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This Is The Business We’ve Chosen

Associated persons (an “AP”) know all too well that the regulators post a considerable amount of information about their history online – particularly, allegations of misconduct.  This information can lead to, among other things, awkward conversations with current or potential clients, which is especially challenging or frustrating when the complaint is false or clearly erroneous.  Without trying to be glib – I am registered myself – as Hyman Roth said to Michael Corleone in “The Godfather II”: This is the business we’ve chosen.

In an earlier post, I recounted the steps an AP must take to expunge a false or erroneous customer complaint or arbitration claim from his or her record on the Central Registration Depository (CRD).  In short, one must obtain an arbitration award in which the panel awards this relief after making one of the findings required under FINRA Rule 2080, have that award confirmed in a court of competent jurisdiction, and finally bring that order to FINRA to process.  Simple, right?

Not So Fast, My Friend

As ESPN College GameDay’s Lee Corso would say: “Not so fast, my friend.”  FINRA has proposed changes to the expungement process.  While FINRA’s proposal does not change the basic requirement to win and confirm an arbitration award that contains expungement relief, it contains significant changes to how one obtains that award.  This is especially true of arbitration claims brought specifically for obtaining expungement relief, which FINRA calls “straight-in requests” in the proposal.

The proposed changes to these straight-in requests include:

  • Limits on how and when an AP can file his or her claim.  The AP cannot file the claim against the former client.  In addition, the AP must file his or her claim within two years of the close of the customer-initiated arbitration or civil litigation that triggered the disclosure, and if the complaint did not evolve into a formal action, three years after the date the customer complaint was initially reported.
  • New requirements for the panel’s composition.  A three-person panel that is randomly selected from a roster of public arbitrators with enhanced expungement training must hear the claim.  The parties cannot stipulate to use a pre-selected arbitrator, nor can they agree to strike or remove an arbitrator.  Moreover, the representative cannot withdraw the claim and refile to get a different panel.  No more single-arbitrator decisions.
  • New burden of persuasion.  The panel must unanimously agree to award expungement relief.  No 2-1 decisions.
  • Codification of the practices presently found in the Notice to Arbitrators and Parties on Expanded Expungement Guidance.  This includes, among others, amendments to codify the panel’s ability to request any evidence relevant to the expungement request.
  • The state regulators may intervene.  FINRA proposes to notify state securities regulators of all expungement requests and create a mechanism for them to participate in expungement hearings.

These changes are significant – particularly, the last one.  The intervention of state regulators already raises some practical questions aside from the challenge of overcoming the regulators’ objection to expungement.  (Presumably, a regulator will not appear to support the request.)  Can the AP serve discovery on, or examine at the hearing, a state regulator to test the regulator’s challenge of the expungement relief?  Will the state regulator use the testimony and evidence offered at the arbitration hearing to open a regulatory action?  I hope that FINRA works through some of these considerations during the comment period, which opened on August 15, 2022, and runs for at least 45 days.

APs: Consider Acting Soon

I do not know what exactly the expungement process will look like a year from now.  However, this much is clear:  Expungement will change dramatically, and not to the AP community’s benefit.  Those who are contemplating an expungement action are well-served to come to a decision shortly.  It will only get harder.

Thank you for reading this article.  Please know that I wrote it for informational purposes only (some may consider it ADVERTISING MATERIAL) and did not intend for it to be legal advice or to form an attorney-client relationship with you – especially in jurisdictions where I am not licensed to practice law.  I encourage you to seek your own counsel to help you with your specific situation.  To that end, I invite you to contact me if you would like to discuss my services.

Ryan Smith and helps broker-dealers, registered investment advisers and their representatives spend more time growing their business by handling a wide range of legal and compliance needs, ranging from outsourced CCO services to representation in litigation and arbitration claims.

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