Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change Amending the Codes of Arbitration Procedure To Establish Procedures for Arbitrators To Follow When Considering Requests for Expungement Relief, 66086-66090 [E8-26442]
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66086
Federal Register / Vol. 73, No. 216 / Thursday, November 6, 2008 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (1) Significantly affect
the protection of investors or the public
interest; (2) impose any significant
burden on competition; and (3) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate if
consistent with the protection of
investors and the public interest, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 11 and Rule 19b–
4(f)(6) thereunder.12 At any time within
60 days of the filing of such proposed
rule change, the Commission may
summarily abrogate such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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
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, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of the filing also will be available
for inspection and copying at the
principal office of the CBOE. 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–CBOE–2008–98 and should
be submitted on or before November 28,
2008.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–26481 Filed 11–5–08; 8:45 am]
• 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–CBOE–2008–98 on the
subject line.
BILLING CODE 8011–01–P
Paper Comments
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving a
Proposed Rule Change Amending the
Codes of Arbitration Procedure To
Establish Procedures for Arbitrators
To Follow When Considering Requests
for Expungement Relief
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2008–98. This file
11 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, when
filing a proposed rule change pursuant to Rule 19b–
4(f)(6) under the Act, an Exchange is required to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
provided such notice to the Commission.
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–58886; File No. SR–FINRA–
2008–010]
October 30, 2008.
I. Introduction
On March 13, 2008, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’
13 17
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or ‘‘SEC’’), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to adopt 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 procedures that arbitrators
must follow when considering requests
for expungement relief under Rule 2130.
The proposed rule change was
published in the Federal Register on
April 3, 2008.3 The Commission
received eleven comment letters on the
proposed rule change.4 FINRA
responded to the comments on June 11,
2008.5 The Commission received an
additional letter from one commenter in
furtherance of its original comments.6
On September 3, 2008, FINRA
submitted a second response to
comments.7 This order approves the
proposed rule change.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 57572
(March 27, 2008), 73 FR 18308 (April 3, 2008) (the
‘‘Notice’’).
4 See letters to Nancy M. Morris, Secretary,
Commission, from Seth E. Lipner, Professor of Law,
Bernard M. Baruch College, CUNY, and Member
Deutsch Lipner, dated April 8, 2008 (‘‘Lipner
letter’’); Steven B. Caruso, Maddox Hargett Caruso,
P.C., dated April 8, 2008 (‘‘Caruso letter’’); Jill
Gross, Director, Pace University, Investor Rights
Clinic, and Teresa Milano, dated April 15, 2008
(‘‘Gross and Milano letter’’); Raghavan
Sathianathan, dated April 17, 2008 (‘‘Sathianathan
letter’’); William A. Jacobson, Associate Clinical
Professor, Director, Cornell Securities Law Clinic,
Cornell Law School and Arthur A. Andersen III,
dated April 23, 2008 (‘‘Cornell I letter’’); Barbara
Black, Charles Hartsock Professor of Law, director
of Corporate Law Center, University of Cincinnati
dated April 24, 2008 (‘‘Black letter’’); Karen Tyler,
President, North American Securities
Administrators Association, North Dakota
Securities Commissioner, dated April 24, 2008
(‘‘NASAA letter’’); Scott R. Shewan, Born, Pape
Shewan, LLP, dated April 24, 2008 (‘‘Shewan
letter’’); Barry D. Estell, dated May 7, 2008 (‘‘Estell
letter’’), Brian N. Smiley, Smiley Bishop Porter LLP,
dated May 8, 2008 (‘‘Smiley letter’’); and Laurence
S. Schultz, President, Public Investors Arbitration
Bar Association, dated May 16, 2008 (‘‘PIABA
letter’’).
5 See letter to Nancy M. Morris, Secretary,
Commission, from Margo A. Hassan, Counsel,
FINRA, dated June 11, 2008 (‘‘First Response’’).
6 See letter to Nancy M. Morris, Secretary,
Commission, from William A. Jacobsen, Associate
Clinical Professor, Director, Cornell Securities Law
Clinic, Cornell Law School, dated June 17, 2008
(‘‘Cornell II letter’’).
7 See letter to Florence Harmon, Deputy Secretary
[sic], Commission, from Margo A. Hassan, dated
September 3, 2008 (‘‘Second Response’’).
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II. Description of the Proposed Rule
Change
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Background
FINRA operates the Central
Registration Depository (‘‘CRD’’) 8
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 is accurate and
complete. These procedures, among
other things, cover expungement of
information from the CRD.
In December 2003, the SEC approved
Rule 2130, which contains procedures
for expungement of customer dispute
information regarding member firms or
associated persons from the CRD.9
Under Rule 2130, FINRA members or
associated persons seeking to expunge
information from the CRD arising from
disputes with customers must obtain an
order from a court of competent
jurisdiction directing expungement of
information or confirming an arbitration
award that contains expungement
relief.10 It also 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.11
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
8 The CRD is an online registration and licensing
system used by members of the securities industry,
state and federal regulators, and self-regulatory
organizations. It contains administrative
information (e.g., personal, educational, and
employment history) and disclosure information
(e.g., criminal matters, regulatory and disciplinary
actions, civil judicial actions, and information
relating to customer disputes) regarding brokerdealers and their associated persons.
9 See Securities Exchange Act Release No. 48933
(December 16, 2003), 68 FR 74667 (December 24,
2003)(SR–NASD–2002–168) (the ‘‘Expungement
Order’’). See also NASD Notice to Members 04–16
(March 2004) (NASD Adopts Rule 2130 Regarding
Expungement of Customer Dispute Information
From The Central Registration Depository).
