July 17, 2020
In a recent SEC Opinion, we are presented with an individual who says that he didn't file a FINRA Arbitration Statement of Claim seeking expungement because FINRA routinely rejects claims such as his as "ineligible." FINRA says he should have filed his claims, and by failing to do so, he failed to exhaust his administrative remedies. The SEC says it has no jurisdiction because the individual wasn't actually denied any services by FINRA because he never went through the motions to elicit them. The individual says going through the motions would be futile because FINRA would have deemed his claims as ineligible for arbitration. And so we go. Round and round and round.
You got your Central Registration Depository ("CRD"). Also, you got FINRA's online BrokerCheck database. A lot of folks think that CRD and BrokerCheck are one and the same. That's a mistak . They're two different databases. For starters, consider this explanation from FINRA's "Central Registration Depository" webpage https://www.finra.org/registration-exams-ce/classic-crd
FINRA is responsible for the Central Registration Depository (CRD) program, which supports the licensing and registration filing requirements of the U.S. securities industry and its regulators. The CRD program covers the registration records of broker-dealer firms, branch offices and their associated individuals, including their qualification, employment and disclosure histories; it also directs the processing of form filings, fingerprint submissions, collection and disbursement of registration-related fees, qualification exams and continuing education sessions. The registration filing requirements of the CRD program are being integrated into the new FINRA Gateway system. Learn more about the CRD program and FINRA Gateway on the pages linked below.
The general public can review information about investment professionals with the registration information collected through the CRD program and is disclosable via our investor protection tool, BrokerCheck.
Transforming CRD and the New FINRA Gateway User Experience
FINRA is redirecting its efforts from building the new CRD system to instead integrate its registration filing functionality into the new FINRA Gateway, which replaces Firm Gateway. As part of our Digital Experience Transformation (DXT) initiative, FINRA Gateway will offer a cohesive and streamlined user experience across all of the reporting and compliance applications that migrate to this new platform. Consolidating our technology efforts and taking this holistic approach with the FINRA Gateway applications to make them intuitive, flexible and efficient, should make it easier for firms and their associated persons to fulfill their compliance obligations. Firm users will be contacted for a phased rollout beginning in April 2020 and transitioning to FINRA Gateway by the end of June. The deployment of registration functionality will be incremental over time, so users should expect to use both classic CRD and FINRA Gateway until the integration is complete.
On CRD BUT Not On BrokerCheck
As you may have inferred, the CRD is a big database that has lots and lots of information, some -- and the key word is "some" of which is available to the public via FINRA's BrokerCheck system. As such, by way of inference, "some" data on CRD is not available to the public. So who gets to see that CRD data that isn't displayed to the public? Consider an explanation, as recently set forth in In the Matter of the Application of Jonathan Edward Graham For Review of Action Taken by FINRA (Opinion, SEC, '34 Act Rel. No. 89237, Admin. Proc. File No. 3-19142 / July 7. 2020)
https://www.sec.gov/litigation/opinions/2020/34-89237.pdf [Ed: footnotes omitted]:
The Exchange Act requires FINRA to maintain a system for collecting and retaining
registration information concerning its members and their associated persons. FINRA does so
through the CRD system, which serves as the online registration and licensing database for the
securities industry. Among other things, information disclosed by a registered representative on
his Uniform Application for Securities Industry Registration or Transfer ("Form U4") is reported
electronically to CRD. The disclosures that Graham seeks to remove here were reported to
CRD because they were disclosed on Graham's Form U4.
