What on earth is a ten hour expungement? It is the approximate number of hours it should take a competent attorney to expunge an auction rate complaint from a registered representative’s CRD. Contrary to popular belief, the CRD is not engraved in stone. Rather, the CRD is intended to be a document that accurately reflects a registered representative’s relevant personal history. It is not intended to be a wall upon which all mud sticks.
So why focus on auction rate complaints? Beginning in March 2008, the CRD system was flooded with U-4 and U-5 amendments reflecting customer complaints related to frozen auction rate positions. While the reporting of many of these customer complaints was appropriate, often it was not. In those instances where reporting may have been inappropriate, the complaining customer was generally happy with his or her registered representative(or “associated person”, as referred to in FINRA lingo), but unhappy with the registered representative’s firm, or the auction rate market in particular. Indeed, the customer whose complaint lead to a reportable event may still be doing business with the registered representative whose CRD reflects the same customer’s complaint. In those cases, it is more likely than not that the customer would agree that his or her complaint based on events from years ago was not about the registered representative, but rather, about the registered representative’s firm, the product, or some other event.
Where the complaining customer is still doing business with the selling registered representative, the likelihood of obtaining an expungement is significantly increased. Moreover, the value of a clean CRD cannot be overstated. Pursuant to FINRA Rule 2080, FINRA will expunge a CRD if:
(A) the claim, allegation or information is factually impossible or clearly erroneous;
(B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
(C) the claim, allegation or information is false.
Demonstrating one of these factors is not especially challenging with the customer’s cooperation. If a customer is willing to sign an affidavit stating that the reportable event is “clearly erroneous”, or that the registered representative “was not involved in the alleged investment related sales practice violation”, obtaining a court order to this effect is realistic. All one needs to do is (1) obtain a customer affidavit; (2) file a complaint in court, naming FINRA as a party; and (3) schedule a hearing to have an Order directing an expungement entered into the public record. If the registered representative’s position regarding expungement is reasonable, and the customer’s affidavit is not contrived, there is a strong likelihood that FINRA will not contest the expungement. Once the Order directing the expungement is entered, the Order is forwarded to FINRA in order to effectuate the expungement. While this is not the only route leading to an expungement, it is the opinion of this lawyer that it is an efficient route.
FINRA’s website contains examples of expungement orders that FINRA finds acceptable for each of the three criteria provided above. Those orders can be found at:
http://www.finra.org/ArbitrationAndMediation/Arbitration/SpecialProcedures/Expungement/P126302
Assuming that the court Order contains the “magical” language that FINRA requires, expungements are clearly within reach.
So Why Bother to Spend Time and Money on Expungements?
There are several reasons one would want to clean up a CRD. First, not only is the CRD a matter of public record through FINRA’s broker check system, a more complete version of the CRD is a matter of public record through various state regulators. The more complete version of the CRD contains the names of complaining customers, whereas the broker check version does not. There are other differences as well. However, because the CRD is a matter of public record, the presence of a complaint on a CRD is information that is available to both current and prospective clients. That information may prove embarrassing, or even threaten an existing or prospective client relationship.
Second, the presence of customer complaints on a CRD may threaten a registered representative’s relationships with referral sources. Those referral sources, such as lawyers and CPA’s, may be reluctant to refer to registered representatives with complaints on their CRD.
Third, the presence of customer complaints on a CRD may impact a registered representative’s ability to find new employment. Prospective employers may have policies limiting new hires to those with clean CRD’s. Prospective employers may also be less inclined to offer transitional compensation (forgivable loans) to registered representatives with complaints. Alternatively, the loan amount may be less generous.
Finally, customer complaints may impact one’s ability to transfer state licenses. Various states routinely ask for additional information before approving the transfer of licenses from one firm to another. It is the registered representative’s responsibility to do everything within their power to maintain their ability to change firms, and in turn, transfer registrations.
Conclusion
Any registered representative interested in an expungement should not delay pursuing it. It is conceivable that FINRA’s rules could change at any time, thereby limiting the availability of expungements. Additionally, if a customer’s cooperation is needed for the expungement, it is better to seek that cooperation while the relationship with that customer is healthy.