10 See NASD Conduct Rule 2130(a).
11 See NASD Conduct Rule 2130(b).
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information is false. If expungement
relief is based on a judicial or arbitral
finding other than those 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, or regulatory
requirements.12
According to FINRA, although
arbitrators may order expungement at
the conclusion of an evidentiary hearing
on the merits of a case, it is more
common for arbitrators to order
expungement at the request of a party to
facilitate settlement of a dispute. For
example, as part of a settlement in
which customers receive monetary
compensation, the terms of that
settlement 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 and any other terms
and conditions of the settlement that
might raise concerns about the
associated person’s behavior before
awarding expungement.13 Contrary to
this expectation, however, arbitrators
often do not inquire into the terms of
settlement agreements. Recently, for
example, one New York state court
expressed concern because arbitrators
did not describe ‘‘a single fact or
circumstance’’ for their conclusion that
the grounds for expungement had been
met.14 Another New York state court
acknowledged that it has reservations
about the existing law on expungement,
which resulted in the confirmation of an
award on which the arbitrator gave no
explanation for his factual finding.15
Proposed Rule Change
Thus, FINRA developed proposed
rules 12805 and 13805 which set forth
procedures that arbitrators must follow
before granting expungement of
information from an associated person’s
CRD record. Specifically, under the
proposed rules, in order to grant
expungement of customer dispute
information under Rule 2130, the panel
must: (i) Hold a recorded hearing
session by telephone or in person
12 Id.
13 See NASD Notice to Members 04–43 (June
2004) (Members’ Use of Affidavits in Connection
with Stipulated Awards and Settlements to Obtain
Expungement of Customer Dispute Information
under Rule 2130).
14 See Matter of Sage, Rutty & Co., Inc. v.
Salzberg, Index No. 2007–01942 (N.Y. Sup. Ct. May
30, 2007).
15 See Matter of Kay v. Abrams, 853 N.Y.S.2d 862
(N.Y. Sup. Ct. February 21, 2008).
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66087
regarding the appropriateness of
expungement, even if a claimant did not
request a hearing on the merits; (ii) for
cases involving settlements, 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; (iii) indicate in the
arbitration award which of the grounds
for expungement in Rule 2130(b)(1)(A)–
(C) serves as the basis for the
expungement order and provide a brief
written explanation of the reason(s) for
its finding that one or more grounds for
expungement exists; and (iv) assess
forum fees for hearing sessions in which
the sole topic is the determination of the
appropriateness of expungement against
the parties requesting expungement.
The proposed rule change would not
affect FINRA’s current practice of
permitting expungement, without
judicial intervention, of information
from the CRD 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.16
III. Summary of Comments
As noted above, the Commission
received twelve comment letters from a
variety of sources. Six comments
supported the proposal,17 but a majority
of those six shared a variety of concerns
and suggestions for how to make the
proposal more effective, as discussed in
greater detail below. Five commenters
opposed the proposal, and one of those
commenters submitted two letters.18
More specifically, the commenters
raised the following issues:
16 In its original filing with the Commission
proposing Rule 2130 (see SR–NASD–2002–168),
NASD (now known as FINRA) 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), NASD 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)
(NASD Adopts Rule 2130 Regarding Expungement
of Customer Dispute Information From The Central
Registration Depository).
17 See Caruso, Gross and Milano, NASAA,
Shewan, Smiley, and PIABA letters.
18 See Lipner, Sathianathan, Cornell I (and in
furtherance of its original comments, Cornell II),
Black, and Estell letters.
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Argument 1: The proposed rule may
enable the party requesting
expungement to use expungement
findings against a customer in a
subsequent proceeding based on the
doctrine of collateral estoppel.19
Response: FINRA was not persuaded
by the argument and stated it does not
have the authority to dictate how parties
may use an arbitral finding after the
arbitration is over; other forums are not
bound to accept FINRA’s determination;
and expungement findings, in FINRA’s
view, should be treated in the same
manner as other arbitral findings.
An additional comment letter was
submitted in rebuttal.20 The commenter
argued that nothing in FINRA’s rules
prohibits it from exercising power to
limit the use of expungement findings;
FINRA may promulgate rules regardless
of whether a court will be ‘‘bound’’ by
those rules; and because the
expungement process is unique and has
a public interest element with respect to
regulatory record-keeping, FINRA
would be justified in treating
expungement findings in a different
manner than other arbitral findings.
FINRA stated in its Second Response
that modifying the proposal to prohibit
collateral use of expungement findings
could result in associated persons who
are respondents asserting counterclaims
against customers in arbitration to
preserve their ability to have the claims
resolved. In response to the argument
that customers who settle and agree to
expungement may subsequently be
subject to a lawsuit alleging malicious
prosecution based on the expungement
findings, FINRA believes that the high
evidentiary standard applied in such
cases, and the fact that most customers
are represented by counsel, provide
sufficient safeguards for the customer.21
Argument 2: If customer claimants do
not participate in the expungement
hearing, arbitrators will hear only the
requesting party’s position.22
Response: FINRA noted that under
the proposal, customers will continue to
have the opportunity to attend and
participate in expungement hearings in
person or via telephone, and the
customer may submit a written
statement if he chooses not to
participate or attend in person.23 In
addition, FINRA vowed to take
measures to ensure that arbitrators are
prepared to perform the critical factfinding that is required by the rule
19 See
Cornell I and Cornell II letters.
Cornell II letter.
21 See Second Response.
22 See Cornell I, NASAA, and Estell letters.
23 See First Response.
20 See
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proposal, whether or not a customer is
present at the hearing.24
Argument 3: The proposed rule
inadequately attempts to fix the
expungement process.25
Argument 4: Expungement affects the
integrity of the CRD by permanently
deleting information that is relevant to
the regulatory function of the SEC,
FINRA, and the states, making the CRD
an unreliable and incomplete source of
information.26 It may be possible for the
public to obtain more complete records
through independent investigation than
regulators can obtain through the CRD.27
Response to Arguments 3 and 4:
FINRA stated in its First Response that
arguments which express opinions on
the expungement process set forth in
Rule 2130 are outside the scope of the
present filing. Nevertheless, FINRA also
stated that it believes the current
proposal contains appropriate new
procedures for arbitrators to follow
when considering expungement
requests under Rule 2130 that should
help ensure that expungement is an
extraordinary remedy and is granted
only under appropriate circumstances.