Although public investors do not have access to CRD, certain information in that system
is available through BrokerCheck, a free online tool. FINRA's rules set forth the services it
offers with respect to the removal or revision of information disclosed on CRD and
BrokerCheck. FINRA Rule 2080, for example, establishes the standards for expungement of
certain customer dispute information from CRD not applicable here. Rule 8312 establishes a process to dispute the accuracy of information publicly disclosed through BrokerCheck, but not
"information contained in the CRD system that is not disclosed through BrokerCheck." And the
information at issue here was not disclosed through BrokerCheck.
at Pages 2 - 2 of the SEC Opinion
Graham Demands Removal of Four CRD Disclosures
All of which sets the stage for the dilemma of former associated person Jonathan Edward Graham, who sent FINRA a letter on February 12, 2019, demanding that the self-regulatory-organization cease and desist from violations of the Fair Credit Reporting Act ("FCRA"):
[I]n the Letter, Graham claimed that FINRA was violating the FCRA by reporting and
maintaining four disclosures in CRD. Specifically, the Letter demanded that FINRA remove the
following disclosures from Graham's CRD record:
- A November 2003 personal bankruptcy filing, for which Graham received a
discharge of his debts in February 2004 (Occurrence #1403263);
- A March 2008 civil judgment against Graham of $54,360.70, which he satisfied
in May 2011 (Occurrence #1687573);
- A September 2009 civil judgment against Graham of $408,615, which he satisfied
in January 2012 (Occurrence #1796198); and
- A September 2010 tax lien of $2,769.78, filed by the IRS against Graham, which
he satisfied in December 2010 (Occurrence #1688857).
In demanding that this information be removed from his CRD record, Graham asserted that
FINRA is a "consumer reporting agency," that an associated person's CRD report is a "consumer
report" for employment purposes, and that the information set forth in the four disclosures may not be included in a consumer report because each disclosure "antedate[s] the report by more
than" a statutorily specified numbers of years.
FINRA Says It's Not An FCRA Consumer Reporting Agency
In its response of March 13, 2019, FINRA declined to expunge the four disclosures and:
noted that none of the four disclosures appeared in BrokerCheck,
rejected Graham's assertions that FINRA and CRD are subject to the FCRA, reminded Graham
of FINRA's obligations under the Exchange Act to collect and maintain information concerning
registered representatives and former registered representatives, and informed Graham that the
four disclosures were required to be reported on Form U4 pursuant to FINRA's By-Laws.
FINRA concluded that "[t]he only way to obtain expungement of these archived disclosures
from CRD is for Mr. Graham to obtain orders of expungement . . . from the relevant agencies or
courts themselves." . . .
Graham Files Petition with SEC
Deeming FINRA's suggested orders of expungement route as "not a viable option," on April 11, 2019, Graham filed his petition with the SEC and asserted that he had exhausted his FINRA administrative remedies. In his appeal, Graham argued that the SEC had jurisdiction over his petition because:
- FINRA prohibited or limited his access to its services, and
- the SEC's review of that action was necessary to vindicate his purported rights under the FCRA given the absence of any other mechanism for doing so
A Question of Jurisdiction
In approaching the threshold question of whether it had jurisdiction over the matter presented, initially the SEC noted that Graham did not pursue and was not denied access to any FINRA services. As such, the SEC then considered whether the absence of a mechanism at FINRA to remove the cited CRD information was, in and of itself, a sufficient basis by which jurisdiction was bestowed on the federal regulator. Preliminary, the SEC found that:
[W]e lack jurisdiction where Congress has not expressly authorized it. And Graham's failure to obtain the relief that he seeks from FINRA does not itself confer such
jurisdiction. Because Graham has not established that Exchange Act Section 19(d) authorizes us
to exercise jurisdiction to review his claims, we dismiss his application for review.
at Page 5 of the SEC Opinion
FINRA's Access to Services
Graham had argued that in violation of '34 Act Section 19(d), FINRA wrongfully denied him access to its arbitration service by determining that his claim was ineligible for arbitration. Fair enough but for the fact that Graham never actually filed a FINRA Arbitration Statement of Claim or otherwise requested access to FINRA's arbitration forum.
