CRD Expungement: A Guide to Obtaining This Now Extraordinary Relief
ASD Rule 2130 makes it difficult, indeed "extraordinary", for reps to clear their records of information relating to customer dispute. But it's not impossible. Let's discuss what is necessary.
Preliminarily, Rule 2130 applies only to disputes involving customers. In other words, it does not apply to "intra-industry" disputes between firms and reps. Likewise, Rule 2130 does not apply to customer disputes arising from arbitrations or civil lawsuits filed before April 12, 2004. For both of these situations, reps need only follow the CRD expungement procedure announced in NASD Notice to Members 99-09. In a nutshell, that procedure allows reps to expunge CRD records when a court of competent jurisdiction either has ordered expungement or has confirmed an arbitration panel's order of expungement.
NASD Notice to Members 04-16 and a very informative "Rule 2130 Frequently Asked Questions" publication, found at
www.nasdr.com/3400_rule2130_faqs.asp,
inform reps what they need to know about expungement under new Rule 2130.
The NASD states that, after considering the interests of customers, reps and firms, CRD expungement "under any circumstances is an extraordinary remedy." It should be used "only when the expunged information has no meaningful regulatory or investor protection value."
Nonetheless, the NASD specifies three special findings. If the "fact-finder" (typically an arbitration panel) makes one or more of them, the NASD will grant the rep's "waiver request", which means that the NASD need not participate in the expungement process and will not oppose the expungement request. The special findings are:
"The claim, allegation or information is factually impossible or clearly erroneous." As an example, a rep was named in an arbitration claim but was not employed or associated with the firm during the relevant time.
"The rep was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds." The NASD states that mere dismissal of a claim, by itself, will not be a basis for ordering expungement under this standard.
"The claim, allegation, or information is false." The NASD states that the fact-finder needs to "assess the evidence" to make such a finding, but clarifies no further.
Even if the fact-finder makes none of those findings, the NASD nonetheless may opt not to oppose expungement if:
The expungement relief and accompanying findings on which it is based are meritorious; and
The expungement would have no material adverse effect on investor protection, the integrity of the CRD system, or regulatory requirements.
The next step is for the rep to obtain a court order of expungement. Reps may rely upon any of the three specific findings detailed above, or argue that there is no investor protection issue, discussed above, in an effort to convince the NASD to waive its opposition to the expungement request. To obtain that waiver, the rep will have to provide the NASD with a waiver request, the arbitration award and any other relevant documents. Should the NASD not waive its opposition, the rep must name the NASD as a party to the court expungement proceeding and serve the NASD with all appropriate documents. In this regard, the NASD views its participation as "an additional safeguard to ensure that the courts are aware of the standards of Rule 2130 and relevant regulatory and investor protection interests." In any event, reps who have been sued in court (not in arbitration) will not be able to avail themselves of the rule's waiver provision and they will be required to name the NASD as a party in all circumstances.
Notably, the NASD does not foreclose state securities regulators from intervening to object to any expungement request. Thus, the NASD will inform the state or states where the rep is registered, or is seeking to be registered, of any expungement notice and waiver request. States then will make their own determination as to whether or not to oppose the expungement request.
Reps also may be able to obtain expungement if they are settling their customer dispute. To begin that process, the parties will request a stipulated award from an arbitration panel. Reps should be expected to provide documents, and may even need to participate in an evidentiary hearing, in order for the arbitration panel to make the required affirmative findings specified above. Similarly, for disputes already settled, reps still may be able to request expungement, by requesting that the arbitrators reopen their case for the limited purpose of considering the expungement request. The NASD notes that arbitrators retain discretion as to whether to grant or deny the request, and that state law may or may not limit or even disallow the reopening of an arbitration. Finally, should the parties agree to settle their dispute outside of the arbitration process, reps may request expungement by way of either initiating a court proceeding or an arbitration claim for the limited purpose of incorporating the settlement and requesting the affirmative findings specified above. In all of these scenarios, reps still would be subject to the requirements discussed above, such as naming the NASD as a party to any court proceeding.
However, in this regard, reps also need to familiarize themselves with Notice to Members 04-43, entitled, "Expungement: Members' Use of Affidavits in Connection with Stipulated Awards and Settlements to Obtain Expungement of Customer Dispute Information under Rule 2130." This notice is in response to the NASD's recently discovering "instances in which [arbitration] claimants and respondents appear to be settling customer claims for monetary compensation to the claimant in return (at least in part) for a customer affidavit that absolves one or more of the respondents of responsibility for any alleged wrongdoing." The NASD notes that these affidavits appear to be inconsistent with the allegations of the arbitration claims as well as the terms of the settlement. The NASD issues strong caution. Affidavits in which the content is the product of "bargained-for consideration as opposed to the truth" will subject brokerage firms and brokers to a panoply of sanctions, including possible disciplinary action as well as possible criminal sanctions!
Overall, the sledding has become much tougher for reps seeking to expunge, but the hills still may be navigated successfully.
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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.
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