Equity And Justice Prevail In Breathtaking FINRA Expungement Award

August 1, 2022

In a recent FINRA Arbitration Award, an arbitrator mounts Rocinante and grabs a lance. Even though we are merely Sancho Pancho (who went along for the ride), still, we get to smile at the spectacle of Don Quixote tilting at windmills. Equity, due process, and justice vanquish the heartless, amoral application of the law. In these plague days, that's a nice change of pace. Also, it's one hell of a wonderful FINRA Arbitration Award penned with eloquence.

2009 Customer Complaint

In a FINRA Arbitration Statement of Claim filed in January 2022, associated person Claimant Dawson sought the expungement of a 2009 customer dispute from his Central Registration Depository record ("CRD"). Respondent Raymond James did not opposed the requested relief. Although notified of the proceeding, the underlying customer did not participate in the expungement hearing. 
Frederick Jack Dawson, Claimant, v. Raymond James Financial Services, Inc., Respondent (FINRA Arbitration Award 22-00100)

Consider this formidable roadblock in Claimant Dawson's way:

FINRA Code of Arbitration Procedure for Industry Disputes Rule 13206: Time Limits

(a) Time Limitation on Submission of Claims

No claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule.

(b) Dismissal under Rule

Dismissal of a claim under this rule does not prohibit a party from pursuing the claim in court. By filing a motion to dismiss a claim under this rule, the moving party agrees that if the panel dismisses a claim under this rule, the non-moving party may withdraw any remaining related claims without prejudice and may pursue all of the claims in court.

(1) Motions under this rule must be made in writing, and must be filed separately from the answer, and only after the answer is filed.
(2) Unless the parties agree or the panel determines otherwise, parties must serve motions under this rule at least 90 days before a scheduled hearing, and parties have 30 days to respond to the motion. Moving parties may reply to responses to motions. Any such reply must be made within 5 days of receipt of a response.
(3) Motions under this rule will be decided by the full panel.
(4) The panel may not grant a motion under this rule unless an in-person or telephonic prehearing conference on the motion is held or waived by the parties. Prehearing conferences to consider motions under this rule will be recorded as set forth in Rule 13606.
(5) If the panel grants a motion under this rule (in whole or part), the decision must be unanimous, and must be accompanied by a written explanation.
(6) If the panel denies a motion under this rule, a party may not re-file the denied motion, unless specifically permitted by panel order.
(7) If the party moves to dismiss on multiple grounds including eligibility, the panel must decide eligibility first.
  • If the panel grants the motion to dismiss the case on eligibility grounds on all claims, it shall not rule on any other grounds for the motion to dismiss.
  • If the panel grants the motion to dismiss on eligibility grounds on some, but not all claims, and the party against whom the motion was granted elects to move the case to court, the panel shall not rule on any other ground for dismissal for 15 days from the date of service of the panel's decision to grant the motion to dismiss on eligibility grounds.
  • If a panel dismisses any claim on eligibility grounds, the panel must record the dismissal on eligibility grounds on the face of its order and any subsequent award the panel may issue.
  • If the panel denies the motion to dismiss on eligibility grounds, it shall rule on the other bases for the motion to dismiss the remaining claims in accordance with the procedures set forth in Rule 13504(a).
(8) If the panel denies a motion under this rule, the panel must assess forum fees associated with hearings on the motion against the moving party.
(9) If the panel deems frivolous a motion filed under this rule, the panel must also award reasonable costs and attorneys' fees to any party that opposed the motion.
(10) The panel also may issue other sanctions under Rule 13212 if it determines that a party filed a motion under this rule in bad faith.

(c) Effect of Rule on Time Limits for Filing Claim in Court

The rule does not extend applicable statutes of limitations; nor shall the six-year time limit on the submission of claims apply to any claim that is directed to arbitration by a court of competent jurisdiction upon request of a member or associated person. However, when a claimant files a statement of claim in arbitration, any time limits for the filing of the claim in court will be tolled while FINRA retains jurisdiction of the claim.

(d) Effect of Filing a Claim in Court on Time Limits for Filing in Arbitration

If a party submits a claim to a court of competent jurisdiction, the six-year time limitation will not run while the court retains jurisdiction of the claim matter.

Upending the Time-Space Continuum

Adding six years to the 2009 date of the customer complaint at issue brings us to 2015; and, well, it seems that Dawson's January 2022 filing of his claim is about seven years late according to FINRA's six-year Eligibility Rule. I'm not sure that there is any way to get around the six-year limit. Then again, what do I know?

