NASD Rule 2130 and the Expungement of Customer Dispute Information from the CRD System
January, 2005
Introduction
There has been an increasing amount of litigation brought by investors against their financial representatives seeking to recover investment losses. These claims are often brought in an arbitration proceeding before the National Association of Securities Dealers (“NASD”) or as a civil lawsuit in state or federal court. The financial representative, regardless of the merits of the claim, is required to disclose information concerning the investor claim on his or her registration form which is then filed with the Central Registration Depository (“CRD system”) maintained by the NASD. The information filed with the CRD system is made available to the investing public and these disclosures are often of great concern to the financial representative, especially when the claim lacks merit. An increasingly common request made by the financial representative during the course of litigation is the request to expunge the record of the customer dispute from the CRD system. The NASD, which has struggled with the issue of how and when expungement of customer dispute information should be permitted, recently passed a rule which sets forth the procedures and standards for expungement – NASD Rule 2130.
Analysis
NASD Rule 2130, which is applicable to customer dispute claims filed after April 12, 2004, will permit expungement under limited circumstances. The circumstances are limited because of the strong public policy that the investing public should have access to information about registered financial representatives. Rule 2130 sets forth three standards by which expungement relief will be granted. Expungement relief will be granted when (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the financial representative was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or (3) the claim, allegation, or information is false.
In an arbitration proceeding, the financial representative must request expungement relief and obtain an affirmative arbitral finding that expungement should be granted based on one or more of the three standards set forth in Rule 2130. If the parties settle the arbitration, then a request for expungement relief should be made to the arbitration panel. In this situation, the arbitration panel may require an evidentiary hearing in order to make an affirmative finding that one or more of the standards have been met. After an affirmative finding is made, the financial representative must then obtain an order from a court of competent jurisdiction confirming the arbitration award. The NASD must be named as an additional party to the court proceeding, but the NASD can waive this requirement if they first determine that the standards of Rule 2130 have been satisfied. The NASD will notify the state regulators where the financial representative is registered or is seeking registration of the waiver request made by the financial representative. The state regulators can then decide for themselves whether they want to participate in the confirmation process.
The same general standards and procedures apply when a financial representative is sued in a court of law. However, the waiver alternative is not available and the NASD must be named as an additional party in the court proceeding. The NASD will then determine whether to oppose the expungement request.
Finally, Rule 2130 also provides the NASD with discretion to provide expungement relief when the expungement is not based on the three specified standards. The rule provides that expungement can be provided only under extraordinary circumstances if the expungement relief and the affirmative findings on which expungement relief is based are meritorious and if the expungement would have no material adverse affect on investor protection, the integrity of the CRD system, or regulatory requirements.
Learning Point:
The NASD was faced with and guided by conflicting interests in drafting Rule 2130. The interests were those of the regulators who require accurate and relevant information, the interests of the brokerage community in protecting their reputation, and the interests of the investing public in having access to meaningful information. Rule 2130 sets forth limited circumstances under which expungement relief will be permitted and as such recognizes expungement as an extraordinary remedy.
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