Expungement under FINRA Rules: What is Expungement?

By Dylan Donley, Spring 2014 Graduate Research Assistant

If you are anything like me, when you first hear the term “expungement,” brokers and brokerage firms are not the first things that pop into your head. More likely than not, you think of having some form of criminal charge wiped clean from your criminal record (not that I know anything about that from experience). Under FINRA rules, brokers are able to seek “expungement” of customer disputes that appear on their FINRA public records if they meet certain requirements set forth under the rules.

Customer disputes are disagreements or controversies typically involving an investor that is a customer with a broker or brokerage firm and the broker or brokerage firm itself arising from the investor-broker or brokerage firm relationship. For example, an investor may bring a customer dispute claiming that the broker responsible for handling his investments failed to disclose an important fact about an investment before the investor agreed to purchase the investment, and as a result, the investor lost money.

Essentially, brokers are able to have their records wiped clean of information relating to customer disputes in certain cases, which may include things such as customer complaints relating to misrepresentation, unsuitability, 10b-5 violations, and the like, information that investors would generally like to know prior to working with any particular broker. The ability for brokers to seek and be granted an expungement of customer dispute information on their public records is something that should and does raise questions for investors: after an expungement occurs, there is no longer any history of the customer dispute that appears on the brokers’ records (found on the Central Record Depository (“CRD”) system). However, such customer dispute information may still appear in certain state legacy reports.

This means that if an investor does their due diligence prior to hiring a broker or purchasing or selling an investment the broker recommends by looking at FINRA’s BrokerCheck website, as all investors should do, the expunged customer dispute information would not show up – investors would not be able to view potentially important information that may impact their decisions to work with a particular broker or make certain investment decisions.

It should be noted, concerned investors, that the expungement rules only apply in a certain set of circumstances. FINRA has explicitly stated that expungement is an “extraordinary remedy that should be granted only under appropriate circumstances,” specifically, “only when [the expunged information] has no meaningful investor protection or regulatory value.”

Stated another way, brokers who have been found liable in customer disputes will not be able to seek expungement for customer dispute information relating to complaints grounded in claims of unsuitability, misrepresentation, 10b-5 violations, and the like, which would serve to defraud other potential investors. For example, a broker who is found liable for misrepresenting that an investor would be guaranteed to yield 150% return on a risky stock that ends up plummeting in value and costing the investor thousands would not be able to obtain expungement of this information. Without this information, the investing public would be unable to obtain the full picture of a broker or brokerage firm prior to deciding whether to entrust their hard-earned money with the individual or entity; securities regulators would be unable to effectively do their jobs as they rely on this type of information in order to take actions against brokers and brokerage firms and protect investors; and potential employers would be unable to be completely apprised of a broker’s employment history and may end up hiring someone who has managed to erase all traces of his bad acts and the complaints against him by former customers. FINRA has continuously acknowledged these concerns when considering whether expungement should be appropriate in a given case, which has helped mold the current rules on expungement relief.

Over the course of the next several weeks, we are going to take a detailed look at expungement, including the reasons behind it and recent guidance on the expungement process.  Check back with us next week to learn about why expungement exists.