Remember that reputation and integrity are your most valuable assets—and can be lost in a heartbeat.
Charlie Munger, Vice Chairman of Berkshire Hathaway
This statement is true for all, but it has a particular resonance for financial advisors. In the highly regulated financial services industry, registered representatives can be haunted for years (or their entire careers) by customer complaints—even those that have been dismissed or otherwise determined to be without merit. With FINRA now actively promoting its internet-based BrokerCheck system in television and print ads and the ADV brochure being sent to all advisory clients annually, the potential harm a “yes” answer on a Form U-4 can cause is greater than ever. At the same time, changes to the manner in which disclosures are reported, classified, and retained by the Central Registration Depository (“CRD”) have made it increasingly difficult to have a disclosure event removed from the publicly available records.
If an unhappy client registers an “investment-related” complaint alleging “sales practice violations” (such as an unsuitable recommendation) resulting in damages of $5,000 or more, a “yes” answer will be reported to the CRD and will appear as a “disclosure” event on the registered representative’s BrokerCheck report—regardless of the disposition—in perpetuity, unless it is “expunged” from the system. While it takes only mere allegations to tarnish someone’s record, expungement requires: (1) an evidentiary hearing before FINRA arbitrators; (2) an affirmative finding that: (a) the claim, allegation, or information is factually impossible or clearly erroneous; (b) the registered representative was not involved in the alleged misconduct; or (c) the claim, allegation, or information is false; and (3) a court order directing FINRA to expunge the information from the CRD.
Although FINRA acknowledges “individuals in the brokerage community have an interest in securing a fair process that recognizes their stake in protecting their reputations and permits expungement from the CRD system when appropriate,” NASD Notice to Members 01-65, since 1999, the regulator has consistently and repeatedly imposed more stringent requirements on the expungement process, while also reminding arbitrators: “Expungement is an extraordinary remedy . . . . Customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.” Notice to Arbitrators and Parties on Expanded Expungement Guidance, Updated September 2015. FINRA further maintains that even information about dismissed claims has “regulatory value as an early indicator of problems or as part of a larger pattern that may also include similar acts of misconduct that were found to have merit.” NASD Notice to Members 01-65.
In spite of these restrictions—or perhaps because of them—arbitrators in recent years have demonstrated a willingness to recommend expungement in appropriate cases. According to FINRA, arbitrators recommended expungement in 11 percent of the 7,621 arbitration cases filed in 2012, 2013, and 2014. Nevertheless, vocal critics of the current expungement system, such as the Public Investors Arbitration Bar Association (“PIABA”), believe the rate of expungement remains far too high.
PIABA maintains that FINRA has “failed” in its efforts to “slow broker misconduct” and urges “wholesale changes” to the expungement system. PIABA October 20, 2015 Press Release. The Final Report of the FINRA Dispute Resolution Task Force, published in December 2015, echoed these criticisms, noting that “reports from PIABA and state regulators suggest that flaws still exist in the [expungement] process,” notwithstanding the repeated tightening of the expungement requirements. FINRA Dispute Resolution Task Force, Final Report at 26. The Task Force report further noted that FINRA is in discussions with the North American Securities Administrators Association (“NASAA,” the leading advocacy group for state regulators) about the expungement process, giving serious consideration to “converting the process into a regulatory procedure.” Id. at 27.
Although the Task Force “[took] no position on whether a regulatory approach should eventually replace the current expungement process,” it recommended “additional training [for arbitrators] that will include input from state regulators and highlight the extraordinary nature of the expungement remedy.” Id. (emphasis added.) This enhanced training would “impress upon arbitrators that they are involved in a regulatory process designed to protect investors.” Id.
The Task Force continued to pay lip service to the interest of FINRA member firms and their registered representatives in access to a fair process that adequately protects their reputations. Nevertheless, it appears very likely that the expungement process will undergo changes—perhaps subtle, perhaps radical—that make it even more difficult to obtain expungement relief. Registered representatives interested in pursuing expungement would be wise to act before these changes are implemented.
Ratner Law has helped many clients successfully navigate the expungement process. We encourage anyone interested in learning more about the process to contact Todd Ratner at 804-665-1042 or firstname.lastname@example.org.