In a compelling, eloquent, and thoughtful FINRA Award, sole FINRA Arbitrator William Stephen Mailander literally wrestles with the time-space continuum in order to allow equity to triumph. Rather than tarnish the artistry of Mailander's powerful prose, let me stand back and quote the pertinent part of his breathtaking "ARBITRATOR'S EXPLANATION OF DECISION":


ln this proceeding, registered person Frederick Jack Dawson (hereinafter "Claimant") (CRD #1024576) seeks an Order of Expungement from his Central Registration Depository (CRD) of one record of customer dispute information. This customer dispute is documented on Claimant's public BrokerCheck Report as Occurrence Number 1447912. This customer dispute was disclosed on Claimant's U4 on March 19, 2009. 

BrokerCheck and Customer Dispute lnformation 

To support their investor protection missions, FINRA and state securities regulators jointly collect and publicly disclose extensive registration information about financial professionals associated with broker-dealer firms. This registration information, which includes information about customer complaints, is used by regulators to license and oversee FINRA-registered financial professionals. 

The collection of registration information in the CRD system and the disclosure of the information through BrokerCheck serves three important purposes: (1) allowing investors to obtain information about the registered financial professional or securities firm with whom they may do business; (2) providing securities regulators with a critical regulatory tool in overseeing the activities of registered financial professionals and in detecting regulatory problems; and (3) providing securities firms with information for use in making informed employment decisions. 

The requirements for reporting disputes between customers and registered financial professionals are extensive. Reportable disputes include customer complaints, arbitration claims and court filings made by customers against registered financial professionals and their broker-dealer firms, and the arbitration awards or court judgments that may result from those claims or filings. lnformation about these disputes must be reported regardless of whether the firm or the registered financial professional believes the allegations are untrue, inaccurate or malicious, and FINRA is required by law and FINRA rules to disclose this information. The value of the information is dependent on its completeness and accuracy. The absence of accurate information, as well as the presence of clearly inaccurate information, decreases the reliability and hence the value of the disclosure regime. 

Pre-Hearing Conference 

At the pre-hearing teleconference, held on May 5, 2020, this Arbitrator ordered Claimant to brief whether the claim was eligible for arbitration under Rule 13206. Claimant was also ordered to notify the customer of the claim and opportunity to participate in the hearing or provide a response. Finally, Respondent was ordered to produce all records, including its investigation report, regarding the customer and their complaint. 

FINRA Eligibility Rule 

FINRA Rule 13206 provides in pertinent part: 

No claim shall be eligible for submission under the Code where six years has elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding eligibility of a claim under this rule. 

The term "claim" means an allegation or request for relief. 

The terms "occurrence or event" are generally understood to include continuous or repeated exposure to substantially the same general conditions which result in injury or damage. This understanding is in accord with policy guidance to be found in FINRA's most recent edition of the Arbitrator's Guide wherein it provides: "[t]he arbitrators may find that there is a continuing occurrence or event giving rise to the dispute."

This Arbitrator is, therefore, of the opinion that FINRA's eligibility rules (in this matter, Rule 13206) are more akin to a statute of limitations, not a statute of repose, in as much as a statute of limitations operates procedurally to bar the enforcement of a right whereas a statute of repose takes away a substantive right to be free of liability after a specified time. 

FINRA Arbitration is an Equitable Forum 

Equity essentially is the power to do justice in a particular case by exercising discretion to mitigate the rigidity of strict rules. "Equity eschews mechanical rules; it depends on flexibility." See Holmbers v. Armbrecht, 327 U.S. 392 (1946). ln this case, Claimant argues that a strict interpretation of the eligibility rule would leave him without recourse or remedy for the continuous reputational harm he experiences as a result of the alleged false information presented by the unadjudicated customer complaint information available for public review via BrokerCheck. This arbitrator agrees that a strict application of the eligibility rule may not be just in this case and believes that it is permissible for arbitrators in this forum to consider equitable principles to accomplish justice according to the facts of a particular case. 

lndeed, the FINRA Dispute Resolution Service Arbitrator's Guide (hereinafter "Guide") contains a quote that makes it clear that arbitrators are not strictly bound by legal precedent, the rules of evidence or rules of procedure governing litigation in other forums. 

Equity is justice in that it goes beyond the written law. And it is equitable to prefer arbitration to the law court, for the arbitrator keeps equity in view, whereas the judge looks only to the law, and the reasons why arbitrators were appointed was that equity must prevail. 

