The U.S. District Court for the Central District of California remanded to a California state court a stockbroker’s lawsuit against the Financial Industry Regulatory Authority for expungement of certain allegedly harmful disclosures from BrokerCheck. Doe v. Fin. Indus. Regulatory Auth., http://www.bloomberglaw.com/public/document/John_Doe_v_Financial_Industry_Regulatory_Authority_Inc_et_al_Dock.
The court found no exclusive federal question jurisdiction over the plaintiff’s cause of action, and that FINRA’s duties under the Securities Exchange Act of 1934 to maintain a system for collecting registration information-including disciplinary action-about registered brokers. FINRA fulfills this obligation by maintaining a database, publicly available through BrokerCheck, that contains disclosures regarding disciplinary actions or other proceedings against registrants.
In the state court lawsuit, the broker complained that he was harmed by seven BrokerCheck disclosure items that allegedly served no public-policy purpose, and asked the court to use its equitable powers to grant declaratory relief expunging the seven items. The court agreed with the broker that it lacks jurisdiction over the controversy and explained that FINRA Rule 2080(a) requires a FINRA member or associated person seeking to expunge information from the Central Registration Depository to obtain a court order. However, the court noted that FINRA Rule 2080 does not provide any substantive standard for determining expungement. California state law does. The court also noted that two federal districts courts have considered if there is federal question jurisdiction over a broker’s bid for expungement of CRD disclosures under state law, and both concluded jurisdiction did not exist.
In sum, federal courts appear to be pushing expungement cases to state court.