UPDATE: Former Stockbroker Sues FINRA Over Online Disclosure of 18 Year Old Settlement

August 7, 2015

This article updates a February 2015 BrokeAndBroker.com Blog. This UPDATE references a Petition for Writ of Certiorari filed with the United States Supreme Court on behalf of the respondent in the FINRA AWC.

In 1997, a registered representative settled allegations of industry misconduct pertaining to 1994 acts. He took a sit-down for 30 days and paid a fine. Perhaps he didn't care all that much because in 1996, he left the biz, never to return. Fast forward a couple of decades and, lo and behold, that former respondent does care because he finds the allegations against him permanently archived online. He sues.  How did it turn out?  Read below.

Case In Point

Alan Santos-Buch worked as a stockbroker from 1986 until 1996. As a result of alleged misconduct by Santos-Buch in 1994, the National Association of Securities Dealers, Inc. ("NASD") (a self-regulatory organization ("SRO") and predecessor in interest to the Financial Industry Regulatory Authority, Inc. ("FINRA")), instituted disciplinary proceedings against Santos-Buch in 1997. The allegations were eventually resolved through an Acceptance, Waiver and Consent settlement ("AWC") whereby Santos-Buch agreed to pay a $10,000 fine and serve a 30-day suspension. Thereafter, NASD published information about the AWC in its August 1997 "Notice to Members / Disciplinary Actions" (see Page 432 of the Notice)

Alan M. Santos-Buch (Registered Representative, South Norwalk, Connecticut) submitted a Letter of Acceptance, Waiver and Consent pursuant to which he was fined $10,000 and suspended from association with any NASD member in any capacity for 30 days. Without admitting or denying the allegations, Santos-Buch consented to the described sanctions and to the entry of findings that he signed and delivered to a public customer a memorandum that stated that the customer's account would be guaranteed against losses. The findings also stated that Santos-Buch stated to the same customer that they shared an investment relationship which allocated financial responsibility for certain changes in the value of the account to him under certain circumstances.

By way of recap, NASD conducted an investigation of Santos-Buch that focused on a now 21-year-old allegation that the registered person allegedly guaranteed a customer against losses. The investigation and AWC largely took place about 18 years ago. The sanctions imposed were a $10,000 fine and a 30-day suspension.

At The Time (1997)

When Santos-Buch entered into his 1997 settlement with NASD, he argues that he had believed that he had consented to NASD publishing one, and only one, Notice to Members about his AWC. It was, to his understanding, a one-and-done event. Pointedly, Santos-Buch asserts that in 1997, NASD did not provide for a permanent, ongoing disclosure of his disciplinary history.  Moreover, once an individual ceased being associated with an NASD member firm, Santos-Buch asserts that the public was not provided with further access to that respondent's disciplinary history.  Notably, Santos-Buch was last registered with an NASD member firm in 1996 -- that's 19 years ago!

The Old Squibs

While it was NASD's policy to generally publish a one-time-only "squib" of its AWCs in 1997, the Internet was only in its infancy. As such, even if the monthly notices were generally printed on hard copy and disseminated in that form, the transition to what is now the Digital Age was coming into place.  Although Santos-Buch's assertions are hard to refute, it is similarly difficult to discern any promise by NASD to not archive its content in digital form and/or online. For many of us, we just never quite saw the flood of online disclosure until, like a tsunami, it was too late and it was upon us.

Disclosure Landscape Changes

In 2000, the SEC authorized the Central Registration Depositiory ("CRD") to extend the provision of disciplinary histories to a period of two years.

In 2007, FINRA comes into existence.

In 2009, FINRA Rule 8312 extended disclosures of regulatory actions to a status of permanent availability.  Consequently, Santos-Buch's AWC is now available via FINRA's BrokerCheck website and other SRO databases. Ouch!

