FINRA Expungement: A Primer for Financial Advisors
FINRA expungement is a process where a broker or financial advisor seeks to remove a customer complaint from their publicly-available BrokerCheck record.
When a client makes a formal grievance against a broker or financial advisor, the details of the complaint, along with any settlement or arbitration awards, are recorded in the broker’s CRD (Central Registration Depository) record. FINRA maintains the CRD.
FINRA rule 2080 provides a mechanism for brokers to seek expungement of customer complaint information if the financial advisor can prove certain criteria.
This primer covers the process beginning with how client disputes wind up on BrokerCheck, to initiating a case, to confirming an award that grants expungement in a court of competent jurisdiction.
What is BrokerCheck?
BrokerCheck is an online, free, publicly-available database that Main Street investors can use to check, among other things, a financial advisor’s history of customer complaints.
How do Investor Grievances Wind Up on BrokerCheck?
By rule, brokerage firms must report client grievances that “involve” one of its current or former brokers to FINRA CRD. FINRA maintains an extremely broad definition of what constitutes a customer complaint that a brokerage firm must report (some argue FINRA’s interpretation of what constitutes a reportable customer grievance is too broad).
In sum, a broker-dealer must report any formal or informal grievance from a investor that alleges any securities-related misconduct to FINRA. FINRA then discloses that complaint on the BrokerCheck record of any broker “involved” in the accusations.
If a broker-dealer fails to properly report an investor complaint, FINRA has the power to discipline the broker-dealer. Therefore, brokerage firms have a strong incentive to report client grievances.
What Types of Customer Grievances Appear on BrokerCheck?
There are two overarching categories of investor accusations that appear on BrokerCheck. Brokers ought to understand these categories because they can impact the likelihood of success in a formal action to remove a client complaint from their CRD record.
Category 1- Formal Client Complaints that Trigger FINRA Arbitration Proceedings.
When a customer initiates a FINRA arbitration claim that alleges securities-related misconduct, the misconduct alleged almost always appears on the BrokerCheck record for the financial advisor who managed the complaining investor’s assets. Even if the statement of claim does not name financial advisor as a party to the lawsuit, FINRA rules still require the employing broker-dealer to report it.
Client grievances appearing on BrokerCheck triggered from formal FINRA arbitration lawsuits are often more credible than informal customer disputes described below. Here’s why: Investors who file FINRA arbitration claims are serious enough about their complaint to bear the expense of taking formal legal action against the broker and/or the brokerage firm. These customers also typically have legal counsel, which can result in more sophisticated claims.
Category 2- Informal Investor Disputes that DO NOT Trigger FINRA Arbitration Proceedings.
Informal client grievances are those that do not trigger FINRA arbitration proceedings. Any written expression of discontent that involves the purchase or sale of securities is an informal complaint. These accusations can come in many forms, including: emails, texts, letters, or even tweets. But they do not escalate to formal FINRA arbitration.
When are Investor Complaints “Ripe” for Expungement?
“Ripeness” refers to when a broker may pursue removal of a customer complaint.
Ripeness of Client Disputes that Trigger FINRA Arbitration
A financial advisor may seek removal of an investor complaint that triggers FINRA arbitration after one of either two overarching events (note that there are procedural nuances to attempting remove a customer complaint from a broker’s record. To better understand those nuances, brokers should seek the advice of competent counsel or, contact us.):
Event 1: Settlement
If the investor settles the FINRA arbitration, the broker may pursue expungement after settlement.
Event 2: At or during the FINRA Arbitration action that forms the basis for the dispute.
If the client protest goes to a formal arbitration hearing and does not settle, the financial advisor may request expungement as part of the underlying proceeding.
Ripeness of Informal Investor Grievances
Ripeness of informal client grievances can contain gray areas. But generally, a broker may pursue expungement of an informal customer dispute when either of the following events take place:
Event 1: Settlement
If the brokerage firm settles with the investor following an informal grievance, the broker may attempt to remove the customer complaint from their CRD record after the settlement is reached.
