FINRA Lawyer Blog
At a FINRA arbitration in September 2021, Mr. Kent Kirby, a financial advisor at UBS Financial Services, Inc., sought the expungement from CRD of five customer complaints spanning a time frame from 2002 through 2011. Mr. Kirby was successful in obtaining an award expunging all five occurrences despite the fact that one customer opposed the expungement in a pre-hearing brief and at the hearing. In a detailed award, the arbitrator found that each of the claims against Mr. Kirby were “factually impossible or erroneous” as required by FINRA Rule 2080(b)(1)(A) and “false” as required by FINRA Rule 2080(b)(1)(c). Mr. Kirby then filed an action in the Circuit Court of Palm Beach County, Florida to confirm the award. Kent Kirby v. FINRA, Case No. 50-2021-CA-013816 (15th Judicial Cir., Palm Beach County, FL).
Many are familiar with FINRA Rule 2080, which involves the expungement of customer complaint information from a registered representative’s Form U4 and from the Central Registration Depository (“CRD”). Rule 2080 requires any arbitration award granting expungement of customer complaint information to be confirmed by a court order. In addition, the rep must name FINRA as a part to the court proceeding or request FINRA to waive that requirement.
What many practitioners may not know is that when FINRA receives a request for a waiver, it takes that request, along with accompanying documents, and sends it to all of the state regulators in each state where the individual is registered. See https://www.finra.org/registration-exams-ce/classic-crd/faq/finra-rule-2080-frequently-asked-questions
This is where the Alabama Securities Commission (“ASC”) stepped into the picture. On February 22, 2021, the ASC filed a Petition to Intervene in Mr. Kirby’s confirmation action and stated its intention to oppose confirmation of Kirby’s arbitration award and seek to vacate it pursuant to 9 U.S.C.A. § 10 and Fla. Stat. § 682.13. The motion to intervene was granted on consent.
The ASC argued, among other things, as the basis for its right to intervene, that the information in CRD is maintained by FINRA pursuant to FINRA’s CRD Agreement with the North American Securities Administration Association (“NASAA”). The CRD agreement explicitly states that the disclosure data in CRD “is owned by the participating stated where a broker is registered.” Thus, Alabama had a property interest in Mr. Kirby’s expungement.
Here is where things get interesting. First, FINRA did not waive the requirement that Kirby name FINRA in his petition for confirmation but then submitted a response to the petition that merely stated that, “FINRA has reviewed the arbitration award and the petition to confirm that was filed in this case. FINRA does not take a position on whether the award should be confirmed.” It leads one to wonder, why did FINRA insists that it be named as a party only to take no position on confirmation?
ASC, however, had no qualms about taking a position in its motion to vacate the award and the Alabama regulator came down hard on the arbitrator (“Arbitrator Linder”). The grounds for vacating an arbitration award pursuant to Florida law are a high hurdlel. The statute provides only a handful of reasons to vacate an award including:
- where the award was procured by corruption, fraud, or undue means;
- evident partiality of the arbitrators;
- misconduct by the arbitrator; or
- the arbitrator exceeded his powers.
The ASC was not shy about accusing Arbitrator Linder of all of these things; corruption, fraud, partiality, misconduct in refusing to hear evidence, and exceeding his powers.
The ASC did not stop at its criticism of the arbitrator but also attacked the whole process of what it named “straight-in expungement cases” which it described as cases in which the broker names his firm as the respondent. The ASC described these cases as “illusory” because the firm does not oppose the relief and the customers are not named as parties and do not typically participate because their underlying issue has already been resolved. ASC cited to a 2019 study that showed, between 2015 and 2019, 98% of firms did not oppose expungement and 87% of customers failed to participate.
ASC also pointed to studies that show that expungement was granted in 90% of “straight-in expungement cases” and that the data from those studies:
strongly suggests that brokers and their firms are coordinating with each other in the arbitrator selection process to hand-pick arbitrators who will most likely grant expungement.
(original emphasis). The ASC pointed out that Arbitrator Linder had presided over 36 expungements since 2015 and granted expungement in all but one case. ASC relied on this fact to argue that Arbitrator Linder was not an impartial trier of fact.
ASC also went to extraordinary measures to conduct its own investigation of Mr. Kirby’s arbitration and complaint history. ASC obtained the audio recording of the arbitration and created a transcript of the proceeding. ASC also contacted the customer who attended the expungement hearing, obtained an affidavit from him, and conducted a thorough review of the customers’ underlying complaint. The ASC’s presentation of the expungement arbitration as well as the customer’s underlying complaint reads much more like a statement of claim from a plaintiff’s attorney rather than a regulator. For example, it accuses Kirby multiple times of making false statements at the hearing simply because the ASC chooses to believe the customer’s version of events.
Ultimately, the ASC’s opposition to confirmation of Kirby’s award, alleges not just a single flawed award but it calls into question FINRA’s entire expungement regime as being corrupt. The fact that FINRA appeared in this action but took no stance as to confirmation stands in stark contrast to Alabama’s scathing 44 page memorandum of law. It remains to be seen if Alabama intends to frequently intervene in expungement award confirmations or if they found Mr. Kirby’s award particularly offensive. In any event, Alabama has fired a shot across FINRA’s bow that could spark rule changes surrounding what ASC calls of “straight-in expungement cases.”
We believe the Court can and should deny Alabama’s motion to vacate the award. If the State of Alabama has issues with the expungement process, the State should direct those concerns to FINRA and request rule changes. It is unfair, however, for the State to challenge a valid Award that was issued in accordance with FINRA’s rules.
Herskovits PLLC has a nationwide practice representing securities industry participants. Feel free to call for a consultation at 212-897-5410.