The Law Planet Blog

I recently wrote about FINRA's policy on expungements. Of course, FINRA has no control over what any individual state securities commissioner might do. In what appears to be a case of first impression, a state securities regulator has stepped in to try and stop a bargained-for expungement.

Melanie Lubin, the securities commissioner for Maryland, intervened in what is usually a milk-run expungement matter. In an attempt to keep the complaint on broker's record, Ms. Lubin objected to the expungement. At the trial court level she was denied the opportunity to intervene. The DC Appeals court ruled that she could intervene and sent the case back to the trial court.

Get ready boys and girls. Not only will this change the whole expungement atmosphere, it will change the wording of releases. If an expungement is a material part of the settlement, then what will happen if the state regulator intervenes and shouts "STOP!" More litigation, that's what. And for those of us that do litigation, that's good news. For those of you who pay the bills for litigation, this is not a good day.

This is going to become an even more sensitive issue as "product failures", such as Auction Rate Securities, are disclosed on a broker's CRD. Many brokers are already stating that they were just a conduit for the information (or misinformation) given to them by their firms. Does a state securities commissioner really want to stick his or her nose in that one? What a mess.

That's the view from The Law Planet - Jupiter, Florida.

I have recently received several inquiries regarding expungements of U-4 and U-5 information. I have said this more than once, but "in the old days" an expungement was a piece of cake. The parties agreed to it, whether it was a customer or industry dispute, and it was done.

Of course FINRA got wise to this and started slowly tightening the noose around expungements. I have done research on this issue before but wanted to share this one link I found which you, my 3 loyal readers, may find helpful. This page contains the be-all and end-all from FINRA regarding expungements.

There are two classes of expungements - customer and non-customer. Expungements of customer complaints require specific findings. If a U-4 or U-5 disclosure is not customer-related, then a different set of rules applies and the only finding that an arbitration panel needs to make is that the disclosure was defamatory.

There is also a procedural difference once the successful litigant has obtained an expungement Order. If it is customer-related, a court needs to sign off on the change to the U-4/U-5 and FINRA needs to be made a party to the action. If the expunged information is not customer-related, a simple finding of defamation is sufficient for FINRA to remove the information from the CRD system.

Now you're informed. That's the view from The Law Planet - Jupiter, Florida.