Although songs and Broadway musicals routinely call upon “memories” as inspiration, it usually is not the province for decisions in FINRA arbitrations.  However, we were treated to a memory lesson in what, at first blush, seemed to be a run of the mill expungement case. See Evans v. Merrill Lynch Pierce Fenner & Smith Inc., FINRA Office of Dispute Resolution Case No.: 18-00845.

As many know, registered persons may move to expunge certain information from their FINRA Central Registration Depository (“CRD”) records. The burden is quite high, and, unfortunately for many, the results are not always good.  However, for the Evans claimant, luck and a good memory appeared to be on her side.

In Evans, the FINRA panel found that the customer “became a client of Respondent [but] had no recollection of any contact with [customer], making any recommendations to [customer], speaking to [customer] or making any trades on behalf of [customer].”  The broker had stated she believed the customer’s account “had been transferred from another broker to her, without her knowledge or notice.”  The Arbitration Panel was persuaded.

Here is the rub, it was her “memory” that saved the broker– no need to break into song just yet!  The broker told the Arbitration Panel “that she was a practitioner of memory techniques, and that she taught the techniques in one of her son’s classes and would have remembered dealing with [customer].”  The Arbitration Panel went onto reason that she “had an ability to recall details, and she testified that she had no contact with [customer].”  Finally, the Arbitration Panel determined that, as a result of the broker’s memory, “the claim of customer was determined to be factually impossible, and expunged.”

In short, it seems that memories (or lack thereof) are valid for more than just carrying a tune.  You can now start singing to yourselves!

Most FINRA arbitration awards are unanimous.  However, once in a while, we have an interesting set of facts that results in a dissent, and, in the almost unheard of cases, we have an outright attack on the entire FINRA Dispute Resolution system as well as the FINRA staff itself.  Such was the case in Hasko v. Morgan Stanley Smith Barney LLC, et al.  See Hasko v. Morgan Stanley Smith Barney LLC, et al., FINRA Dispute Resolution Arbitration Number 15-03434 (August 10, 2018).

The Hasko case started out like many other expungement cases handled by FINRA arbitration panels, but, somewhere between the hearing and the resulting award, the tracks fell off the case, and the FINRA staff was being accused of “egregious misconduct” by one of its own arbitrators.  The dissenting arbitrator in question took great umbrage with the FINRA staff’s refusal to change the language in a CRD (that the unanimous arbitration panel found defamatory) unless a court of competent jurisdiction confirmed the FINRA arbitration award.  Apparently, despite FINRA rules not requiring such a court award confirmation where no customer information was at issue, the FINRA staff refused to budge.  Consequently, the dissenting arbitrator wrote a detailed and scathing opinion excoriating the FINRA staff’s conduct for seeking to force a “rule change” by making the arbitration panel agree to court confirmation.  Accordingly, in the dissent, the arbitrator specifically outlined all of the reasons why a court would not have jurisdiction to confirm, but, if it were to chose to confirm the award, the court should assess against FINRA “all attorney’s fees and expenses, court costs and other related expenses for both parties, or either party as the case may be, and of those of any other persons, if any, compelled by the court to appear or give testimony, for FINRA’s actions in connection with this dispute as set forth above.”  The arbitrator’s vitriol was not sated because the arbitrator went onto request that: “[a]s the court deems appropriate it should also charge FINRA with a penalty for any action it deems ethically improper or otherwise egregious in conduct.”

There is really only one word for this arbitration award…. WOW!  In short, arbitrators do not normally “bite the hand that fees them,” but, in the Hasko matter, this particular panelist felt the need to simply unload on a system that placed an undue burden on one party in an intra-industry action.  Although one appreciates the panelist’s willingness to look at the actual underlying FINRA rule and not slavishly accept some bureaucratic directive, I believe there is more to this story.

Simply stated, the FINRA staff is not the great evil the panelist makes them out to be.  Before the criticism of this statement begins, let me state for the record that I am by no means a FINRA apologist, and FINRA and its staff certainly do not need my defense.  Nonetheless, FINRA and its staff are working under some harsh and glaring eyes, that is, the public customer claimant’s bar, who view any expungement case as nothing short of a Watergate cover-up.  This unending and misguided glare has caused the overly cautious approach so despised by the dissenting arbitrator.

In sum, the FINRA arbitrator should be lauded for taking on this issue, but we hope other arbitration panels lay the blame on the appropriate party and not take out their frustrations on people merely trying to avoid more unwarranted criticism of the CRD process.

FINRA proposed a rule to bar brokers and their firms from requiring customers to consent to the removal of a dispute from the Central Registration Depository as a condition of settling the disagreement.

In a release, FINRA said the proposal was intended to ensure that the CRD system continues to contain relevant information.  The proposal was approved by FINRA’s board of governors.  It was submitted to the SEC, who signed off on the rule change.  The Rule went into effect on July 30, 2014.

Candidly, this is going to be a disaster for the BDs and brokers.  Many arbitration claims have little or no merit and cause stains on the records of many good people.  Expungements are the only way to even the playing field.

FINRA recently put into place the highly publicized prohibition of making a settlement contingent upon a registered representative having the subject arbitration expunged from the representatives U-4.  Is this a good thing? 

