Securities Litigation

FINRA operates the Central Registration Depository ("CRD") - the central, publicly-accessible licensure and registration information source on the US securities industry. Industry members seek to remove - "expunge" - unfounded or merely negative information from their CRD records, while regulators seek to keep a full and accurate record available to the public. For both public claimants and industry defendants, however, CRD expungement became a bargaining chip in securities litigation: Claimants could add individual respondents to increase settlement leverage and then bargain away an expungement, while individual respondents threatened to hold settlements hostage without one. Over time, FINRA has restricted the expungement of CRD records. In 2004, it implemented Rule 2080 requiring Court approval and affirmative findings that: (1) the claim, allegation or information is factually impossible or clearly-erroneous; (2) the registrant was not involved in the alleged sales-practice event; or (3) the allegation or information is false. See NTM 04-16. FINRA followed that with an interpretation that negotiating settlements including unwarranted expungement was a unfair practice. See NTM 04-43. FINRA later added Rule 12805 requiring an arbitration hearing and written findings to support an expungement recommendation. See NTM 08-79. Still concerned, FINRA recently proposed new Rule 2081 to flatly prohibit "conditioning or seeking to condition a settlement … or to otherwise compensate customers for a CRD expungement." See SR-2014-020 (SEC, filed Apr. 14, 2014). The new Rule seeks to un-couple expungement from the underlying litigation or arbitration settlement process altogether. FINRA's proposal prohibits it even where the customer offers or requests it. By attempting to take expungement entirely out of play in the litigation/arbitration context, the Proposed Rule may avoid seemingly inevitable conflicts in joint-defense situations. One must wonder, though, whether the compensation prohibition will lead to invasion of the attorney-client privilege in cases where regulatory hindsight questions if a too-high settlement value suggests an implicit embedded expungement agreement. Somewhat curiously, FINRA did not first submit the proposal to its membership for comment, but submitted it directly to the SEC. The SEC comment period remains open until May 14, 2014. Thomas K. Potter, III (tpotter@burr.com). Tom is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Resident in the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience representing financial institutions in litigation, regulatory and compliance matters.