«NOTE WHAT YOU DO NOT KNOW CAN HURT YOU: HOW THE FINRA EXPUNGEMENT PROCESS IS ENDANGERING FUTURE INVESTORS THROUGH A LACK OF INFORMATION I. ...»
63. Arbitrator Selection, FINRA, http://www.finra.org/ArbitrationAndMediation/ Arbtitration/Process/ArbitratorSelection/index.htm (last visited July 20, 2014) (providing three arbitrators for claims exceeding $100,000 and one arbitrator for claims between $50,000 and $100,000). During the selection process FINRA will send a list of qualified arbitrators to each party, allowing each party to strike up to four arbitrators from the list, leaving the ultimate selection of the panel up to FINRA; for claims of $50,000 or less, FINRA will appoint one arbitrator for a simplified arbitration procedure. Id.
64. Arbitration Process, supra note 62; see also Discovery, FINRA, http://www.finra.org/ ArbitrationAndMediation/Arbitration/Process/Discovery/index.htm (last visited July 20, 2014) (subjecting the discovery process to The Codes of Arbitration Procedure); Hearings, FINRA, http://www.finra.org/ArbitrationAndMediation/Arbitration/Process/Hearings/index.htm (last visited July 20, 2014) (involving motions, cross-examination, and testimony, similar to a trial).
65. Arbitration Process, supra note 62; Decision & Awards, FINRA, http://www.finra.org/ ArbitrationAndMediation/Arbitration/Process/DecisionAwards/index.htm (last visited July 20, 2014).
1236 HOFSTRA LAW REVIEW [Vol. 42:1227 C. Establishing an Informational Database for the Securities Industry As the securities industry was rapidly growing, the NASD needed to ensure that it could maintain, and subsequently dispense to the public, the registration and dispute information of the thousands of broker dealers that were forming in the industry.66 Thus, the NASD created the CRD in 1981.67 The CRD houses registered firm and individual broker information, which includes customer dispute information disclosures.68 Customer dispute information consists of “customer complaints, arbitration claims,... court filings made by customers, and the arbitration awards or court judgments that may result from those claims or filings.”69 FINRA gathers the information found on the CRD through the completion of required registration forms.70 The most commonly referred to forms in the industry are the U-4 and U-5, which are used for the registration and termination of associated persons.71 Customer dispute information reported on FINRA’s registration forms is made available through the investor tool BrokerCheck.72 What started as the NASD’s Public Disclosure Program in 1988 became known as BrokerCheck in 2003.73 BrokerCheck is a free tool for investors, intended to assist their investing decisions by providing professional background information on current and former FINRA-registered brokerage firms and brokers.74 FINRA intends for BrokerCheck to be the
66. See CRD & IARD, N. AM. SEC. ADMINSTRATORS ASS’N, http://www.nasaa.org/industryresources/investment-advisers/crd-iard (last visited July 20, 2014) (sharing the responsibility of maintaining the system with the North American Securities Administrators Association (“NASAA”)).
68. See Elisofon, supra note 20, at 1 (including criminal and disciplinary history and civil litigation history too); Central Registration Depository, supra note 3 (operating as the central licensing and registration system); CRD & IARD, supra note 66.
69. Notice to Members 04-16, supra note 15, at 212 (“[C]ontain[ing] allegations that a member or one or more of its associated persons has violated securities laws, rules, or regulations.”).
70. See Current Uniform Registration Forms for Electronic Filing in Web CRD, FINRA, http://www.finra.org/industry/compliance/registration/crd/filingguidance/p005235 (last visited July 20, 2014) (listing all registration forms required by FINRA). For the purposes of this Note, only the U-4, U-5, U-6, BD, and BDW are relevant.
71. See id. Forms BD and BDW are used for SEC registration and Form U-6 reports disciplinary action. Id.
72. FINRA BrokerCheck, supra note 11.
73. See Regulatory Notice 12-10, FINRA Requests Comment on Ways to Facilitate and Increase Investor Use of BrokerCheck Information, FINRA (Feb. 2012), at 2, http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p125621.pdf (establishing the program in 1988).