Consider the current iteration of Rule 8312 and note some of the sections that I have highlighted in yellow:

8312. FINRA BrokerCheck Disclosure

(a) In response to a written inquiry, electronic inquiry, or telephonic inquiry via a toll-free telephone listing, FINRA shall release through FINRA BrokerCheck information regarding:

(1) a current or former FINRA member or a current or former member of a registered national securities exchange that uses the Central Registration Depository ("CRD") for registration purposes ("CRD Exchange") (collectively, "BrokerCheck Firms"); or
(2) a current or former associated person of a BrokerCheck Firm.
(1) Except as otherwise provided in paragraph (d) below, FINRA shall release the information specified in subparagraph (2) below for inquiries regarding a current or former BrokerCheck Firm, a person currently associated with a BrokerCheck Firm, or a person who was associated with a BrokerCheck Firm within the preceding ten years.
(2) The following information shall be released pursuant to this paragraph (b):
(A) any information reported on the most recently filed Form U4, Form U5, Form U6, Form BD, and Form BDW (collectively "Registration Forms");
(B) currently approved registrations;
(C) summary information about certain arbitration awards against a BrokerCheck Firm involving a securities or commodities dispute with a public customer;
(D) the most recently submitted comment, if any, provided to FINRA by the person who is covered by BrokerCheck, in the form and in accordance with the procedures established by FINRA, for inclusion with the information provided through BrokerCheck. Only comments that relate to the information provided through BrokerCheck will be included;
(E) information as to qualifications examinations passed by the person and date passed. FINRA will not release information regarding examination scores or failed examinations;
(F) in response to telephonic inquiries via the BrokerCheck toll-free telephone listing, whether a particular member is subject to the provisions of Rule 3170 ("Taping Rule");
(G) Historic Complaints (i.e., the information last reported on Registration Forms relating to customer complaints that are more than two (2) years old and that have not been settled or adjudicated, and customer complaints, arbitrations or litigations that have been settled for an amount less than $10,000 prior to May 18, 2009 or an amount less than $15,000 on or after May 18, 2009 and are no longer reported on a Registration Form), provided that any such matter became a Historic Complaint on or after August 16, 1999; and(H) the name and succession history for current or former BrokerCheck Firms.

(1) Except as otherwise provided in paragraph (d) below, FINRA shall release the information specified in subparagraph (2) below for inquiries regarding a person who was formerly associated with a BrokerCheck Firm, but who has not been associated with a BrokerCheck Firm within the preceding ten years, and:
(A) was ever the subject of a final regulatory action as defined in Form U4 that has been reported to the CRD system on a Registration Form; or
(B) was registered with FINRA or a CRD Exchange on or after August 16, 1999, and any of the following applies, as reported to the CRD system on a Registration Form:
(i) was convicted of or pled guilty or nolo contendere to a crime;
(ii) was the subject of a civil injunction in connection with investment-related activity, a civil court finding of involvement in a violation of any investment-related statute or regulation, or an investment-related civil action brought by a state or foreign financial regulatory authority that was dismissed pursuant to a settlement agreement; or
(iii) was named as a respondent or defendant in an investment-related, consumer-initiated arbitration or civil litigation which alleged that the person was involved in a sales practice violation and which resulted in an arbitration award or civil judgment against the person.
(2) The following information shall be released pursuant to this paragraph (c):
(A) information regarding the event(s) enumerated in paragraph (c)(1)(A) or (B) as reported on a Registration Form;
(B) administrative information, including employment history and registration history derived from information reported on a Registration Form;
(C) the most recently submitted comment, if any, provided to FINRA by the person who is covered by BrokerCheck, in the form and in accordance with the procedures established by FINRA, for inclusion with the information provided through BrokerCheck. Only comments that relate to the information provided through BrokerCheck will be included; and
(D) information as to qualifications examinations passed by the person and date passed. FINRA will not release information regarding examination scores or failed examinations.
For purposes of this paragraph (c), a final regulatory action as defined in Form U4 may include any final action, including any action that is on appeal, by the SEC, the Commodity Futures Trading Commission, a federal banking agency, the National Credit Union Administration, another federal regulatory agency, a state regulatory agency, a foreign financial regulatory authority, or a self-regulatory organization (as those terms are used in Form U4).