FINRA stated it believes the proposal
would add transparency to the
expungement process and would help
enhance the integrity of information in
the CRD.28
Argument 5: Arbitrators may not be
the proper parties to make expungement
decisions.29 Related comments (i) argue
that expungement decisions should be
made by regulators and/or by a
regulatory tribunal, not by arbitrators,30
and (ii) question whether arbitrators
may exceed their authority when
considering requests for expungement.31
Response: FINRA believes that this
argument also goes to Rule 2130 and is
24 FINRA will notify all arbitrators of the rule
change. In addition, FINRA will (i) update its
online training program to reflect the new
expungement guidelines and encourage all of its
arbitrators to take the training; (ii) send arbitrators
written materials with questions and answers; (iii)
publish an article in The Neutral Corner explaining
the new rules; (iv) conduct a call-in workshop
during which staff will discuss the rule change and
answer questions previously submitted by
arbitrators and mediators; and (v) have a broadcast
e-mail which discusses the new rules. FINRA will
require arbitrators to certify in writing that they
have familiarized themselves with the new rule via
at least one of the training methods. Telephone call
among Jean I. Feeney, Vice President and Chief
Counsel, FINRA Dispute Resolution, Katherine A.
England, Assistant Director, Commission, and
Kristie Diemer, Special Counsel, Commission on
October 29, 2008.
25 See Cornell I, NASAA, and Estell letters.
26 See Cornell I, Shewan, Estell, and Smiley
letters.
27 See Cornell I letter.
28 See First Response.
29 See Caruso and Cornell I letters.
30 See Lipner, Black, Shewan, and PIABA letters.
31 See NASAA letter.
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thus outside the scope of the proposal.32
FINRA noted, however, that Rule 2130
requires a firm or associated person
petitioning a court for expungement
relief or seeking judicial confirmation of
an arbitration award containing
expungement relief to name FINRA as a
party in the court proceeding and serve
FINRA with all appropriate documents,
unless FINRA waives this requirement.
Therefore, FINRA is able to conduct a
regulatory review of all such waiver
requests and/or participate in the
judicial expungement proceeding.
FINRA further noted it has a process
whereby it notifies the states where the
individual is registered or seeking
registration of the expungement notice
or waiver request,33 and if the state
should wish to intervene, it may
petition the court.34 Finally, as
discussed above, FINRA would revise
its arbitrator training to include
guidance on the proposed rule change.
Argument 6: The proposal should
address the situation in which an
arbitration brought against a firm that
does not also name the individual
broker as a party is not considered a
complaint against the broker, even if the
broker’s name appears prominently in
the text of the arbitration complaint.35
Response: FINRA stated in its Second
Response that this issue is outside the
scope of this proposal, but notes that in
April 2008, it sought comment on a
proposed change which would revise
the customer complaint questions to
elicit reporting of allegations of sales
practice violations made in arbitrations
or civil suits against registered persons
not named as parties in those
proceedings, and the proposed revisions
would require firms to treat these
matters as customer complaints.36
Argument 7: The proposal should
include a provision to deter overuse of
expungement, particularly in
settlements and/or as a condition of
monetary payment to the customer.37
Response: FINRA has expressly stated
that expungement should be an
extraordinary remedy 38 and has
32 See
Second Response.
NASD Notice to Members 04–16 (March
2004) (NASD Adopts Rule 2130 Regarding
Expungement of Customer Dispute Information
From The Central Registration Depository).
34 See the Expungement Order, supra note 9, 68
FR at 74671.
35 See Lipner, Shewan, and PIABA letters.
36 See FINRA Regulatory Notice 08–20 (April
2008) (Proposed Changes to Forms U4 and U5). The
comment period ended on May 27, 2008, and
FINRA stated that it expects to file these changes
with the Commission shortly.
37 See Cornell I, NASAA, and PIABA letters.
38 See, e.g. , NASD Notice to Members 01–65
(October 2001) (NASD Seeks Comment On
Proposed Rules And Policies Relating To
33 See
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addressed the use of customer affidavits
in settlements leading to stipulated
awards.39 The proposed rule would
require arbitrators to review settlement
documents and consider the amount of
payments made to any party as well as
any other terms and conditions of the
settlement. Arbitrators would be
required to provide a written
explanation of the reasons for finding
that one or more of the grounds for
expungement apply to the facts of the
case. FINRA believes that the rule
proposal will help ensure that
arbitrators fully evaluate each request
for expungement of information from
the CRD.
Argument 8: Payment for settlement
in excess of the reporting threshold on
Forms U4 and U5 should raise a
presumption that expungement is not
appropriate.40
Argument 9: There should be an
express presumption that claims should
not be expunged from a representative’s
CRD record unless the person seeking
expungement is able to overcome the
presumption by a preponderance of the
evidence.41
Response to Arguments 8 and 9:
FINRA stated that because it is not
proposing to amend the evidentiary
standards in the Codes, these comments
are outside the scope of the rule filing.42
Nonetheless, FINRA states that the
proposal requires arbitrators to evaluate
fully whether the party requesting
expungement either in arbitration or in
connection with a settlement agreement
has met the criteria promulgated under
Rule 2130(b)(1)(A)–(C), and FINRA
notes that the proposal requires the
arbitrators, if expungement is ordered,
to set forth a written explanation
regarding that decision.
Argument 10: The effect of the
proposal, combined with the current
rule, is that there will be greater
potential for broker-dealer misuse
because (i) it will be more difficult to
expunge defamatory information filed
on CRD and will increase the power that
Expungement Of Information From The Central
Registration Depository); Securities Exchange Act
Release No. 47435 (March 4, 2003), 68 FR 11435
(March 10, 2003)(‘‘Rule 2130 Notice’’); Second
Response.
