Expungement

FINRA RELEASES PAPER REGARDING EXPUNGEMENT OF CUSTOMER COMPLAINTS

May 11, 2022 | Herskovits, PLLC

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On May 6, 2022, FINRA released a “Discussion Paper – Expungement of Customer Dispute Information” (the “Discussion Paper”) to address what FINRA clearly sees as problems with the current system for expunging customer complains. Let’s be clear from the outset, FINRA is openly hostile to the expungement of customer complaint information. FINRA is particularly hostile to what they describe as “straight-in” expungement arbitrations where the financial advisor seeks expungement by naming their firm as the respondent (typically after a customer arbitration has settled).

As many practitioners know, FINRA passed an amendment, effective September 14, 2020, establishing a minimum filing fee for expungement arbitrations. The Discussion Paper touts the success of this amendment in reducing the number of straight-in expungement actions by 37% between 2019 and 2020. Thus, FINRA makes it clear that its goal is reduction of expungement claims rather than making sure the claims have merit.

The tone of the Discussion Paper starts off somewhat defensive as FINRA makes sure to let the public know how few expungements are actually awarded every year. Between January 2016 and December 2021, approximately 8 percent of financial advisors registered with FINRA had a customer dispute disclosure on their record and only 1 in 10 had customer dispute information expunged during that time period. If expungement of customer dispute information is so rare, it is hard to understand why FINRA has as they put it, “engaged in longstanding efforts with NASAA and state securities regulators to explore a redesign of the current expungement process.” I recently blogged about the Alabama Securities Commission’s (“ASC”) intervention into an expungement award confirmation proceeding and the ASC’s very dim view of the “straight-in” expungement process. In light of the intervention and then the subsequent release of this Discussion Paper, it seems likely that more state regulators than just Alabama are unhappy with the current expungement system.

STATE SECURITIES REGULATOR MOVES TO VACATE A FINRA ARBITRATION EXPUNGMENT AWARD

May 5, 2022 | Herskovits, PLLC

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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 (15^th 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

FINRA ARBITRATION AWARD DESCRIBES MERRILL LYNCH’S “RECKLESS DISREGARD FOR THE TRUTH” IN A FORM U5 FILING

May 6, 2021 | Herskovits, PLLC

In September of 2018, Merrill Lynch terminated the Claimant in this arbitration for allegedly opening up a Bank of America bank account for a customer without authorization. In 2020, the Claimant brought an arbitration against Merrill Lynch seeking expungement of the alleged defamatory reason for termination and also sought $50,000 in compensatory damages. The FINRA arbitration award is viewable here.

The arbitration was conducted under FINRA’s simplified rules before a single public arbitrator and the Claimant represented herself without an attorney. Merrill Lynch was represented by the law firm Seyfarth Shaw LLP.

In her findings, the single arbitrator seemed particularly concerned that Merrill Lynch failed to even speak with the customer about the allegations in dispute. Merrill Lynch also failed to have the customer sign an affidavit supporting the allegations. The client in question was known to be suffering from memory problems so significant that Merrill Lynch terminated her as a brokerage client despite an account balance in excess of $500,000. The client had previously complained about unauthorized trading in her account by her primary advisor.

Herskovits PLLC Proves Form U5 Defamation and is Awarded Attorneys’ Fees for Our Client

November 24, 2020 | Herskovits, PLLC

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On November 19, 2020, FINRA published a noteworthy arbitration award for a Herskovits PLLC client in FINRA Arbitration No. 20-01054. This case has garnered significant attention in the press due to the fact that Wells Fargo was ordered to pay our client’s attorneys’ fees. Stories about the case have been reported in AdvisorHub, InvestmentNews and ThinkAdvisor.

On February 18, 2020, Wells Fargo terminated the FA and inserted the following allegation on the Form U5:

“WF Bank, N.A., registered banker was discharged by the bank after a bank investigation reviewed complaints received by AMIG from two bank customers alleging the customers were enrolled in renter’s insurance policies for which the banker received referral sales credit without the customers’ authorization. The registered banker denied the customers’ allegations. The activity was not related to the securities business of WFCS.”

FINRA SEEKS TO LIMIT EXPUNGEMENT REQUESTS WITH PROPOSED RULE

September 27, 2020 | Herskovits, PLLC

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On September 22, 2020, FINRA submitted a proposed rule change to the SEC. The proposed rule furthers FINRAs assault on the expungement process by imposing stringent requirements on expungement requests filed during a customer arbitration by or on behalf of the associated person (“on-behalf-of request”) or filed by a registered representative separate from a customer arbitration (“straight-in request”). The proposed rule also (a) establishes a roster of arbitrators with enhanced training and experience, from which a panel of 3 arbitrators would decide straight-in requests; and (b) codifies and updates the Notice to Arbitrators and Parties on Expanded Expungement Guidance.

Here are some of the key takeaways from the proposed rule change:

Denial of FINRA Forum