(d) FINRA shall not release:
(1) information reported as a Social Security number, residential history, or physical description, information that FINRA is otherwise prohibited from releasing under Federal law, or information that is provided solely for use by regulators. FINRA reserves the right to exclude, on a case-by-case basis, information that contains confidential customer information, offensive or potentially defamatory language or information that raises significant identity theft, personal safety or privacy concerns that are not outweighed by investor protection concerns;
(2) information reported on Registration Forms relating to regulatory investigations or proceedings if the reported regulatory investigation or proceeding was vacated or withdrawn by the instituting authority;
(3) "Internal Review Disclosure" information reported on Section 7 of the Form U5;
(4) "Reason for Termination" information reported on Section 3 of the Form U5;
(5) Form U5 information for fifteen (15) days following the filing of such information;
(6) the most recent information reported on a Registration Form, if:
(A) FINRA has determined that the information was reported in error by a BrokerCheck Firm, regulator or other appropriate authority;
(B) the information has been determined by regulators, through amendments to the uniform Registration Forms, to be no longer relevant to securities registration or licensure, regardless of the disposition of the event or the date the event occurred;
(7) information provided on Schedule E of Form BD.

(e) Eligible parties may dispute the accuracy of certain information disclosed through FINRA BrokerCheck pursuant to the administrative process described below:
(1) Initiation of a Dispute
(A) The following persons (each an "eligible party") may initiate a dispute regarding the accuracy of information disclosed in that eligible party's BrokerCheck report:
(i) any current BrokerCheck Firm;
(ii) any former BrokerCheck Firm, provided that the dispute is submitted by a natural person who served as the former BrokerCheck Firm's Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Legal Officer or Chief Compliance Officer, or individual with similar status or function, as identified on Schedule A of Form BD at the time the former BrokerCheck Firm ceased being registered with FINRA or a CRD Exchange; or
(iii) any associated person of a BrokerCheck Firm or person formerly associated with a BrokerCheck Firm for whom a BrokerCheck report is available.
(B) To initiate a dispute, an eligible party must submit a written notice to FINRA, in such manner and format that FINRA may require, identifying the alleged inaccurate factual information and explaining the reason that such information is allegedly inaccurate. The eligible party must submit with the written notice all available supporting documentation.
(2) Determination of Disputes Eligible for Investigation
(A) FINRA will presume that a dispute of factual information is eligible for investigation unless FINRA reasonably determines that the facts and circumstances involving the dispute suggest otherwise.
(B) If FINRA determines that a dispute is eligible for investigation, FINRA will, except in circumstances involving court-ordered expungement, add a general notation to the eligible party's BrokerCheck report stating that the eligible party has disputed certain information included in the report. The notation will be removed from the eligible party's BrokerCheck report upon resolution of the dispute by FINRA. In disputes involving a court order to expunge information from BrokerCheck, FINRA will prevent the disputed information from being displayed via BrokerCheck while FINRA evaluates the matter.
(C) If FINRA determines that a dispute is not eligible for investigation, it will notify the eligible party of this determination in writing, including a brief description of the reason for the determination. A determination by FINRA that a dispute is not eligible for investigation is not subject to appeal.
(3) Investigation and Resolution of Disputes
(A) If FINRA determines that the written notice and supporting documentation submitted by the eligible party is sufficient to update, modify or remove the information that is the subject of the request, FINRA will make the appropriate change. If the written notice and supporting documentation do not include sufficient information upon which FINRA can make a determination, FINRA, under most circumstances, will contact the entity that reported the disputed information (the "reporting entity") to the CRD system and request that the reporting entity verify that the information, as disclosed through BrokerCheck, is accurate in content and presentation. If a reporting entity other than FINRA is involved, FINRA will defer to the reporting entity about whether the information received is accurate. If the reporting entity acknowledges that the information is not accurate, FINRA will update, modify or remove the information, as appropriate, based on the information provided by the reporting entity. If the reporting entity confirms that the information is accurate in content and presentation or the reporting entity no longer exists or is otherwise unable to verify the accuracy of the information, FINRA will not change the information.
(B) FINRA will notify the eligible party in writing that the investigation has resulted in a determination that:
(i) the information is inaccurate or not accurately presented and has been updated, modified or deleted;
(ii) the information is accurate in content and presentation and no changes have been made; or
(iii) the accuracy of the information or its presentation could not be verified and no changes have been made.
(C) A determination by FINRA, including a determination to leave unchanged or to modify or delete disputed information, is not subject to appeal.

