Flowers was a registered representative of two NASD member firms from 1995
until 2000, Pacific Cortez Securities Incorporated (also known as La Jolla Capital), and
Equitrade Securities Corporation. As such, his regulatory history as a participant in the
securities industry is available to the public on BrokerCheck. There is no dispute
Flowers's BrokerCheck history states that: in August 2000, the Ohio Division of
Securities rejected his application for a securities salesperson license because it found
that he was "not of 'good business repute' "; that in 2000, he was fined $10,000 by the
4
NASD for engaging with La Jolla Capital in penny stock sales, which did not comply
with the Exchange Act and SEC Penny Stock Rules; and that in 2001, the NASD barred
Flowers from participating in the securities industry because he failed to timely cooperate
with an NASD investigation as required by his firm's membership in the NASD.
By way of the complaint he filed in the trial court against FINRA, Flowers sought
an order requiring that FINRA expunge these matters from its database. Flowers alleged
that the information about him as disclosed on BrokerCheck was false, inaccurate and
misleading. In particular, he alleged that he had never in fact applied for an Ohio sales
license, that in 2000, he had accepted the $10,000 fine only because he was leaving the
securities business and did not wish to contest the matter, and that he initially had
declined to cooperate with NASD's investigation on the advice of counsel and had later
agreed to cooperate. Flowers further alleged that although he no longer wishes to act as a
securities broker, his BrokerCheck record prevents him from opening a personal
securities account and, because it is publicly available, the record inhibits his ability to
obtain employment. Given these circumstances, Flowers's complaint alleges that as a
matter of equity the three items should be expunged from FINRA's records.
Initially, FINRA removed Flowers's complaint to the United States District Court.
However, the district court remanded the case to the trial court, where FINRA filed a
demurrer. In support of its demurrer, FINRA asked the trial court to take judicial notice
of records with respect to Flowers's Ohio application for a sales license and its own
5
records of the regulatory actions it took against Flowers.1 FINRA argued Flowers's
complaint was barred by the requirement that he exhaust available administrative and
judicial remedies and that in any event his claims were preempted by federal securities
laws and regulations. The trial court agreed and sustained FINRA's demurrer without
leave to amend and entered a judgment in favor of FINRA. Flowers filed a timely notice
of appeal.
I
The principles governing our review of orders sustaining a demurrer without leave
to amend are well-established. " ' "We treat the demurrer as admitting all material facts
properly pleaded, but not contentions, deductions or conclusions of fact or law.
[Citation.] We also consider matters which may be judicially noticed." [Citation.]
Further, we give the complaint a reasonable interpretation, reading it as a whole and its
parts in their context. [Citation.] When a demurrer is sustained, we determine whether the
complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is
sustained without leave to amend, we decide whether there is a reasonable possibility that
the defect can be cured by amendment: if it can be, the trial court has abused its
discretion and we reverse; if not, there has been no abuse of discretion and we affirm.
[Citations.] The burden of proving such reasonable possibility is squarely on the
plaintiff.' " (Champion v. County of San Diego (1996) 47 Cal.App.4th 972, 976, quoting
Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
1 Those documents conflict with Flowers's allegations with respect to the accuracy of FINRA's BrokerCheck disclosures.
6
II
We agree with the trial court that Flowers's complaint is barred by the doctrine of
exhaustion of remedies. As we explain, our concern here is not so much with the fact
that it appears from the record that Flowers could have challenged Ohio's rejection of his
sales license, as well as NASD's earlier disciplinary actions administratively and obtained
judicial review of any adverse administrative determination2; rather we are more
concerned here with Flowers's ability to seek relief from publication of those matters first
from FINRA itself, then the SEC and finally a United States Circuit Court of Appeals.
With respect to disciplinary actions against participants in the securities industry, we
believe the doctrine of exhaustion of remedies requires that such a determination be made
in the first instance in the forums to which Congress has assigned the task of resolving
those issues. Moreover, by requiring that the subject of a BrokerCheck report which
includes disciplinary action seek expungement by way of exhausting the remedial scheme
available under the Exchange Act, we not only assure that the expertise and interests of
the institutions to which Congress has delegated the task of policing the securities
industry is brought to bear, we also diminish the risk of intruding into areas where state
law has been preempted by federal securities statutes and regulations.
"[W]here an administrative remedy is provided by statute, relief must be sought
from the administrative body and this remedy exhausted before the courts will act."
2 The record includes documents which demonstrate that Flowers received notice of his right to challenge both the rejection of his application for an Ohio sales license and the discipline imposed by NASD.
