry professionals. And we’re proud to be unique, in that only AdvisorLaw exclusively advocates for and actively represents the interest of individual brokers, investment advisor representatives, and other associated persons.
So from the perspective of protector, I felt it important to explain and analyze just how devastating and, frankly appalling, it was for the Securities and Exchange Commission (SEC) to approve FINRA’s latest proposal for overhauling its expungement forum. The changes are quite the overreach by the “self-regulating organization” (SRO), which drastically undervalues the negative impacts upon both associated persons and the integrity of the information contained within its CRD system. The SEC announced its decision last Wednesday, and the changes go into effect in a mere couple of weeks.
Below are some of the most offensive changes.
|Expungement can be requested at any time.1
|Expungement must be requested within two or three years of the time of the claim.
|Expungement can be requested after an underlying customer-initiated arbitration concludes.
|Expungement must be requested during the underlying customer-initiated arbitration.
|Most expungements can be overseen by a sole arbitrator.
|All expungements must be overseen by a three-arbitrator panel.
|When overseen by a three-arbitrator panel, a majority decision is required.
|Expungement may only be granted with a unanimous decision by all three arbitrators on the panel.
|There is no state regulator involvement or notification requirement.
|The FINRA director will contact the state regulator to intervene in each expungement case.
|The party seeking expungement must notify the underlying customer of the expungement hearing and their right to participate.
|The director will also contact all investors so that they may intervene in each expungement hearing.
|Advisors may appear at the hearing by telephone.
|Advisors will be required to appear at the hearing by video conference or in person, and the arbitration panel may impose a requirement that the advisor appears in person.
|The advisor may participate in arbitrator selection, ranking, and striking the most undesirable arbitrator candidates.
|All arbitrators will be “randomly” chosen from a pool of arbitrators who are specially trained by FINRA. The advisor will have no ability to strike arbitrators.
|Advisors may withdraw a case from FINRA arbitration post-filing, with the option to try it in another forum.
|All withdrawn cases will be withdrawn with prejudice — eliminating the option to forum shop.
|Member fees of $5,850 are assessed to the member broker-dealer firm respondent.
|Member fees of $5,850 will be assessed to the advisor, resulting in a total of roughly $10,000 in fees to seek expungement, even if done pro se (self-representing).
|Customer complaints sharing the same relative fact pattern as a state or regulatory disclosure are eligible for expungement.
|Customer complaints sharing the same relative fact pattern as a state or regulatory disclosure are not eligible for expungement.
|The advisor and broker-dealer submit documentation. The customer may submit a letter and/or documentation, as well.
|The arbitrators can unilaterally request any documentation they desire.
The importance of an independent third party as the factfinder is a tenant of justice that has remained constant for as far back in time as the beginning of American independence. The SEC recently held that “access to FINRA’s arbitration forum to seek expungement” is “a fundamentally important service that [FINRA] offers.”2 FINRA itself states that “ordering expungement of information…that is found to be defamatory, misleading, inaccurate, or erroneous, is equitable in nature.” In its own Dispute Resolution Guide for Arbitrators, FINRA states that information is “defamatory in nature”3 when it serves to portray “the broker in a negative light,” and FINRA even established a “right” for brokers to seek expungement in the past, in order to ensure the reliability of the information contained in its reports.4
Yet through the recent, authoritarian overhaul of its expungement system, FINRA has thoroughly decimated that so-called “right,” effectively rendering reps’ ability to achieve expungement through FINRA arbitration extinct. In the rule’s proposal, FINRA correctly highlighted the fact that customer dispute disclosure information is considered by regulators, employers, and investors. More pointedly, the information contained within the CRD system regarding customer complaints has an ongoing and permanent impact on the affected associated persons’ careers, from several perspectives (e.g., licensure, employment, client retention, and client acquisition). FINRA’s arbitrators, along with courts in hundreds of thousands of proceedings across the United States, have found that inaccurate information or that which is otherwise deserving of expungement does indeed exist within the CRD.
FINRA, through its predecessor, the now-defunct National Association of Securities Dealers (NASD), has been recording customer allegations against its registered representatives going back several decades, yet it just released its BrokerCheck website in 2016. Before the existence of BrokerCheck, customer allegations were only visible to those with access to brokers’ CRD records. Expungement was rarely sought. Relatively few were able to view the disclosures, and the brokers could discuss the allegations, if and when the topic was raised.