74. FINRA BrokerCheck, supra note 11 (containing background information for approximately 1.3 million FINRA-registered brokers and 17,400 FINRA-registered brokerage 2014] FINRA EXPUNGEMENT PROCESS 1237 first resource that investors turn to when contemplating investment relationships.75 BrokerCheck is a valuable source of information because it provides investors with “information about their registered representative before [the customers] open [their] account[s].”76 Moreover, because most investor claims will be heard through private arbitration, the CRD and BrokerCheck are the public’s only access to information about legal proceedings brought by customers.77 The information available on BrokerCheck was enhanced by a FINRA rule change in May 2009.78 Prior to May 18, 2009, there were only two categories of customer complaints that required reporting on Forms U-4 and U-5: (1) customer initiated sales practice violations; and (2) customer-initiated investment-related arbitration in which the broker was a named respondent.79 Missing from the required reporting, however, were actions where a registered representative was identified through arbitration as being involved in the practice violations, but was not a named respondent.80 This anomaly was corrected when the SEC approved FINRA’s proposed rule change,81 which incorporated two additional questions into the Form U-4 and Form U-5; this could incidentally be responsible for the higher expungement requests since 2009, due to more broker reporting and subsequently more desired expungements.82 firms).
76. Transcript of Testimony of Adam Levitt, Chairman, Concerning the Large Firm Project, (Sept. 14, 1994), available at http://www.sec.gov/news/studies/rogue2.txt. Finding a trustworthy and reliable representative is essential. Id.
77. See Lipner, supra note 12, at 95 (providing that Internet access to arbitration information fills a significant gap in the public record).
78. See Order Approving a Proposed Rule Change as Modified by Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to Filing as Amended by Amendment No. 2 Relating to Changes to Forms U4, U5, and FINRA Rule 8312, Securities Exchange Act Release No. 34-59916, 95 SEC Docket 2283 (Dec. 7, 2009) (approving SR-FINRA-2009-008).
79. See Ilgenfritz, supra note 3, at 341-42.
80. See Notice of Filing of Proposed Rule Change Relating to Proposed Rule Changes to Forms U4 and U5, 74 Fed. Reg. 13491, 13491-92 (Mar. 27, 2009) (stating purposes for rule change); Ilgenfritz, supra note 3, at 342 (regarding the absence of a requirement to report to FINRA).
81. Order Approving a Proposed Rule Change as Modified by Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to Filing as Amended by Amendment No. 2 Relating to Changes to Forms U4, U5, and FINRA Rule 8312, 74 Fed. Reg. 23750, 23751 (May 20, 2009).
82. See Ilgenfritz, supra note 3, at 342, 359 (requiring registered representatives to report being the subject of investment related, customer-initiated arbitration claims within the past twentyfour months, even when not named as a defendant, brought about expected results); Antilla, supra note 4 (increasing requests was likely a result of the rule change in 2009).
1238 HOFSTRA LAW REVIEW [Vol. 42:1227 D. The Initial Expungement Process and Subsequent Moratorium Rule Changes The process through which customer dispute information was expunged from a broker’s CRD record went unchanged from the inception of the CRD in 1981 until 1999.83 During that time, the NASD took the position that expungement ordered by an arbitrator should be afforded the same treatment as court-ordered expungement.84 A disconnect between the NASD and the North American Securities Administrators Association (“NASAA”) led to the 1999 moratorium imposed by the NASD.85 Because of the disconnect between the NASD and NASAA, 86 the NASD imposed a moratorium solely on arbitrator awarded expungements in February 1999, meaning that a customer dispute record would not be expunged unless it was confirmed by a court of appropriate jurisdiction.87 The moratorium was met with serious opposition from members of the securities industry.88 Following the moratorium, a multiyear effort was undertaken by the NASD to formulate and propose a new rule regarding the expungement process.89 After circulating the text of
83. Elisofon, supra note 20, at 2 (expunging information from the CRD system was permitted on the basis of an arbitration award directing such relief).
84. See Notice to Members 99-09, supra note 32, at 47.
85. See id. (disagreeing with the position that an arbitrator awarded expungement should be afforded the same treatment as an award granted by a court); see also Our Role, N. AM. SEC.
ADMINSTRATORS ASS’N, http://www.nasaa.org/about-us/our-role (last visited July 20, 2014) (working within state governments, the NASAA state securities regulators protect the investing public).
