Self-Regulatory Organizations: Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Amendments to the Codes of Arbitration Procedure To Establish New Procedures for Arbitrators To Follow When Considering Requests for Expungement Relief, 18308-18310 [E8-6870]
Download as PDF
<![CDATA[
18308
Federal Register / Vol. 73, No. 65 / Thursday, April 3, 2008 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57572; File No. SR–FINRA–
2008–010]
Self-Regulatory Organizations:
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change Relating to
Amendments to the Codes of
Arbitration Procedure To Establish
New Procedures for Arbitrators To
Follow When Considering Requests for
Expungement Relief
March 27, 2008.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’)1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 13,
2008, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) (f/k/a
National Association of Securities
Dealers, Inc. (‘‘NASD’’)) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
rwilkins on PROD1PC63 with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing Rule 12805 of the
Code of Arbitration Procedure for
Customer Disputes (‘‘Customer Code’’)
and Rule 13805 of the Code of
Arbitration Procedure for Industry
Disputes (‘‘Industry Code’’) to establish
new procedures that arbitrators must
follow when considering requests for
expungement relief under Rule 2130.
Below is the text of the proposed rule
change. All the text is new.
*
*
*
*
*
12805. Expungement of Customer
Dispute Information Under Rule 2130
In order to grant expungement of
customer dispute information under
Rule 2130, the panel must:
(a) Hold a recorded hearing session
(by telephone or in person) regarding
the appropriateness of expungement.
This paragraph will apply to cases
administered under Rule 12800 even if
a customer did not request a hearing on
the merits.
(b) In cases involving settlements,
review settlement documents and
consider the amount of payments made
to any party and any other terms and
conditions of a settlement.
1 15
2 17
17:19 Apr 02, 2008
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
FINRA is proposing to amend its
Customer Code and Industry Code to
U.S.C. 78s(b)(1).
CFR 240.19b–4.
VerDate Aug<31>2005
(c) Indicate in the arbitration award
which of the Rule 2130 grounds for
expungement serve(s) as the basis for its
expungement order and provide a brief
written explanation of the reason(s) for
its finding that one or more Rule 2130
grounds for expungement applies to the
facts of the case.
(d) Assess all forum fees for hearing
sessions in which the sole topic is the
determination of the appropriateness of
expungement against the parties
requesting expungement relief. 13805.
Expungement of Customer Dispute
Information under Rule 2130
In order to grant expungement of
customer dispute information under
Rule 2130, the panel must:
(a) Hold a recorded hearing session
(by telephone or in person) regarding
the appropriateness of expungement.
This paragraph will apply to cases
administered under Rule 13800 even if
a claimant did not request a hearing on
the merits.
(b) In cases involving settlements,
review settlement documents and
consider the amount of payments made
to any party and any other terms and
conditions of a settlement.
(c) Indicate in the arbitration award
which of the Rule 2130 grounds for
expungement serve(s) as the basis for its
expungement order and provide a brief
written explanation of the reason(s) for
its finding that one or more Rule 2130
grounds for expungement applies to the
facts of the case.
(d) Assess all forum fees for hearing
sessions in which the sole topic is the
determination of the appropriateness of
expungement against the parties
requesting expungement relief.
*
*
*
*
*
Jkt 214001
PO 00000
Frm 00052
Fmt 4703
Sfmt 4703
establish new procedures that
arbitrators must follow when
considering requests for expungement
relief under Rule 2130. The procedures
are designed to: (1) Make sure that
arbitrators have the opportunity to
consider the facts that support or weigh
against a decision to grant
expungement; and (2) ensure that
expungement occurs only when the
arbitrators find and document one of the
narrow grounds specified in Rule 2130.
Proposed Rules 12805 and 13805
would require arbitrators considering an
expungement request to hold a recorded
hearing session by telephone or in
person, provide a brief written
explanation of the reasons for ordering
expungement, and, in cases involving a
settlement, review the settlement
documents to examine the amount paid
to any party and any other terms and
conditions of the settlement that might
raise concerns about the associated
person’s involvement in the alleged
misconduct before awarding
expungement. The proposed rule
change would provide that the panel
must assess forum fees for hearing
sessions held solely for the purpose of
considering expungement against the
parties requesting the relief.
