Following a recent U.S. Court of Appeals ruling, financial advisors will continue to find it difficult to purge their Central Registration Depository (CRD) records of consumer complaint information following a settlement agreement. This makes it all the more important for advisors to prevent complaints in the first place.

In its Karsner v. Lothian ruling, the appeals court reversed a lower court decision that prohibited the State of Maryland from intervening in a stockbroker’s attempt to purge complaints from his CRD record. The state was attempting to preserve its statutory right to review license applications and determine advisor fitness to do business in the state.
The case resulted from a FINRA arbitration proceeding against a Maryland broker. An investor claimed that the broker led her to invest in unsuitable investments and performed negligently in managing her account, resulting in a $104,638 loss. Before the arbitration hearing, the investor entered into a settlement agreement, receiving $47,000 in return for abandoning her claims and agreeing to the expungement of all references to the dispute from the broker’s CRD record.

The appeals court ruled that states do have the right to block expungements. FINRA’s existing view of expungements — that they should be approved only under limited circumstances and with state regulatory involvement — remains intact for the time being.

What “red flags” are affecting your business? Send your comments to the National Ethics Bureau at redflags@ethicscheck.com.