In today's BrokeAndBroker.com Blog, publisher Bill Singer, Esq. attempts to tackle a recent California case in which a former NASD-registered stockbroker sought the expungement of language from his BrokerCheck file. It's a fascinating case because FINRA didn't exist and BrokerCheck didn't exist when the stockbroker left the industry. The Plaintiff feels aggrieved by FINRA's posting on its BrokerCheck website of his alleged regulatory history and asked the court to expunge it.
Although the fact pattern presented a fascinating lawsuit, unfortunately, the outcome reminds Bill Singer of those frustrating times when he goes down to the gym to lose weight, spends an hour on the treadmill, spends an hour lifting weights, comes back home, gets on the scale, and hasn't lost a single pound -- which then sends him into the kitchen for a box of Oreo cookies to be washed down by a pint of ice cream and, of course, a bag of potato chips to cut down on the sweetness.Three Regulatory-Final Disclosures If you were to review the Financial Industry Regulatory Authority's ("FINRA's") online BrokerCheck records for "Troy Flowers" as of November 13, 2017, you would find that he was first registered in 1995 and was last registered with a FINRA member firm in August 2000. Under the BrokerCheck heading of "Regulatory - Final," you would find three entries. 2000 Ohio Division for SecuritiesFlowers's BrokerCheck record states the following, in part, under "Sanction Details":
ON AUGUST 1, 2000, THE OHIO DIVISION FOR SECURITIES ISSUED A FINAL ORDER TO DENY APPLICANT FOR A SECURITIES SALESMAN LICENSE, DIVISION ORDER NO. 00-217. THE DIVISION FOUND THAT THE APPLICANT WAS NOT OF GOOD BUSINESS REPUTE AS THAT TERM IS DEFINED IN OHIO ADMINISTRATIVE CODE RULE 1301:6-3-19(D)(G) AND (9) AND OHIO REVISED CODE 1707.19(A)(1).2000 NASD Flowers's BrokerCheck file indicates that on October 19, 2000, the National Association of Securities Dealers ("NASD") alleged that a former member firm acting through Flowers did not comply with any of the '34 Act's Penny Stock Rules with respect to all customer purchases of a stock that allegedly was "incorrectly and improperly" not deemed a penny stock. Pursuant to those NASD allegations, the self-regulatory-organization ("SRO") entered into an Acceptance, Waiver & Consent settlement ("AWC") with Flowers whereby it fined him $10,000 and suspended him. As set forth in BrokerCheck under "Sanction Details," Flowers was
SUSPENDED FROM ASSOCIATION WITH ANY NASD MEMBER IN ANY CAPACITY FOR ONE YEAR. THE FINE SHALL BE DUE AND PAYABLE EITHER PRIOR TO REASSOCIATION WITH A MEMBER FIRM FOLLOWING THE ONE-YEAR SUSPENSION OR PRIOR TO ANY APPLICATION OR REQUEST FOR RELIEF FROM ANY STATUTORY DISQUALIFICATION RESULTING FROM THIS OR ANY OTHER EVENT OR PROCEEDING, WHICHEVER IS EARLIER. THE SUSPENSION WILL COMMENCE WITH THE OPENING OF BUSINESS ON NOVEMBER 20, 2000 AND CONCLUDE AT THE CLOSE OF BUSINESS ON NOVEMBER 19, 2001.