The proposed rule change would not
affect FINRA’s current practice of
permitting expungement, without
judicial intervention, of information
from the Central Registration Depository
(‘‘CRD’’) system as directed by
arbitrators in intra-industry arbitration
awards that involve associated persons
and firms based on the defamatory
nature of the information ordered
expunged.3
Background
The CRD system, an online
registration and licensing system,
contains information regarding brokerdealers and their associated persons. It
contains administrative information
(e.g., personal, educational, and
3 In its original filing with the Commission
proposing Rule 2130 (see SR–NASD–2002–168),
FINRA (then known as NASD) explained in
Footnote 2 that ‘‘NASD may execute, without a
court order, arbitration awards rendered in disputes
between registered representatives and firms that
contain expungement directives in which the
arbitration panel states that expungement relief is
being granted because of the defamatory nature of
the information. These expungements are not
covered by the moratorium and will not be covered
by the proposed rules and policies.’’ In Amendment
No. 1 to that filing (at page five), FINRA reiterated
this point by stating ‘‘NASD may execute, without
a court order, an arbitration award rendered in a
dispute between a member and a current or former
associated person that contains an expungement
directive in which the arbitration panel states that
expungement relief is being granted based on the
defamatory nature of the information.’’ See also
NASD Notice to Members 04–16 (March 2004) n. 4.
E:\FR\FM\03APN1.SGM
03APN1
Federal Register / Vol. 73, No. 65 / Thursday, April 3, 2008 / Notices
rwilkins on PROD1PC63 with NOTICES
employment history) and disclosure
information (e.g., criminal matters,
regulatory and disciplinary actions, civil
judicial actions, and information
relating to customer disputes). Members
of the securities industry, state and
federal regulators, and self-regulatory
organizations use the CRD system.
Although public investors do not have
access to the CRD system, much of the
information in that system is available
to investors through FINRA
BrokerCheck and individual state
disclosure programs.4 FINRA recognizes
that accurate and complete reporting in
the CRD system is an important aspect
of investor protection.
FINRA operates the CRD system
pursuant to policies developed jointly
with the North American Securities
Administrators Association (NASAA).
FINRA works with the SEC, NASAA,
other members of the regulatory
community, and broker-dealer firms to
establish policies and procedures
reasonably designed to ensure that
information submitted to and
maintained in the CRD system is
accurate and complete. These
procedures, among other things, cover
expungement of information from the
CRD system.
In December 2003, the SEC approved
NASD Rule 2130, which contains
procedures for expungement of
customer dispute information from the
CRD System.5 It requires that FINRA
members or associated persons name
FINRA as an additional party in any
court proceeding in which they seek an
order to expunge customer dispute
information or request confirmation of
an award containing an order of
expungement.
Under Rule 2130, FINRA may waive
the requirement to be named as a party
if it determines that the expungement
relief is based on an affirmative judicial
or arbitral finding that: (i) The claim,
allegation, or information is factually
impossible or clearly erroneous; (ii) the
registered person was not involved in
the alleged investment-related sales
practice violation, forgery, theft,
misappropriation, or conversion of
funds; or (iii) the claim, allegation, or
information is false. If expungement
relief is based on a judicial or arbitral
finding other than as enumerated
immediately above, FINRA may also
4 FINRA BrokerCheck is a free online tool to help
investors check the background of current and
former FINRA-registered securities firms and
brokers.
5 Securities Exchange Act Release No. 48933
(December 16, 2003), 68 FR 74667 (December 24,
2003). Rules 2130 applies to all cases filed on or
after April 12, 2004; see NASD Notice to Members
04–16 (March 2004).
VerDate Aug<31>2005
17:19 Apr 02, 2008
Jkt 214001
waive the requirement to be named as
a party if it determines that the
expungement relief and accompanying
findings on which it is based are
meritorious and that expungement
would not have a material adverse effect
on investor protection, the integrity of
the CRD system, or regulatory
requirements.
