Navigating CRD Expungement: Understanding the Evolving FINRA Rules for Financial Advisors

For registered representatives in the securities industry, maintaining a clean Central Registration Depository (CRD) record, and by extension, a clear BrokerCheck profile, is paramount. A tarnished record can significantly impact an advisor’s career, reputation, and ability to attract and retain clients. FINRA’s expungement process offers a pathway to remove certain customer dispute information from these records. However, the landscape for expungement has significantly changed with new rules that took effect on October 16, 2023. Understanding these updated regulations is crucial for any advisor considering this process.

At Galvin Legal, PLLC, we specialize in representing registered representatives in FINRA dispute resolution, including the complex process of CRD expungement. This includes navigating customer dispute disclosure expungements, as well as addressing employment separation after allegations and amendments to Form U5.

FINRA, the Financial Industry Regulatory Authority, maintains the CRD system, a database containing the licensing and disciplinary history of securities firms and registered representatives. Information from CRD, including customer complaints, arbitrations, and certain regulatory actions, is made publicly available through BrokerCheck.

Expungement is the process of removing specific customer dispute information from an advisor’s CRD record. If expungement is granted through a FINRA arbitration award, and subsequently confirmed by a court, FINRA will erase the specified information from the CRD system, meaning it will no longer be visible on BrokerCheck.

Under FINRA rules, expungement is an extraordinary remedy. It can only be recommended if an arbitration panel finds, and a court confirms, that one of the following narrow grounds has been met (typically under FINRA Rule 2080, with procedural elements for customer dispute expungement detailed in Rules 12805 and 13805):

1. Factual Impossibility or Clear Error: The claim, allegation, or information is factually impossible or clearly erroneous.
2. No Involvement: The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds.¹
3. False Allegation: The claim, allegation, or information is false.

The recent amendments to FINRA’s Codes of Arbitration Procedure (primarily impacting Rules 12805 and 13805) have introduced significant changes to how expungement requests are handled. These changes generally make the process more challenging and place greater emphasis on customer notification and participation, as well as scrutiny by a special roster of arbitrators in certain cases.

1. Strict Time Limits for Filing:

• “Straight-In” Requests: These are requests filed by the advisor separate from any customer-initiated arbitration (governed by Rule 13805). Such requests are now subject to strict timing:
  • They must be filed within two years after the close of the customer-initiated arbitration or civil litigation associated with the customer dispute information.²
  • If the customer complaint did not evolve into an arbitration or litigation, the request must be filed within three years of the date the customer complaint was initially reported in CRD.
• Requests During Customer Arbitration (Rule 12805): If an advisor is named as a party in a customer-initiated arbitration (and it’s not a simplified arbitration), they must request expungement in that same arbitration. Failure to do so may bar them from seeking expungement of that dispute later. Specific pleading deadlines apply.

2. Panel Composition for “Straight-In” Requests:

• All “straight-in” expungement requests must now be decided by a three-person panel of public arbitrators.
• These arbitrators are randomly selected from a special FINRA roster of experienced public arbitrators who have received enhanced expungement training.
• Critically, the parties (the advisor and the firm) cannot rank or strike these arbitrators, nor can they stipulate to an arbitrator’s removal or agree to use pre-selected arbitrators.
• The panel must issue a unanimous decision to grant expungement.

3. Enhanced Customer and State Regulator Notification and Participation:

• FINRA will notify relevant state securities regulators of all expungement requests.
• For “straight-in” requests, state regulators will have a mechanism to attend and participate in the expungement hearing as a non-party.
• Customers involved in the original dispute will be provided with notice of the expungement hearing and informed of their right to attend and participate in all aspects of the hearing, including prehearing conferences. They can participate in person, by video, or by telephone, and may submit their position in writing.

4. Mandatory Appearance of the Associated Person:

• The associated person seeking expungement must appear (in person or by video conference, as determined by the panel) at the expungement hearing. Telephone appearances are generally no longer permitted for the requesting party.

5. Detailed Arbitration Awards:

• If a panel grants expungement, the arbitration award must provide a more detailed explanation of the reasons for the decision. The arbitrators must identify the specific grounds for expungement and the documentary, testimonial, or other evidence relied upon.

6. Restrictions on Withdrawing and Re-filing Requests:

• An advisor who withdraws an expungement request may be barred from re-filing it (withdrawal with prejudice).
• An expungement request cannot be filed if a panel previously considered the merits of, or a court previously denied, an expungement request for the same customer dispute.

7. “On Behalf Of” Requests:

• The rules also detail procedures for firms to request expungement on behalf of an unnamed person in a customer arbitration.

The new rules create a more challenging and costly environment for achieving expungement. The shortened timeframes mean advisors must act more promptly. The specialized arbitrator roster and the prohibition on striking arbitrators in straight-in requests reduce the parties’ control over panel selection. The requirement for a unanimous decision from this three-member panel also raises the bar for success in these cases.

Furthermore, increased customer and state regulator participation can lead to more contested expungement hearings.

The Eligibility Rule’s Time Limit To File for Expungement