Domke on Aristotle, Guide, Feb. 2021 ed., page 9. 

ln any given context in which an arbitrator or panel is called upon to exercise its equitable power, as discussed more fully below, it should weigh the competing equities bearing on the issue at hand and grant or deny relief based on the overall balance of these equities. 

Claimant's Claim is Eligible for Arbitration 

Under the facts and circumstances of this case, this arbitrator interprets Rule 13206 to accommodate a factual finding that a claim seeking expungement, as opposed to a claim seeking monetary damages, will be eligible for arbitration where the equities on balance favor the Claimant. This arbitrator believes that the equities favor the Claimant in this proceeding and the claim is eligible for arbitration. 

ln reaching this decision, this arbitrator considered the following factors that favor the Claimant being given his opportunity to present his case on the merits: 

The customer dispute information reflected on the Claimant's BrokerCheck report was not adjudicated in any arbitration proceeding and the customer has not elected to appear in this proceeding. This Arbitrator believes that it is reasonable under the facts and circumstances of this matter to draw reasonable inferences from the customer's decision not to pursue arbitration following receipt of the Respondent's lnvestigation Report that the customer was either convinced that there was no wrongdoing or otherwise not confident that they would prevail in arbitration. Moreover, the customer received notice of this proceeding and elected not to respond to this notice and opportunity to participate in this proceeding; 

Claimant's BrokerCheck Report does not contain any other reports of adverse customer dispute information or disciplinary action during an almost 40-year career; 

Claimant indicated that he did not know that he could seek expungement of the adverse customer dispute information through FINRA arbitration. While ignorance of a rule or remedy may not typically be a valid excuse, this arbitrator notes that a recent study, albeit involving a relatively small sample, reported that many arbitrators are unaware that the customer dispute information could be viewed publicly or that the expungement process was available to them. See Colleen Honigsberg & Matthew Jacob, Deleting Misconduct: The Expungement of BrokerCheck Records, 139 Journal of Financial Economics, 800-831 (2021); 

The primary purpose of the eligibility rule - claims should be submitted within a reasonable period of time to ensure the availability of evidence and to prevent unfairness to the Respondent who should reasonably be able to expect to be free of stale claims and potential liability at some point in time - has been largely satisfied because the Respondent has produced its contemporaneous response to the customer dispute, dated March 17, 2009 (Claimant's Exhibit 11), describing the investigative actions taken and its finding that there was no wrongdoing on the part of Claimant, Respondent has indicated that it is unopposed to the Claimant seeking expungement and the instant claim does not appear to present any issue of liability for the Respondent. 

Claimant has testified that, while he does not recall a specific incidence where a prospective client rejected his services due to the customer complaint report, he believes that it is possible, if not likely, that he has experienced and continues to experience reputational harm from the posting of this adverse customer dispute information available to the public through BrokerCheck; 

Claimant has testified that he believes that recent actions taken by FINRA, to include, but not limited to, actions described in Regulatory Notices 12-10 and 15-50, has increased the likelihood of even more damage to his reputation if the customer complaint information is not expunged; and, 

Claimant has opined that the expungement of the unadjudicated customer complaint information is consistent with the purpose of BrokerCheck insomuch as its value to the public is dependent upon accurate information. 

Expungement Rules 

FINRA adopted Rule 13805 to establish "procedures that arbitrators must follow before recommending expungement of customer dispute information related to arbitration cases from a broker's Central Registration Depository {CRD) record. 

The grounds for expungement are specified in Rule 2080(b)(1)(A-C). They are: (A) that the claim, allegation or information is factually impossible or clearly erroneous; (B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (C) that the claim, allegation or information is false.

Additionally, Rule 2080(b)(2)(B) provides an alternative ground for expungement if it "would have no material adverse effect on investor protection, the integrity of the CRD system, or regulatory requirement." 

Recommended Expungement

Now that's what I call one helluva rationale! You may or may not agree with Arbitrator Mailander. That's your prerogative. On the other hand, give him credit for providing you with enough content and context to foster your opinion. Moreover, appreciate this nugget of wisdom:

This arbitrator agrees that a strict application of the eligibility rule may not be just in this case and believes that it is permissible for arbitrators in this forum to consider equitable principles to accomplish justice according to the facts of a particular case. 