Proposed new Rules 12805 and 13805
would set forth procedures that
arbitrators must follow before
recommending expungement of
information related to arbitration cases
from an associated person’s CRD record.
If the arbitrators do not fully adhere to
these procedures, FINRA may determine
not to waive the obligation under Rule
2130 to be named as a party to an
expungement proceeding.
Sometimes, arbitrators will order
expungement at the conclusion of an
evidentiary hearing on the merits of the
case. More often, however, arbitrators
will order expungement at the request of
a party to facilitate settlement of the
dispute. For example, customers may
receive monetary compensation as part
of a settlement, the terms of which
require the customer to consent to (or
not oppose) the entry of a stipulated
award containing an order of
expungement. In such cases, FINRA
expected that arbitrators would examine
the amount paid to any party and any
other terms and conditions of the
settlement that might raise concerns
about the associated person’s behavior
before awarding expungement.6
Contrary to this expectation, however,
arbitrators often did not inquire into the
terms of settlement agreements.
In order for arbitrators to perform the
critical fact finding necessary before
granting expungement, the proposed
rule change would require arbitrators to
hold a recorded hearing session by
telephone or in person. The requirement
of a hearing session would ensure that
arbitrators consider the facts that
support or weigh against a decision to
grant expungement. In cases involving
settlements, the proposal would require
arbitrators to review the settlement
documents, consider the amount paid to
any party, and consider any other terms
and conditions of the settlement that
might raise concerns about the
associated person’s involvement in the
alleged misconduct before awarding
expungement.
The proposed rule change would
require arbitrators to indicate which of
the Rule 2130 grounds for expungement
serve as the basis for their expungement
order, and provide a brief written
explanation of the reasons for ordering
6 See
PO 00000
NASD Notice to Members 04–43 (June 2004).
Frm 00053
Fmt 4703
Sfmt 4703
18309
expungement under Rule 2130. This
new requirement would address issues
concerning judicial confirmation of
awards containing orders of
expungement, as demonstrated in a
recent state court case 7 in which the
court expressed concern that the
arbitrators did not describe ‘‘a single
fact or circumstance’’ 8 for their
conclusion that the claims were
factually impossible or clearly
erroneous (one of the grounds for
expungement enumerated in Rule 2130).
As a result, the court ordered the
arbitrators to conduct a hearing to
clarify the facts and circumstances that
led them to order expungement. The
proposed requirement of a written
explanation would provide regulators
with additional insight into why
arbitrators awarded expungement based
on what might appear to be questionable
facts and circumstances (e.g., cases
involving payment of significant
monetary compensation to the
customer).9
The proposed rule change also would
require the arbitrators to assess all
forum fees for hearing sessions in which
the sole topic is the determination of the
appropriateness of expungement against
the parties requesting expungement
relief. In cases that settle, industry
parties often seek expungement. In such
cases, parties generally present
arguments solely on the issue of
expungement. In these circumstances,
FINRA believes the fee for that hearing
session should not be assessed against a
customer.10
In cases administered under Rule
12800 or Rule 13800 (Simplified
Arbitration), a hearing on the merits
normally is held only at the request of
a customer or claimant, respectively.
The proposed rule change would clarify
that if parties request expungement
relief in such cases, a hearing session
would be held to determine the
appropriateness of the request even if a
hearing on the merits was not requested.
Any forum fees for hearing sessions
associated with a request for
expungement would be assessed against
the parties making the request.
As noted above, the proposed rule
change would not affect FINRA’s
current practice of permitting
7 Matter of Sage, Rutty & Co., Inc. v. Salzberg,
Index No. 2007–01942 (N.Y. Sup. Ct. May 30, 2007).
8 Id. at 4.
9 In such cases, the payment may be based on the
behavior of someone other than the associated
person who is seeking expungement.
10 In those situations where the issue of
expungement does not constitute the sole topic
considered by the arbitrators during a hearing
session, the panel will determine the hearing
session fee that each party must pay. See Rules
12902(a) and 13902(a).
