Wednesday, November 26, 2014

The Alternative Option for Expunging CRD Records

It is incorrect for financial advisors to assume that the expunging of disclosure events from their Central Registration Depository ("CRD") records can only happen at the conclusion of an arbitration and only if the panel finds (a) that the customer's claims, allegations, or information is factually impossible or clearly erroneous, (b) that the advisors were not involved in the alleged misconduct, and/or (c) that the claim, allegation, or information is false. To the contrary, an alternative and independent route exists through the courts. Moreover, with a standard developing that courts can use when determining whether or not to grant expungement, courts are particularly well suited for expunging disclosure events (a) that are years, sometimes decades, old or (b) in situations where an arbitration panel has not made any findings of falsity or non-involvement as mentioned above.

Such a standard for the courts is necessary because FINRA's Rule 2080 governing expungements is surprisingly silent on how courts should go about determining whether or not to grant an expungement. See Reinking v. FINRA, 2011 U.S. Dist. LEXIS 5611 (W.D. Tx. 2011) and Bridge v. E*Trade, 2012 U.S. Dist. LEXIS 110693 (N.D. Ca. 2012). Indeed, as the Reinking court observed, the majority of Rule 2080's focus is on the standard to be used when determining whether or not FINRA may waive the obligation to be named as a party to the court proceedings. Reinking at *9. This is not, as Reinking observes, the standard courts are to use, or should use, when deciding to grant expungement as it is too exacting for a merits determination, since its purpose is to govern when FINRA will oppose an expungement not whether expungement should ultimately be granted. Reinking at *12.

Consequently, Reinking looked for guidance from the SEC's commentary on Rule 2080's predecessor, NASD Rule 2130. That commentary emphasizes striking the appropriate balance between the ability to remove information from the CRD that holds no regulatory value, while simultaneously preserving information in CRD that is valuable to investors and regulators. Reinking at *11. Accordingly, Reinking held that it too should weigh the regulatory value of the information to be expunged when weighing whether or not to grant expungement.

This Reinking standard, subsequently adopted and endorsed by Bridge, is also in keeping with other existing legal tenets that balance an individual's rights against society's interests, such as those governing the expungement of a criminal record wherein the harm to the individual must be balanced against the government's interest in preserving such records. cfn. Com. v. Wexler, 431 A2d 877 (Pa. 1981).

Practically speaking, and unlike the balance of Rule 2080, it allows a court to decide in a fair and balanced manner the oftentimes critical question - how long is too long for an event to remain an advisor's CRD report when the value of a prior event for investors and regulators arguably diminishes with each additional year. Accordingly, the Reinking standard allows a court to properly weigh an advisor's desire to remove a disclosure event that is behind them and to which they have responded with positive changes in practice against the regulatory value of keeping that same event in the CRD.

Consequently, expungement through the courts is possible thanks to Reinking's guidance.

This material is for informational purposes only. It is not and should not be solely relied on as legal advice in dealing with any specific situation.

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