Associated persons (“AP”) are very aware of the impact that a complaint has, or can have, on their practice. At best, its disclosure leads to an awkward conversation with a current or potential client. At worst, it ends that relationship. This is especially challenging when the complaint is false or clearly erroneous. There is one thing that an AP can do to maintain the accuracy of his or her record: seek expungement of those false or erroneous complaints. This article gives an overview of this process.
Anyone Can Indict a Ham Sandwich – or Put a Complaint on an AP’s Record1
From where I sit, the reporting of a complaint against an AP is one of the more controversial aspects of the broker-dealer industry. This is chiefly because the standard for reporting a complaint is extremely low. A broker-dealer must amend an AP’s registration on the Central Registration Depository (“CRD”) to report a written complaint in which the complainant alleges a sales practice violation and contains a claim for damages of $5,000 or more.2 The complaint can be informal. The complainant does not have to name the AP or specify damages. The broker-dealer generally cannot review the complaint’s accuracy or truthfulness in deciding whether to report it. In addition, if the complainant does not name who the complaint is against, then the broker-dealer must decide against whom to report it. This is true even if the complaint is an arbitration claim before FINRA Dispute Resolution.3
Your Elementary School Teacher Wasn’t Kidding – The Disclosure Goes on the AP’s Permanent Record (CRD)
The consequence of the reporting is significant. FINRA releases information about the complaint and its resolution to the public through its BrokerCheck program per FINRA Rule 8312(b)(2)(G). This even includes a complaint that a broker-dealer denies after concluding that it was false.
Once posted, this information is readily available to current and prospective investors. BrokerCheck is easily accessible through FINRA’s website. In fact, a broker-dealer must include a “readily apparent” reference and hyperlink to BrokerCheck on its initial webpage and any other page that includes an AP’s profile.4 The complaint – right or wrong, correct or inaccurate – is in the public domain for anyone to review.
Righting the Wrong – Expungement Requires a Court Order
The information in CRD are government records. As a result, FINRA will not expunge information from it absent a court order directing it to do so.5 The path to obtaining this order is filled with potential traps for the unwary. Especially given that FINRA will oppose expungement under certain circumstances.
But the Process Generally Starts with an Arbitration Award
The most direct path starts with the panel that is deciding the client’s arbitration claim. (This assumes that the claim is in arbitration; more on this below.) A respondent – the AP if he or she is a party to the claim and/or the broker-dealer – must move the panel for expungement relief. The respondent must convince the panel that:
- the claim was factually impossible or clearly erroneous;
- the registered person was not involved in the alleged investment-related sales practice violation; or
- the claim was false.6
If the panel agrees and issues an explained award ordering expungement of the dispute, then the respondent must have a court of competent jurisdiction confirm the award. This requires a lawsuit, which may have to be in state court as the Federal Arbitration Act (9 U.S.C. §1 et seq.) does not automatically confer federal jurisdiction on actions to confirm arbitration awards.7
FINRA is generally a party to that lawsuit.8 FINRA will waive this requirement and not oppose confirmation of the award if it contains the information Rule 2080 requires.
Even if the Client Did Not Bring an Arbitration Claim
While the most direct path starts with the panel that decides the claim, APs know that broker-dealers can, and do, deny or otherwise resolve a client claim without it seeing the inside of a hearing room.9 In that case, the path forward still generally starts with an arbitration panel. However, instead of asking the panel for expungement relief within the context of deciding the client’s claim, the AP files an arbitration claim for the sole purpose of having the panel rule on expungement. The AP can bring this claim against the complaining (often, former) client, but in most cases, it brings the action against the broker-dealer under the FINRA Code of Arbitration Procedure for Industry Disputes.
The process that follows is generally the same as previously described. The AP bears the burden of production and persuasion for expungement. The panel must issue an award, which the AP must confirm. If the award has the requisite information, then FINRA will waive the requirement to be named in the action and not oppose confirmation.
One Can Seek an Expungement Order Without First Obtaining an Award
FINRA Rule 2080 also contemplates the possibility that an AP can obtain expungement relief by going straight to court. APs should be aware that FINRA will likely litigate the matter in the absence of an underlying arbitration award that contains the requisition information. This will take considerable resources and may not yield the desired result.
Protect Your Record
The public interest in information regarding an AP’s history should not mean that they get unfettered access to complaints that are false or clearly inaccurate. APs can, and should, take appropriate measures to see that their BrokerCheck records are accurate. Careful planning is key.
Thank you for reading this article. Please know that I wrote it for informational purposes only (some may consider it ADVERTISING MATERIAL) and did not intend for it to be legal advice or to form an attorney-client relationship with you – especially in jurisdictions where I am not licensed to practice law. I encourage you to seek your own counsel to help you with your specific situation. To that end, I invite you to contact me if you would like to discuss my services.
Ryan Smith is a partner at Practus, LLP and provides direct and detailed legal and compliance advice for broker-dealers, registered investment advisers and their representatives.
