Neutral Corner - February 2006
Arbitrator Training: Expungement
By Barbara Brady, Director of Neutral Management
In August 2004, NASD Dispute Resolution introduced a new mandatory online arbitrator training course on expungement. The course explains the role of the Central Registration Depository (CRD® or CRD system), gives a general overview of the expungement process and NASD Rule 2130, and discusses the specific findings arbitrators must make in order for NASD to waive its right to oppose the expungement request in court.
As it has been more than a year since many of our arbitrators participated in the training, the purpose of this article is to remind arbitrators of the standards outlined in Rule 2130 and the arbitrators' role in the expungement process.
What is Expungement?
Brokerage firms and their registered persons (sometimes referred to as "associated persons") are required to initially complete their respective applications for registration and to keep them current thereafter.1 In addition to being required to report, among other things, certain criminal charges and convictions, regulatory actions, and bankruptcies, registered persons are required to report certain customer complaints and customer-initiated arbitration claims. When a registered person is named as a respondent in a customer-initiated arbitration proceeding, the arbitration claim and any allegations of wrongdoing contained therein are required to be reported on the registered person's Form U4.
Once reported, that information is recorded on the registered person's CRD record and made available to the public upon request through NASD's Brokercheck program.
A registered person may seek to have any reference to the arbitration removed from his or her CRD record. The process of removing this information from the CRD system is called "expungement."
How Does the Expungement Process Work under Rule 2130?
Under NASD Rule 2130, a party may seek an expungement order either directly from a court or may ask the arbitrators, who are most familiar with the facts of the case, to order expungement as part of the award. If the arbitrators grant the request, the party must ask a court of competent jurisdiction to confirm the arbitration award. Before NASD will expunge information from a CRD record in these circumstances, the court must confirm the arbitrators' award.
If a party seeks expungement relief in arbitration, the arbitrators will determine whether to grant expungement on the basis of one or more of the standards identified in Rule 2130. Prior to seeking a court order for expungement, the parties must advise NASD of the grounds for expungement. NASD will then determine whether to require the parties to name NASD as a party to the court proceedings so that NASD can oppose the expungement in court, or waive the requirement to be named as a party.
What Are the Three Grounds upon which Arbitrators May Grant Expungement?
Under Rule 2130, NASD may waive the obligation to name NASD as a party if the arbitrators make an affirmative finding that expungement is granted under one or more of the following standards:
- The claim, allegation, or information is factually impossible or clearly erroneous.
- This standard could be the basis for expungement if, for example, the individual named in the arbitration was not employed by the member firm during the relevant time period.
- The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds.
- This is an objective standard based on CRD reporting requirements. This standard would require an affirmative arbitral finding that the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. Dismissal of the claim alone would not be a sufficient basis for ordering expungement. For purposes of Rule 2130, the terms "sales practice violation," "investment-related," and "involved" have the same meaning as those terms are defined on the Form U4 (found on NASD's Web site).
- The claim, allegation, or information is false. This standard is self-explanatory. As described below, the arbitrators must have a reasonable basis for making this finding.
NASD will not consider waiving the requirement to be named as a party to the court proceedings unless the arbitrators have made an affirmative finding that one or more of the above standards have been met, and the arbitrators' written award clearly and expressly includes such a finding. The requisite finding (or findings) cannot merely be implied in the award—they must be clearly and expressly stated in the "Other Issues Decided" and/or "Award" sections.
Should Arbitrators Routinely Grant Requests for Expungement?
No. Arbitrators must remember that an order to expunge information from a CRD record is an extraordinary remedy. The mere fact that a complaint against a registered person was dismissed would not provide a sufficient basis for ordering expungement. Arbitrators must make a specific finding that the expungement meets one or more of the prescribed standards in Rule 2130 before directing expungement of customer dispute information from the CRD system. Further, it is highly unlikely that one of the standards for granting expungement in Rule 2130 could be met if there is an adverse arbitration award rendered in favor of a customer and against the registered person. It is doubtful that an arbitrator could make one of the specific findings above unless the allegations were dismissed against the registered person who is requesting expungement.
As a "best practice," arbitrators should identify the circumstances that warrant the affirmative findings and include a brief explanation summarizing the circumstances underlying the finding either in the "Other Issues Decided…" section or in the section titled "Award."