E:\FR\FM\03APN1.SGM
03APN1
18310
Federal Register / Vol. 73, No. 65 / Thursday, April 3, 2008 / Notices
expungement, without judicial
intervention, of information from the
CRD system as directed by arbitrators in
intra-industry arbitration awards that
involve associated persons and firms
based on the defamatory nature of the
information ordered expunged. In
allowing expungement relief without
judicial intervention under such
circumstances, FINRA believes that it is
fairly balancing the interests of the
brokerage community and others in
expunging defamatory statements with
FINRA’s interests in investor protection
and the integrity of the CRD system.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act, 11 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. The new procedures
would enhance the integrity of the
information in the CRD system and
would ensure that investor protection is
not compromised when arbitrators order
expungement of information related to
arbitration cases from an associated
person’s CRD record.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received from
Members, Participants, or Others
Written comments were neither
solicited nor received.
rwilkins on PROD1PC63 with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change, or
11 15
U.S.C. 78o–3(b)(6).
VerDate Aug<31>2005
17:19 Apr 02, 2008
Jkt 214001
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–FINRA–2008–010 on the
subject line.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–6870 Filed 4–2–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57575; File No. SR–Phlx–
2008–06]
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Order Approving Proposed Rule
Change, as Modified by Amendment
No. 1 Thereto, Relating to U.S. DollarSettled FCO Spot Prices
March 28, 2008.
I. Introduction
On January 28, 2008, the Philadelphia
• Send paper comments in triplicate
Stock Exchange, Inc. (‘‘Phlx’’ or
to Nancy M. Morris, Secretary,
‘‘Exchange’’) filed with the Securities
Securities and Exchange Commission,
and Exchange Commission
100 F Street, NE., Washington, DC
(‘‘Commission’’), pursuant to Section
20549–1090.
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’)1 and Rule 19b–4
All submissions should refer to File
Number SR–FINRA–2008–010. This file thereunder,2 a proposed rule change to
amend the definition of Spot Price so
number should be included on the
subject line if e-mail is used. To help the that the Exchange may use certain bid
and ask prices (‘‘Thomson Quotes’’)
Commission process and review your
provided by Tenfore Systems Limited
comments more efficiently, please use
only one method. The Commission will (‘‘Tenfore’’) through Thomson Financial
post all comments on the Commission’s LLC (‘‘Thomson’’) as Spot Prices in
determining applicable margin
Internet Web site (https://www.sec.gov/
requirements and strike prices for the
rules/sro.shtml). Copies of the
Exchange’s U.S. dollar-settled foreign
submission, all subsequent
currency options (‘‘FCOs’’). On February
amendments, all written statements
19, 2008, the Exchange filed
with respect to the proposed rule
Amendment No. 1 to the proposed rule
change that are filed with the
change. The proposed rule change, as
Commission, and all written
modified by Amendment No. 1, was
communications relating to the
published for comment in the Federal
proposed rule change between the
Commission and any person, other than Register on February 27, 2008.3 The
Commission received no comments on
those that may be withheld from the
the proposal. This order approves the
public in accordance with the
proposed rule change, as modified by
provisions of 5 U.S.C. 552, will be
Amendment No. 1.
available for inspection and copying in
the Commission’s Public Reference
II. Description of the Proposal
Room on official business days between
Phlx proposes to amend the definition
the hours of 10 a.m. and 3 p.m. Copies
of Spot Price to permit the Exchange to
of such filing also will be available for
use the Thomson Quotes to calculate the
inspection and copying at the principal
Spot Prices in connection with the
office of FINRA.
Exchange’s determination of strike
All comments received will be posted prices and margin requirements for its
without change; the Commission does
U.S. dollar-settled FCOs.4 Under Phlx
not edit personal identifying
information from submissions. You
12 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
should submit only information that
2 17 CFR 240.19b–4.
you wish to make available publicly. All
3 See Securities Exchange Act Release No. 57361
submissions should refer to File
(February 20, 2008), 73 FR 10503.
Number SR–FINRA–2008–010 and
4 The Exchange is also proposing to substitute the
should be submitted on or before April
term ‘‘Spot Prices’’ for the defined term ‘‘Spot Sales
24, 2008.
