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California Northern District Court Adopts 'Regulatory Value' Standard in Granting Motion for Expungement of CRD Records

In Bridge v. E*Trade Securities LLC, 2012 WL 3249508 (N.D. Cal. Aug. 7, 2012), the District Court granted E*Trade’s motion for an order directing expungement of plaintiffs’ complaint from the Central Registration Depository (“CRD”) record of its employee pursuant to FINRA Rule 2080. In doing so, the court noted that “case law regarding the standard for CRD expungement is scarce” and adopted the standard used by the Western District of Texas in Reinking v. Financial Industry Regulatory Authority, Case No. A-11-CA-813-§ (W.D. Tex. Dec. 1, 2011), which standard is “predicated upon whether or not allegations’ continued inclusion on the CRD [have] ‘regulatory value.’”

Plaintiffs’ claims stemmed from E*Trade’s sale of auction rate securities (“ARS”). After E*Trade successfully moved to strike Plaintiffs’ punitive damages claims and dismiss the vast majority of the remaining claims, the parties reached a settlement. As part of the settlement, Plaintiffs agreed not to oppose E*Trade’s motion for partial summary judgment on the issue of whether allegations regarding the employee, who had not participated in the ARS sales, were erroneous or false. The court granted E*Trade’s motion, finding “undisputed evidence” that the employee did not recommend nor sell ARS to Plaintiffs and holding that the allegations against the employee were “clearly erroneous.”

As a recent California appellate ruling held, the court confirmed that FINRA Rule 2080 is merely procedural in nature and does not provide a substantive legal standard for deciding whether expungement is appropriate or required. See also Lickiss v. FINRA, 2012 WL 3605785 (Cal. Ct. App. Aug. 23, 2012). Still, the court gave deference to the SEC’s approval of Rule 2080’s predecessor, NASD Rule 2130, and adopted the “regulatory purpose” standard expressed in the Reinking decision. The court found that there was no regulatory value in maintaining disclosure records based upon false accusations, expressing its concern that  inaccurate reportings “against nonculpable individuals would dilute the value of the CRD as a useful source of information.”

The Bridge opinion reinforces scarce authority upon which brokers and their counsel may rely when contemplating whether to seek expungement of erroneous or historical CRD disclosure items. Due to the heightened scrutiny of CRD records - by regulators, employers and customers - anyone considering pursuing expungement is encouraged to seek professional advice while these expungement options remain available.

©2023 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume II, Number 268
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About this Author

Adil Khan, Greenberg Traurig Law Firm, Los Angeles, Labor and Employment Litigation Attorney
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Adil M. Khan is a commercial litigator with a primary focus on commercial disputes, class actions, and labor & employment matters. He has diverse experience in all phases of civil litigation, from the pleadings stage through trial.

Adil has represented companies in a variety of contexts, including asserting claims against former executives and managers for theft of trade secret, unfair competition, and fraud.

He also has wide-ranging experience with consumer class action litigation, including the defense of a...

310-586-3882
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