FAILURE TO RESPOND TO REQUESTS FOR INFORMATION BY THE NASD UNDER NASD RULE 8210 AND TO TAKE CORRECTIVE ACTION WITHIN 20 DAYS AFTER SERVICE OF PRE-SUSPENSION NOTICE DATED DECEMBER 6, 2001.This same NASD BrokerCheck disclosure indicates that on June 18, 2002, the SRO barred Flowers as indicated under "Sanction Details":
BARRED FROM ASSOCIATION WITH ANY NASD MEMBER IN ANY CAPACITY EFFECTIVE JUNE 18, 2002 PURSUANT TO NASD RULE 9544 AND IN ACCORDANCE WITH THE NOTICE OF SUSPENSION FROM ASSOCIATION WITH ANY NASD MEMBER PURSUANT TO NASD RULE 9541(B).As additionally noted under "Regulator Statement":
SUSPENDED DECEMBER 28, 2001, IN ANY CAPACITY PURSUANT TO THE PROVISIONS OF NASD RULE 9541(B). IF RESPONDENT FAILS TO REQUEST A HEARING TO CHALLENGE THE SUSPENSION WITHIN SIX MONTHS OF RECEIPT OF THE PRE-SUSPENSION NOTICE (12/06/01), HE WILL AUTOMATICALLY BE BARRED FROM ASSOCIATION WITH ANY MEMBER IN ANY CAPACITY. APPEALED TO THE SEC ON NOVEMBER 26, 2003. DECEMBER 16, 203 - THE SEC DECLINED TO REVIEW FLOWERS'S APPLICATION BECAUSE IT WAS NOT FILED TIMELY.A Matter of Dates The above three BrokerCheck "Regulatory -- Final" disclosures reference from 2000 to 2002. It was only in 2007, however, that NASD consolidated its regulatory functions with the regulatory functions of NYSE Regulation, Inc. and the resulting organization became FINRA. Further, BrokerCheck was first established in 2009, when the Securities and Exchange Commission ("SEC") approved FINRA Rule 8312. The dates of FINRA's and BrokerCheck's creation raise an interesting question as to whether it is "fair" for Flowers's disciplinary records to be publicly posted on the Internet by an SRO that did not exist until some seven years after Flowers was last registered. Moreover, the BrokerCheck website did not exist until some nine years after Flowers was last registered. If you prefer to measure Flowers's last year of industry involvement from the 2002 NASD Bar, then that still does not alter the operative facts that neither FINRA nor BrokerCheck existed for several years thereafter. Counterbalancing concerns about fairness to Flowers are equally valid concerns about fairness to the investing public for whom BrokerCheck was purportedly created. State Superior Court (Round One) Flowers sued FINRA in San Diego Superior Court ("CASupCt") alleging seeking an expungement in equity of the three BrokerCheck disclosures cited above. SDCA Remand In response to Flowers's state lawsuit, FINRA removed the matter to the United States District Court for the Southern District of California ("SDCA") on the basis of alleged federal question jurisdiction. Troy Flowers, Plaintiff. Financial Industry Regulatory Authority, Inc., DOES 1 through 30, Defendants (Order, SDCA, 15-CV-2390 / December 24, 2015). The SDCA Order states that:
[D]efendant acknowledged that two district courts in California have refused to find federal question jurisdiction in cases similar to this one, see In re Lickiss, No. C-11-1986 EMC, 2011 U.S. Dist. LEXIS 66437 (N.D. Cal. June 22, 2011); Doe v. Financial Industry Regulatory Authority, Inc., No. CV 13-06436 DDP (ASx), 2013 U.S. Dist. LEXIS 164671 (C.D. Cal. Nov. 19, 2013), but alleged this case is different because Plaintiff "seeks to remove regulatory information - not customer complaints." (Id. ¶ 5.) Plaintiff disagrees that his case is any different from Lickiss and Doe, and argues his case, like those, should be remanded to state court.
Page 2 of the SDCA Order
In rejecting FINRA's federal jurisdiction arguments and granting Plaintiff Flowers's Motion to Remand, the SDCA Order explains in part that:
Pages 4 - 5 of the SDCA OrderHere, as mentioned above, FINRA asserts this case is distinguishable from Lickiss and Doe because Plaintiff "seeks to remove regulatory information - not customer complaints." (Notice of Removal ¶ 5.) However, neither Lickiss nor Doe relied on the type of information at issue in reaching the conclusion that federal question jurisdiction was lacking. Rather, those courts relied on the language of 15 U.S.C. § 78aa, which gives federal courts exclusive jurisdiction over only those claims involving a "liability or duty" created by the Exchange Act. Those courts found the claims at issue did not involve any such "liability or duty," and therefore federal question jurisdiction was lacking. That reasoning applies to this case, as well, even though the type of information sought to be expunged may be different.Next, FINRA argues, as it did in Spalding and Doe, that this case raises substantial questions of federal law. This argument, however, was rejected in those cases, and the reasoning of those cases applies with equal force here.In sum, Defendant has not shown why this case falls outside the holdings of Lickiss, Spalding and Doe. This Court finds the reasoning of those cases persuasive, and like those courts, finds there is no basis for this Court to exercise jurisdiction over this case.