(f) Upon written request, FINRA may provide a compilation of information about FINRA members, subject to terms and conditions established by FINRA and after execution of a licensing agreement prepared by FINRA. FINRA may charge commercial users of such information reasonable fees as determined by FINRA. Such compilations shall consist solely of information selected by FINRA from Forms BD and BDW and shall be limited to information that is otherwise publicly available from the SEC.

• • • Supplementary Material ***

.01 Availability and Format of Information Regarding Persons Associated with a Member Prior to 1999. Certain types of information about some persons formerly associated with a member, but who have not been associated with a member since January 1, 1999, may not be available through BrokerCheck. Types of information that may be unavailable for these persons may include the following: administrative information (e.g., employment and registration history) and information as to qualifications examinations. In addition, FINRA may release a composite report that includes information from multiple Registration Forms for such persons.
.02 Disputes Not Eligible for Investigation. For purposes of paragraph (e) of this Rule, examples of situations in which FINRA will determine that a dispute is not eligible for investigation include, but are not limited to:
(a) a dispute that involves information that was previously disputed under this process and that does not contain any new or additional evidence;
(b) a dispute that is brought by an individual or entity that is not an eligible party;
(c) a dispute that does not challenge the accuracy of information contained in a BrokerCheck report but only provides an explanation of such information;
(d) a dispute that constitutes a collateral attack on or otherwise challenges the allegations underlying a previously reported matter such as a regulatory action, customer complaint, arbitration, civil litigation, or termination;
(e) a dispute that consists of a general statement contesting information in a BrokerCheck report with no accompanying explanation; and
(f) a dispute that involves information contained in the CRD system that is not disclosed through BrokerCheck.
.03 Availability of Information Regarding Firms and Associated Persons Registered Exclusively With a CRD Exchange. Information about firms and associated persons that have been registered exclusively with a CRD Exchange is available through BrokerCheck only if the firm or associated person has been registered with a CRD Exchange on or after August 16, 1999.

Back To The Future

All of which brings us back to a very unhappy Santos-Buch, who asserts that FINRA has no right to permanently display his AWC because the rules that now permit such publication were not in effect at the time of his 1997 settlement. To some extent, he argues an inappropriate ex post facto application by a regulator that didn't exist.

Federal Lawsuit

Santos-Buch sued FINRA in the United States District Court for the Southern District of New York ("SDNY") based upon allegations of breach of contract and invasion of privacy; and he sought:
  • A declaratory judgment to prohibit notice of the 1997 FINRA disciplinary action as a WebFile;
  • Removal of the 1997 notice of disciplinary action from FINRA's BrokerCheck database;
  • A judgment permanently enjoining FINRA from disclosing Santos-Buch's disciplinary action in response to BrokerCheck inquiries;
  • And damages for both the breach of contract and invasion of privacy.
FINRA moved to dismiss citing:
  • lack of subject matter jurisdiction based upon Santos-Buch's failure to exhaust his administrative remedies; and,
  • monetary damages were barred by FINRA's immunity to suits for damages when acting in a regulatory capacity.
SDNY granted FINRA's Motion to Dismiss.Alan Santos-Buch, Plaintiff, v. Financial Industry Regulatory Authority, Inc., Defendant (Opinion and Summary Order, United States District Court For the Southern District of New York, 14-2767-CV, July 8, 2014) . In explaining some of the facts and circumstances presented by the parties, SDNY noted (Ed: Footnotes omitted]:

On December 18, 1998, the NASDR submitted a proposal to make a portion of the CRD's registration information available on the Internet. The SEC approved the proposal, and on August 16, 1999, the NASDR made certain BrokerCheck information available on the Internet.  To obtain BrokerCheck information one must go to FINRA's website, submit an information request form, and agree to FINRA's terms of service. . . .

