In an incredibly competitive field, financial advisors are always looking for creative and effective ways in which to prospect and market their services to potential clients. On the other side of the spectrum, individuals looking to hire an advisor have a wealth of information at their fingertips with respect to an advisor’s reputation and background. Outside of Google reviews, one of the most important databases regarding an advisor’s track record is their BrokerCheck® page.
The Financial Industry Regulatory Authority (“FINRA”) maintains the BrokerCheck® database. Here, the general public can simply type in the name of their financial advisor and freely gather an array of information related to their advisor’s past dealings. This information includes places of employment, licenses held, exams passed, and their “disclosures.”
One type of disclosure that can be extremely damaging to an advisor’s ability to prospect and gain new clients, relates to past “Customer Disputes” (a/k/a “Customer Complaints”). While these Customer Disputes may be denied, or even settled for very little monetary amounts, the pure fact an advisor’s BrokerCheck® reveals that the advisor has been the subject of a past complaint, is enough to send many prospective clients running.
However, a Customer Dispute on an advisor’s BrokerCheck® doesn’t have to be a permanent scarlet letter. FINRA actually allows advisors to seek an expungement of past Customer Disputes from their BrokerCheck®, but only in limited circumstances.
If you are a financial advisor contemplating the expungement of a Customer Complaint, here are a few items to consider:
- Do I Have a Legal Basis to Seek an Expungement Under the FINRA Rules?
Under FINRA Rule 2080(b)(1) persons may seek expungement of a Customer Complaint in only three (3) limited circumstances. These are:
- The claim, allegation or information is factually impossible or clearly erroneous;
- The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
- The claim, allegation or information is false.
Under these narrow grounds, it is clear that an advisor does not have a basis to seek an expungement solely because he/she disagrees with the allegations made by the customer. Assuming the advisor was involved in the alleged wrongful conduct, the advisor will have to prove that the allegations are “factually impossible/erroneous” or false.
- Do I Have to Attend an Arbitration Hearing or Can I be Awarded an Expungement by Way of Settlement?
Under FINRA Rule 12805(a) an arbitrator, or arbitration panel, must hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement. Therefore, no matter how strong the evidence may be in favor of awarding an expungement, a hearing will have to be conducted.
- What Evidence Will the Arbitrator(s) Consider During My Hearing?
The evidence presented at the expungement hearing should be directly related to the specific basis, or bases, the advisor is seeking expungement under. For instance, if the person is asserting the claim is factually impossible or clearly erroneous, the person seeking expungement should produce communications or documents refuting the allegations, as stated, in the underlying complaint. For example, if the allegation is that the advisor “engaged in unauthorized trading,” the advisor should produce their communications with the customer, showing they had the customer’s authorization to execute the transaction that occurred.
Additionally, persons seeking expungement should consider whether the customer will want to participate in the hearing, as it is required to give the customer notice of the proceeding. If, for instance, the customer complaint was fiercely litigated or contested, the advisor should be fully prepared to defend their actions over the objection of the customer. Arbitrators may also be sympathetic to customers who testify in determining whether or not to award the expungement of a customer complaint.
- If I Receive and Order for Expungement After an Arbitration, is My BrokerCheck® Immediately Changed?
No. Under FINRA Rule 2080(a), the person must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.
Generally speaking, this is an administrative hurdle that requires the advisor to file a case in the district court, asking the court to confirm the award. The parties may stipulate to a court entering an Order for Expungement without any further proceedings or testimony needed. Assuming that is the case, the court will generally issue an Order within a few weeks of the parties submitting the appropriate paperwork.
Once the Order is granted by the court, the advisor should work with his/her compliance department to properly update his/her Form U4. Thereafter, the advisor’s BrokerCheck® will be updated, and the previous customer dispute will no longer be visible to any visitors to the page.
If you have any questions, please reach out to Christopher Sall at 952-746-2136 or csall@hjlawfirm.com.
