Are we set to expunge like its 1999? Do ancient CRD entries have “regulatory value?”
A California state appellate court, in Liss v. FINRA, recently held that the earlier trial court’s earlier decision — that FINRA’s Rule 2080 was the only path to expungement of material from the CRD — was wrongfully decided. Importantly, the information in the CRD record need not be erroneous to seek expungement. It could be still true but arguably no longer relevant due to the amount of time between the events in question and the present day.
FINRA Rule 2080 requires the person seeking expungement to include FINRA as a party to any expungement case brought in state or federal court. FINRA’s Rule 2080 requires proving two additional items. First, the fact finder – court or arbitration panel – must make an affirmative finding. Courts routinely do this but arbitrators do not. Indeed, FINRA arbitration panels will not provide an explanation unless all parties unanimously agree by certain case milestones. Second, that finding must demonstrate one of the following occurred: (i) the claim, allegation or information is factually impossible or clearly erroneous; (ii) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (iii) the claim, allegation or information is false. Those are high hurdles for FINRA arbitration where discovery is more limited, no written opinion generally need be given and often no explanation for a decision is given.
In Liss v. FINRA, registered representative Mr. Liss requested the court use its inherent equitable powers to affect the expungement. Equitable powers essentially means invoking the Court’s conscience to obtain relief aside from an award of money. In the case of expungement, the court must weigh the hardship to the individual with the protection afforded to society by the information being in the records.
Mr. Liss, believed the following factors warranted expungement. All complaints on his CRD record were related to only one security. Every complaint was more than fifteen (15) years old, and he has had an unblemished record since the incidents in question. Importantly, Mr. Liss filed an affidavit that he suffered professional and financial hardship due to current and potential clients using the Internet to obtain his Broker Check history.
The Liss court latched onto something mentioned in the SEC Release approving FINRA Rule 2080: whether or not continued inclusion of the allegation(s) in the CRD have “regulatory value.” That standard has been utilized by two other federal courts.
Why is the Liss decision so important? It demonstrates that this court believes that FINRA’s requirements in Rule 2080 are not the exclusive way to get materials erased from the CRD system despite FINRA’s arguments to the contrary. While the Liss decision is helpful to those seeking expungement, the downside to court based expungement includes its expense and the lack of privacy.
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