Over the years, FINRA has made several efforts to increase public disclosure of information relating to financial advisors and to make this information more accessible to investors through BrokerCheck.
It largely has been accepted that financial advisors can remove customer complaint information from their Central Registration Depository (CRD) and BrokerCheck records only under three specific circumstances outlined in FINRA Rule 2080. Those circumstances are: (1) where the claim, allegation or information is factually impossible or clearly erroneous; (2) where the broker was not involved in the alleged conduct; or (3) where the claim, allegation, or information is false. FINRA Rule 2080.
However, inaccurate or otherwise unjustified customer allegations do not always fall within these descriptions. Hence, there has been little to no recourse for those brokers who want to rid their records of claims that may be improper. That was until a recent decision by a California Court of Appeal came down.
According to that decision, brokers seeking to keep their records accurate and clean are not necessarily limited to the slim expungement standards enlisted in FINRA Rule 2080. In Lickiss v. FINRA, the California court determined that a broker was entitled to seek expungement relief from the court based on what is known as the court’s inherent powers of equity or put otherwise basic principles of fairness. Specifically, in that case, a financial advisor named Edwin Lickiss filed an action in a California state court to expunge his CRD of 17 past customer complaints and a regulatory action, all of which were filed between 1991 and 1996. Lickiss asserted that the court should order this expungement because the complaints were very old, his record had been clean ever since, and the claims largely resulted from his old firm’s bankruptcy, which he had no control over. Further, he also contended that he suffers professional and financial hardship based on the disclosures of these complaints because his current and potential clients increasingly use the Internet to obtain his BrokerCheck history.
The court weighed the benefit of expunging outdated and potentially misleading complaint information from Lickiss’ CRD against any disadvantages that non-disclosure of complaints on BrokerCheck posed to the public, or others. While the court did not say that expungement would ultimately be warranted in Lickiss’ case, its decision arguably opens the door for brokers to seek the court’s assistance in removing unwanted allegations and complaints that may fall outside the scope of FINRA Rule 2080. The Lickiss case does not guarantee that all brokers who seek the court’s equitable assistance for expungement will be successful but rather it seems to guarantee that when a financial advisor seeks expungement relief based on the court’s powers of equity, the court must look beyond the confines of FINRA Rule 2080 and evaluate competing concerns with the goal of reaching a fair result.
It is apparent that as a result of investors’ increasing use of Internet resources, the information reported on BrokerCheck (whether warranted or not) will only become magnified in the public arena under FINRA’s new and proposed regulations. Thus, brokers may increasingly face the loss of existing clients, prospective clients, or potential employment opportunities as a result of the heightened advertising of BrokerCheck and the customer complaint disclosures therein.
Eccleston Law Offices counsels, represents and defends financial advisers nationwide in regulatory, compliance, disciplinary and employment matters in arbitration and litigation, and before regulatory bodies such as the SEC, FINRA and state securities regulators. We frequently defend forgivable loan collection actions, prosecute Form U-5 defamation actions, counsel advisers as to how to transition successfully from firm to firm and negotiate the best possible agreements with their new firm, and provide succession planning, buy-sell agreements and other exit strategies and strategic consulting, practice transitions, mergers, acquisitions and divestitures.