The Financial Advisor Expungement Process
Financial advisors registered with FINRA each have information regarding their experience in the securities industry available on FINRA’s Broker Check. The purpose of BrokerCheck is to help investors make informed choices about brokers and brokerage firms-and to provide easy access to investment adviser information.
Financial advisors are of course aware of the importance of this report and want to keep their broker report as pristine as possible. For example, if a broker believes that they have been named in a customer complaint unfairly, there is actually a process to have that disclosure removed, or “expunged,” from the broker’s report.
The following is breakdown on the expungement process – the rule that applies and the generally accepted standard for whether removal is appropriate:
The information that is available on a financial advisor’s broker report includes how he/she did on their licensing exam, whether they have ever declared bankruptcy, any regulator investigations, and (perhaps most importantly) whether the advisor has ever been subject to any customer complaints. Basically an advisor’s broker report has most of the information an investor would want before deciding whether to entrust that advisor with their hard earned money.
FINRA Rule 2080: Expungment
FINRA states “Expungement of customer dispute information from the CDR system under any circumstances is an extraordinary remedy and should be recommended only when the information to be expunged has no meaningful investor protection or regulatory value.” Per a Sept. 2015 Notice to Arbitrators and Parties on Expanded Expungement Guidance.
The stringent requirements for expungement as set forth in FINRA Rule 2080. The procedures are intended to ensure that expungement occurs only after the arbitrators find and document one of the following narrow grounds specified in FINRA Rule 2080:
1) The claim, allegations or information is factually impossible or clearly erroneous;
2) The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
3) The claim, allegation or information is false.
Most advisors that seek expungement to do arguing that the allegations in the claim are “factually impossible or clearly erroneous.” The standard, as laid out by FINRA Section III of the FINRA Office of Dispute Resolution Expungement Training literature, has a clear meaning.
An example would be if the evidence shows that the broker was not even employed by the securities firm during the relevant time period. In that context the arbitrators could certainly find that the advisor was erroneously named in the arbitration claim because the claims brought are factually impossible or clearly erroneous.
Generally for arbitrators to grant expungement on the basis that the claim, allegation or information submitted by the investor is false requires evidence proving the same. For example, if the customer alleged that the broker made unauthorized trades and the broker provided evidence contrary to this claim, such as a document signed by the customer directing the trades, arbitrators could find that the claim or allegation was false.
It is for this reason that expungement requests must be made in conjunction with a recorded hearing or conference call, giving the advisor and the investor an opportunity to argue as to why the expungement should or should not be granted.
Arbitrators are also instructed by FINRA that public policy dictates that accurate reflections of customer disputes on a broker’s CDR are important for investor protection. Given the information provided in the broker report (or CRD), it serves an important purpose for investor protection in that it provides public disclosure of arbitrations against a FINRA registered representative.
FINRA has created this free tool ‘BrokerCheck’ in efforts to help investors make informed choices about brokers and brokerage firms. It is important that a record of claims filed by an investor involving their financial advisor be recorded and available to the public so that investors can make informed decisions as to who to trust in investing their life savings.
Additionally, advisors are provided an opportunity to respond to allegations directly on their broker report so even if a claim is not expunged the advisor still has an opportunity to tell his/her “story” about the alleged claim. As such, generally, arbitrators are instructed that removing a disclosure should be an “extraordinary measure.” Right or wrong, in practice, particularly in situations where the investors does not oppose the request, arbitration panels often do grant expungement requests.
AUTHOR: Daxton White
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.