FINRA Code of Arbitration Procedure of Customer Disputes Rule 12805: Expungement of Customer Dispute Information Under Rule 2080
In order to grant expungement of customer dispute information under Rule 2080, the panel must:(a) Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement. This paragraph will apply to cases administered under Rule 12800 even if a customer did not request a hearing on the merits.(b) In cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement.(c) Indicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2080 grounds for expungement applies to the facts of the case.(d) Assess all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief.
FINRA Code of Arbitration Procedure for Industry Disputes Rule 13805: Expungement of Customer Dispute Information Under Rule 2080
In order to grant expungement of customer dispute information under Rule 2080, the panel must:(a) Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement. This paragraph will apply to cases administered under Rule 13800 even if a claimant did not request a hearing on the merits.(b) In cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement.(c) Indicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2080 grounds for expungement applies to the facts of the case.(d) Assess all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief.
Bill Singer's Comment: I disagree with the assertion in Rules 12805 and 13805 that a FINRA Arbitration Panel will "grant expungement of customer dispute information under Rule 2080."According to Rule 2080(a):
[P]ersons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction . . . confirming an arbitration award containing expungement relief.
According to Rule 2080(b):
[P]ersons petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents unless this requirement is waived . . .
There is no self-executing grant of expungement emanating from any FINRA Arbitration Panel.The Rule 2080 expungement scheme requires that any expungement relief awarded by a Panel must be confirmed by a court and your petition for confirmation must name FINRA as a party. The addition of FINRA as a party provides the self-regulatory organization with standing in court to challenge an expungement award made by its own forum. Consider this recent court case in which a petition to confirm a FINRA Arbitration Panel expungement was rejected and both the public customer and FINRA (which was named as a post-Arbitration partyy) petitioned for the vacatur:
Royal Alliance Associates, Inc., Plaintiff / Appellant, v. Sandra L. Liebhaber et al., Defendants / Respondents (Opinion, Court of Appeal of the State of California, Second Appellate District; B264619 / August 30, 2016) (the "Liebhaber CtApp Opinion"):
Appellant Royal Alliance Associates, Inc., a securities brokerage firm, petitioned to confirm an arbitration award recommending expungement of an allegation of misconduct from the record of one of its employees, Kathleen J. Tarr. The individual who made the allegation of misconduct, Sandra Liebhaber, petitioned to vacate the same arbitration award. Liebhaber argued that the arbitrators violated the rules applicable to the arbitration and refused to hear evidence she sought to introduce and cross-examination she sought to elicit. The Financial Industry Regulatory Authority, Inc. (FINRA), under whose auspices and rules the arbitration at issue was performed, also petitioned to vacate the award on similar grounds.The trial court denied Royal Alliance's petition to confirm the award and granted Liebhaber's and FINRA's petitions to vacate, ruling that the arbitrators exceeded their powers and that Liebhaber's rights were substantially prejudiced by the arbitrators' misconduct and refusal to hear material evidence. Royal Alliance appealed, and we affirm . . .At Page 2 of the Liebhaber CtApp Opinion
Note that the Liebhaber Court stated that the "arbitration panel issued an award recommending expungement on September 10, 2014 . . ." At page 7 of the Liebhaber CtApp Opinion[Ed: Emphasis added]. FINRA's activist role is further explained:
FINRA also opposed Royal Alliance's petition and sought to vacate the arbitration award. FINRA took "no position on the merits of the underlying case," but "oppose[d] expungement of the arbitration from FINRA's regulatory database because the arbitrators failed to follow FINRA rules governing such expungements," specifically Rules 2080 and 12805. FINRA argued that the expungement hearing "was fatally defective because Tarr, the broker seeking expungement, was permitted to testify unsworn without cross examination, while her customer Liebhaber, who opposed expungement, was denied the right even to speak, with or without cross examination. As a result, the award's findings were not properly made under FINRA Rule 2080 (which governs arbitrator-ordered expungements)." FINRA further contended that the arbitrators exceeded their powers by violating applicable FINRA rules, and substantially prejudiced Liebhaber by disallowing her testimony.
Pages 10 - 11 of the Liebhaber CtApp Opinion
Also READ: "California Court Of Appeal Says FINRA Expungement Hearing Unfair" (BrokeAndBroker.com Blog, September 1, 2016)
Notwithstanding my above disagreement with the accuracy of the rules' characterization of a FINRA Arbitration Panel's expungement ruling, in order for the Panel to grant / recommend expungement, the following preconditions must be satisfied:
Bill Singer's Comment: You don't get to mail-in a request for an expungement. FINRA requires that a hearing session be conducted during which the appropriateness of your request must be considered. You may be able to save on some fees and costs by requesting that the hearing be conducted via telephone rather than requiring you to travel for an in-person session. The hearing is not optional, however, must occur even if not requested by a customer.
