Last month, the California Court of Appeal in San Francisco issued an opinion in Lickiss v. Financial Industry Regulatory Authority explicitly permitting courts across the state to use an equitable balancing test in order to determine whether a broker’s CRD record can be expunged. The broker in the case, Edwin Lickiss, defeated FINRA’s attempts to have his expungement case thrown out of court after 18 months of litigation. Lickiss is seeking to expunge 17 arbitration matters stemming from a REIT investment he recommended to clients from 1987 to 1991 that ultimately went south, and one FINRA rule violation that was resolved in 1997.
FINRA argued successfully in the trial court that the standard set forth in FINRA Rule 2080(b)(1), rather than the court’s inherent equitable powers, governed Lickiss’s expungement petition. That Rule states that a FINRA member or associated person (like Lickiss) that petitions a court for expungement relief, or seeks judicial confirmation of an arbitration award containing expungment relief, must name FINRA as a party unless FINRA waives that obligation as a result of an “affirmative judicial or arbitral findings that: (A) the claim, allegation or information is factually impossible or clearly erroneous; (B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (C) the claim, allegation or information is false.” The relief sought by Lickiss did not fall within this narrow provision; rather, Lickiss argued the court should use its equitable power to remove the disclosures because they “occurred anciently,” his “regulatory record has long since been and remained clean,” and because the “material sought to be expunged was overwhelminghly caused by the failure of a single investment security which Petitioner brokered for nothing more than ordinary commissions and over which Petitioner had no control or influence.”
In rejecting FINRA’s argument that Rule 2080(b)(1) provides the standard for the trial court’s determination of whether Lickiss’s record could be expunged, the appellate court described Rule 2080(b) as “a procedural rule that does not provide any substantive criteria as to when expungment would be appropriate.” Permitting Lickiss’s petition to proceed, the appellate court confirmed an equitable balancing test should be used—i.e., weighing the equities favoring expungement against the detriment to the public should expungment be granted. The appellate court stated that the trial court’s use of the “very narrow, rigid legal rule to assess the legal sufficiency of Lickiss’s petition—a choice that closed off all avenues to the court’s conscience in formulating a decree and disregarded basic principals of equity—was nothing short of an end run around equity.”
While he may still face an uphill battle in convincing the trial court to expunge his record under the balancing standard adopted by the court of appeals, Lickiss and other brokers seeking expungment now have that chance.
For further information about expungment or other securities or compliance concerns, please contact the author at sarah.weber@jackolg.com or (619)298-2880.