86. See supra note 85.
87. See Notice to Members 99-09, supra note 32, at 47 (“NASD Regulation will not expunge information from the CRD system based on a directive contained in an arbitration award... unless the award has been confirmed by a court of competent jurisdiction.”).
88. Mason, supra note 24, at 77; Letter from Stuart J. Kaswell to Joan C. Conley (July 30, 1999), available at http://www.sifma.org/issues/item.aspx?id=1365 (recommending a return to premoratorium practices); NASD Notice to Members 99-54, NASD Regulation Seeks Comment on Issues Relating to Arbitrator-Ordered Expungements of Information from the Central Registration Depository (July 1999), at 352 [hereinafter Notice to Members 99-54], available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p004219.pdf (acknowledging the opposing view of Florida’s Attorney General and NASAA).
89. See Proposed Rule 2130 Governing Expungement of Customer Dispute Information from the Central Registration Depository (CRD System), File No. SR-NASD-2002-168 (Nov. 18, 2002), available at http://www.sec.gov/rules/sro/34-47435.htm (providing initial rule proposal to SEC for review); Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the National Association of Securities Dealers, Inc. Relating to Proposed Rule 2130 Concerning the Expungement of Customer Dispute Information from the Central Registration Depository, 68 Fed.
Reg. 11435, 11435 (Mar. 10, 2003) (filing amendment to 2130; proposing new rule by the NASD);
Order Granting Approval of Proposed Rule Change and Amendment No. 1, Thereto, and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 2, Thereto, Relating to Proposed NASD Rule 2130 Concerning the Expungement of Customer Dispute Information From 2014] FINRA EXPUNGEMENT PROCESS 1239 the new rule for comments and concerns from members of the industry,90 the NASD proposed Rule 2130 to the SEC; it was subsequently confirmed and put into effect by the SEC in 2004.91 Rule 2130 attempted to establish an approach to expungement that would challenge expungement awards “that might diminish or impair the integrity of the system and to ensure the maintenance of essential information for regulators and investors.”92 In reaching the basis for the new rule, the NASD concluded it must balance the interests of three separate groups: (1) regulators; (2) the brokerage community; and (3) the investing community.93 The NASD’s new rule held over the requirement from the 1999 moratorium that a court of competent jurisdiction must order or confirm all expungement directives.94 Further, Rule 2130 required that in order to expunge customer dispute information, the arbitrator must find that: “(A) 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) the claim, allegation, or information is false.”95 Thus, when a respondent sought expungement relief in arbitration, the respondent had to ask for expungement in his prayer for relief, and the arbitrator thereafter decided whether to grant the expungement request on the basis of at least one of the three articulated standards.96 If an expungement award was granted by the arbitrator, the party seeking to enforce the award not only had to seek a court order to confirm the award, the party also had to name the NASD as an additional party to the request and serve the NASD with all appropriate documents, unless the NASD waived the requirement.97 The notice of Rule 2130’s approval98 was short lived though, as the NASD the Central Registration Depository System, 68 Fed. Reg. 74667, 74667 (Dec. 24, 2003).
90. See Notice to Members 01-65, supra note 21, at 563 (seeking specific comment on whether it should limit expungement to cases where order is based on one of three listed findings).
91. See 68 Fed. Reg. at 74667 (ordering approval of proposed rule); Notice to Members 04supra note 15, at 211 (informing members that the SEC had confirmed Rule 2130 and it was now in effect).
92. See Notice to Members 04-16, supra note 15, at 212.
93. See id. at 212-13 (protecting the ability of both investors and regulators to obtain meaningful data).
94. Id. at 213.
95. NASD MANUAL R. 2130(b)(1)(A)–(C) (2004).
96. Notice to Members 04-16, supra note 15, at 213.
97. See id. at 214. “[The] NASD will waive the obligation to be named as a party if [the] NASD determines that the expungement relief is based on an affirmative finding that the expungement meets one or more of the standards in the rule.” Id. However, “[if the] NASD staff determines that the expungement was not based on one or more of the standards in Rule 2130, it will advise the parties that NASD will not waive the requirement....” Id.
98. See generally id.