Need Help for FINRA CRD U4 Expungement Advisor?

Need Help for FINRA CRD U4 Expungement Advisor?

If you are a registered representative and have undeserved complaints or disclosures on your Form U4, Form U5, or Form U6, are you aware if these were reported on your FINRA BrokerCheck Report and prevent you from growing your practice or finding a job in the financial services industry? Worry no more because a FINRA CRD U4 Expungement proceeding can help you have these unfair disclosures be eliminated. If so, MAH Advising can assist you.

What are the Central Registration Depository (CRD) and FINRA BrokerCheck Systems?

FINRA operates and maintains the CRD pursuant to its roles and its agreements with other securities and regulators and the NASAA (North American Securities Administrators Association). The CRD contains disclosure and administrative information about registered securities firms and registered individuals. In CRD there is a record of information where it is used as a tool to check the background of the financial advisers and brokers that shows whenever there is a complaint against them. Also it includes education, professional certifications, enforcement actions, and licensing.

Information on the CRD comes from broker-dealers and regulators who submitted the registration forms. In the CRD, information is currently filed using six different forms called Uniform Registration Forms. The most commonly used forms are U4, U5 and U6. To register and terminate associated persons’ registrations with self-regulatory organizations or SROs and jurisdictions, broker-dealers use Form U4 (Application which is Uniform for Securities Industry Registration or Transfer) and Form U5 (Securities Industry Registration Notice of Uniform Termination). To report disciplinary actions against brokers-dealers and related persons, SROs, regulators and jurisdictions use the Form U6 (Form to Conduct a Report on Uniform Disciplinary Action). A final arbitration award against the associated persons of broker-dealers, as well as themselves is also reported on this form by FINRA.

CRD cannot be accessed directly by the public. But a limited amount of information about CRD is available at FINRA BrokerCheck, an online tool offered by FINRA itself. In the FINRA BrokerCheck system, the public can access CRD information such as:

  • Brokers’ credentials and a summary report;
  • The qualifications of the broker, including their current registration and license, as well as any exams they have passed;
  • A list of the securities firms with which the broker is registered, and a history of employment it has had for the last ten years (inside and outside of the securities industry);
  • And the information that covers investigations, customer complaints, regulation matters, employment separations following allegations, civil and criminal judicial matters, judgments and liens, and financial matters as they relate to customers.

It is possible for brokers to request removal of information from their CRD records. It is accomplished through a FINRA Dispute Resolution arbitration proceeding, and the process is known as CRD Expungement. Additionally, U4 expungement is a lawsuit in which records of convictions or arrests are erased or sealed.

FINRA CRD Expungement: How Does It Work?

If a party seeks a U4 expungement in an existing arbitration proceeding, he or she should either submit a statement of claim or an answer asking for the U4 expungement. In accordance with FINRA Rule 2080, the arbitrators determine whether a request for expungement will be granted based on one or more of the three criteria. Furthermore, FINRA’s Code of Arbitration Procedure for Customer Disputes and Code Arbitration for Disputes in Industry which is (collectively, the “Arbitration Code”) which specifically, it includes provisions pertaining to appeal to remove customer dispute record, namely, that arbitrators conduct a personal hearing or over the telephone, review settlement documents, consider the amount of payments paid to each party, and any other terms and conditions under the settlement. 

The Arbitration Code also requires that, when granting expungement relief, the arbitrators briefly explain in the award the factual basis(es) for finding that the U5 Expungement meets the FINRA Rule 2080 requirements. The Regulatory Notice 08-79, FINRA Rule 13805, and FINRA Rule 12805 provide additional information about these requirements. To determine whether the information in the CRD system is exempt from U5 features, the arbitrator (or arbitrators) should follow FINRA Rule 12805 or FINRA Rule 13805. The FINRA rule 2080 does not allow a ruling to be waived if FINRA does not identify itself as a party during the court process to confirm the U5 expungement award.

FINRA U5 Expungement must be granted by the arbitrator(s) in order for the CRD to be cleared. The court award must then be confirmed before the information can be removed. In court proceedings to confirm arbitration awards, FINRA must be listed as a party, unless the agency waives that requirement, which is part of FINRA Rules. FINRA must receive a written request for an expungement, along with relevant documents, including the statement of claim, answer, any settlement agreement, the  arbitration award, and any other relevant documents. If FINRA receives a waiver request, FINRA staff will provide a copy of the waiver request and accompanying documents to the state where the individual is registered, or is seeking registration.

The FINRA staff will review the information to determine if the CRD U4 Expungement relief was granted based on one or more of FINRA Rule 2080 requirements, and whether it complied with FINRA Rule 12805 and FINRA Rule 13805. FINRA Rule 2080 contains a positive statement that the expungement met at least one requirement provided it was in compliance with the rule. In general, the waiver will be granted by FINRA. Please see Notice to Members 04-16. If the waiver request is granted or denied, FINRA will respond in writing. The party whose waiver request was denied may still proceed to litigation to confirm the award, provided that FINRA is named as a party and served notice. If the state opposes expungement, that decision is in the hands of the state authorities.