39 See NASD Notice to Members 04–43 (June
2004) (Members’ Use of Affidavits in Connection
with Stipulated Awards and Settlements to Obtain
Expungement of Customer Dispute Information
under Rule 2130).
40 See PIABA letter. The commenter states that
this amount is currently $10,000, but FINRA
recently sought comment on a proposal to increase
this amount to $15,000. See FINRA Regulatory
Notice 08–20 (April 2008) (Proposed Changes to
Forms U4 and U5). The comment period ended on
May 27, 2008.
41 See NASAA and PIABA letters.
42 See Second Response.
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FINRA member firms have over
employees; and (ii) allegations by a
whistleblower-employee of a FINRA
member firm of criminal activities by
the FINRA member firm or its senior
executives can be expunged without
judicial approval.43
Response: FINRA stated in its First
Response that Argument 10 is outside
the scope of the filing.
IV. Discussion and Commission
Findings
After careful review of the proposal
and consideration of the comment
letters and FINRA’s response to the
comment letters, the Commission finds
that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to FINRA.44 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 15A(b)(6) of the Act,45
which requires, among other things, that
FINRA’s rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
The Commission finds that the
proposed rule change is reasonably
designed to accomplish these ends by
establishing procedures that arbitrators
must follow when considering whether
to grant requests for expungement either
in connection with arbitration or with a
settlement agreement, thus making the
expungement process more transparent.
The additional procedures, such as the
required review of settlement
documents, and the written explanation
of the regulatory basis and reason for
granting expungement, in the proposed
rule are designed to help assure that the
expungement process is not abused.
This, in turn, should help ensure that
investors and regulators have access to
all relevant data in the CRD.
The Commission believes that FINRA
has adequately addressed the issues
raised by the commenters. The CRD is
an important regulatory tool as well as
an important tool for investors who seek
information about associated persons
and member firms.46 Once information
is removed from CRD via expungement
43 See
Sathianathan letter.
approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
45 15 U.S.C. 78o–3(b)(6).
46 See, e.g., https://www.finra.org/Investors/
ToolsCalculators/BrokerCheck/index.htm.
44 In
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
66089
it is lost to both the regulators and the
investing public. Therefore, the
Commission takes seriously the
concerns raised by the commenters. The
commenters raised concerns both of a
general nature and of a specific nature.
The general concerns related to the
integrity of the CRD, who should make
the decision to grant expungement, and
the frequency with which expungement
is granted. The specific concerns related
to whether the new rules will result in
findings that can be used in a
subsequent legal proceeding based on
the doctrine of collateral estoppel and
the meaning of the standards in the new
rules and how the standards will be
applied.
The Commission agrees with FINRA
that the comments about existing Rule
2130 and the expungement process
itself, as well as comments with respect
to whether arbitrators are the proper
parties to decide if information should
be expunged from CRD, are technically
outside the scope of the proposed rule
change.47 The Commission notes,
however, that FINRA has stated
repeatedly that expungement is meant
to be an extraordinary remedy,48 and
recognizes it ‘‘should be used only
when the expunged information has no
meaningful regulatory or investor
protection value.’’ 49 The Commission
agrees with FINRA that expungement
should be an extraordinary remedy.
Information that is expunged from CRD
is permanently deleted and thus no
47 Another commenter’s concern which FINRA
stated was outside the scope of the proposal was the
belief that under the proposal, allegations by a
whistleblower-employee of a member firm of
criminal activities by either the FINRA member
firm or senior executives of a FINRA member firm
could be expunged without judicial approval. The
Commission urges all persons to report allegations
of criminal activity to the relevant authority,
regardless of the rules governing expungement.
Furthermore, the Commission notes that criminal
activity does not qualify for expungement under the
current rule, and thus would not be more easily
expunged under FINRA’s proposed rules. As noted
above, the arbitrator could not make an affirmative
finding that one of the conditions for waiver was
met, and FINRA would have to oppose the
expungement. The Commission expects FINRA to
review any allegations of misuse of the CRD by
member firms. This is particularly important in
light of the ruling in New York that broker-dealer
firms have absolute immunity for statements made
on U4 and U5. See Rosenberg v. MetLife, Inc., 493
F.3d 290 (2d Cir. N.Y., June 14, 2007). CRD should
not be used by broker-dealers against registered
representatives. Such actions would violate FINRA
rules.
48 See, e.g., NASD Notice to Members 01–65
(October 2001) (NASD Seeks Comment On
Proposed Rules And Policies Relating To
Expungement Of Information From The Central
Registration Depository); Securities Exchange Act
Release No. 47435 (March 4, 2003), 68 FR 11435
(March 10, 2003); Second Response.
49 See Rule 2130 Frequently Asked Questions,
https://www.finra.org/Industry/Compliance/
Registration/CRD/FilingGuidance/P005224.
E:\FR\FM\06NON1.SGM
06NON1
66090
Federal Register / Vol. 73, No. 216 / Thursday, November 6, 2008 / Notices
longer available to regulators or the
investing public.
Under Rule 2130, FINRA must be
named as a party when a respondent is
seeking confirmation from a court of an
expungement award. FINRA can waive
its right to be named as a party in the
court confirmation process, if it makes
an affirmative determination consistent
with Rule 2130.50 The Commission
believes that FINRA should use its
authority to review expungement
requests to ensure that expungement is
an extraordinary remedy.51
With respect to the issue of whether
an associated person or member will be
able to use the arbitrators’ written
findings on expungement as collateral
estoppel in a subsequent legal
proceeding against the customer, FINRA
believes that the high evidentiary
standard that applies in such cases, and
the fact that most customers are
represented by legal counsel, should
address this issue. The Commission
believes that this is a reasonable
assessment and conclusion regarding
this potential situation.