Page 4 of the SDNY Opinion and Order

In explaining the actual point of contention, SDNY offers this] [Ed: Footnotes omitted]:

Originally, the CRD did not provide access to information of people who were no longer associated with an NASD member firm. On February 7, 2000, however, the SEC approved an amendment to IM 8310-2 that allowed the CRD to include disciplinary information for individuals who had been associated with a member firm within the prior two years. Because Santos-Buch had not been associated with a member firm in four years, his disciplinary information was not initially included in the CRD.

E. 2009 Amendment to Rule 8312

In 2009, FINRA proposed and the SEC approved an amendment to FINRA Rule 8312. The rule provided that "Final Regulatory Actions,"as defined by U4 registration forms, for people who were formerly associated with a member firm would become permanently available. Under the U4 registration form, Santos-Buch's AWC is a final regulatory action. Thus, information regarding Santos-Buch's AWC became available on the BrokerCheck website. In addition to BrokerCheck and FINRA's Final Disciplinary Action online database, FINRA has also created a WebFile that includes Santos-Buch's disciplinary action as a searchable PDF. .

Pages 6 - 7 of the SDNY Opinion and Order

In considering Santos-Buch's argument that FINRA's publication of a nearly  two-decades-old regulatory is a stigma, the SDNY dismissed that contention [Ed: Footnotes omitted]:

Next, Santos-Buch alleges a constitutionally vested interest in his reputation under the "stigma-plus" test This argument also fails. First, SantosBuch has not satisfied the "stigma-plus" test because he is not a government employee. Second, relying on Valmonte v. Bane, Santos-Buch argues that public disclosure of his disciplinary action places an undue burden on his employment prospects and injures his reputation. In Valmonte, however, the court held that "Valmonte is not going to be refused employment because of her reputation; she will be refused employment simply because her inclusion on the list results in an added burden on employers who will therefore be reluctant to hire her." But public disclosure of Santos-Buch's disciplinary action places no undue burden on employers. Instead, it reveals to potential clients that Santos-Buch has previously violated a fair practice rule. As such, Santos-Buch has no vested due process interests and raises no "substantial constitutional questions" that would allow him to avoid exhausting the administrative remedies made available to aggrieved parties under the Exchange Act. . .

Pages 15 -16 of the SDNY Opinion and Order

Federal Appeal

Santos-Buch appealed the SDNY's grant of FINRA's Motion to Dismiss to the United States Court of Appeals for the Second Circuit ("2Cir"), which affirmed SDNY. Concurring with the lower court, 2Cir held that challenges to FINRA's rules, such as those set forth by Santos-Buch, must proceed exclusively before the SEC and would not be properly before a court unless Santos-Buch could prove that the SEC lacked power to grant him effective relief.  

As to whether FINRA's alleged misconduct raised "constitutional issues" that could properly be presented to a federal court, 2Cir found that the case involved no state action because FINRA is a private actor whose conduct is not fairly attributable to the government and, accordingly, the SRO dould not have violated Santos-Buch's due process rights or the Ex Post Fact clause.  As to further issues alleging that FINRA may not have properly followed its own rules, 2Cir held that there was no private right of action in such circumstances. Set out in stark terms is this finding:

While Santos-Buch's claims for injunctive and declaratory relief for publication of his disciplinary action via Web File are not subject to the Exchange Act's exhaustion requirement because they challenge neither the disciplinary action taken by FINRA, nor a FINRA rule, they were also properly dismissed. Santos-Buch alleges that the Web File publication violates his substantive due process rights, but he fails to state a due process claim because FINRA is not a state actor that can be held to constitutional standards. To the extent that his claims for injunctive and declaratory relief rest instead on FINRA's failure to comply with its own rules, as is required by
statute, see 15 U.S.C. § 78s(g)(1) ("Every [SRO] shall comply with . . . its own rules."), we have held that there is no implied private right of action to enforce this statutory obligation, see Desiderio, 191 F.3d at 208.

Page 4 of 2Cir Summary Order

In addressing Santos-Buch's claims for monetary relief, 2Cir found that as an SRO, FINRA and its officer were entitled to absolute immunity from the private damages sought in connection with what was deemed the discharge of regulator responsibilities.