Prices’’ in Rule 1000(b)(16), as a clarification that
Paper Comments
PO 00000
Frm 00054
Fmt 4703
Sfmt 4703
E:\FR\FM\03APN1.SGM
03APN1
]]>Agencies
[Federal Register Volume 73, Number 65 (Thursday, April 3, 2008)]
[Notices]
[Pages 18308-18310]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-6870]
[[Page 18308]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57572; File No. SR-FINRA-2008-010]
Self-Regulatory Organizations: Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to
Amendments to the Codes of Arbitration Procedure To Establish New
Procedures for Arbitrators To Follow When Considering Requests for
Expungement Relief
March 27, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 13, 2008, Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing Rule 12805 of the Code of Arbitration Procedure
for Customer Disputes (``Customer Code'') and Rule 13805 of the Code of
Arbitration Procedure for Industry Disputes (``Industry Code'') to
establish new procedures that arbitrators must follow when considering
requests for expungement relief under Rule 2130.
Below is the text of the proposed rule change. All the text is new.
* * * * *
12805. Expungement of Customer Dispute Information Under Rule 2130
In order to grant expungement of customer dispute information under
Rule 2130, the panel must:
(a) Hold a recorded hearing session (by telephone or in person)
regarding the appropriateness of expungement. This paragraph will apply
to cases administered under Rule 12800 even if a customer did not
request a hearing on the merits.
(b) In cases involving settlements, review settlement documents and
consider the amount of payments made to any party and any other terms
and conditions of a settlement.
(c) Indicate in the arbitration award which of the Rule 2130
grounds for expungement serve(s) as the basis for its expungement order
and provide a brief written explanation of the reason(s) for its
finding that one or more Rule 2130 grounds for expungement applies to
the facts of the case.
(d) Assess all forum fees for hearing sessions in which the sole
topic is the determination of the appropriateness of expungement
against the parties requesting expungement relief. 13805. Expungement
of Customer Dispute Information under Rule 2130
In order to grant expungement of customer dispute information under
Rule 2130, the panel must:
(a) Hold a recorded hearing session (by telephone or in person)
regarding the appropriateness of expungement. This paragraph will apply
to cases administered under Rule 13800 even if a claimant did not
request a hearing on the merits.
(b) In cases involving settlements, review settlement documents and
consider the amount of payments made to any party and any other terms
and conditions of a settlement.
(c) Indicate in the arbitration award which of the Rule 2130
grounds for expungement serve(s) as the basis for its expungement order
and provide a brief written explanation of the reason(s) for its
finding that one or more Rule 2130 grounds for expungement applies to
the facts of the case.
(d) Assess all forum fees for hearing sessions in which the sole
topic is the determination of the appropriateness of expungement
against the parties requesting expungement relief.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA is proposing to amend its Customer Code and Industry Code to
establish new procedures that arbitrators must follow when considering
requests for expungement relief under Rule 2130. The procedures are
designed to: (1) Make sure that arbitrators have the opportunity to
consider the facts that support or weigh against a decision to grant
expungement; and (2) ensure that expungement occurs only when the
arbitrators find and document one of the narrow grounds specified in
Rule 2130.
Proposed Rules 12805 and 13805 would require arbitrators
considering an expungement request to hold a recorded hearing session
by telephone or in person, provide a brief written explanation of the
reasons for ordering expungement, and, in cases involving a settlement,
review the settlement documents to examine the amount paid to any party
and any other terms and conditions of the settlement that might raise
concerns about the associated person's involvement in the alleged
misconduct before awarding expungement. The proposed rule change would
provide that the panel must assess forum fees for hearing sessions held
solely for the purpose of considering expungement against the parties
requesting the relief.
