The Securities and Exchange Commission (“SEC”) approved Financial Industry Regulatory Authority (“FINRA”) Rule 2081. This rule prohibits a broker from conditioning the settlement of a customer dispute on, or otherwise compensating the customer for, the customer’s consent not to oppose the expungement of customer dispute information from the Central Registration Depository (the “CRD”). These agreements will be prohibited, whether they are oral or in writing, and even if the customer offers not to oppose expungement as part of negotiating a settlement agreement.
The CRD system
The CRD is the central licensing and registration system for the U.S. securities industry. Most information on the CRD is provided by broker-dealers, employees, and regulatory authorities in response to questions on securities industry registration forms. These registration forms require the disclosure of administrative and disciplinary information about registered personnel, including customer complaints, arbitration claims, and court filings made by customers, as well as arbitration awards and court judgments that can result from those claims or filings. FINRA, state securities commissions and other regulators use information on the CRD in connection with their licensing and other regulatory activities. Brokers also use this information when making hiring decisions. Although the public does not have access to information on the CRD, a subset of this information is released to the public through FINRA’s BrokerCheck system. The BrokerCheck system is a free website that allows investors to research the professional backgrounds of brokerage firms and registered personnel as well as investment adviser firms and their representatives.
Investor access to information
For many years, FINRA has been concerned about parties conditioning settlement agreements for the purpose of obtaining expungement relief, and thereby, eliminating information from the CRD that could be useful to investors. In approving FINRA’s rule proposal, the SEC determined that the proposed rule was consistent with Section 15A(b)(6) of the Securities Exchange Act of 1934, which requires, among other things, that FINRA’s rules be designed to prevent fraudulent and manipulative acts and to promote just and equitable principles of trade. The SEC stated that this rule should help assure that “accurate and complete customer dispute information remains available to the investing public, regulators, and broker-dealers.”
Review of expungement rules
The SEC also encouraged FINRA to conduct a comprehensive review of its expungement rules and procedures to determine whether additional rulemaking is necessary to assure that expungement is only utilized where the information to be expunged would not have meaningful investor protection or regulatory value. Therefore, brokers should be aware that additional rulemaking regarding the expungement of information from the CRD may be on the horizon.