June 29, 2017
In a recent FINRA expungement arbitration, a registered person challenged an 11-year-old customer complaint. In the ensuing years, the brokerage firm had gone out of business and many records were long-since destroyed or lost. Talk about an uphill battle! In the end, the registered rep prevailed and how she did it and why the arbitrator ruled in her favor are worthwhile lessons.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2016, associated person Claimant Welborn sought the expungement from her Central Registration Depository records ("CRD") of disclosures on her Uniform Termination Notice for Securities Industry Registration ("Form U5") as filed by Respondent Colonial Brokerage following her termination. In the Matter of the FINRA Arbitration Between Lori Ann Welborn, Claimant, vs. Colonial Brokerage, Inc., Respondent (FINRA Arbitration 16-03312, June 23, 2017).
SIDE BAR: Online FINRA BrokerCheck records as of June 29, 2017, disclose that Welborn was registered with Respondent Colonial Brokerage from August 2002 to February 2006.
Respondent Fly on the Wall
The FINRA Arbitration Decision states that the "In the Statement of Answer, Respondent responded to the Statement of Claim" and "Respondent did not request relief in the Statement of Answer," and that Respondent "participated in the expungement hearing but did not contest the request for expungement."
Claimant Welborn provided a copy of the Statement of Claim and notice of the expungement hearing to the customer referenced in the cited CRD disclosures but that individual did not respond or appear, and purportedly advised Claimant that she did not wish to participate in the expungement hearing.
Rule 2080 Considerations
In accordance with the dictates of FINRA Rule 2080, the sole FINRA Arbitrator found that the customer's claim, allegation, or information was factually impossible or clearly erroneous. In presenting his rationale, the sole Arbitrator found that:
Two Form U5s were filed as exhibits by Claimant. They state that the reason for termination is a customer complaint ("Complaint") that was filed with Respondent three days after Claimant's employment was terminated. Thus, the Complaint could not have been the reason for Claimant's termination. Furthermore, Claimant testified that the Customer involved in the Complaint testified in a prior NASD employment-related arbitration (filed by Claimant against Respondent) that she did not file any complaint. Respondent is defunct and none of its records could be located. Mr. Overbey, Respondent's representative, had no knowledge of the facts. The Arbitrator found that the information involving this incident in the CRD system is based on incorrect information, is defamatory, and it serves no purpose to inform the public of the issues involved in this situation.
The Arbitrator further explained that no settlement had ever been entered into with the customer. Reference is made to a settlement involving an NASD employment-related arbitration between Welborn and Colonial Brokerage. Although the Arbitrator had ordered the production of the employment arbitration settlement, the parties could not produce any records because "the records do not exist because the firms went out of business several years ago." Accordingly, the Arbitrator disclosed that he had:
considered the Form U5s presented as exhibits, Claimant's testimony that she did not recall any mention of expungement in the employment-related settlement agreement and that the Customer stated in the prior employment-related arbitration that she did not file a complaint, Claimant's testimony that the reasons given for her discharge were pretextual and that she was not notified of a customer complaint, and Respondent's settlement payment to Claimant in a prior employment-related arbitration, alleging defamation among other claims.
The Arbitrator further considered a letter from Claimant's prior attorney, filed as an exhibit, that Claimant's employment-related claim was settled for a fraction of the claimed amount.
Based upon his findings, the Arbitrator recommended the expungement from CRD of the Termination Explanation in Section 3 of the Forms U5 filed by both Colonial Brokerage, Inc. and Colonial Asset Management Inc. on February 3, 2006. The Reason for Termination will not be changed on either Form U5 but the deleted explanation is to be replaced with "The firm wanted to move her business to another agent." Similarly, the "YES" answers to Questions 7B and 7F(1) on the Forms U5 are to be changed to "NO," and the accompanying Internal Review and Termination Disclosure Reporting Pages are to be deleted. Conforming changes will be made to all subsequent Forms U4 referencing the same underlying events.
Bill Singer's Comment
Consider this crucial finding by the arbitrator:
Imagine if you need to prove at some point in the future that you had resigned "three days" before an event or even "three hours." Similarly, assume that a dispute arises between you and your former employer (or a regulator is investigating) as to whether you quit before your former firm alleges that they had fired you or vice versa. How could you best prove the pertinent date and time of your resignation?
They state that the reason for termination is a customer complaint ("Complaint") that was filed with Respondent three days after Claimant's employment was terminated. Thus, the Complaint could not have been the reason for Claimant's termination.
I often suggest that resignations include email notice so that a registered person can retain proof of the date and time when such notice was provided. When giving that advice, however, I also note that if there are specific notification procedures set forth in an applicable employment agreement or in order to remain compliant with the Broker Protocol (which requires delivery of a written resignation to "local branch management" and the submission of a list of clients) that such requirements must be followed (at times, such other requirements may be satisfied as required but a separate email also sent with the requisite documents attached; or such requirements may be satisfied by an email). If such conflicts arise, you should consult with a lawyer as to your obligations.
When providing email notice of resignation, you should send yourself a copy of the email so that you have a copy for your records. Also, retain in a mailbox folder a copy of the "Sent" email. Additionally, I suggest that you retain several hard-copies and a PDF copy, and to copy the email onto a portable/external drive. Why all those bells and whistles? For starters, if your "Sent" email file ages out and the transmitted message deleted, you would lose that digital record. Also, if you only retain digital copies of the email on a laptop or PC and that device crashes (or you no longer have access to it), you may not be able to produce proof of the date/time when you resigned. In this day and age of increased hacking, viruses, and malware, you can't be guaranteed that any files solely retained in an email file, on a laptop/PC, or in the Cloud will be available at some point in the near or far future. Consequently, you just can't have too many copies in too many forms of that all-important industry resignation.
To make my point, consider that Claimant Welborn's 2017 expungement recommendation involved her 2006 termination from Respondent Colonial Brokerage -- that's a date about 11 years ago. See how easy it would be for you to prove the date and time on which you did anything 11 years ago. While you're at it, try and find a specific email that you sent in 2006. Remember that Netscape email account you closed when you moved to Gmail or that CompuServe account you cancelled?
- FINRA Rule 2080: Obtaining Customer Dispute Expungement
- FINRA Rule 2081: Prohibited Conditions Relating to Expungement of Customer Dispute
- FINRA Rules 12805 and 13805: Expunging Customer-Dispute Information Under Rule 2080