By participating in the court confirmation proceeding, both FINRA and the state can ensure that courts are aware of FINRA Rule 2080 and other relevant regulatory and investor protection interests, at no additional cost. U4 expungement of customer dispute information does not appear to be subject to any mechanism for informing courts about the investor protection, public policy, and regulatory implications it entails. 

FINRA Rule 2080 gives FINRA and the States the chance to participate in the court confirmation process. This allows the Rule to make FINRA and the States aware of the concerns regarding appropriate U4 expungements, even though courts are not obliged to abide by its standards. FINRA generally takes part in any court vindication proceedings and opposes the confirmation of an expungement directive when it does not comply with FINRA Rule 12805 or FINRA Rule 13805, or when arbitration awards fail to satisfy the required affirmative findings. Moreover, to ensure that the court is aware of the investment protection and regulation implications of a U4 expungement, States may intervene if they are concerned about whether issues of investor protection and regulation will be fair considered.

Arbitration awards issued between registered representatives and firms in which the arbitration panel states that expungement relief is being granted due to the defamatory nature of information may continue to be expunged by FINRA without a court order. Accordingly, FINRA will expunge this information from the sections of the Form 5 relating to reasons for terminations or internal reviews without requiring court confirmation of the order. When an arbitration panel orders U4 expungement of customer dispute information from another section of the Form U5 or from the Form U4, this order is subject to the requirements of FINRA Rule 12805, FINRA Rule 18305, and FINRA Rule 2080 for additional expungement relief.

What Kind of Disclosures can be Expunged? 

In accordance with this policy, FINRA removes information from Form 5 concerning terminations and internal reviews without requiring court approval.

Arbitrators should only recommend FINRA U4 Expungement if certain conditions are met, as it is considered to be an “extraordinary remedy.” Accordingly, FINRA can expunge customer complaints and disputes, as well as Form U5’s Reason for Termination and the associated Disclosure Reporting Pages (i.e. Employment Section After Allegations) if they meet the conditions specified by the rules.

Is it Possible to Expunge Customer Disputes and Complaints?

The requirements for expunging customer dispute information from the customer dispute database are set forth in FINRA Rule 2080. Under the Rule, FINRA CRDs may expel customer disputes and complaints based on three narrow grounds:

  1. The allegation, claim, or information is clearly incorrect;
  2.  The registered representative has not been involved in any unlawful act related to an investment, such as theft, forgery, fraud, or misappropriation of funds; or
  3. There is no truth to the assertion, allegation, or information.

FINRA Rule 2081 states that the performance of FINRA arbitration shall not be conditioned upon or compensated for a customer’s agreement to consent to, or not oppose, the  BrokerCheck Expungement request.

Expunction of the Form U5 Reason for Termination and Associated Disclosure Reporting Pages (i.e. Employment Separation After Allegations), Possible?

In order to report the termination of a broker’s employment, brokerage firms must file Form U5 with securities regulators within 30 days of taking action. Form U5 asks the brokerage firm to identify the reason for terminating the broker and whether the broker left voluntarily, resigned after being permitted to do so, or was fired. It is also a requirement that a brokerage firm discloses:

  1. If any governmental agencies or SROs are or were investigating the broker, or if any disciplinary action has been taken against him;
  2. If the brokerage firm is or was internally investigating the broker for violating securities laws or rules, or if the firm fired the broker for doing so;
  3. If the broker has been convicted or charged with certain crimes while working for the firm; and;
  4. If anyone brought arbitration or customer complaints against the broker while he was employed at the firm.

When the brokerage firm’s answer to any of these Disclosure Questions is “yes”, then the brokerage must detail the events or proceedings on the Disclosure Reporting Page (“DRP”) included with the broker’s Form U5. Information from each broker’s Form U5 is kept in the broker’s CRD file, which is made available to other broker-dealers for them to use when deciding whether to hire that broker. Brokers who are being retaliated against by their brokerage firms may include inaccurate information on Form U5 that damages their good name and seriously undermines their ability to find new employment. Moreover, there is an increasing trend among brokerage firms to use Form U5s as an anti-competitive tool. Increasingly, firms disparage brokers on Uniform Termination Notices to prevent customers from following them to a new provider.

The Reasons to Retain a Form U5 Negotiation Attorney Following Termination

A broker should retain a Form U5 Negotiation Attorney right after being fired or terminated by his or her firm to negotiate the information that the former employer is going to include on the broker’s Form U5. Here is a list of the information that is negotiable:

  1. The cause of termination;
  2. If the broker voluntarily left, if he was allowed to resign, or if he was fired; and
  3. Customer complaints, arbitration proceedings, and legal litigation, such as regulatory actions, internal reviews, criminal offenses, and termination disclosures.

If he or she is discharged, the broker can request through a lawyer to notify the financial services firm that the actions that resulted in the broker’s discharge or negotiated departure are not securities-related, customer-related, investment-related, or sales  practice-related. Negotiations regarding the language of a broker’s Form U5 are permissible. As a result, FINRA only requires that a brokerage firm respond to Form U5 questions with enough detail so that a rational person can understand the circumstances that lead to an affirmative response. See FINRA Regulatory Notice 10-39.