Event 2: After the Broker-dealer denies the complaint
Broker-dealers almost always have an internal review process for informal investor complaints. This process assesses the merits of the underlying customer complaint. If the firm concludes that the client complaint lacks merit, it will deny the complaint.
A financial advisor may pursue expungement after the brokerage firm denies the complaint. But pursuing elimination of an investor complaint at this point contains a major caveat. After a firm denies a grievance, the client may still pursue their accusations formally through FINRA arbitration. Brokers ought to remain mindful of this possibility. And they should seek counsel or contact us to understand potential challenges of removing informal disputes from BrokerCheck records.
What are the FINRA Expungement Costs?
FINRA charges a $1,575 filing fee. Additionally, FINRA charges hearing session fees that can vary depending on the number of hearings held.
For more information about attorneys’ fees as a component of FINRA expungements costs, please contact us.
What Rules Apply to the FINRA Expungement Process?
FINRA has established several rules for the expungement process. FINRA’s formal notices and guidance help shape these rules.
FINRA Rule 2080- The “Expungement Rule”
FINRA rule 2080 represents the primary rule that governs extinguishing investor complaint information from a broker’s record. That rule provides 3 primary grounds for expungement. The standards are as follows:
If the financial advisor can establish that the underlying customer complaint is factually impossible or clearly erroneous, an arbitration panel may rule to remove the client complaint from the broker’s record.
Suppose an investor complains that a broker sold him an unsuitable annuity. But the broker did not maintain the insurance license necessary to sell annuities, and therefore couldn’t sell them even if he wanted to. The broker’s inability to sell annuities at all makes the customer’s claim both “factually impossible” and “clearly erroneous.”
If the financial advisor can demonstrate a lack of involvement in the misconduct alleged in the investor complaint, an arbitration panel may order removal of the customer complaint from a financial advisor’s record.
Suppose a client complains that broker JON DOE breached his fiduciary duty owed to him because Jon failed to disclose a substantial commission that the customer paid. The complaint becomes a formal disclosure on Jon Doe’s BrokerCheck report. As it turns out, the broker who actually failed to disclose the commission was named JIM DOE. And the investor simply got the names confused.
In this example, Jon Doe may have the complaint removed because he can prove that he was not involved in the alleged misconduct.
If a broker can prove that the customer’s complaint is false, an arbitration panel may rule in favor of removing the complaint.
Suppose an investor complains that his financial advisor churned and excessively traded his account. As a result, the investor claims he paid exorbitant commissions on the account, even though the investor’s account was profitable.
But as it turns out, the account was fee-based as opposed to commission-based. Therefore, the client was not charged commissions, but a reasonable annual fee tied to the assets in the account. Moreover, the investor signed new account forms confirming his understanding that the account charged a fee and not commissions.
In this example, the investor’s complaint is false and could be expunged.
FINRA Considers Expungement an “Extraordinary Remedy”
FINRA has provided notice to its arbitrators that they must consider expungement an “extraordinary remedy.” In addition to the FINRA Rule 2080 standards described above, arbitrators may only rule in favor of removing a customer complaint if doing so, “has no meaningful investor protection or regulatory value.”
Arbitrators are also trained to consider “the integrity of the CRD system” when evaluating these types of cases.
Bottom line: FINRA trains its arbitrators to not take requests to remove client issues from CRD records lightly.
Complaining Clients are Encouraged to Participate in FINRA Expungement cases
FINRA encourages the investors who made the complaint that caused the BrokerCheck disclosure to participate in any formal attempt to remove it from a financial advisor’s record. Brokers must serve the complaining client and/or their counsel with notice of their attempt to remove a complaint they made. And provide the customer an opportunity to oppose it.
What is the a Financial Advisor’s Burden of Proof in a FINRA Expungement Case?