Bill Singer's Comment: Carefully note that the Rule does not predicate the panel's review of settlement documents on a settlement involving the individual seeking an expungement but states that the review is required when the underlying case settles. Why is that an important distinction? Consider the circumstances where a public customer sued Member Firm X, Registered Representative A, and You for $3 million; but the customer ultimately settled all claims for $3 million with only Firm X. Registered Rep A didn't settle. You didn't settle. On the other hand, the "case" settled regardless of the participation of two of the three respondents. You might have decided from day one to fully contest the customer's allegations and made it clear that you would not participate in any settlement negotiations and would never contribute to any cash settlement. When you learned that the client entered into a full and final settlement of all claims and that only Firm X was on the hook, you felt vindicated. Guess what: If you pursue your expungement relief, the FINRA Arbitration Panel is still required to review all settlement documents. Also, carefully consider this commentary from "FINRA Rule 2080 Frequently Asked Questions" (FINRA.org):
15. How does a respondent request expungement if the parties settle the arbitration?In the event of settlement, the parties could jointly request a stipulated award from an arbitration panel that would include a request that the panel make affirmative findings and order expungement based on one or more of the standards in Rule 2080. The arbitrators would be required to follow the procedures set forth in Arbitration Code Rule 12805 or 13805 in considering any such request for expungement. The arbitrators would then determine whether expungement should be granted based on one or more of the three standards set forth in Rule 2080. Note: Parties who plan to seek expungement relief notwithstanding a settlement should immediately advise the FINRA arbitration staff member assigned to the case that they plan to do so, so that the case is not closed before the expungement request is considered. As discussed in response to Question No. 17, the Arbitration Code contains strict time deadlines and other conditions for reopening closed cases. See Arbitration Code Rules 12905 and 13905.
Bill Singer's Comment: Rule 2080 sets forth specific grounds on which a Panel may find an expungement is appropriate. READ Bill Singer's in-depth analysis of FINRA Rule 2080. Make sure that your Statement of Claim for expungement relief specifies which of those grounds (or all of those grounds) that your request is based on. In arguing your case, provide the arbitrators with citations to the section(s) of Rule 2080 that you believe support your expungement. Keep in mind that many FINRA Expungement Decisions are written in a manner that often "tracks" the arguments and proof presented by the Claimant, and, as such, the more detail you provide in your written submissions, the easier it may be for the arbitrators to cut-and-paste your positions into their final Decision. On the other hand, don't submit "War and Peace" because Rule 2080(c) specifically requires a "brief written explanation" of the arbitrators' rationale.
Bill Singer's Comment: Ka-ching!
The FINRA BrokerCheck report on Lickiss shows 17 past customer complaints, as well as a regulatory action, filed between 1991 through 1996. According to a summary of the arbitration claims and regulatory action Lickiss provided with his moving papers, the sale of stock in Commonwealth Equity Trust (CET) was specifically named in disclosures of 13 of the 17 customer complaints. Lickiss has declared that aside from the CET customer complaints, the only other blemish on his CRD report concerned one client settlement he made after the client sustained a loss on a promissory note sold to the client by Lickiss's partner. He agreed to reimburse the client for his loss under pressure-the client was believed to be on his deathbed. However, Lickiss did not contact his broker-dealer first, a violation of FINRA rules. The client later complained to FINRA.In his moving declaration, Lickiss stated that he began selling CET stock to clients in 1987 and continued selling through the early part of 1991, during which time CET exhibited strong financial performance, under the prudent management of Jeff Berger, Sr. Lickiss stopped selling CET stock because he became concerned about its rising level of debt, which coincided with Berger, Sr.'s death, at which time the son, Berger, Jr., took over. Berger Jr.'s company, B&B Property Investment (B&B), extracted $7.2 million in prepaid commissions from CET around 1990. This drained liquidity from CET and weakened its financial position as California entered a recession and experienced a declining commercial real estate market. CET's share price plummeted, its stock became illiquid and the company declared bankruptcy in 1993. Meanwhile, lawsuits against B&B were settled for approximately $1 million, and Berger, Jr. was ousted from the company.Many of Lickiss's clients who invested in CET filed claims against him, their essence being ―that the investments were unsuitable for the clients and [Lickiss] failed to disclose the risks of the stock to them.According to Lickiss, in at least 12 of the 17 arbitration claims, clients were represented by Richard Sacks, a nonattorney who ran an "investor recovery" service in the Bay Area in the mid-1990's. Prior to this career, Sacks was the subject of over $479,000 in securities regulatory fines and was eventually barred from the industry. Sacks's operating method was to affirmatively contact investors and incite them to sue Lickiss.The issues surrounding Lickiss's sale of CET stock occurred more than 20 years ago, and the one regulatory matter against him resolved 15 years ago in 1997. Since then, his record has been clear, yet Lickiss attested that he suffers professional and financial hardship relating to the prior sale of CET stock because current and potential clients increasingly use the Internet to obtain his BrokerCheck history.