If negotiations fail, there is a process by which a broker can have a negative statement made by his or her former brokerage firm removed from Form U5. In particular, a broker may bring a FINRA arbitration against his former employer, seeking expungement of the broker’s Form U5 filed upon termination by the ex-employer. In addition to any Form U5 or Uniform Application for Securities Industry Registration filed or amended after broker termination, if such information is defamatory in nature, the broker will be barred from obtaining securities industry registration.

The CRD system can be ordered to delete defamatory information if an arbitration panel finds it to be reprehensible. See FINRA Notice to Members 99-54. Therefore, FINRA Rule 12805, FINRA Rule 13805, FINRA Rule 2080 and FINRA Rule 2081 do not apply to intra-industry disputes, unless the information to be expelled concerns customer disputes. One scenario is for a broker to ask for the expungement of a reason for termination (e.g. failing to meet production standards) listed on their CRD records by their former employer. FINRA Rule 2080 and the procedural requirements under FINRA Rules 12805 and 13805 could not be applied to this request since it does not involve customer dispute information. Thus, arbitrators could recommend expungement of this information from the CRD system without following prevailing standards.

In the case of non-customer dispute information that is recommended for U4 expungement and that is deemed defamatory in nature, FINRA will expunge the information  without a court order. Arbitrators should be provided evidence that is defamatory in nature to allow parties to request the record of a broker be expunged when such information paints the broker in a negative light. Arbitrators who decide that the information in the CRD system is defamatory must clearly indicate this in their award in their recommendation for expungement. However, arbitrators are not required to state explicitly in the award that all elements required to satisfy a defamation claim under applicable law have been met. The CRD information will be expunged only if the arbitration award which grants expungement relief is confirmed by a court of competent jurisdiction if the arbitral award does not state it is awarding expungement relief on the basis of the defamatory nature of the information.

Can Some Disclosures Not Be Expunged?

Disclosure events that brokers seek to eliminate from their records are typically customer disputes, employment terminations, or internal reviews. The rules, requirements, and procedure for expunging such events vary depending on what the broker is trying to do for U4 expungement. Brokers will occasionally attempt to have events that are not eligible for exclusion from the CRD system through arbitration removed from disclosure categories. Below are further details on these disclosure categories.

Finances

Compromising with creditors and filing for bankruptcy within the previous 10 years, denying, paying on, or revoking the bond of a bonding company, as well as unsatisfied judgements and liens, are financial disclosures.

Judiciary Action – Civil

Generally, civil judicial actions are proceedings where a court has enjoined a broker from engaging in any investment-related activity, found that a broker violated any applicable statute or regulation, or investing-related civil actions brought by state or foreign financial regulators against a broker were settled or dismissed.

The Investigation

Disclosures related to investigations or proceedings under way by governmental or regulatory agencies having jurisdiction over investment-related businesses are included in this category.

Aspects of Regulations

Regulations are generally brought by either a state or federal regulatory authority, a foreign regulator, or an organization that conducts self regulation. An example would be regulatory actions where a broker has been disciplined or a certain enumerated finding has been made. As part of this category, brokers who have been revoked or suspended from acting as lawyers, accountants, or federal contractors are also disclosed.

Crimes

Criminal disclosures include charges and convictions for felony offenses as well as misdemeanor offenses such as fraud, wrongful taking of property, and bribery.

These disclosure events are not eligible for expungement from the CRD system through  arbitration. However, there are certain circumstances under which these disclosure events will no longer be publicly disclosed on FINRA BrokerCheck, even though they cannot be deleted from the CRD system. A broker’s compliance with a judgment or lien will remove it from the FINRA BrokerCheck system, even if it remains in the CRD  system. Accordingly, arbitration panels have the right to deny expungement requests for any disclosure events they receive. Additionally, even if the arbitration panel recommends that one or more of these non-eligible disclosures be expunged, FINRA will not do so.

Time Limit for Filing for U4 Expungement Under the Eligibility Rules

According to FINRA Rule 13206(a), “[FINRA] arbitration shall not be available to claims which have elapsed six years after the event giving rise to the claim.” Brokers have six years from their ex-employer’s filing of a Form U5 to bring an arbitration proceeding against their ex-employer through FINRA to have this information expunged from that document.

With cases like these that could destroy your career, MAH Advising has taken steps to make their U4 as clean as possible. In the event a criminal history disclosure appears on your U4, it would be wise to find out if it can be expunged. Having your case expunged, sealed, or restricted from public records is key to effectively completing the process. This also means that the records are not accessible by the public. Recommendations on how you can go about this are available here.

In some states, even in cases that are resolved without conviction, these types of actions are not allowed. It may not be possible to clear the U4 once the criminal action has taken place for some FAs. In certain states, particularly in those where there was no formal conviction, there are some opportunities for relief. It is important to assess your situation and to be aware of what options you may have.

In the event of a sealing order or U4 expungement, MAH Advising invites you to request a consultation in order to ensure your Form U4 is clean. With MAH Advising, you can quickly protect your business from regulatory risk and be compliant and protected against enforcement actions. For more information on MAH Advising, please visit www.mahadvising.com or call toll free 917 426 8704.

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