The proposed rule change would not affect FINRA's current practice
of permitting expungement, without judicial intervention, of
information from the Central Registration Depository (``CRD'') system
as directed by arbitrators in intra-industry arbitration awards that
involve associated persons and firms based on the defamatory nature of
the information ordered expunged.\3\
---------------------------------------------------------------------------
\3\ In its original filing with the Commission proposing Rule
2130 (see SR-NASD-2002-168), FINRA (then known as NASD) explained in
Footnote 2 that ``NASD may execute, without a court order,
arbitration awards rendered in disputes between registered
representatives and firms that contain expungement directives in
which the arbitration panel states that expungement relief is being
granted because of the defamatory nature of the information. These
expungements are not covered by the moratorium and will not be
covered by the proposed rules and policies.'' In Amendment No. 1 to
that filing (at page five), FINRA reiterated this point by stating
``NASD may execute, without a court order, an arbitration award
rendered in a dispute between a member and a current or former
associated person that contains an expungement directive in which
the arbitration panel states that expungement relief is being
granted based on the defamatory nature of the information.'' See
also NASD Notice to Members 04-16 (March 2004) n. 4.
---------------------------------------------------------------------------
Background
The CRD system, an online registration and licensing system,
contains information regarding broker-dealers and their associated
persons. It contains administrative information (e.g., personal,
educational, and
[[Page 18309]]
employment history) and disclosure information (e.g., criminal matters,
regulatory and disciplinary actions, civil judicial actions, and
information relating to customer disputes). Members of the securities
industry, state and federal regulators, and self-regulatory
organizations use the CRD system. Although public investors do not have
access to the CRD system, much of the information in that system is
available to investors through FINRA BrokerCheck and individual state
disclosure programs.\4\ FINRA recognizes that accurate and complete
reporting in the CRD system is an important aspect of investor
protection.
---------------------------------------------------------------------------
\4\ FINRA BrokerCheck is a free online tool to help investors
check the background of current and former FINRA-registered
securities firms and brokers.
---------------------------------------------------------------------------
FINRA operates the CRD system pursuant to policies developed
jointly with the North American Securities Administrators Association
(NASAA). FINRA works with the SEC, NASAA, other members of the
regulatory community, and broker-dealer firms to establish policies and
procedures reasonably designed to ensure that information submitted to
and maintained in the CRD system is accurate and complete. These
procedures, among other things, cover expungement of information from
the CRD system.
In December 2003, the SEC approved NASD Rule 2130, which contains
procedures for expungement of customer dispute information from the CRD
System.\5\ It requires that FINRA members or associated persons name
FINRA as an additional party in any court proceeding in which they seek
an order to expunge customer dispute information or request
confirmation of an award containing an order of expungement.
---------------------------------------------------------------------------
\5\ Securities Exchange Act Release No. 48933 (December 16,
2003), 68 FR 74667 (December 24, 2003). Rules 2130 applies to all
cases filed on or after April 12, 2004; see NASD Notice to Members
04-16 (March 2004).
---------------------------------------------------------------------------
Under Rule 2130, FINRA may waive the requirement to be named as a
party if it determines that the expungement relief is based on an
affirmative judicial or arbitral finding that: (i) The claim,
allegation, or information is factually impossible or clearly
erroneous; (ii) the registered person was not involved in the alleged
investment-related sales practice violation, forgery, theft,
misappropriation, or conversion of funds; or (iii) the claim,
allegation, or information is false. If expungement relief is based on
a judicial or arbitral finding other than as enumerated immediately
above, FINRA may also waive the requirement to be named as a party if
it determines that the expungement relief and accompanying findings on
which it is based are meritorious and that expungement would not have a
material adverse effect on investor protection, the integrity of the
CRD system, or regulatory requirements.
Proposed new Rules 12805 and 13805 would set forth procedures that
arbitrators must follow before recommending expungement of information
related to arbitration cases from an associated person's CRD record. If
the arbitrators do not fully adhere to these procedures, FINRA may
determine not to waive the obligation under Rule 2130 to be named as a
party to an expungement proceeding.
Sometimes, arbitrators will order expungement at the conclusion of
an evidentiary hearing on the merits of the case. More often, however,
arbitrators will order expungement at the request of a party to
facilitate settlement of the dispute. For example, customers may
receive monetary compensation as part of a settlement, the terms of
which require the customer to consent to (or not oppose) the entry of a
stipulated award containing an order of expungement. In such cases,
FINRA expected that arbitrators would examine the amount paid to any
party and any other terms and conditions of the settlement that might
raise concerns about the associated person's behavior before awarding
expungement.\6\ Contrary to this expectation, however, arbitrators
often did not inquire into the terms of settlement agreements.