The release of BrokerCheck breathed new life into a host of decades-old allegations against these individuals. Claims made by the long-since-passed amateur investor who complained that his investments declined in 2000, for example, were now newly published on the internet. While FINRA did impose a six-year time limit on expungements, many arbitrators understood the newfound impact of old disputes with the release of BrokerCheck, and they chose to override that imposition.
With the new process that’s being rolled out, only those disputes lodged within the past three, and often two, years are even eligible to seek expungement. To make matters worse, if a disclosure stems from a customer-initiated arbitration, the advisor must request expungement of the disclosure during that arbitration — or risk ineligibility. By imposing such a short window of time in which to seek expungement, FINRA sets in stone thousands of meritless current disclosures by rendering them ineligible through its forum, all while wholly ignoring the obvious fact that there is no correlation whatsoever between the amount of time that has passed since allegations were cast and the merit of those allegations.
In the past, advisors had a fighting chance, in that they were allowed to stipulate to a sole arbitrator, rather than a three-person panel, participate in arbitrator selection, and strike undesirable arbitrators. Under the new regime, FINRA will create its own “Special Arbitrator Roster” (SAR), comprised of its choice arbitrators (a.k.a., cronies), from which it will cherry-pick the panel to oversee each arbitration hearing and do its best to stack that panel against the advisor. Requiring such a panel is equivalent to a judicial criminal case, and FINRA’s basis for stripping the fundamental right to participate in the arbitrator ranking/selection process is rooted in the very inaccurate claim that expungement requests are not adversarial (yet FINRA also did everything it could to bolster opposition, as described below). All three of the FINRA-selected arbs will now be required to unanimously agree that expungement is warranted — or the rep loses their once-ever chance at getting the false mark removed from their records.
Historically, FINRA has allowed non-party investors to participate in expungement proceedings. Not only will that continue under the new rule, but FINRA will now require the involvement of yet another non-party in the proceedings — the state regulators. Notably, non-parties who commit perjury cannot be held accountable through sanctions or reprimand. One may only surmise that FINRA’s inclusion of state regulators in customer dispute expungement proceedings is being done on the off chance that they “provide meaningful opposition to the expungement request[.]” Id., P. 72. By increasing its barriers, it would appear that FINRA is actively trying to make the expungement process more complicated and costly and to preserve the bad information in the CRD system that is desperately in need of being culled.
The existing process requires that the advisor filing for relief inform the underlying customer that an arbitration hearing will be taking place and that the customer has a right to attend or make a submission. Understandably, customer participation and opposition can have a negative impact on the rep’s chance at success. In addition to its requirement that the advisor notifies the customer, FINRA now dictates that the customer be notified by both the state regulator and the FINRA director, as well, in order to encourage more of that “meaningful opposition” that FINRA values so highly.
The new rule change does a fantastic job of ensuring that member firms and associated persons are compelled to pay substantial and duplicative fees to FINRA. Recently, the FINRA fees assessed to the advisor have been around $3,850 per hearing. The broker-dealer respondent firm is assessed fees of approximately $5,850, as well. In its infinite wisdom, FINRA has now deemed it appropriate for the rep to shoulder 100% of those fees, in addition to the entirety of hearing session fees, for a grand total of more than $10,000 in FINRA fees, per hearing. To add to the potential costs of seeking expungement, arbitration panels, at their discretion, may now burden the reps with travel costs on top of the fees by dictating that the rep attend the hearing in person.
Until now, advisors also had a little bit of wiggle room when it came to withdrawing their case after filing it with FINRA, because they had the option of voluntarily doing so without prejudice. Going forward, any case withdrawn will be done so with prejudice — resulting in the rep giving up their one chance to seek expungement anywhere. In the same spirit, when a customer dispute shares the same relative fact pattern as a state disclosure or a regulatory disclosure on the same rep’s record, that dispute is also rendered ineligible for expungement through FINRA. Often, the broker-dealer respondents choose not to oppose the rep’s request for expungement. When the rep and broker-dealer work together, they can strategically determine which documentation to provide in the matter. With the new system, the arbitrator may unilaterally demand any (and all) documentation they feel they may want to review.
