FINRA Plays Guessing Game With Expungement Waiver Request

From Ulmer’s Broker-Dealer Law Corner Blog
By Christopher D. Seps

When a registered rep contacts us about seeking expungement of customer complaints from his or her CRD record, we always respond that expungement is not a sure thing. It turns out that is more true than ever before because of the way FINRA is treating its “waiver” process.

You see, we recently participated in an expungement hearing on behalf of our client, let’s call him AJ. After the obligatory hearing took place, which was uncontested, the panel recommended expungement of the customer disputes on AJ’s CRD record. We always warn our clients that this is only the first step, and that they still have to go to court to get the award confirmed before CRD will expunge the records. That is usually not a particularly arduous process, unless FINRA decides to make it one, which is what happened in this case.

FINRA Rule 2080 requires a rep to name FINRA as a party in the court proceeding that the rep must file to confirm the expungement award, ostensibly so that FINRA has a chance to challenge the hearing panel’s decision and block the rep from obtaining that confirmation. Putting the unfairness (not to mention the just plain weirdness) of that aside, FINRA allows a rep to seek a waiver from this requirement. FINRA may grant the waiver if the expungement award contains findings that “(A) the claim, allegation or information is factually impossible or clearly erroneous; (B) the registered person was not involved in the alleged [misconduct]; or (C) the claim, allegation or information is false.” (Rule 2080(b)(1)).

If FINRA grants your waiver request, you don’t need to waste time and money naming FINRA as a defendant, serving it via process server, and waiting to see if it is going to challenge the award. The good news is that FINRA almost always grants the waiver so long as the panel uses the “magic words” in its order (i.e., that the claims are “factually impossible” or “clearly erroneous” or “false”). In fact, FINRA explicitly says that in its FAQs regarding Rule 2080: “Provided that the award reflects compliance with the Arbitration Code, and contains an affirmative finding that the expungement meets one or more of the standards in Rule 2080, FINRA staff will generally grant the waiver.” Note the use of “generally.”

In our case, we were in good shape: the expungement award contained the magic words, so there appeared to be no basis for FINRA to deny our request for a waiver. But guess what happened? FINRA denied our request for a waiver. The ostensible reason? AJ owned his own broker-dealer, and he had named that broker-dealer as the respondent in the expungement arbitration. FINRA apparently did not like the fact that AJ was essentially on both sides of his expungement case. But, FINRA said, the fact that it did not grant a waiver did not necessarily mean that it would actually proceed to challenge the confirmation of the award. Indeed, FINRA advised us that that determination, i.e., whether actually to challenge, would, in fact, be made by a different division within FINRA.

That explanation was completely unsatisfactory for several reasons. First, there’s no requirement about who a rep must name as the respondent when filing a Statement of Claim seeking expungement. The rep could name the complaining customer, the broker-dealer that made the initial disclosure of the customer complaint on the rep’s U4, or the rep’s current broker-dealer. Second, naming your own broker-dealer may make it look like a one-sided arbitration on its face, but it really isn’t. Regardless of who is actually named as the respondent in the expungement hearing, the rep must still submit evidence that he provided notice to the customer and provided the customer the chance to come testify in opposition to the expungement request. So, there is always an opportunity for the customer to contest the expungement request regardless of who is named as the respondent. Third, FINRA’s decision to deny the waiver was completely arbitrary. It was not based on any rule or problem with the award, but rather, simply because FINRA didn’t like the way it looked.

As a result, we filed our petition to confirm the expungement award in court and named FINRA as a defendant, fully expecting FINRA to oppose the confirmation. We hired local counsel in anticipation of a fight, and we hired a process server to serve FINRA. Then, we waited. And guess what? Just before the deadline for FINRA to file its Answer in court, we received a letter from FINRA’s Office of General Counsel stating that they decided NOT to oppose confirmation of the expungement award after all. Gee, thanks.

Thankfully, that was the right decision because there was no basis under the state or federal arbitration act for FINRA to oppose confirmation of the award. But the entire way that FINRA went about it was unnecessary. If it would have just granted the waiver, we would not have had to waste a great deal of time and money naming FINRA as a defendant in the court action to confirm the award. And, our client would not have had to wait around nervously wondering what reason FINRA was going to conjure up to oppose the award. And, our client could have gotten the disclosure removed from his record faster, and a clean CRD is always helpful when trying to bring in new clients.

There are two lessons here. First, despite what FINRA says, even if your expungement award complies with all the requirements of the rules, it is not a sure thing that FINRA will grant your waiver request. It might deny it for an arbitrary reason that is not grounded in any rule or law. And second, even if FINRA denies your waiver request, that alone is not a reason to panic. In the end, you might still get the expungement award confirmed, but you may need to spend more time and money doing so. But, as with many things, that’s your problem, not FINRA’s.