The Denial May Be a River in Egypt
SIDE BAR: Registration, Responsibilities, and Oversight of Self-Regulatory Organizations:
Section 19(d) of the Securities Exchange Act of 1934:
(d)(1) If any self-regulatory organization imposes any final disciplinary sanction on any member thereof or participant therein,
denies membership or participation to any applicant, or prohibits
or limits any person in respect to access to services offered by such
organization or member thereof or if any self-regulatory organization (other than a registered clearing agency) imposes any final disciplinary sanction on any person associated with a member or bars
any person from becoming associated with a member, the self-regulatory organization shall promptly file notice thereof with the appropriate regulatory agency for the self-regulatory organization and
(if other than the appropriate regulatory agency for the self-regulatory organization) the appropriate regulatory agency for such
member, participant, applicant, or other person. The notice shall be
in such form and contain such information as the appropriate regulatory agency for the self-regulatory organization, by rule, may prescribe as necessary or appropriate in furtherance of the purposes
of this title.
(2) Any action with respect to which a self-regulatory organization is required by paragraph (1) of this subsection to file notice
shall be subject to review by the appropriate regulatory agency for
such member, participant, applicant, or other person, on its own
motion, or upon application by any person aggrieved thereby filed
within thirty days after the date such notice was filed with such
appropriate regulatory agency and received by such aggrieved person, or within such longer period as such appropriate regulatory
agency may determine. Application to such appropriate regulatory
agency for review, or the institution of review by such appropriate
regulatory agency on its own motion, shall not operate as a stay
of such action unless such appropriate regulatory agency otherwise
orders, summarily or after notice and opportunity for hearing on
the question of a stay (which hearing may consist solely of the submission of affidavits or presentation of oral arguments). Each appropriate regulatory agency shall establish for appropriate cases an
expedited procedure for consideration and determination of the
question of a stay.
(3) The provisions of this subsection shall apply to an exchange
registered pursuant to section 6(g) of this title or a national securities association registered pursuant to section 15A(k) of this title
only to the extent that such exchange or association imposes any
final disciplinary sanction for-
(A) a violation of the Federal securities laws or the rules
and regulations thereunder; or
(B) a violation of a rule of such exchange or association, as
to which a proposed change would be required to be filed under
section 19 of this title, except that, to the extent that the exchange or association rule violation relates to any account,
agreement, contract, or transaction, this subsection shall apply only to the extent such violation involves a security futures product.
If Graham didn't actually initiate a FINRA Arbitration via the filing of a Statement of Claim, how then would FINRA have denied him the services of its arbitration forum? Frankly, that very question seemed to have perplexed the SEC, which found that it lacked jurisdiction because:
therefore did not deny him access or determine that a claim that he filed was ineligible for arbitration. Indeed, in Graham's view the information at issue cannot be removed through an
arbitration claim. Graham may thus have believed that FINRA would not grant him access to the
arbitration forum had he filed such a claim. Although Graham may have been correct in this
belief, declining to request access to services offered by an SRO based on a "belie[f] that
[access] will not be granted is not the same as receiving a denial."
at pages 5 - 6 of the SEC Opinion
What About the FCRA Argument?
Graham's claim that FINRA failed to comply with the FCRA proves to no avail with the SEC because the federal regulator noted that Graham's claim "goes to the merits of FINRA's determination that CRD records are not subject to the FCRA and "do[es] not create jurisdiction for us under Exchange Act Section 19(d)." at pages 6 - 7 of the SEC Opinion.
The Absence of a FINRA Mechanism
Perhaps fashioning an "in the alternative" argument, Graham also asserted that even in the absence of a Section 19(d) jurisdictional basis, the SEC should exercise jurisdiction because he cannot obtain relief otherwise. In support of his contention, Graham first argues that there is no viable option in the form of seeking expungement from the relevant agencies/courts as urged by FINRA because that direct approach would be "far more complicated, expensive, and time-consuming" than the FINRA arbitration expungement route. In response to that contention, the SEC responded that [Ed: footnotes omitted]:
But the fact that seeking expungement from the relevant
agencies or courts may be complicated, expensive, and time-consuming does not provide us with
jurisdiction. And Graham's arguments that he must arbitrate to comply with FINRA's rules and
to exhaust administrative remedies are facially inconsistent with his assertions that FINRA's
rules do not authorize arbitration of his claims. Graham offers no further evidence, authority,
or explanation for these arguments' relevance to his appeal.