By way of the complaint he filed in the trial court against FINRA, Flowers sought an order requiring that FINRA expunge these matters from its database. Flowers alleged that the information about him as disclosed on BrokerCheck was false, inaccurate and misleading. In particular, he alleged that he had never in fact applied for an Ohio sales license, that in 2000, he had accepted the $10,000 fine only because he was leaving the securities business and did not wish to contest the matter, and that he initially had declined to cooperate with NASD's investigation on the advice of counsel and had later agreed to cooperate. Flowers further alleged that although he no longer wishes to act as a securities broker, his BrokerCheck record prevents him from opening a personal securities account and, because it is publicly available, the record inhibits his ability to obtain employment. Given these circumstances, Flowers's complaint alleges that as a matter of equity the three items should be expunged from FINRA's records. [I]n support of its demurrer, FINRA asked the trial court to take judicial notice of records with respect to Flowers's Ohio application for a sales license and its own records of the regulatory actions it took against Flowers. FINRA argued Flowers's complaint was barred by the requirement that he exhaust available administrative and judicial remedies and that in any event his claims were preempted by federal securities laws and regulations. The trial court agreed and sustained FINRA's demurrer without leave to amend and entered a judgment in favor of FINRA . . .Pages 5 - 6 of CACtApp Opinion CACtApp affirmed CASupCt's finding that Flowers's complaint was barred by the doctrine of exhuastion of administrative remedies. In approaching the issues before it, CACtApp wrestled with the competing interests of a court's equitable powers versus a statutorily mandated regulatory scheme:
In requiring that Flowers exhaust his federal administrative and judicial remedies, we fully recognize the trial court has equitable power to order expungement of public records in appropriate circumstances. (Lickiss v. Financial Industry Regulatory Authority (2012) 208 Cal.App.4th 1125, 1133-1134 (Lickiss).) The court in Lickiss expressly recognized that power. (Ibid.) "[I]n any given context in which the court is prevailed upon to exercise its equitable powers, it should weigh the competing equities bearing on the issue at hand and then grant or deny relief based on the overall balance of these equities . . . [thus,] expungement is proper where the benefits to the petitioner outweigh the disadvantages to the public and the burden on the court." (Ibid.; italics added.) However, because a trial court, in exercising its equitable power to order expungement, must weigh the benefits to an individual against the public's interest in full disclosure, disposition of Flowers's claims by the agencies tasked with protecting the public interest will not only avoid the need for the trial court's intervention but will plainly facilitate the " 'development of a complete record that draws on administrative expertise.' " (Yamaha Motor Corp. v. Super. Ct., supra, 185 Cal.App.3d at p. 1240.)
Pages 10 - 11 of the CACtApp Opinion"Congress's intent to preempt state law is implied to the extent that federal law actually conflicts with any state law. [Citation.] Conflict preemption analysis examines the federal statute as a whole to determine whether a party's compliance with both federal and state requirements is impossible or whether, in light of the federal statute's purpose and intended effects, state law poses an obstacle to the accomplishment of Congress's objectives." (Whistler Invs. v. Depository Trust & Clearing Corp. (2008) 539 F.3d 1159, 1164.) Conflict preemption applies even where, as here, a case is heard in a state tribunal. (See, e.g., AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 352, [preventing state court from applying rule which is obstacle to purposes and objectives of Federal Arbitration Act].) In light of the SEC's determination the public has an interest in having access to the disciplinary records of individuals providing financial and investment advice, there is an obvious risk of conflict between the SEC's conclusion a particular individual's records should remain public and a state court's decision that the individual's interests outweigh the public benefit of disclosure. Such a result would plainly put FINRA in a situation where it was subject to the conflicting duties and in turn require application of conflict preemption.
We note that in adopting the predecessor to rule 2080 discussed in Lickiss, the NASD was responding to concerns that members, by way of settlements with customers in third party litigation would be able to "buy clean records" by obtaining an expungement order from a court or arbitrator hearing a customer complaint. (68 Fed.Reg. 74667-01.) Rule 2080 and its predecessor sought to prevent such evasion of its recording keeping and publication responsibilities by requiring notice to the NASD and now FINRA and providing them an opportunity to object to any expungement sought in such third-party proceedings. In the context of third party customer disputes which are the subject of rule 2080, the SEC has expressly found state and federal courts are fully capable of determining whether expungement is appropriate. (68 Fed.Reg. 74667-01; Lickiss, supra, 208 Cal.App.4th at p. 1135.) As FINRA emphasizes, Flowers is seeking expungement of disciplinary actions FINRA itself has taken against him and quasi-disciplinary action taken by the State of Ohio; by its terms rule 2080 does not speak to expungement of such disciplinary actions. Thus, the SEC's expressed willingness to permit the state and federal courts where customer complaints are pending determine whether expungement is appropriate in those cases in no way suggests the SEC believes its own disciplinary actions should be treated similarly by courts or any other forum which did not impose the discipline in the first instance. . .