Can Arbitrators Order Expungement in a Stipulated Award?
Yes. On occasion, parties may reach a settlement and ask the arbitrators to incorporate their settlement into a "stipulated award." Stipulated awards that request expungement relief are subject to the same requirements as contested claims (claims where the parties have not settled their differences). To satisfy these requirements, arbitrators should understand the terms of the settlement, and be comfortable that at least one of the standards of Rule 2130 has been met. The award must clearly and expressly contain one or more of the affirmative findings listed in Rule 2130.
In addition, arbitrators should consider whether expungement was a "quid pro quo" for settling the case, particularly where a monetary settlement is involved. A "quid pro quo" settlement may be contrary to NASD conduct rules. (See Notice to Members 04-43, "Members' Use of Affidavits in Connection with Stipulated Awards and Settlements to Obtain Expungement of Customer Dispute Information under Rule 2130" (June 2004)).
If expungement relief is to be included in a regular or stipulated award, the arbitrators must hear or review enough evidence to satisfy themselves that one of the three standards of Rule 2130 has been met.
The above direction is consistent with Canon V(d) of the AAA/ABA Code of Ethics for Commercial Arbitrators, which reads as follows:
"In the event that all parties agree upon a settlement of issues in dispute and request the arbitrator to embody that agreement in an award, the arbitrator may do so, but is not required to do so unless satisfied with the propriety of the terms of settlement. Whenever an arbitrator embodies a settlement by the parties in an award, the arbitrator should state in the award that it is based on an agreement of the parties."
What if Arbitrators Do Not Believe They Have Enough Information to Order Expungement in a Stipulated Award?
Arbitrators who do not believe that they have enough information to make one of the three affirmative findings have several options:
- They may ask the parties to submit additional information, including the terms of the settlement agreement;
- They may conduct a telephonic or in-person hearing to obtain testimony; or
- They may decline to sign the stipulated award.
An arbitrator who is uncomfortable with signing any stipulated award or who believes that he or she cannot make an affirmative finding based on the evidence presented is not required to do so and should not sign the stipulated award.
Can an Arbitrator Apply NASD Rule 2130 to Cases Filed before April 12, 2004?
No. NASD Rule 2130 applies only to cases filed on or after April 12, 2004. If you have any questions relating to the process for expungements on cases filed prior to April 12, 2004, please feel free to contact the case administrator assigned to the case.
If you have any concerns about your ability to handle an expungement request, or if you have additional questions after reading this article, we strongly recommend that you re-take NASD's expungement training for arbitrators. You have two options:
- Completing the online course, free of charge, on our site.
- Listening to a recording of an Arbitrator Phone-in Workshop on Expungement, also located on our site.
Suggested Additional Reading
1 The application form for broker-dealers is the Uniform Application for Broker-Dealer Registration (Form BD); the application for registered persons is the Uniform Application for Securities Industry Registration or Transfer (Form U4).
Message from the Editor
In addition to comments, feedback, and questions regarding the material presented in this publication, or other arbitration and mediation issues, The Neutral Corner invites readers to submit articles on important issues
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Jisook Lee, Editor
The Neutral Corner
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Dispute Resolution News
Arbitration case filings from January 1 through December 31, 2005 reflect a 26 percent decrease compared to case filings during the same twelve-month period in 2004 (from 8,201 in 2004 to 6,074 in 2005).
During the same time, the overall turnaround time to process arbitration cases (hearing and simplified decisions) decreased by seven percent compared to 2004 (from 15.4 months in 2004 to 14.3 months in 2005).
On February 14, 2006, Linda Fienberg, President of NASD Dispute Resolution (NASD DR), hosted a phone-in arbitrator workshop titled, "NASD Dispute Resolution: New Rules Important to Arbitrators and Refresher on Expungement Rule 2130." Topics discussed during the workshop included NASD DR's 2005 highlights and accomplishments, recently approved rules, and a look ahead to the updated Code of Arbitration Procedure. In addition, George Friedman, Executive Vice President and Director of Arbitration, provided a brief review of NASD Rule 2130 on expungement. The program concluded with a question-and-answer segment.
