New FINRA Rule Prohibits Expungement As A Condition Of Settlement

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New FINRA Rule Prohibits Expungement As A Condition Of Settlement

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It is the rare broker-dealer who doesn’t face a customer complaint at some point in their career, and it is rarer still to find one who wouldn’t prefer to have customer dispute information expunged from the public record whenever possible. While FINRA Rule 2080 provides a mechanism for requesting a court order to expunge a dispute record from the Central Registry Depository (“CRD”), broker-dealers can no longer condition a settlement of a customer dispute on the customer’s agreement to consent to, or to not oppose, a request to expunge such information from the CRD.

FINRA Rule 2081

In July, the Securities and Exchange Commission (“SEC”) approved the implementation of FINRA Rule 2081. Entitled “Prohibited Conditions Relating to Expungement of Customer Dispute Information,” the rule provides that:

No member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to consent to, or not to oppose, the member’s or associated person’s request to expunge such customer dispute information from the CRD system.

In announcing the new rule, FINRA stated that it “has long had concerns about the practice of firms and associated persons conditioning settlement agreements for the purpose of obtaining expungement relief and, thereby, potentially removing from the CRD system information that helps protect investors.”

Accordingly, as of July 30, 2014, any agreements regarding expungement, whether written or unwritten, whether as part of settlement negotiations or otherwise, are now prohibited. The rule also precludes such agreements even if the customer offers not to oppose expungement as part of negotiating a settlement agreement and applies to any settlements involving customer disputes, not only to those related to arbitration claims.

Court Order Required For Expungement

Broker-dealers seeking to have customer dispute information expunged from the CRD and the BrokerCheck system can still seek relief under FINRA Rule 2080 which provides that a court order must be obtained that either directs expungement or confirms an arbitration award containing expungement relief. The rule requires that those seeking such a court order or confirmation name FINRA as a party. Upon request, FINRA may waive the obligation to name it as a party if FINRA determines that the expungement relief is based on an affirmative judicial or arbitral finding that:

  1. the claim, allegation or information is factually impossible or clearly erroneous;
  2. the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
  3. the claim, allegation or information is false.

If you have questions about the new FINRA rule or about the expungement of customer complaint or dispute information from the CRD, please contact Ohrenstein & Brown at (888) 260-6821.