As discussed, the Commission
believes that having accurate and
complete information in the CRD is
vital; information that has regulatory
value or that could assist investors in
protecting themselves should not be
removed from CRD.52 Because of the
central role that arbitrators have in the
expungement process, the Commission
believes that it is critical for arbitrators
to be well-informed regarding FINRA’s
rules governing expungement. FINRA
stated that this proposal is part of its
‘‘continuing effort to ensure that
arbitrators evaluate fully each request
sroberts on PROD1PC70 with NOTICES
50 Rule
2130(b)(2), however, does allow for
exceptions under extraordinary circumstances.
51 FINRA also provides the states with all requests
for expungement and petitions so that the states
have an opportunity to review them and/or
participate in the hearing. The ability for FINRA
and the states to participate in the expungement
process is critical so that information that should
remain in CRD is not expunged. The Commission
expects that all regulators will take these
responsibilities seriously and work cooperatively as
the new rule is implemented, and thereafter. See,
e.g., UBS Financial Services, Inc. v. Gibson, 851
N.Y.S.2d 75 (N.Y. Sup. Ct.)(consolidated with
Johnson v. Summit Equities, Inc., 238 N.Y.L.J. 109
(Nov. 15, 2007)); Zaferiou v. Holgado, Index No.
102996/07 (N.Y. Sup. Ct. April 14, 2008); Matter of
Kay v. Abrams, 853 N.Y.S.2d 862 (N.Y. Sup. Ct.
Feb. 21, 2008); and Karsner v. Lothian, 532 F.3d 876
(D.C. Cir. July 15, 2008).
52 FINRA routinely advises investors to check
CRD before they decide to do business with a firm
or a broker. See e.g., https://www.finra.org/Investors/
SmartInvesting/GettingStarted/
SelectingInvestmentProfessional/index.htm; https://
www.finra.org/Investors/ProtectYourself/
InvestorAlerts/FraudsAndScams/P01492; and
https://www.finra.org/Investors/ProtectYourself/
BeforeYouInvest/AvoidProblemswithYourBroker/
index.htm.
VerDate Aug<31>2005
19:11 Nov 05, 2008
Jkt 217001
for expungement.’’ 53 The Commission
believes that the training and education
FINRA provides in conjunction with the
proposed rule change will be critical to
the implementation and proper
application of the rules. Proper training
of arbitrators should help make
expungement the extraordinary remedy
that it was meant to be and should
convey to the arbitrators the importance
of their role in maintaining the integrity
of the CRD.
FINRA noted that it has requested
comment on amendments to address the
issue of complaints that do not name a
registered representative as a party.
FINRA stated that it expects to file these
changes with the Commission shortly.54
The Commission does not believe that it
would be in the interest of investors to
delay approval of the instant proposal
while that rule change is being
considered by FINRA; however given
the interrelationship of the issues, the
Commission urges FINRA to submit this
filing as soon as possible so that this
information will be recorded in CRD.
In conclusion, the Commission
believes that the proposed rule is
consistent with the Act and will help
assure that accurate information will
remain in CRD and inaccurate
information will be expunged. Given the
importance of CRD for regulators and to
customers who want to get information
about registered persons or member
firms before they do business with
them, the Commission urges FINRA in
its regulatory role to monitor how this
rule is applied by arbitrators to assure
that it is achieving its goals, and to
propose additional changes, if needed.
V. Conclusion
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
FINRA, and, in particular, with Section
15A(b)(6) of the Act.55
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,56 that the
proposed rule change (SR–FINRA–
2008–010) is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.57
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–26442 Filed 11–5–08; 8:45 am]
Second Response.
54 Id.
55 Id.
56 15
57 17
PO 00000
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
Frm 00081
Fmt 4703
[Release No. 34–58891; File No. SR–
NASDAQ–2008–072)]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Approving a Proposed Rule Change To
Establish a PORTAL Reference
Database and Related Fees
October 30, 2008.
I. Introduction
On September 16, 2008, The
NASDAQ Stock Market LLC (‘‘Nasdaq’’
or ‘‘Exchange’’), filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
establish a PORTAL Reference Database
and related fees. The proposed rule
change was published for comment in
the Federal Register on September 30,
2008.3 The Commission received no
comments on the proposal. This order
approves the proposed rule change.
II. Description of the Proposal
Nasdaq has created, and has proposed
to make publicly available, for a fee, a
consolidated fully-electronic reference
database of information culled from
PORTAL offering documents and
applications submitted to Nasdaq since
1990.4 Nasdaq has represented that
access to the database would available
to all market participants. The database
would allow users to determine a
PORTAL issue’s name and offering
description, CUSIP, country of
incorporation, security class, maturity
class and date, currency denomination,
applicable interest and credit rating,
convertibility and call provisions, total
number of shares offered, and date of
PORTAL designation, in addition to
other information. On an ongoing basis,
data regarding securities that obtain
PORTAL designation would be added to
the database.
Nasdaq has proposed that users of the
PORTAL Reference Database would pay
both an annual fee and an access fee per
year of data desired. Annual fees would
range between $20,000 and $100,000
and would be based on the number of
users and are per calendar year. Access
1 15
U.S.C. 78s(b)(l).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 58622
(September 23, 2008), 73 FR 56876 (September 30,
2008)(the ‘‘Notice’’).
4 For more information related to the background
of the PORTAL Market, see Securities Exchange Act
Release No. 55669 (April 25, 2007), 72 FR 23874
(May 1, 2007).
2 17
BILLING CODE 8011–01–P
53 See
SECURITIES AND EXCHANGE
COMMISSION
Sfmt 4703
E:\FR\FM\06NON1.SGM
06NON1
]]>Agencies
[Federal Register Volume 73, Number 216 (Thursday, November 6, 2008)]
[Notices]
[Pages 66086-66090]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-26442]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58886; File No. SR-FINRA-2008-010]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change Amending the
Codes of Arbitration Procedure To Establish Procedures for Arbitrators
To Follow When Considering Requests for Expungement Relief
October 30, 2008.
