The End of Not Opposing Expungements in Return For Settlement?

Thinking of conditioning the settlement of  a customer arbitration claim on the customer agreeing to expunge her complaint against you? Think again.  The FINRA is now awaiting the SEC’s approval of a FINRA rule proposal that would prohibit associated persons from conditioning settlements of customer disputes on, or otherwise compensating customers for, an agreement not to oppose a request to expunge information from an associated person’s Central Registration Depository (CRD) record.

The change should not come as a surprise.  For some time, FINRA has  expressed doubts and concerns about the use of  the expungement as part of arbitration settlements — deeming it an “extraordinary remedy” that should be granted only under appropriate circumstances.  FINRA has stated that information should be expunged “only when it has no meaningful investor protection or regulatory value” –  a fairly high hurdle to jump.

A related hurdle has been FINRA’s position insisting that when reviewing such settlements, arbitrators inquire and fully consider whether a party conditioned a settlement upon agreement not to oppose the associated person’s request for expungement in cases in which the investor does not participate in the expungement hearing or the requesting party states that an investor has indicated that he or she will not oppose the expungement request.  Additional standards that apply to expungement requests are outlined in FIRA’s Code of Arbitration Procedure  Rules 12805, 13805 and FINRA Rule 2080.

See FINRA’s recent news release at http://www.finra.org/Newsroom/NewsReleases/2014/P445251

Author: Dexter Johnson

The author is a an attorney who for the past 14 years has concentrated his practice in representing, successfully, investment advisers, broker-dealers, corporations and individuals who are subject to SEC, FINRA, State or other regulations and who may be the subject of regulatory examination, review or investigation. He formerly worked at the SEC. His regulatory and litigation experience has encompassed virtually every type of securities issue in the industry. He has also negotiated favorable outcomes in many of these matters for his clients.