The view from the impending “fiscal cliff” takes in much of Fairfield County’s “Gold Coast”—Greenwich, Stamford, Darien, and Westport. We at Maya Murphy, P.C. represent many residents employed in the financial industry, both within and without the State of Connecticut. Some of their financial employers may be considering reductions in personnel depending upon the results of the upcoming Presidential election, Congressional action (or inaction) concerning “taxmaggedon” and “sequestration,” and their own Q4 and year-end results. If financial firms retrench, there will be dirty U-5’s on “the street.” We are often asked about the possibility of “scrubbing” a U-5 or expunging it altogether. The current economic climate and new proposed rules from FINRA warrant a warning that usually accompanies our advice.
The current FINRA Customer and Industry Codes do not afford “unnamed persons,” i.e., the subject of allegations but not named parties to the underlying arbitration, to seek expunging of allegations reported to the Central Registration Depository (“CRD”) on Form U-5 (and available to the public through such resources as “Broker Check”). To rectify that situation (recognizing that a dirty U-5 impacts one’s livelihood), FINRA has proposed In re expungement rules seeking to balance the respective interests of the registered professional and the investing public. Public comment on the proposed rules was closed on May 21, 2012. The purpose of this post is not to critique the new rules that, while not problem-free, at least address the issue of incorrect allegations remaining on CRD records in the absence of an evidentiary hearing to determine the accuracy of those allegations. The purpose of this post is to point out that the new rules, in whatever final form they may take, can be a cure worse than the disease.
There is no denying the injustice of having a registered representative’s U-5 amended to reflect a customer complaint without the representative being named as a respondent in subsequent arbitration. The net effect is to have the representative tried in absentia without the ability to present evidence or cross-examine witnesses by way of defense. The proposed In re expungement rules, however, may not be all they are cracked up to be. A recent FINRA arbitration decision points up the problem.
In the Matter of the FINRA Arbitration between Eduard Van Raay, Claimant v. Raymond James Financial Services, Inc., et al., Respondents (FINRA 11-04544, July 16, 2012), the underlying claim was settled and an arbitrator was appointed solely for the purpose of considering a request for U-5 expunging. The original offending, terminating language was: “Violation of firm policy. Failure to disclose an outside business activity (personal representative relationship with a client).” After the arbitration, the recommendation was for the language to be amended to read: “Permitted to resign. Advisor chose to continue unapproved outside business activity.” This was hardly an improvement to that which he sought to have expunged.
The original language was cryptic, susceptible to differing interpretations, and perhaps easily explained. The post-arbitration language, however, was clear, concise, damaging, and most importantly, the product of FINRA arbitration. Instead of vague allegations of a personal relationship with a client, the representative’s CRD will now be saddled with a finding that he chose to continue an unapproved outside business activity. The takeaway is that the outcome would not survive a rigorous pre-arbitration risk/reward analysis. Arbitrations, as with lawsuits, are a lot like wars—they are easier to start than to stop. They often bring with them unintended consequences.
The new In re expungement rules present registered representatives with an additional option that was previously unavailable. Assuming their future adoption, that does not mean that every offending CRD entry should be the subject of a FINRA arbitration.
Whether, and when, to pursue expunging is a decision that should be discussed thoroughly with a seasoned litigator familiar with the FINRA Rules and decisions. We, here, in Maya Murphy’s Westport, Connecticut office stand ready to assist in that regard. Please call at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.
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