The claimants’ bar thinks this is a good thing because it will prevent bad apples from having their records cleaned.  This position seems a bit silly since a case could only settle with that pre-condition if a claimant agreed to it.   

There is also the possibility that this rule change may have unintended consequences.  More cases may have to be tried to an award, thus causing claimants and respondents additional and unnecessary

There are times that the sheer economics of a boarder-line claim should be settled, but those cases may not settle anymore because those cases will now stay on the representative’s record unless a panel awards expungement as part of its award.  In other words, without having expungement as part of the settlement, registered representatives will likely prefer taking arbitrations to award. 

The only party who may be the winner as a result of this change may be FINRA, who will earn more forum fees from arbitrations that are tried to an award, where they would not have been in the past.   

The only solution for registered representatives is to avoid being a respondent.  Of course, there is no guarantee, but there are many things that you can do to avoid risk – a subject that I have written about.  Put the odds in your favor, avoid risk and avoid being an unfortunate respondent that must try arbitrations to award to be vindicated.

* photo from

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.,

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.

Expungement relief was granted in a very high percentage of arbitration cases filed by investors against broker-dealers, particularly those that were resolved by settlement or stipulated awards.

FINRA panels granted expungement relief in 60.3 percent of arbitration cases, allowing broker-dealers to remove those customer claims from the records, from 2007 through May 2009.  More recently, between May 18, 2009 through December 31, 2011, the arbitration panels granted expungement relief in 61.9 percent of the cases.  Further, between January 1, 2007 through mid-May 2009, expungement was granted in 89 percent of cases resolved by stipulated awards or settlement.  FINRA recently providing expanded guidance to assist arbitrators in the proper performance of their responsibilities regarding expungement.  FINRA is reviewing its rules and interpretations, and will consider changes to provide clarity as to what actions in connection with conditions on settlements violate conduct rules.

In short, FINRA is under increasing pressure to reduce expungements.

A senator wrote to FINRAand the SEC raising concerns about the high rate that broker-dealers have complaints expunged from their records.  See http://www.markey.senate.gove/documents/2013-10-25_FINRA.pdf; http://www.markey.senate.gove/documents/2013-10-25_SEC.pdf.

In the letter to FINRA, the senator said the high expungement rate means that BrokerCheck is not providing investors with accurate information, and “rogue brokers” continue to operate their businesses.  The senator wants all arbitration awards and settlements reported to BrokerCheck and expungement rarely granted.  Additionally, it was suggested that FINRA establish an internal process to determine if expungement is required.

In sum, FINRA will review these suggestions very carefully.

A frequent tool for settlement was to make a stipulated award that included expungement of the registered representative’s U-4 a condition of settlement.  FINRA recently announced that it is “developing rule changes that would prohibit the practice of conditioning settlements on an investor’s agreement not to oppose expungement.”

It should come as no shock that FINRA is taking the next step to do away with stipulated awards that include expungement as a condition to settlement when considered in the context of FINRA Rule 2080, which requires specific findings by an arbitral body before recommending expungement as part of an award.  Whether this is a good idea will remain to be seen. 

One unintended result may be an impetus to try arbitrations to award rather than settle.  After all, if a registered representative cannot get an expungement without an award (based upon a factual record), then what is the point to settle in the first place.   

Conversely, this change may force the claimant’s bar not to name registered representatives or refer to them specifically in statements of claim in order to avoid the expungement issue altogether and, in turn, promote settlement.  Would that result be a bad thing? 

Having represented respondents for the better part of my career, I can see a distinct possibility that more claims will be tried to an award because there may be little incentive to settle if expungement is not possible without a fully developed record.  At some point, this additional cost would likely be passed on to the consumer.  I suspect that this is not what FINRA intended.

A must read is the article in this quarter’ s The Neutral Corner, published by FINRA Dispute Resolution, and authored by John D. Nachmann, Esq., Deputy Chief Counsel, FINRA Registration and Disclosure.  Mr. Nachmann’s article, “Limitations on the Types of Disclosure Events That May Be Expunged From the Central Registration Depository Through Arbitration,” provides a blueprint for those seeking expungement through arbitration.  The article also offers a waring that, even if expungement is ordered, FINRA’s CRD may not be obligated to remove the material from the system.  We encourage all those who are interested in expungement to read this informative article.  See

Over the course of the next 18 months, FINRA will proceed on two tracks regarding the removal of negative information from broker records.

FINRA submitted to the Securities and Exchange Commission a rule proposal to facilitate the process for brokers who are not named in a case to expunge their records, where there was a full hearing and a decision by arbitrators.  FINRA will also consider additional rules for arbitrators to consider in granting expungement relief, and if there should be a change in the standards.  Under current FINRA rules, broker-dealers must disclose when they are implicated in sales practice violations in arbitration claims or civil lawsuits, even if they are not named as parties in the arbitration or suit.  The information is recorded in FINRA’s Central Registration Depository, and is publicly available upon request through the BrokerCheck program.  Brokers may seek to remove– or expunge– the records through a court order, or court confirmation of a FINRA arbitration panel’s grant of expungement relief.  When reviewing its expungement rules, FINRA intends to consider if hearings will be necessary when expungement is a result of settlement between the parties.

In sum, this may be good news for the industry!!