---------------------------------------------------------------------------
\6\ See NASD Notice to Members 04-43 (June 2004).
---------------------------------------------------------------------------
In order for arbitrators to perform the critical fact finding
necessary before granting expungement, the proposed rule change would
require arbitrators to hold a recorded hearing session by telephone or
in person. The requirement of a hearing session would ensure that
arbitrators consider the facts that support or weigh against a decision
to grant expungement. In cases involving settlements, the proposal
would require arbitrators to review the settlement documents, consider
the amount paid to any party, and consider any other terms and
conditions of the settlement that might raise concerns about the
associated person's involvement in the alleged misconduct before
awarding expungement.
The proposed rule change would require arbitrators to indicate
which of the Rule 2130 grounds for expungement serve as the basis for
their expungement order, and provide a brief written explanation of the
reasons for ordering expungement under Rule 2130. This new requirement
would address issues concerning judicial confirmation of awards
containing orders of expungement, as demonstrated in a recent state
court case \7\ in which the court expressed concern that the
arbitrators did not describe ``a single fact or circumstance'' \8\ for
their conclusion that the claims were factually impossible or clearly
erroneous (one of the grounds for expungement enumerated in Rule 2130).
As a result, the court ordered the arbitrators to conduct a hearing to
clarify the facts and circumstances that led them to order expungement.
The proposed requirement of a written explanation would provide
regulators with additional insight into why arbitrators awarded
expungement based on what might appear to be questionable facts and
circumstances (e.g., cases involving payment of significant monetary
compensation to the customer).\9\
---------------------------------------------------------------------------
\7\ Matter of Sage, Rutty & Co., Inc. v. Salzberg, Index No.
2007-01942 (N.Y. Sup. Ct. May 30, 2007).
\8\ Id. at 4.
\9\ In such cases, the payment may be based on the behavior of
someone other than the associated person who is seeking expungement.
---------------------------------------------------------------------------
The proposed rule change also would require the arbitrators to
assess all forum fees for hearing sessions in which the sole topic is
the determination of the appropriateness of expungement against the
parties requesting expungement relief. In cases that settle, industry
parties often seek expungement. In such cases, parties generally
present arguments solely on the issue of expungement. In these
circumstances, FINRA believes the fee for that hearing session should
not be assessed against a customer.\10\
---------------------------------------------------------------------------
\10\ In those situations where the issue of expungement does not
constitute the sole topic considered by the arbitrators during a
hearing session, the panel will determine the hearing session fee
that each party must pay. See Rules 12902(a) and 13902(a).
---------------------------------------------------------------------------
In cases administered under Rule 12800 or Rule 13800 (Simplified
Arbitration), a hearing on the merits normally is held only at the
request of a customer or claimant, respectively. The proposed rule
change would clarify that if parties request expungement relief in such
cases, a hearing session would be held to determine the appropriateness
of the request even if a hearing on the merits was not requested. Any
forum fees for hearing sessions associated with a request for
expungement would be assessed against the parties making the request.
As noted above, the proposed rule change would not affect FINRA's
current practice of permitting
[[Page 18310]]
expungement, without judicial intervention, of information from the CRD
system as directed by arbitrators in intra-industry arbitration awards
that involve associated persons and firms based on the defamatory
nature of the information ordered expunged. In allowing expungement
relief without judicial intervention under such circumstances, FINRA
believes that it is fairly balancing the interests of the brokerage
community and others in expunging defamatory statements with FINRA's
interests in investor protection and the integrity of the CRD system.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act, \11\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. The new procedures would enhance the integrity of the
information in the CRD system and would ensure that investor protection
is not compromised when arbitrators order expungement of information
related to arbitration cases from an associated person's CRD record.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-FINRA-2008-010 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2008-010. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room on official
business days between the hours of 10 a.m. and 3 p.m. Copies of such
filing also will be available for inspection and copying at the
principal office of FINRA.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-FINRA-2008-010
and should be submitted on or before April 24, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
---------------------------------------------------------------------------
\12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-6870 Filed 4-2-08; 8:45 am]
BILLING CODE 8011-01-P