(b) Members or associated persons petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents unless this requirement is waived pursuant to subparagraph (1) or (2) below.
(1) Upon request, FINRA may waive the obligation to name FINRA as a party if FINRA determines that the expungement relief is based on affirmative judicial or arbitral findings that:
(A) the claim, allegation or information is factually impossible or clearlyerroneous;(B) the registered person was not involved in the alleged investment-relatedsales practice violation, forgery, theft, misappropriation or conversion of funds; or(C) the claim, allegation or information is false.
(1) the material requested to be expunged occurred anciently, i.e., 20 or more years ago, (2) Petitioner's regulatory record has long since been and remained clean, and (3) the material sought to be expunged was overwhelming[ly] caused by the failure of a single investment security which Petitioner brokered for nothing more than ordinary commissions and over which Petitioner had no control or influence" . . .
[T]his is not, as FINRA contends, merely a request for a remedy. Rule 2080(a) essentially recognizes the right of members and associated persons to seek expungement of information from the CRD system by obtaining an order from a court of competent jurisdiction directing such expungement. Lickiss's petition and declaration reference rule 2080(a) and the facts upon which the equitable remedy of expungement was sought. Lickiss proceeded to state court, took a detour in federal court, and then returned to state court in pursuit of the right to seek expungement. Exercising that right under a rule that provides no substantive criteria for delivering the remedy of expungement, Lickiss called upon the court's inherent equitable powers to weigh the equities favoring expungement against the detriment to the public should expungement be granted. . .
[I]f, as FINRA suggests, the court believed that equity permitted it to rely exclusively on rule 2080(b)(1) to resolve the demurrer, the court erred. The choice of a very narrow, 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. This is particularly so given that on its face rule 2080(b)(1) is a procedural rule that does not provide any substantive criteria as to when expungement would be appropriate. The SEC itself argued against applying the rule 2080 standards directly to NASD members, acknowledging that federal and state courts are better suited to make the right decision. (68 Fed.Reg., supra, 74667-01, 74671.) Further, if the court determined it could rule on the demurrer without addressing Lickiss's equitable claim it also erred because Lickiss has stated a valid cause of action.
Page 1 of the Godfrey CDCA OrderIn 1988, Godfrey purchased securities for members of his family. Id. ¶ 12. Later that year, Godfrey's then-wife claimed that Godfrey had improperly converted the funds for his own use and benefit. Id. ¶ 13. NASD filed a complaint against Godfrey on the basis of the allegations made by Godfrey's then spouse. Id. ¶ 16. Although Godfrey alleges that he did nothing wrong, he entered into a settlement with NASD. Id. ¶¶ 14-18. Godfrey's complaint and settlement information is currently included in FINRA's Central Registration Depository ("CRD"), and is available to the public through FINRA's "BrokerCheck" feature. Id. ¶¶ 10-11, 16-18. Godfrey alleges that his record is otherwise clean. Id. ¶ 18.On March 25, 2016, Godfrey filed an action for expungement and declaratory relief in the Superior Court for the County of Los Angeles. Dkt. #1-1. FINRA timely removed to this Court. Dkt. #1. On May 23, 2016, Godfrey filed the present motion to remand.