While it strikes us as brazenly absurd that FINRA would be so stubbornly attached to keeping ludicrous and unwarranted allegations on its database, we are obligated to bend to FINRA’s demands. Sadly, FINRA’s massacre of its expungement forum has left us with no choice but to cease seeking expungement of customer disputes through FINRA’s forum — completely. As of April 27, 2023, AdvisorLaw will no longer be filing customer dispute expungement cases with FINRA. Despite its purported right for brokers to seek expungement, FINRA has shamelessly constructed a system so stacked against advisors that expunging any customer dispute — no matter how obviously preposterous or erroneous it may be — will become a nonstarter. Because of this, we can no longer ethically advise any client to pursue expungement through FINRA Dispute Resolution.
We say this with a heavy heart, as it is truly a shame to watch upstanding advisors struggle with the effects of meritless marks on their records. Over the past several years, we did everything we could to preserve the expungement process for reps. But unfortunately, FINRA caved to pressure from organizations like PIABA (the Public Investors Advocate Bar Association), who battled to ensure that no rep gets a fair shot and that, once hit with any qualifying allegation by any customer, the reps will have no rights nor recourse available to them through the FINRA Dispute Resolution arbitration forum.
Despite the fact that there was never even any evidence of errant expungements occurring,5 bureaucracy and cronyism prevailed once again. Truly un-American, FINRA’s actions have placed reps in a “guilty-until-proven-innocent” scenario — without even providing a path to proving their own innocence. FINRA has truly created a dystopian nightmare for these advisors, who are now subject to all of the harm that can be inflicted upon them by others’ words — regardless of merit. Investors’ right to hurl any accusations they choose at any rep and have those accusations published daily in a public forum is strongly protected, while reps’ right to set the record straight about their personal and professional reputations is sacrificed. While other parts of the world implement the “right to be forgotten” or “right to [data] erasure,”6 for example, FINRA is stampeding its way in the other direction — doing all it can to eliminate associated persons’ ability to escape ancient and assassinating remarks about their personal and professional character — all in the name of providing investor and public protection. Due process has been largely nonexistent for associated persons entangled in FINRA’s Dispute Resolution forum, and the latest rule change strips away the very few remaining remnants of fairness and equity.
As the force that AdvisorLaw has come to be known, we remain dedicated to furthering and expanding our ability to protect and defend industry professionals. While we actively strive to find a way to keep looking out for reps who want their disclosures expunged, we offer one solution that advisors may consider for the time being. If FINRA can’t play nice, don’t play with FINRA at all. The registered investment advisor (RIA) sphere can offer reps the opportunity to apply their skills and knowledge, keep their customer base, and continue to serve their clients, without the heavy hand of FINRA trying to knock them down at every turn. AdvisorLaw offers RIA registration and setup services, as well as practice migration, RIA compliance, mergers and acquisitions, and private fund formation and compliance services.
If you’re interested in learning more about the RIA space, or if you have questions about how to navigate FINRA’s latest minefield, give us a call.
1FINRA Rule 13206 imposes time limits, though a panel decision may override the rule. See, https://www.finra.org/rules-guidance/rulebooks/finra-rules/13206
2See Consolidated Arbitration Applications, Exchange Act Release No. 89495, 2020 WL 4569083 (Aug. 6, 2020) (holding that the FINRA action Edmark challenges here—denying a request to use FINRA’s arbitration forum on the ground that an expungement claim is ineligible for arbitration—is a prohibition of access to SRO services for which the Commission has jurisdiction under Exchange Act Section 19(d)(2)). See also, Eric David Wanger, Exchange Act Release No. 79008, 2016 WL 5571629, at *4 (Sept. 30, 2016) (explaining that a prohibition or limitation of access “involves a denial or limitation of ‘the applicant’s ability to utilize one of the fundamentally important services offered by the SRO”).
3FINRA Notice to Members 99-54
4See, FINRA Rules 2080, 8312
5A mere four percent of customer dispute disclosures entered into the CRD system between 2015 and 2020 were expunged. See, https://www.finra.org/rules-guidance/key-topics/expungement