I. Introduction
On March 13, 2008, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt 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 procedures that arbitrators must
follow when considering requests for expungement relief under Rule
2130.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The proposed rule change was published in the Federal Register on
April 3, 2008.\3\ The Commission received eleven comment letters on the
proposed rule change.\4\ FINRA responded to the comments on June 11,
2008.\5\ The Commission received an additional letter from one
commenter in furtherance of its original comments.\6\ On September 3,
2008, FINRA submitted a second response to comments.\7\ This order
approves the proposed rule change.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 57572 (March 27,
2008), 73 FR 18308 (April 3, 2008) (the ``Notice'').
\4\ See letters to Nancy M. Morris, Secretary, Commission, from
Seth E. Lipner, Professor of Law, Bernard M. Baruch College, CUNY,
and Member Deutsch Lipner, dated April 8, 2008 (``Lipner letter'');
Steven B. Caruso, Maddox Hargett Caruso, P.C., dated April 8, 2008
(``Caruso letter''); Jill Gross, Director, Pace University, Investor
Rights Clinic, and Teresa Milano, dated April 15, 2008 (``Gross and
Milano letter''); Raghavan Sathianathan, dated April 17, 2008
(``Sathianathan letter''); William A. Jacobson, Associate Clinical
Professor, Director, Cornell Securities Law Clinic, Cornell Law
School and Arthur A. Andersen III, dated April 23, 2008 (``Cornell I
letter''); Barbara Black, Charles Hartsock Professor of Law,
director of Corporate Law Center, University of Cincinnati dated
April 24, 2008 (``Black letter''); Karen Tyler, President, North
American Securities Administrators Association, North Dakota
Securities Commissioner, dated April 24, 2008 (``NASAA letter'');
Scott R. Shewan, Born, Pape Shewan, LLP, dated April 24, 2008
(``Shewan letter''); Barry D. Estell, dated May 7, 2008 (``Estell
letter''), Brian N. Smiley, Smiley Bishop Porter LLP, dated May 8,
2008 (``Smiley letter''); and Laurence S. Schultz, President, Public
Investors Arbitration Bar Association, dated May 16, 2008 (``PIABA
letter'').
\5\ See letter to Nancy M. Morris, Secretary, Commission, from
Margo A. Hassan, Counsel, FINRA, dated June 11, 2008 (``First
Response'').
\6\ See letter to Nancy M. Morris, Secretary, Commission, from
William A. Jacobsen, Associate Clinical Professor, Director, Cornell
Securities Law Clinic, Cornell Law School, dated June 17, 2008
(``Cornell II letter'').
\7\ See letter to Florence Harmon, Deputy Secretary [sic],
Commission, from Margo A. Hassan, dated September 3, 2008 (``Second
Response'').
---------------------------------------------------------------------------
[[Page 66087]]
II. Description of the Proposed Rule Change
Background
FINRA operates the Central Registration Depository (``CRD'') \8\
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 is
accurate and complete. These procedures, among other things, cover
expungement of information from the CRD.
---------------------------------------------------------------------------
\8\ The CRD is an online registration and licensing system used
by members of the securities industry, state and federal regulators,
and self-regulatory organizations. It contains administrative
information (e.g., personal, educational, and employment history)
and disclosure information (e.g., criminal matters, regulatory and
disciplinary actions, civil judicial actions, and information
relating to customer disputes) regarding broker-dealers and their
associated persons.
---------------------------------------------------------------------------
In December 2003, the SEC approved Rule 2130, which contains
procedures for expungement of customer dispute information regarding
member firms or associated persons from the CRD.\9\ Under Rule 2130,
FINRA members or associated persons seeking to expunge information from
the CRD arising from disputes with customers must obtain an order from
a court of competent jurisdiction directing expungement of information
or confirming an arbitration award that contains expungement
relief.\10\ It also 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.\11\
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 48933 (December 16,
2003), 68 FR 74667 (December 24, 2003)(SR-NASD-2002-168) (the
``Expungement Order''). See also NASD Notice to Members 04-16 (March
2004) (NASD Adopts Rule 2130 Regarding Expungement of Customer
Dispute Information From The Central Registration Depository).
\10\ See NASD Conduct Rule 2130(a).
\11\ See NASD Conduct Rule 2130(b).
---------------------------------------------------------------------------
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 those 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, or regulatory requirements.\12\
---------------------------------------------------------------------------
\12\ Id.
---------------------------------------------------------------------------
According to FINRA, although arbitrators may order expungement at
the conclusion of an evidentiary hearing on the merits of a case, it is
more common for arbitrators to order expungement at the request of a
party to facilitate settlement of a dispute. For example, as part of a
settlement in which customers receive monetary compensation, the terms
of that settlement 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 and any other terms and conditions of the settlement that might
raise concerns about the associated person's behavior before awarding
expungement.\13\ Contrary to this expectation, however, arbitrators
often do not inquire into the terms of settlement agreements. Recently,
for example, one New York state court expressed concern because
arbitrators did not describe ``a single fact or circumstance'' for
their conclusion that the grounds for expungement had been met.\14\
Another New York state court acknowledged that it has reservations
about the existing law on expungement, which resulted in the
confirmation of an award on which the arbitrator gave no explanation
for his factual finding.\15\
---------------------------------------------------------------------------
\13\ See NASD Notice to Members 04-43 (June 2004) (Members' Use
of Affidavits in Connection with Stipulated Awards and Settlements
to Obtain Expungement of Customer Dispute Information under Rule
2130).
\14\ See Matter of Sage, Rutty & Co., Inc. v. Salzberg, Index
No. 2007-01942 (N.Y. Sup. Ct. May 30, 2007).
