RIA Compliance Blog
In a decision last month, the California Court of Appeals may have opened the door for brokers to bypass the Financial Industry Regulatory Authority’s (FINRA) rigid expungement rules in order to remove matters from their CRD records. Currently, brokers must abide by Rule 2080 in order to expunge their records. The FINRA rule allows for expungement only upon meeting one of three tests: (1) the claim is factually impossible, (2) the broker was not involved in the conduct or (3) the information is false. The rule states that a broker who seeks expungement “must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.”
In its recent decision, the California Court of Appeals held that a court may expunge a broker’s CRD record in the interest of fairness and equity, regardless of FINRA’s rule. Edwin Lickiss filed a petition in the court in April 2011 seeking expungement of 17 customer complaints and a regulatory action from his CRD record claiming that they were old and irrelevant and negatively affected his profession. The customer complaints against Mr. Lickiss had resulted in total payments of $831,000, and Mr. Lickiss was required to personally pay a $5,000 settlement. FINRA objected to Mr. Lickiss’s expungement request, stating that he was trying to “sanitize his record and prevent regulators, brokerage firms and investors from learning of this history for what amounts to ‘time served.'” The trial court dismissed the complaint, citing the requirements of Rule 2080. The court of appeals reversed the trial court’s decision, holding that it should have looked to equitable principles instead of FINRA rules.
FINRA’s policy requires brokers to disclose all complaints regardless of their age, but unproven or unsettled allegations no longer appear on the CRD record after two years. This California court’s decision may allow brokers to expunge all complaints. The decision only allows the case to move forward; Mr. Lickiss will still have the burden of persuading a judge to expunge his record. According to legal experts in the industry, there may still be a long legal battle ahead between FINRA and Mr. Lickiss. In the event that Mr. Lickiss convinces a judge to expunge his record, FINRA may still appeal that decision.
The decision in this case directly affects only California, although other states may regard it as persuasive. If Mr. Lickiss wins and has his record expunged, it may open the door to other brokers to pursue expungement proceedings in court under equitable principles, rather than following FINRA’s more stringent rules.
In April of this year, FINRA proposed a new rule for expungement proceedings for persons not named in arbitration proceedings, which we discussed in a previous blog post. The rule states that FINRA has to notify the unnamed person of arbitration proceedings, after which the person has 180 days to respond declaring that he or she intends to bring expungement proceedings. Once the arbitration proceeding has concluded, FINRA will again notify the unnamed person, and he or she will then have 60 days to begin the expungement proceeding. As of now, the proposed rule has not been finalized.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.