FINRA’s Concern for the Integrity of the BrokerCheck® System

The Central Registration Depository or “CRD” system is the central licensing and registration system for all registered securities professionals. Among other uses, the CRD system is the primary source of information contained in FINRA’s BrokerCheck® system. That system is intended, in part, to provide the investing public with readily available, accurate information regarding the administrative and disciplinary history of registered personnel, including customer complaints, arbitration claims, court filings, and any related judgments or awards. Because of its use by investors, registered individuals often wish to have matters expunged or removed from their CRD. However, FINRA has been very reluctant to ease requirements for obtaining an expungement for fear that loose expungement standards will jeopardize the integrity of the BrokerCheck® system. Newly approved Rule 2081 is another step by FINRA down the path of limiting expungements and presumably protecting the integrity of the BrokerCheck® system. See Regulatory Notice 14-31.

Rule 2081 Prohibits Conditioning Settlements on an Expungement

FINRA Rule 2080 sets forth the process for obtaining an expungement, and limits such relief to those instances where the allegations are unfounded and/or did not involve the individual seeking such relief. FINRA has expressed its concerns that firms and/or associated persons have on occasion conditioned settlement on agreements to consent to or cooperate in obtaining an expungement for the registered individual. The result, FINRA fears, is the removal from the CRD system of precisely the type of information that FINRA intends to provide for the protection of investors.

In response, FINRA Rule 2081 expressly prohibits any member firm or associated person from conditioning or seeking to condition settlement of any matter on an agreement to consent to or not oppose a request for expungement. It makes no difference whether the settlement is oral or written, or if the customer initiates the settlement negotiations. Further, the limitations of this rule apply equally to arbitration and court proceedings.

Consequently, in cases that may warrant expungement even under the new Rule 2081, firms and associated individuals should consider incorporating the following into their settlement agreement:

  1. Respondents intend to seek expungement relief;
  2. expungement relief was not a condition of the settlement;
  3. Respondents have not paid any consideration related to expungement; and
  4. the Claimant may participate in expungement proceedings as (s)he chooses.