More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
Where does an advisor go to get his reputation back? That is the heart of a complaint of a former broker suing FINRA to expunge damaging allegations from his CRD that have kept the former wirehouse employee from working in the brokerage industry for two years.
The broker maintains that a vindictive wirehouse employer, abusing the ability to put complaints on his record, included allegations from clients of a former partner, whom this broker never advised nor even met. A FINRA arbitration panel last year agreed with the broker, who was disillusioned to later find out that FINRA refused to confirm the panel’s finding.
In what is perhaps a sign of the extreme sensitivity of expungement cases, the broker, who contacted AdvisorOne and provided extensive documentation of his case including his and FINRA’s court filings, apparently got cold feet and abruptly ceased cooperation on this story. His lawyer also did not return a call.
But the case is illustrative of misunderstandings that brokers often have about FINRA and the Central Registration Depository (CRD) system. According to Steven Insel, a Los Angeles securities attorney with 30 years of experience in these types of cases, an arbitration award alone gives no right to expungement.
“You always end up having to go court to have it confirmed” except in rare cases where FINRA has waived the requirement, such as instances when allegations are factually impossible.
That is because FINRA is generally opposed to expungement on public policy grounds. Consequently, brokers may find arbitration awards they won at great effort and expense to be Pyrrhic victories.
For brokers seeking to dispute information on their CRD without the expense and difficulty of going to court, FINRA spells out its strict guidelines on its website, saying that “to be eligible for investigation, the dispute must pertain only to factual information, and not to information that is subjective in nature or a matter of interpretation.”
But brokers and securities attorneys say FINRA’s process is too rigid. Says Patrick Burns, a securities lawyer in Beverly Hills, Calif., “Brokers have complained for years about the lack of accountability of FINRA arbitration panels, and the great deal of difficulty in getting expungements processed. The expungement process needs to be fixed. “
Attorney Steven Insel agrees, saying in certain cases involving mass product failures, FINRA needs to broaden opportunities for expungement. “In the case of auction rate securities, the regulators have made findings that the firms have misled their own advisors as much as they’ve misled the public.”
Yet, despite “affirmative findings that the firms lied to the brokers,” Insel continued, “if someone called in a complaint on you, it’s on your record. If there was no complaint, it’s not on your record at all even if the conduct was the same. There’s a lack of consistency to the data in BrokerCheck as a result.”
Insel proposes that FINRA form an internal group that could more liberally determine if it should expunge records in cases like auction rate securities where the authorities found that the firms misled its brokers, or other obvious situations. “They should have a streamlined internal procedure, a panel that can use a little more discretion to get ridiculous things off the record,” he says.
“This would enhance the opportunity for fairness to the advisors. Not everyone can afford the huge fees to the court,” Insel adds.
The broker who contacted AdvisorOne says he has borne significant costs in his dispute with FINRA, and doubtless has a costly legal battle ahead. A FINRA spokeswoman said, “The case is in litigation and FINRA is unable to comment on it.”
In its motion to dismiss the complaint, FINRA offered many arguments based on the facts of the case, but also affirmed its general policy stance against expungement: “Confirmation of the award would violate FINRA's rules, adversely affect the investing public and CRD's integrity, and deprive regulatory authorities and securities firms of vital information.”
In a notice to members issued in 1999, FINRA’s predecessor organization (NASD Regulation) explained its reason for requiring court confirmation of arbitrator-ordered expungements, saying CRD information “is in many cases a state record, and state laws do not currently recognize the authority of an arbitrator to expunge a state record or do not otherwise currently permit such expungements because of state recordkeeping requirements.”