\15\ See Matter of Kay v. Abrams, 853 N.Y.S.2d 862 (N.Y. Sup.
Ct. February 21, 2008).
---------------------------------------------------------------------------
Proposed Rule Change
Thus, FINRA developed proposed rules 12805 and 13805 which set
forth procedures that arbitrators must follow before granting
expungement of information from an associated person's CRD record.
Specifically, under the proposed rules, in order to grant expungement
of customer dispute information under Rule 2130, the panel must: (i)
Hold a recorded hearing session by telephone or in person regarding the
appropriateness of expungement, even if a claimant did not request a
hearing on the merits; (ii) for cases involving settlements, 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; (iii) indicate in the arbitration award
which of the grounds for expungement in Rule 2130(b)(1)(A)-(C) serves
as the basis for the expungement order and provide a brief written
explanation of the reason(s) for its finding that one or more grounds
for expungement exists; and (iv) assess forum fees for hearing sessions
in which the sole topic is the determination of the appropriateness of
expungement against the parties requesting expungement.
The proposed rule change would not affect FINRA's current practice
of permitting expungement, without judicial intervention, of
information from the CRD 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.\16\
---------------------------------------------------------------------------
\16\ In its original filing with the Commission proposing Rule
2130 (see SR-NASD-2002-168), NASD (now known as FINRA) 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), NASD 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) (NASD Adopts Rule
2130 Regarding Expungement of Customer Dispute Information From The
Central Registration Depository).
---------------------------------------------------------------------------
III. Summary of Comments
As noted above, the Commission received twelve comment letters from
a variety of sources. Six comments supported the proposal,\17\ but a
majority of those six shared a variety of concerns and suggestions for
how to make the proposal more effective, as discussed in greater detail
below. Five commenters opposed the proposal, and one of those
commenters submitted two letters.\18\
---------------------------------------------------------------------------
\17\ See Caruso, Gross and Milano, NASAA, Shewan, Smiley, and
PIABA letters.
\18\ See Lipner, Sathianathan, Cornell I (and in furtherance of
its original comments, Cornell II), Black, and Estell letters.
---------------------------------------------------------------------------
More specifically, the commenters raised the following issues:
[[Page 66088]]
Argument 1: The proposed rule may enable the party requesting
expungement to use expungement findings against a customer in a
subsequent proceeding based on the doctrine of collateral estoppel.\19\
---------------------------------------------------------------------------
\19\ See Cornell I and Cornell II letters.
---------------------------------------------------------------------------
Response: FINRA was not persuaded by the argument and stated it
does not have the authority to dictate how parties may use an arbitral
finding after the arbitration is over; other forums are not bound to
accept FINRA's determination; and expungement findings, in FINRA's
view, should be treated in the same manner as other arbitral findings.
An additional comment letter was submitted in rebuttal.\20\ The
commenter argued that nothing in FINRA's rules prohibits it from
exercising power to limit the use of expungement findings; FINRA may
promulgate rules regardless of whether a court will be ``bound'' by
those rules; and because the expungement process is unique and has a
public interest element with respect to regulatory record-keeping,
FINRA would be justified in treating expungement findings in a
different manner than other arbitral findings.
---------------------------------------------------------------------------
\20\ See Cornell II letter.
---------------------------------------------------------------------------
FINRA stated in its Second Response that modifying the proposal to
prohibit collateral use of expungement findings could result in
associated persons who are respondents asserting counterclaims against
customers in arbitration to preserve their ability to have the claims
resolved. In response to the argument that customers who settle and
agree to expungement may subsequently be subject to a lawsuit alleging
malicious prosecution based on the expungement findings, FINRA believes
that the high evidentiary standard applied in such cases, and the fact
that most customers are represented by counsel, provide sufficient
safeguards for the customer.\21\
---------------------------------------------------------------------------
\21\ See Second Response.
---------------------------------------------------------------------------
Argument 2: If customer claimants do not participate in the
expungement hearing, arbitrators will hear only the requesting party's
position.\22\
---------------------------------------------------------------------------
\22\ See Cornell I, NASAA, and Estell letters.
---------------------------------------------------------------------------
Response: FINRA noted that under the proposal, customers will
continue to have the opportunity to attend and participate in
expungement hearings in person or via telephone, and the customer may
submit a written statement if he chooses not to participate or attend
in person.\23\ In addition, FINRA vowed to take measures to ensure that
arbitrators are prepared to perform the critical fact-finding that is
required by the rule proposal, whether or not a customer is present at
the hearing.\24\
---------------------------------------------------------------------------
\23\ See First Response.
\24\ FINRA will notify all arbitrators of the rule change. In
addition, FINRA will (i) update its online training program to
reflect the new expungement guidelines and encourage all of its
arbitrators to take the training; (ii) send arbitrators written
materials with questions and answers; (iii) publish an article in
The Neutral Corner explaining the new rules; (iv) conduct a call-in
workshop during which staff will discuss the rule change and answer
questions previously submitted by arbitrators and mediators; and (v)
have a broadcast e-mail which discusses the new rules. FINRA will
require arbitrators to certify in writing that they have
familiarized themselves with the new rule via at least one of the
training methods. Telephone call among Jean I. Feeney, Vice
President and Chief Counsel, FINRA Dispute Resolution, Katherine A.
England, Assistant Director, Commission, and Kristie Diemer, Special
Counsel, Commission on October 29, 2008.
---------------------------------------------------------------------------
Argument 3: The proposed rule inadequately attempts to fix the
expungement process.\25\
---------------------------------------------------------------------------
\25\ See Cornell I, NASAA, and Estell letters.
---------------------------------------------------------------------------
Argument 4: Expungement affects the integrity of the CRD by
permanently deleting information that is relevant to the regulatory
function of the SEC, FINRA, and the states, making the CRD an
unreliable and incomplete source of information.\26\ It may be possible
for the public to obtain more complete records through independent
investigation than regulators can obtain through the CRD.\27\
---------------------------------------------------------------------------
\26\ See Cornell I, Shewan, Estell, and Smiley letters.