The financial advisor bears the burden of proving one of the standards described above to a panel of three arbitrators. Brokers must therefore understand what a “burden of proof” means generally; and what level of burden applies to a case that seeks removal of a complaint from their record.
What is a burden of proof?
The burden of proof is the obligation or responsibility placed on someone making a claim or assertion to provide evidence to support that claim.
The burden of proof typically falls on the party bringing the case or making an accusation. The following are some commonly recognized levels of burden of proof:
- Beyond a reasonable doubt: This is the highest level of burden of proof, commonly used in criminal trials. It requires that the prosecution prove the defendant’s guilt to a degree that leaves no reasonable doubt in the mind of a reasonable person.
- Clear and convincing evidence: This level of burden of proof is used in civil cases where the stakes are high, such as in cases involving termination of parental rights or civil commitment. It requires evidence that is substantially more likely to be true than not true.
- Preponderance of the evidence: This is the lowest level of burden of proof, commonly used in civil cases. It requires that the plaintiff show that it is more likely than not (i.e., over 50% probability) that their claims are true.
- Probable cause: This is a level of burden of proof used in criminal investigations to justify an arrest, search, or seizure. It requires that there be sufficient evidence to warrant a reasonable person’s belief that a crime has been committed.
What level of “burden of proof” must a broker satisfy?
FINRA does not designate a specific level of burden brokers must meet to justify removing a client complaint from a CRD record. But based on FINRA’s notices, guidance, and recent efforts to change the rules to make removing customer complaints from BrokerCheck more difficult, brokers bear a heavy burden to win. This burden likely falls in the level requiring proof by “clear and convincing evidence.” But again, FINRA has not formally assigned a level of burden.
How does a FINRA Expungement Hearing Work?
There are several stages of the FINRA process leading up to the formal hearing. These stages are summarized below:
Stage 1- The Financial Advisor Initiates the Case by filing the Statement of Claim
The FINRA expungement process begins when the broker initiates a claim that requests removal of an underlying investor issue from their record. The broker (typically through counsel) files a statement of claim, which initiates a FINRA arbitration proceeding. The statement of claim requests expungement of a specific customer grievance, which FINRA designates through an occurrence number.
Once the broker files the claim, FINRA processes the case as it would any arbitration under the Industry Code of Arbitration Procedure (as opposed to the Customer code, which covers arbitration procedure for investor claims).
After the claim is filed, the responding brokerage firm may file an Answer to the Statement of Claim.
Stage 2- The Parties Select Arbitrators
Through FINRA’s arbitrator selection process, the parties rank and strike potential arbitrators tasked with deciding the case.
Stage 3- The Parties Engage in Discovery
FINRA rules permit the broker to request documents and information from the responding broker-dealer necessary to prove her case. Relevant categories of documents can including include, but are not necessarily limited to: new account forms, monthly statements, contracts, correspondence, and account performance history relating to the customer.
Stage 4- Serving the Customer
Financial advisors must serve the investor who complained with notice of their intent to remove the dispute from their record. Generally, the broker and/or the broker’s counsel must supply the client with the statement of claim and the hearing date and time. The arbitration panel may also require the broker to supply the customer with additional documents if the customer confirms intent to appear or participate.
Stage 5- Preparing the case for Arbitration
After the broker receives the documents necessary to prove their case, their counsel must prepare the case for arbitration. To prepare, the broker and their counsel must identify and organize the documents they intend to use as evidence to support the case. They also must identify the witnesses necessary to support their claim. Additionally, the broker’s counsel should prepare an opening statement and closing argument.
What to Expect at a formal FINRA Expungement Hearing
Hearings may be held in-person or virtually. Regardless of how the hearing is held, these matters follow a fairly consistent sequence of events, which can be broken down into 4 stages:
Stage 1- The Chairperson Opens the Hearing and Reads the FINRA Script
The hearing typically begins with the Chairperson reading a script that FINRA requires read to the parties. After the Chairperson reads the script, he or she then typically invites opening statements from the broker’s counsel.
