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The Broker’s “Odds” of Earning Expungement

The Broker’s “Odds” of Earning Expungement

The first question brokers ask when contemplating whether or not to pursue expungement of an investor complaint from their publicly available Central Registration Depository (“CRD”) record is almost always, “What are the odds that I earn expungement?”
Unfortunately, the answer to this question is an uninspiring, “It depends.”

To contemplate why “it depends,” brokers must understand the criteria for earning an expungement recommendation before FINRA.[1]  A broker can obtain an expungement recommendation by proving to a FINRA arbitration panel one of the following:

  • The investor’s claim or allegation is impossible or clearly erroneous;
  • The broker was not involved in the alleged sales practice violation; or
  • The investor’s claim or allegation is false.

(See FINRA Rule 2080)

Did the investor name the broker as a defendant to a lawsuit?

As a general rule, expungement is more difficult to attain where the investor lawsuit that caused the broker’s record to become tarnished names the broker as a defendant to the claim. Indeed, when the investor names the broker as a defendant, there is a direct link between the broker’s conduct and the wrongdoing alleged in the complaint.
In other words, when a broker is named as a defendant to an investor lawsuit, it typically becomes more challenging to prove that either the investor’s claim was impossible or clearly erroneous; that the broker was not involved in the alleged sales practice violation; or that the investor’s claim or allegation was false.

Conversely, where the broker is not named as a defendant to the lawsuit giving rise to the negative disclosure, it typically indicates that the investor does not hold the broker responsible for the wrongdoing alleged in the complaint.  In turn, when the broker later seeks expungement, the argument that the investor’s claim was impossible or clearly erroneous; that the broker was not involved in the alleged sales practice violation; or that the investor’s claim or allegation was false, becomes more palatable to FINRA arbitrators.

Did the investor complaint involve a “product failure?”

Brokers’ chances of earning expungement of an investor complaint generally also improve if the customer complaint involved allegations of wrongdoing in connection with a widespread financial product failure (the 2008 failure of auction rate securities would be but one example of such a widespread failure).
Investor complaints concerning product failures lend themselves to arguments in favor of expungement because brokers can often cite unforeseeable market conditions and total lack-involvement in the creation of the marketing and prospectus material of the failed products to support their expungement request.
Indeed, such arguments can prove convincing to arbitrators, particularly when the crux of the investor complaint involves the broker-dealer’s alleged misrepresentations concerning the relative safety of the product.

What allegations did the investor make?

Intuitively, the allegations the investor makes in connection with the complaint play a role in weighing the likelihood of earning expungement. For example, expungement of allegations that the broker misrepresented something concerning the customer’s accounts are generally more difficult to expunge than are allegations of unauthorized trading, where there typically exists a confirmation of the trade that the investor alleges was “unauthorized.”

Did the broker do anything wrong to warrant disclosure of the customer complaint on his or her record?

Though this factor seems obvious, it is nevertheless the most important consideration when weighing the likelihood of whether a broker will earn expungement of an investor complaint from his or her CRD record.

As a rule of thumb, however, if a broker can objectively state that he or she did nothing wrong in connection with investor complaint, then the likelihood of earning expungement improves.

For more information about this topic or related topics, please Email Attorney Patrick Mahoney.

**This article is intended for informational purposes only and does not constitute legal or investment advice. Any views expressed are those of the author only.**

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