To the dismay of financial advisors across the country, FINRA has taken notice of the public’s negative association with expungement of customer complaints from central registration depository (“CRD”) records. As a result, the standards a financial advisor must meet to convince a FINRA arbitrator to recommend expungement of a customer complaint from their record have never been higher.
Having handled numerous expungement matters before FINRA, when I assess a potential expungement matter, the prospective client invariably asks, “What are the odds that I win?” For obvious reasons, I never answer that question because the truth is this: You never know. All cases carry with them the risk of loss.
I do, however, evaluate whether I believe that the underlying facts associated with the customer complaint might lend themselves to earning expungement. The below hypothetical applications of FINRA’s expungement rule are designed to provide greater understanding of what it might take to earn expungement.
FINRA Rule 2080 governs expungement. Generally, expungement is warranted if you can establish one of the following: (1) the claim or allegation is false; (2) the claim is impossible or clearly erroneous; or (3) the financial advisor was not involved in the alleged sales practice violation. Your ability to apply one of these standards to the facts surrounding the customer complaint determines whether expungement is warranted.
Is the claim false? In other words, did you do the thing the customer complained about? This is the most straightforward standard. For example, if the customer complained that you or your firm churned their account. Did you? If the customer complained that you or your firm misrepresented the features of an annuity. Did you?
Is the claim impossible or clearly erroneous? This standard typically applies where (at the risk of sounding glib) the financial advisor’s ability to do the thing the customer complained about is impossible. For example, suppose a customer complains that you recommended they purchase a structured note that performed poorly. In reality, you have never sold a structured note to any client, you have the commission runs to back it up, and your branch manager strictly enforces a policy to never sell the structured note that the customer complained about. In that case, the customer’s claim that you recommended the purchase of a structured note is arguably both impossible and clearly erroneous.
Consider another example: Suppose a customer complains that you churned their account. Upon closer evaluation, you discover that your deranged partner churned the account without your knowledge while you were in Costa Rica for your sister’s wedding. Your partner earned all the commissions from his nefarious behavior. This situation would arguably satisfy both the impossibility standard and the lack of involvement standard described directly below.
Did you lack involvement in the customer’s alleged complaint? I like to refer to this as the “you got the wrong guy/gal!” standard. Suppose a customer complains that you, John Doe, negligently managed their portfolio. Upon closer investigation, you discover that you never worked as the complaining customer’s broker of record. John Joe, your colleague, acted as the customer’s broker of record, and the customer named the wrong guy/gal. You arguably sufficiently lacked involvement in the alleged sales practice violation.
There are limitless applications of FINRA Rule 2080. Expungement depends on your ability to apply the facts surrounding what actually happened in connection with the customer’s complaint to one of the standards set out in FINRA Rule 2080.
Importantly, FINRA Rules make it your burden to establish by a preponderance of the evidence that one of the standards set forth in FINRA Rule 2080 applies to you. For example, if you do not have enough evidence to show an arbitration panel that the customer’s complaint is false, you will fail to meet your burden and lose, even if the customer actually made a false claim. Additionally, if an arbitration panel renders a FINRA arbitration award that recommends expungement, Rule 2080 requires the financial advisor to then confirm the expungement award “in a court of competent jurisdiction” before FINRA will formally expunge the underlying customer complaint.
FINRA has set a high bar to earn expungement, and the presiding arbitration panel is the ultimate arbiter of whether an expungement recommendation is warranted. But by understanding some basic applications of the rule that governs expungement, you can have a clearer idea as to how they might apply to you.[1]
[1] Disclaimer- The information contained in this article is for educational use only and is not legal advice. The hypothetical applications of FINRA Rule 2080 provided in this article are scenarios that might be worthy of expungement and are in not exhaustive. If you are considering pursuing expungement, contact a qualified attorney to give you a formal case assessment.