Having fully discharged his duty to the industry and the investing public by explaining the "whys" of his decision, Mailander then completes his role as an arbitrator with a superb rendition of the "Award":

After considering the pleadings, the testimony and evidence presented at the expungement hearing, and any post-hearing submissions, the Arbitrator has decided in full and final resolution of the issues submitted for determination as follows: 

The Arbitrator recommends the expungement of all references to Occurrence Number 1447912 from registration records maintained by the CRD for Claimant Frederick Jack Dawson (CRD Number 1024576) with the understanding that, pursuant to Notice to Members 04-16, Claimant Frederick Jack Dawson must obtain confirmation from a court of competent jurisdiction before the CRD will execute the expungement directive. 

Unless specifically waived in writing by FINRA, parties seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents. 

Pursuant to Rule 13805 of the Code of Arbitration Procedure ("Code"), the Arbitrator has made the following Rule 2080 affirmative findings of fact: 

The claim, allegation, or information is factually impossible or clearly erroneous; and 

The claim, allegation, or information is false. 

The Arbitrator has made the above Rule 2080 findings based on the following reasons: 

Sometime in 2005, the Customer approached Claimant and sought to invest in mutual funds. The Customer advised Claimant that the funds were proceeds taken from a home equity loan. Claimant counseled the Customer against using proceeds taken from a home equity loan for investment purposes on several occasions. The Customer, however, insisted that they wanted to invest these proceeds in mutual funds. Consistent with the Customer's wishes, although contrary to his advice, Claimant prepared and presented a Freedom Mutual Fund lnvestment Proposal to the Customer in December 2005. The proposal indicated an asset allocation mix of cash, real estate, international equity, large cap, mid cap and small cap stocks with a combination of value, growth and blended funds. 

On December 28, 2005, the Customer authorized an investment in the Freedom Mutual Fund. From December 28, 2005 through August 31, 2008, the Customer experienced positive returns on their Mutual Fund. Then, from September 2008 to February 13, 2009, the Customer experienced negative returns on their Mutual Fund due to the 2008-2009 recession-related market downturn. 

ln February 2009, the Customer lodged a complaint with Respondent that the mutual fund had lost approximately $20,000 and demanded to be made whole. The premise of the complaint alleges that Claimant allowed them to invest funds taken from a home equity loan in violation of an unspecified SEC rule prohibiting the use of such funds for investment purposes. 

On March 17, 2009, Respondent denied the complaint. Respondent found that Claimant did not solicit or recommend that the Customer uses the proceeds from a home equity loan for investment purposes and, in fact, had cautioned against such use for the very reasons of what had occurred during the then recent market downturn. Respondent further found that it was not aware of any SEC rule that prohibits clients from using home equity loan proceeds for investment purposes if they chose to do so and that Claimant had fully complied with the published FINRA guidelines in this matter. Respondent further found that the Customer's investment in mutual funds was completely compatible with their stated investment goals, objectives and risk temperament - growth with medium risk tolerance and a time horizon of greater than ten years. The fund was comprised of a variety of mutual funds diversified across various growth-type investment categories. Claimant was not disciplined or found guilty of any wrong-doing by Respondent as a result of its investigation of the Customer complaint. 

Claimant testified that the Customer closed their account against his advice on or about August 2009, without giving the investment time to recover the losses complained of. Claimant also testified that the Customer did not pursue any further action regarding their complaint after receiving Respondent's report of investigation and denial of their complaint. 

Claimant further testified that the Customer's allegations were false, that he had not acted in violation of any pertinent rules and did nothing wrong. Claimant also testified that he was in complete agreement with Respondent that the Customer's investment in mutual funds (between 10 or 15) was appropriately diversified and compatible with their customer profiles (based on age, other investments, financial situation and needs, tax implications, investment objectives, investment experience, investment horizon, liquidity needs and risk tolerance). 

Finally, Claimant argues that expungement of this unadjudicated customer complaint information, if granted, would actually serve and further the purposes and goals of the CRD/BrokerCheck system inasmuch as the value of the information available to the public and regulators is dependent upon the information being accurate and complete. Claimant maintains that this reported customer complaint information is not and thereby potentially misleading. This Arbitrator agrees under the facts and circumstances presented in this matter - Claimant's BrokerCheck shows no other customer complaint information or other wrongdoing in an almost 40-year career. 

Occurrence Number 1447912 should be expunged from Complaint's CRD record on the grounds that Claimant has met his burdens of proof and persuasion that the allegations are clearly erroneous and/or false. The interests of consumer protection and awareness being in no way negatively implicated, the undersigned recommends that the unadjudicated customer complaint information designated as Occurrence Number 1447912 be expunged from Claimant's CRD pursuant to Rule 2080(b)(1)(A) and 2080(b)(1)(C).  

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