The rules around expunging customer disputes from a broker’s record are complex. FINRA oversees the expungement process, which involves navigating strict procedural requirements and limitations under FINRA Rules 12805 and 13805.
In this article, we’ll provide an overview of the expungement process and explain what you need to know about the key FINRA rules governing the expungement of BrokerCheck records.
FINRA’s BrokerCheck and Central Registration Depository
The Central Registration Depository (CRD) is a central licensing and registration system operated by FINRA. It houses administrative, regulatory, and disciplinary information about securities brokers and firms.
Uniform registration forms like Form U4 are used to report information into the CRD system. This includes customer complaints, arbitrations, and litigation – what FINRA terms “customer dispute information.”
FINRA then makes certain registration data in the CRD publicly available through its BrokerCheck website. This allows investors to research the background and conduct of brokers and firms.
Regulators also rely on the CRD and BrokerCheck for oversight purposes. However, brokers may seek to have certain customer dispute information removed or “expunged” from their CRD records under limited circumstances.
FINRA Rules 12805 and 13805 Set Grounds for Expungement
FINRA Rules 12805 and 13805 strictly limit the grounds for expunging customer dispute information from a broker’s CRD record.
For customer arbitration cases under Rule 12805, expungement may be appropriate where the arbitration panel determines:
- The claim, allegation, or information is factually impossible or clearly erroneous;
- The registered representative was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds or
- The claim, allegation, or information is false.
Similarly, Rule 13805 allows the expungement of a broker’s CRD record if the same three grounds are established through a standalone expungement request filed directly with FINRA’s Dispute Resolution forum.
In either case, the party seeking expungement relief bears the burden of proving one of these narrow grounds. Arbitrators must make specific findings in their award rationale to justify expungement.
Enhanced Expungement Process Strengthens Oversight
Significant amendments to FINRA’s expungement rules take effect in October 2023 to further limit unwarranted removal of customer dispute information.
For standalone expungement requests under Rule 13805, cases will be heard by a three-member panel randomly selected from a Special Arbitrator Roster. Arbitrators on this roster undergo enhanced expungement training.
The parties have no input on arbitrator selection for these straight-in expungement requests. A unanimous arbitrator agreement is required to award expungement.
Other key enhancements include stricter time limits on seeking expungement under Rule 13805 and required participation in expungement hearings by the broker seeking expungement relief.
Overall, these changes aim to uphold the integrity of CRD records, prevent unwarranted expungements, and protect investors. The rules preserve transparency around broker backgrounds.
How Expungement Worked Under Previous FINRA Rules
Under FINRA’s old expungement process, brokers had more leeway to request expungement and influence the arbitrator selection process. This raised concerns about the reliability of CRD records.
For example, brokers could request expungement without the participation of the customer who filed the original complaint. Or parties might agree to use a single arbitrator rather than a three-member panel.
There were also no specialized training requirements for arbitrators deciding expungement cases and no limits on arbitrator selection through the ranking/striking process.
Background on Expungement and Its Importance
The ability to expunge customer disputes from CRD and BrokerCheck is impactful, so FINRA restricts it to limited scenarios. CRD information helps regulators perform oversight duties and assists firms in making hiring decisions. BrokerCheck then provides transparency for investors.
Overall, FINRA Rules 12805 and 13805 allow expungement from CRD records, and BrokerCheck reports only where explicitly permitted. This preserves the integrity of these important regulatory tools. Strict procedures must be followed to obtain expungement relief.
We hope this overview of expungement under FINRA rules helps explain the process and requirements. Reach out to the securities lawyers at My RIA Lawyer at https://www.myrialawyer.com/contact-us/. Their team can assist with an expungement or related matter. Serving financial professionals nationwide, they have deep experience helping clients navigate FINRA rules and arbitrations.