If you missed the workshop, you may listen to a replay of the program through MCI until March 14 by dialing (800) 685-0932. After that time, you may download a recording of the workshop from NASD's Web site at www.nasd.com.
NASD DR Personnel Update
We are pleased to announce that Shari Sturm, Regional Director, Mid-Atlantic Region, has been promoted to Associate Vice President. Shari joined NASD Dispute Resolution as a Staff Attorney in the Northeast Regional Office in December 1987. In 1991, she was promoted to Senior Attorney. After working in NASD DR's New York office for five years, Shari opened a satellite office for the Northeast region in Washington, DC. From 1987 to 2003, she administered arbitration cases for the Northeast and Mid-Atlantic regions. In 2003, the Washington satellite office became a regional office, and Shari was promoted to Regional Director of the Mid-Atlantic Region.
SEC Rule Approval
Reorganization and Revision of NASD Mediation Rules
On October 31, 2005, the SEC approved a rule change to reorganize NASD DR's mediation rules. The proposed rule change is part of a comprehensive plan to reorganize NASD's Code of Arbitration Procedure (Code) into three separate procedural codes: the NASD Code of Arbitration Procedure for Customer Disputes (Customer Code), the NASD Code of Arbitration Procedure for Industry Disputes (Industry Code), and the NASD Code of Mediation Procedure (Mediation Code). The rule change, SR-NASD-2004-013, reorganizes and simplifies the language of the Mediation Code. For additional information on the approval order implementing the Mediation Code, please visit NASD's Web site.
This rule change became effective on January 30, 2006 and will apply to any claims filed on or after January 30, 2006. A Notice to Members was issued on December 30, 2005.
Northeast Regional Update
On February 6, 2006, Katherine M. Bayer, Deputy Regional Director for the Northeast Region, appeared before arbitrators and party representatives at the Seventh Annual "NASD Listens…and Speaks" meeting at the New York County Lawyers Association in New York City. Ms. Bayer discussed new initiatives including the proposed eligibility rule, the discovery arbitrator pilot, online claim filing, the change in arbitration fees for certain statutory employment cases, online arbitration evaluation forms, and arbitrator classification.
During the next three months, the Northeast Regional Office will conduct in-person Basic Panel Member Training programs in these cities on the following dates:
- Hartford, Connecticut March 23, 2006
- New York, New York April 19, 2006
- Cleveland, Ohio May 10, 2006
- Boston, Massachusetts May 23, 2006
If you are interested in attending a Basic Panel Member Training program in any of these cities, please contact Cheree White at (212) 858-4063, or by email.
Mid-Atlantic Regional Update
During the next three months, the Mid-Atlantic Regional Office will conduct in-person Basic Panel Member Training programs in these cities on the following dates:
- Pittsburgh, Pennsylvania March 9, 2006
- Richmond, Virginia April 7, 2006
- Philadelphia, Pennsylvania April 20, 2006
- Charlotte, North Carolina May 5, 2006
If you are interested in attending a Basic Panel Member Training program in any of these cities, please contact Karen Carter at (202) 728-8327, or by email.
Midwest Regional Update
During the next three months, the Midwest Regional Office will conduct in-person Basic Panel Member Training programs in these cities on the following dates:
- Houston, Texas March 8, 2006
- Louisville, Kentucky March 22, 2006
- Chicago, Illinois April 19, 2006
- Dallas, Texas May 17, 2006
If you are interested in attending a Basic Panel Member Training program in any of these cities, please contact Deborah Woods at (312) 899-4431, or by email.
Southeast Regional Update
During the next three months, the Southeast Regional Office will conduct in-person Basic Panel Member Training programs in these cities on the following dates:
- Tampa, Florida March 15, 2006
- Atlanta, Georgia April 13, 2006
- New Orleans, Louisiana April 27, 2006
- Birmingham, Alabama May 11, 2006
- Boca Raton, Florida May 18, 2006
If you are interested in attending the Basic Panel Member Training program in any of these cities, please contact Lanette Cajigas at (561) 447-4911, or by email.
West Regional Update
The West Regional Office announces the appointment of Katrina Key as its new Mediation Administrator. Prior to this promotion, Katrina worked as a senior case assistant in arbitration. This experience will greatly benefit mediators and parties.
