A California Court of Appeal has opened the door for brokers to obtain expungement of Central Registration Depository (“CRD”) reports where they can show that equitable considerations support such relief. Lickiss v. Financial Industry Regulatory Authority, Case No. A134179 (Cal. Ct. App., 1st Dist. Aug. 23, 2012).

The California Court of Appeal refused to apply FINRA Rule 2080(b)(1), ruling it was is a procedural rule that does “not provide any substantive criteria as to when expungement would be appropriate.” The Court of Appeal held that because Lickiss had invoked the equitable powers of the court, the trial court erred when it applied the procedural criteria in 2080(b)(1). The Court noted that applying the “rigid legal rule to assess the legal sufficiency of Lickiss’s petition—a choice that closed off all avenues to the court’s conscience in formulating a decree and disregarded basic principles of equity—was nothing short of an end run around equity.” Having found that Lickiss had stated a valid claim for relief, the Court of Appeal remanded the case back to the trial court.

Lickiss commenced an action by filing a petition in the California Superior Court, County of Los Angeles for expungement pursuant to FINRA Rule 2080. In his petition, Lickiss claimed that these complaints caused professional and financial hardships, particularly given the ability of clients to use the Internet to obtain a “BrokerCheck” history. Lickiss specifically invoked the equitable powers of the Court.

FINRA opposed Lickiss’s request and filed a demurrer1 to the Complaint, arguing that FINRA Rule 2080(b)(1) controlled the court’s determination and that Lickiss had failed to satisfy any of the Rule’s three enumerated grounds for expungement.2 Those grounds provide that members may seek expungement in a court of competent jurisdiction by making a petition that names FINRA as an additional party. FINRA Rule 2080 further sets forth the circumstances in which the petitioner/broker must provide notice to FINRA.

The trial court agreed and sustained the demurrer. Lickiss appealed and a unanimous California Court of Appeal, relying on Minnesota case law allowing for expungement in proper cases on equitable grounds3, reversed. The Court of Appeal’s decision and analysis bodes well for similarly-situated brokers in California and elsewhere.

The Court of Appeal reasoned that Rule 2080(b)(1) is a procedural rule that does “not provide any substantive criteria as to when expungement would be appropriate.” The Court of Appeal held that because Lickiss had invoked the equitable powers of the court, the trial court erred when it applied the procedural criteria in 2080(b)(1)—which are used merely to determine when FINRA is entitled to notice of the action—to evaluate whether Lickiss had stated a valid claim for relief.

The Court chastised the trial court for declining to exercise its equitable powers, noting that applying the “rigid legal rule to assess the legal sufficiency of Lickiss’s petition—a choice that closed off all avenues to the court’s conscience in formulating a decree and disregarded basic principles of equity—was nothing short of an end run around equity.” Having found that Lickiss had stated a valid claim for relief, the Court of Appeal remanded the case back to the trial court.

Courts in California and other jurisdictions (including Minnesota) may follow this lead and more freely invoke their equitable powers to consider expungement requests by members and other affiliated persons. Any request for expungement that does not strictly adhere to the procedural requirements listed 2080(b) will likely be opposed by FINRA, so it is imperative that the request specifically invoke the equitable powers of the court and state as compelling of facts as possible to ensure a favorable result.