At least four courts have addressed remand in similar FINRA-expungement actions, and all have found that remand was proper. In In re Lickiss, the plaintiff sought expungement of "references to certain customer claims and settlements" under California law. No. C-11-1986 EMC, 2011 WL 2471022, at *1 (N.D. Cal. June 22, 2011). FINRA moved to remand, arguing that federal courts had exclusive jurisdiction under 15 U.S.C. § 78aa. Id. at *2. Section 78aa states that the "district courts . . . shall have exclusive jurisdiction of . . . all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder." 15 U.S.C. § 78aa(a). The Lickiss court explained that although FINRA has a duty to collect and retain registration information, it has no corresponding duty to expunge. Id. at *3. The Court also noted that FINRA Rule 2080, which states in relevant part that "[m]embers or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief," "sets forth procedures, not a substantive duty," and seems to contemplate an action in state court due to the use of the phrase "court of competent jurisdiction." Id. at *4. The Court thus found that there was no exclusive jurisdiction for expungement actions under state law, and remanded the case for lack of subject matter jurisdiction. Id.The plaintiff in Spalding v. Financial Industry Regulatory Authority, Inc. sought expungement of customer-dispute information under Georgia law. No. 1:12-CV-1181-RWS, 2013 WL 1129396, at *1-2 (N.D. Ga. Mar. 19, 2013). FINRA offered two theories of federal jurisdiction this time -- that federal courts had exclusive jurisdiction under § 78aa because expungement implicated a duty, and that the suit would require the state court to interpret federal law (which was identified as Rule 2080). Id. at *2-3. Citing Lickiss, the Spalding court found that there was no exclusive jurisdiction because there was no duty to expunge under the Exchange Act or Rule 2080. Id. at *3-5. The court also rejected FINRA's argument that substantial federal issues were implicated because expungement would require "a reading and interpretation of Rule 2080" and involved a "comprehensive federal regulatory scheme in which FINRA plays an integral role in enforcing the 1934 Act and regulating participants in the securities industry." Id. at *5. The court explained that nothing in the expungement action would require interpretation of Rule 2080, and that the existence of a compressive federal regulatory scheme was insufficient on its own to establish federal jurisdiction. Id. at *5-6. The Court thus remanded the case for lack of subject matter jurisdiction. Id. at *6.Doe, like Lickiss, addressed the expungement of customer-dispute information under California law. 2013 WL 6092790, at *1. FINRA again argued that federal courts have exclusive jurisdiction over expungement of customer-dispute information, and that the case involved substantial issues of federal law. Id. at *2-3. Citing Lickiss, the Doe court held that there was no duty to expunge that would trigger exclusive jurisdiction. Id. Citing Spalding, the court also held that there was no substantial issue of federal law implicated because the plaintiff "d[id] not claim that FINRA failed to fulfill any particular duty or that FINRA's rules are facially invalid," and "no determination [would need to] be made by the [state court] as to whether FINRA was required to remove the disclosures under the circumstances in determining whether expungement is appropriate in this case." Id. at *3. The court therefore remanded the case. Id. at *4.The most recent case cited by the parties, Flowers v. Financial Industry Regulatory Authority, Inc., addressed expungement under California law for regulatory information. No. 15CV2390 DMS (JMA), 2015 WL 9487450, at *1 (S.D. Cal. Dec. 24, 2015). FINRA again moved to remand on the ground that federal courts had exclusive jurisdiction and that substantial issues of federal law were implicated. Id. at *1-3. FINRA attempted to distinguish the expungement at issue in Flowers from the expungements in Lickiss, Spalding, and Doe, arguing that those plaintiffs sought to remove customer-dispute information, while the Flowers plaintiff sought to expunge final regulatory information. Id. at *1-2. The court was unpersuaded. Citing Lickiss, Spalding, and Doe, the court found that there was no duty implicated that would lead to exclusive jurisdiction. Id. at *1-2. The court explained that Lickiss and Doe did not "rel[y] on the type of information at issue in reaching the conclusion that federal question jurisdiction was lacking," so their reasoning applied equally to the Flowers plaintiff's request. Id. at *2. The court also found there were no substantial issues of federal law implicated for the reasons set forth in Spalding and Doe. Id. at *3. The Court noted that FINRA had offered a third theory, complete preemption, but declined to address it because the theory was not included in the notice of removal. Id. at *3 n.2. The court therefore remanded the case for lack of subject matter jurisdiction. Id. at *3.
Although the Court notes that FINRA is now 0 for 5 (counting Lickiss, Spalding, Doe, Flowers, and this case), and FINRA's counsel is now 0 for 4 (as lead counsel here was also the lead counsel in Lickiss, Doe, and Flowers), the Court will not award attorney's fees. FINRA had at least one new legal theory in this case (complete preemption), and argued that the only other court to address final regulatory actions (Flowers) erred. The Court disagrees with FINRA's arguments, but does not find them objectively unreasonable.
FINRA Rule 2080 Frequently Asked Questions6. Do the standards described above apply to court proceedings in addition to arbitrations?Yes. Although courts are not obligated to adhere to the standards enunciated in Rule 2080, FINRA will use the Rule 2080 standards in determining whether to oppose the expungement request and will recommend that the court use the standards when considering the request for expungement.