7
(Abelleira v. Dist. Ct. of App. (1941) 17 Cal.2d 280, 292.) Exhaustion of available
administrative remedies "is a jurisdictional prerequisite, not a matter of judicial
discretion." (Yamaha Motor Corp. v. Super. Ct. (1986) 185 Cal.App.3d 1232, 1240,
1164.) Conflict preemption applies even where, as here, a case is heard in a state
10
tribunal. (See, e.g., AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 352,
[preventing state court from applying rule which is obstacle to purposes and objectives of
Federal Arbitration Act].) In light of the SEC's determination the public has an interest in
having access to the disciplinary records of individuals providing financial and
investment advice, there is an obvious risk of conflict between the SEC's conclusion a
particular individual's records should remain public and a state court's decision that the
individual's interests outweigh the public benefit of disclosure. Such a result would
plainly put FINRA in a situation where it was subject to the conflicting duties and in turn
require application of conflict preemption.
Contrary to Flowers's argument, the holding in Lickiss has no bearing on the
exhaustion of remedies determination we make here. In Lickiss, the court held the
provisions of FINRA's distinct rule 2080 only govern the circumstances under which
FINRA will waive its right to participate in third party judicial or arbitral proceedings
involving customer disputes and in which expungement has been sought by a FINRA
member; contrary to FINRA's contention in Lickiss, the waiver of notice and service
standards set forth in rule 2080 do not govern the substantive principles of equity, which
a court must apply in determining whether such expungement is appropriate. (Lickiss,
supra, 208 Cal.App.4th at pp. 1135–1136.)
11
We note that in adopting the predecessor to rule 2080 discussed in Lickiss, the
NASD was responding to concerns that members, by way of settlements with customers
in third party litigation would be able to "buy clean records" by obtaining an
expungement order from a court or arbitrator hearing a customer complaint. (68
Fed.Reg. 74667-01.) Rule 2080 and its predecessor sought to prevent such evasion of its
recording keeping and publication responsibilities by requiring notice to the NASD and
now FINRA and providing them an opportunity to object to any expungement sought in
such third-party proceedings. In the context of third party customer disputes which are
the subject of rule 2080, the SEC has expressly found state and federal courts are fully
capable of determining whether expungement is appropriate. (68 Fed.Reg. 74667-01;
Lickiss, supra, 208 Cal.App.4th at p. 1135.) As FINRA emphasizes, Flowers is seeking
expungement of disciplinary actions FINRA itself has taken against him and quasi-
disciplinary action taken by the State of Ohio; by its terms rule 2080 does not speak to
expungement of such disciplinary actions. Thus, the SEC's expressed willingness to
permit the state and federal courts where customer complaints are pending determine
whether expungement is appropriate in those cases in no way suggests the SEC believes
its own disciplinary actions should be treated similarly by courts or any other forum
which did not impose the discipline in the first instance.
In sum, we affirm the trial court's judgment because although the trial court has
equitable power to order expungement of public records, in this case Flowers has an
adequate and more carefully tailored remedy under the process set forth in the Exchange
Act.
12
DISPOSITION
The judgment is affirmed. FINRA to recover its costs of appeal.
BENKE, J.
WE CONCUR:
McCONNELL, P. J.
NARES, J.
13
Filed 11/2/17 CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
TROY FLOWERS, D071392
Plaintiff and Appellant, (Super. Ct. No. 37-2015-00029957- v. CU-MC-CTL)
FINANCIAL INDUSTRY REGULATORY ORDER CERTIFYING OPINION AUTHORITY, INC., FOR PUBLICATION
Defendant and Respondent.
THE COURT:
The opinion in this case filed October 20, 2017, was not certified for publication.
It appearing the opinion meets the standards specified in California Rules of Court, rule
8.1105(c), the respondent's request pursuant to California Rules of Court, rule 8.1120(a)
for publication is GRANTED.
IT IS HEREBY CERTIFIED that the opinion meets the standards for publication
specified in California Rules of Court, rule 8.1105(c); and
ORDERED that the words "Not to Be Published in the Official Reports" appearing
on page one of said opinion be deleted and the opinion herein to be published in the
Official Reports.
McCONNELL, P. J.
Copies to: All parties
2
AI Brief
AI-generated · verify before citing
Holding. A plaintiff seeking to expunge disciplinary records maintained by FINRA must first exhaust the administrative and judicial remedies provided under the federal Exchange Act before seeking relief in state court.
Issues
Whether a plaintiff must exhaust administrative remedies under the Exchange Act before seeking judicial expungement of FINRA disciplinary records.
Whether a state court action for expungement of FINRA records is barred by conflict preemption.
Disposition. Affirmed
Quotations verified verbatim against the opinion
“Because federal securities laws and regulations provide Flowers with a process by which he may challenge FINRA's publication of his disciplinary history, and Flowers has not pursued that process, he may not now, by way of a civil action, seek that relief from the trial court.”
“With respect to disciplinary actions against participants in the securities industry, we believe the doctrine of exhaustion of remedies requires that such a determination be made in the first instance in the forums to which Congress has assigned the task of resolving those issues.”