During the next three months, the West Regional Office will conduct in-person Basic Panel Member Training programs in these cities on the following dates:
- Phoenix, Arizona March 7, 2006
- Los Angeles, California April 11, 2006
- Denver, Colorado May 9, 2006
If you are interested in attending a Basic Panel Member Training program in any of these cities, please contact Tiffany Hansmann at (213) 613-2684, or by email.
Question and Answer: Joint and Several Liability
Question: Alice Smith and Jim O'Henry are brokers at EZE Securities. The two brokers and EZE Securities are named as respondents in an arbitration claim where the panel found "churning" in the claimant's account, and ordered payment of $50,000. How might an arbitrator allocate damages?
Answer: If a panel determines the respondents are all equally liable for damages to the claimant, it may indicate in the award that all three respondents are "jointly and severally liable." This means that those three respondents are all liable for the full amount, and the claimant, in his or her discretion, may enforce the judgment against any or all of the parties.
In the above example, if the panel finds Smith, O'Henry, and EZE equally responsible, it might find them to be "jointly and severally liable." Naturally, "joint and several" liability does not allow a claimant to collect the entire award from each of the parties, so that there is a multiple recovery. Rather, if any one (or more) of the respondents pays the full amount, the others are released.
Alternatively, the panel might allocate the damages to each individual respondent based on what it finds to be an appropriate allocation of the damages. Again, the panel's decision would obviously be influenced by the evidence considered and the arguments that are made by claimants and respondents.
If an arbitrator needs further clarification of joint and several liability, please contact the case administrator assigned to your matter.
The Neutral Corner endeavors to provide impartial information, which is both informative and relevant, to aid arbitrators as they serve on arbitration cases. We used the Question and Answer (Q & A) feature in this newsletter to provide general guidance on joint and several liability—an issue that comes up frequently. NASD Dispute Resolution (NASD DR) did not intend to suggest in the article that arbitrators have the authority—without regard to state law—to determine liability and to allocate damages, or that case administrators would provide advice to arbitrators on legal matters. NASD DR staff has been trained that under no circumstances should they provide legal advice.
We have been asked to supplement the February Q&A by addressing the role of state law in determining joint and several liability. While arbitrators generally have the authority to determine liability and allocate damages, there may be instances when more specific or contrary state law applies. In such cases, it is the parties' responsibility to bring to the arbitrators' attention any issues regarding relevant state law. The February Q & A did not intend to suggest that arbitrators should disregard applicable state law.
The February Q&A also advised arbitrators to contact the assigned case administrator with questions on joint and several liability. As stated above, we did not mean to imply that case administrators would provide advice to arbitrators on legal matters. Rather, when faced with a question regarding legal matters, arbitrators should direct all inquiries for clarification on applicable law to the parties through the NASD DR case administrator. In addition, arbitrators may question the parties during the hearing on applicable law, or request briefs from the parties on the subject at any time prior to the award. NASD DR case administrators serve as intermediaries for the parties and the arbitrators for communications outside of hearings, and are available to provide procedural guidance related to the Code of Arbitration Procedure and general NASD practices. NASD DR case administrators do not provide legal advice to parties or to arbitrators.
|Linda D. Fienberg
NASD Dispute Resolution
George H. Friedman
Executive Vice President &
Director of Arbitration
NASD Dispute Resolution
Kenneth L. Andrichik
Senior Vice President &
Director of Mediation & Business
Jean I. Feeney
Vice President & Chief Counsel
Vice President &
Director of Operations
Richard W. Berry
Vice President &
Director of Case Administration
Barbara L. Brady
Associate Vice President &
Director of Neutral Management
Elizabeth R. Clancy
Vice President & Regional Director
|Judith Hale Norris
Vice President & Regional Director
Associate Vice President &
Regional Director, Southeast Region
Associate Vice President &
Regional Director, Mid-Atlantic Region
Associate Vice President
MATRICS DR Business
Associate Director of Neutral
Management and Editor of The Neutral Corner
Nicole Haynes - Northeast Region
Marya Santor - Mid-Atlantic Region
Elaine Kohn - West Region
Lisa Lasher - Southeast Region
Mignon McLemore - Office of Chief Counsel
Patrick Walsh - Midwest Region
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