Finally, even if there is no FINRA mechanism by which to redress his grievance, that omission does not confer jurisdiction upon the SEC, which retreats to the position that Congress failed to authorize such jurisdiction in Section 19(d).
Bill Singer's Comment
Ummm . . . I dunno . . . maybe, yes . . . on the other hand, nah, maybe, no.
I mean it's pretty clear that FINRA has been aggressively barring the doors to a lot of expungement arbitration Statements of Claim via a declaration of ineligibility by the Director of Arbitration. On the other hand, as the SEC notes with some credibility, at least such Claimants went through the motions of submitting the Statement of Claim and proving that it was rejected as ineligible. Here, Graham didn't bother going through the motions. As Graham argued, there comes a point when it's just silly to go through the motions when you know that the outcome is preordained against you. As such, what FINRA and the SEC characterize as "going through the motions," Graham characterizes as the very definition of "futility." Frankly, that's not all that lousy an argument.
See, "Gregory Acosta Hands FINRA An Earth Shattering, Precedent Setting, Historic, Stunning Defeat" (BrokeAndBroker.com Blog / June 24, 2020)http://www.brokeandbroker.com/index.php?a=blog&id=5291&utm_source=dlvr.it&utm_medium=twitter In Acosta, FINRA had deemed an individual to be statutorily disqualified but then denied him the ability to challenge that characterization because he was required to enlist a member firm to sponsor an application for his admission back into the industry but no such firm would submit the requisite MC-400 document. That left Acosta in a regulatory limbo where he needed to file a form but couldn't get anyone to do so, and FINRA refused to consider his appeal unless the form that no one would file was filed. All of which sort of smacks of some form of futility.
Does Acosta apply to Graham? My sense is that Acosta is distinguished as a case in which an individual is effectively barred from the industry because FINRA offers no mechanism by which he can personally pursue an administrative remedy to redress that status. In contrast, in Graham, an individual could personally file a FINRA Arbitration Statement of Claim (in contradistinction to needing to secure a member firm's sponsorship). So -- okay, I sort of see the SEC's distinction.
Notwithstanding the SEC's differentiation, I sense a flaw in Graham to the extent that the SEC Opinion does not seem to be focusing on the critical aspect of the doctrine at issue: the "futility of exhaustion of administrative remedies." Graham seems to argue that FINRA has an established pattern, practice, policy and/or protocol whereby the set of facts that would be presented in his contemplated FINRA Arbitration Statement of Claim in furtherance of an expungement application is regularly deemed as "ineligible" for arbitration. If FINRA does indeed regularly deem such claims as "ineligible," it would seem that requiring someone to present those very facts in order to obtain a formal finding of ineligibility would constitute a textbook definition of forcing someone to engage in a futile effort. In fairness to both FINRA and the SEC, I may be presenting Graham's case in a somewhat different, somewhat more pointed manner. In fairness to Graham, however, the SEC's Opinion presents no discussion whatsoever as to whether FINRA submitted a brief clarifying that it does not have the cited pattern, practice, policy and/or protocol whereby Graham's claim would have prompted a perfunctory finding of ineligibility.
Reduced to something of an absurd circularity, Graham says that he didn't file a FINRA Statement of Claim because FINRA has a policy of routinely rejecting claims such as his. FINRA says he should have filed his claims and by failing to do so, he did not exhaust his administrative remedies. The SEC says it has no jurisdiction because Graham was never denied any services by FINRA because he never filed a Statement of Claim seeking to elicit the services at issue. Graham says he didn't file any claims because to do so would have been futile because FINRA would have deemed them as ineligible.
All of which suggests that the SEC's guidance on how you demonstrate that FINRA has a futile process is by engaging in the futility of showing that FINRA has a futile process. If you think about it too much, your head might explode.