Stage 2- Opening Statements
Because the broker bears the burden to prove the case, his opening statement usually comes first. After the opening statement, the Chairperson invites the respondent to make an opening statement (if they would like to make one). Often the broker-dealer respondent does not oppose expungement requests. If the respondent does not oppose expungement, they may decide to forego making an opening statement.
If the investor attends the hearing, the chairperson may also enable the investor or their counsel to make opening remarks as well.
Stage 3- Examination of Witnesses
After opening statements, the Chairperson generally asks the financial advisor’s counsel to begin calling witnesses. Both sides may then examine and/or cross-examine relevant witnesses and introduce relevant documents into evidence.
After the financial advisor finishes calling his or her witnesses, the respondent will have an opportunity to call its witnesses (if it has any).
If the customer participates in the hearing to oppose expungement, the Chairperson typically enables the broker’s counsel to cross-examine the customer. In turn, the Chairperson may allow the customer or their counsel cross-examine any witnesses called in the case in support of their opposition to a settled dispute. The chairperson may also enable the customer to submit and/or present relevant documents in opposition to expungement.
Stage 4- Closing Argument
After all witnesses have testified, the Chairperson may invite closing arguments from the parties or an opposing customer.
What Happens after the FINRA Expungement Hearing?
After the hearing the arbitration panel deliberates and renders an arbitration award that either recommends expungement or denies expungement. If the award recommends expungement, the FINRA rules require the arbitration pane to provide an explanation for the basis of their decision. If, on the other hand, the arbitration panel denies it, the arbitration panel does not have to provide any explanation.
Confirming a FINRA Arbitration Award that Recommends Expungement
Importantly, if the arbitration panel recommends removal of the customer complaint from the broker’s record, the process has not ended. FINRA Rule 2080 requires financial advisors who win expungement cases to then confirm the arbitration award in a “court of competent jurisdiction.”
State and federal law provide a pathway to confirm, amend, or vacate any arbitration award.
What does it mean to Confirm an Arbitration Award?
Similar to a verdict in court, arbitration awards bind the parties to the decision made in the award. But there are some circumstances where one or both parties may want to challenge the award. In these cases, they can seek to confirm, vacate, or amend the arbitration award.
- Confirm: To confirm an arbitration award means to request a court to recognize and enforce the award. Typically, this occurs when one party wants to ensure that the other party follows through with the terms of the award. Confirming the award in court therefore makes a party’s failure to comply with the award contempt of court.
- Vacate: To vacate an arbitration award means to request a court to set aside or cancel the award. This is typically done when one party believes that there was some kind of misconduct or procedural error during the arbitration process that affected the outcome of the award. For example, if the arbitrator was biased or there was evidence of fraud or corruption, a party may seek to vacate the award.
- Amend: To amend an arbitration award means to request a court to modify or change some aspect of the award. This is typically done when one party believes that there was a mistake or error in the award, such as a mathematical error or a misunderstanding of the facts. The court will only amend the award if there is clear evidence of an error that needs to be corrected.
Why does FINRA Require Court Confirmation of Expungement Awards?
FINRA requires parties to confirm arbitration awards that recommend expungement for two overarching reasons. First, FINRA considers expungement a serious remedy that can have significant consequences for the accuracy and completeness of a broker’s public record. Confirmation therefore helps ensure the accuracy of the information on a broker’s record.
Second, FINRA wants to ensure that the expungement recommendation is consistent with its rules and policies. FINRA has specific rules and procedures for expungement requests, and arbitration panels are required to follow these rules when making recommendations for expungement. Confirming the award allows FINRA to review the recommendation and ensure that it meets its requirements.
*The Law Offices of Patrick R. Mahoney is a full service law firm with extensive experience handling FINRA expungement cases. This page is for information purposes only and does not constitute legal advice. If you would like to explore the possibility of pursuing removal of a customer complaint from your BrokerCheck record please contact us.*