Bill Singer's Comment

A fascinating battle. It's hard not to feel some sympathy for Santos-Buch, particularly when you consider that his underlying misconduct consisted of guaranteeing against losses, not the worst of all Wall Street sins.  Similarly, given that he has been out of the business since 1996 and virtually all of the online disclosure came after that date, you have to wonder whether there was an unfair dragging of the disclosure of his case into a very wide net.

That being said, there are also two points in FINRA's favor. One, the advent of newer technology does not necessarily come with a promise that it will not be adapted to update legacy systems.  Just think about the transition from vinyl to tape to CD to DVD to digital download to streaming. A second point in FINRA's favor is that it expanded its online disclosure in response to a storm of public and political protest about the relatively hidden nature of its prior protocol.

In the end, it's a balancing act between Santos-Buch's expectations and FINRA's obligations. Personally, I don't like the outcome in this case but I do understand the merits. Perhaps this case will serve as a warning for other future respondents about the impact and ramification of settling with FINRA rather than fully contesting the case.

The BrokeAndBroker.com Blog has recently obtained a copy of the Petition for a Writ of Certiorari filed in Alan Santos-Buch, Petitioner, v. Financial Industry Regulatory Authority, Inc., Respondent (Supreme Court of the United States). Regardless of where you stand on the question presented, I urge all serious industry participants to read this articulate Petition, which clearly sets forth the salient points in the debate over the efficacy and limits of Wall Street self-regulation.

In seeking to appeal from the 2Cir to the US Supreme Court, the Petition explains that:

The Second Circuit rejected the claim, holding that FINRA was not a state actor and not subject to due process. As a result of the Second Circuit decision, a split now exists within the Circuits, since the Fifth and Tenth Circuits have previously held that FINRA is subject to due process claims. The existence of the split has been acknowledged by the Eleventh Circuit, which, itself, has declined to weigh in on the issue. Thus the specific question presented is:

Whether FINRA's performance of its responsibilities in disciplining members and associated persons and disclosing disciplinary information about them to the public is subject to the restraints of the due process clause of the United States Constitution, Fifth Amendment.

Page ii of the Petition

The gist of Petitioner Santos-Buch's appeal to the Supreme Court is preliminarily encapsulated as follows:


If FINRA were considered a state actor, at minimum Santos-Buch's due process claims seeking declaratory and injunctive relief to terminate the wrongful website publication would proceed since neither sovereign immunity (Alden v. Maine, 527 U.S. 706, 757 (1999)) nor common law absolute immunity (Bolin v. Story, 225 F.3d 1234, 1242 (11th Cir. 2000); Tarter v. Hury, 646 F.2d 1010, 1012 (5th Cir.1981)) bars non-monetary claims.

The Second Circuit, however, affi rmed the dismissal of Santos-Buch's due process claims for declaratory and injunctive relief aimed at terminating FINRA's wrongful "proactive" publication of the 17-year old disciplinary action on its website.

The Second Circuit held that FINRA was not a state actor-i.e., was not sufficiently like the government-to be subjected under a due process theory to Santos-Buch's claims for declaratory and injunctive relief terminating the wrongful website publication.

With respect to Santos-Buch's claims for money damages, the Second Circuit did an about face and found that FINRA was sufficiently like the government that it should be afforded absolute immunity.

Notably, the Second Circuit decision strongly suggests that, had FINRA been a state actor, a due process violation would have occurred since, as the decision found, there was no avenue for Santos-Buch to obtain administrative review of his wrongful website publication claim before the SEC. (Pet. App. 6a.)

Pages 10 - 11 of the Petition

In my capacity as a regulatory lawyer, I am intrigued by this claim and the ensuing legal battle.  If nothing else, Santos-Buch's legal team has done an exceptional and commendable job for the client. Although my expectation is that the Supreme Court will not grant Cert, I would welcome an airing of many of the issues inherent in this appeal. Stay tuned.

Also READ:

SEC Commissioner Gallagher Says FINRA. Bill Singer Says Finito (BrokeAndBroker.com Blog, September 18, 2014)

Reappraising Self-Regulation: