Brokers may finally see the light at the end of the expungement tunnel. Over the last month, registered representatives have received some surprisingly good news relating to their CRD licensing records.
In August 2012, the United States District Court for the Northern District of California granted a motion by E-Trade Securities LLC to expunge an employee’s CRD records relating to an investor dispute where he had no involvement. The court stated that there is a FINRA Rule 2080, relating to the expungement of information from the CRD system, provides that a court of competent jurisdiction may direct and order such an expungement, providing that FINRA may participate in the judicial proceeding. Nonetheless, the court found that there was no substantive legal standard to determine if such a challenge was or was not appropriate. As a result, the court adopted the standard for expungement that SEC guidance provided, as well as, from case law, Reinking v. FINRA, Western District of Texas, #A-11-CA-813 (Dec. 1, 2011).
Applying these standards, the court found that the broker’s case easily meets the regulatory purpose standard found in Reinking case some of the allegations were false in that there was no regulatory value in keeping the records active. As such, the court determined that the records should be expunged from this broker’s record. See Bridge v. E-Trade Securities LLC, et al., N.D. Cal. No. C-11-2521 E.M.C. (Aug. 7, 2012).
Additionally, in another California case, this time at the state court level, a California Appeals Court held that a court could erase past public disclosure reports for a broker that were old or irrelevant since it unfairly hurt his livelihood. The appeals court, thus, allowed the lower court to possibly invoke unusually broad authority to erase details on this broker’s record involving more than a dozen arbitration cases. The court determined that this was simply the fair thing to do, and that the court did not have to follow any rigorous standards imposed by FINRA. See Lickiss v. Financial Industry Regulatory Authority, __ Cal. Rptr. 3d __, 2012 WL 3605785 (August 23, 2012). Although this was a victory for the broker, in that he could proceed with his case, his case must now proceed before the trial court to determine if this information should, in fact, be expunged. As a result, at least in California, brokers now have the opportunity to ask a Judge to rule that such disclosures on CRD licensing records are simply not fair.
Intriguingly, Reuters also reports that the number of broker requests for expungement to date nearly matches the total number filed last year. This is indicative of the overall trend by brokers to clean their records.
In sum, these two cases represent a watershed for brokers seeking to clean up their CRD disclosures. Although some commentators are suggesting that this may open up the flood gates and possibly provide for other states to follow suit, we believe that the more appropriate approach would be for FINRA to propose new rules and regulations to streamline the process so that such information would be removed from the public disclosure files, especially when it is old and irrelevant.