\27\ See Cornell I letter.
---------------------------------------------------------------------------
Response to Arguments 3 and 4: FINRA stated in its First Response
that arguments which express opinions on the expungement process set
forth in Rule 2130 are outside the scope of the present filing.
Nevertheless, FINRA also stated that it believes the current proposal
contains appropriate new procedures for arbitrators to follow when
considering expungement requests under Rule 2130 that should help
ensure that expungement is an extraordinary remedy and is granted only
under appropriate circumstances. FINRA stated it believes the proposal
would add transparency to the expungement process and would help
enhance the integrity of information in the CRD.\28\
---------------------------------------------------------------------------
\28\ See First Response.
---------------------------------------------------------------------------
Argument 5: Arbitrators may not be the proper parties to make
expungement decisions.\29\ Related comments (i) argue that expungement
decisions should be made by regulators and/or by a regulatory tribunal,
not by arbitrators,\30\ and (ii) question whether arbitrators may
exceed their authority when considering requests for expungement.\31\
---------------------------------------------------------------------------
\29\ See Caruso and Cornell I letters.
\30\ See Lipner, Black, Shewan, and PIABA letters.
\31\ See NASAA letter.
---------------------------------------------------------------------------
Response: FINRA believes that this argument also goes to Rule 2130
and is thus outside the scope of the proposal.\32\ FINRA noted,
however, that Rule 2130 requires a firm or associated person
petitioning a court for expungement relief or seeking judicial
confirmation of an arbitration award containing expungement relief to
name FINRA as a party in the court proceeding and serve FINRA with all
appropriate documents, unless FINRA waives this requirement. Therefore,
FINRA is able to conduct a regulatory review of all such waiver
requests and/or participate in the judicial expungement proceeding.
FINRA further noted it has a process whereby it notifies the states
where the individual is registered or seeking registration of the
expungement notice or waiver request,\33\ and if the state should wish
to intervene, it may petition the court.\34\ Finally, as discussed
above, FINRA would revise its arbitrator training to include guidance
on the proposed rule change.
---------------------------------------------------------------------------
\32\ See Second Response.
\33\ See NASD Notice to Members 04-16 (March 2004) (NASD Adopts
Rule 2130 Regarding Expungement of Customer Dispute Information From
The Central Registration Depository).
\34\ See the Expungement Order, supra note 9, 68 FR at 74671.
---------------------------------------------------------------------------
Argument 6: The proposal should address the situation in which an
arbitration brought against a firm that does not also name the
individual broker as a party is not considered a complaint against the
broker, even if the broker's name appears prominently in the text of
the arbitration complaint.\35\
---------------------------------------------------------------------------
\35\ See Lipner, Shewan, and PIABA letters.
---------------------------------------------------------------------------
Response: FINRA stated in its Second Response that this issue is
outside the scope of this proposal, but notes that in April 2008, it
sought comment on a proposed change which would revise the customer
complaint questions to elicit reporting of allegations of sales
practice violations made in arbitrations or civil suits against
registered persons not named as parties in those proceedings, and the
proposed revisions would require firms to treat these matters as
customer complaints.\36\
---------------------------------------------------------------------------
\36\ See FINRA Regulatory Notice 08-20 (April 2008) (Proposed
Changes to Forms U4 and U5). The comment period ended on May 27,
2008, and FINRA stated that it expects to file these changes with
the Commission shortly.
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Argument 7: The proposal should include a provision to deter
overuse of expungement, particularly in settlements and/or as a
condition of monetary payment to the customer.\37\
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\37\ See Cornell I, NASAA, and PIABA letters.
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Response: FINRA has expressly stated that expungement should be an
extraordinary remedy \38\ and has
[[Page 66089]]
addressed the use of customer affidavits in settlements leading to
stipulated awards.\39\ The proposed rule would require arbitrators to
review settlement documents and consider the amount of payments made to
any party as well as any other terms and conditions of the settlement.
Arbitrators would be required to provide a written explanation of the
reasons for finding that one or more of the grounds for expungement
apply to the facts of the case. FINRA believes that the rule proposal
will help ensure that arbitrators fully evaluate each request for
expungement of information from the CRD.
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\38\ See, e.g. , NASD Notice to Members 01-65 (October 2001)
(NASD Seeks Comment On Proposed Rules And Policies Relating To
Expungement Of Information From The Central Registration
Depository); Securities Exchange Act Release No. 47435 (March 4,
2003), 68 FR 11435 (March 10, 2003)(``Rule 2130 Notice''); Second
Response.
\39\ See NASD Notice to Members 04-43 (June 2004) (Members' Use
of Affidavits in Connection with Stipulated Awards and Settlements
to Obtain Expungement of Customer Dispute Information under Rule
2130).
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Argument 8: Payment for settlement in excess of the reporting
threshold on Forms U4 and U5 should raise a presumption that
expungement is not appropriate.\40\
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\40\ See PIABA letter. The commenter states that this amount is
currently $10,000, but FINRA recently sought comment on a proposal
to increase this amount to $15,000. See FINRA Regulatory Notice 08-
20 (April 2008) (Proposed Changes to Forms U4 and U5). The comment
period ended on May 27, 2008.
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Argument 9: There should be an express presumption that claims
should not be expunged from a representative's CRD record unless the
person seeking expungement is able to overcome the presumption by a
preponderance of the evidence.\41\
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\41\ See NASAA and PIABA letters.
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Response to Arguments 8 and 9: FINRA stated that because it is not
proposing to amend the evidentiary standards in the Codes, these
comments are outside the scope of the rule filing.\42\ Nonetheless,
FINRA states that the proposal requires arbitrators to evaluate fully
whether the party requesting expungement either in arbitration or in
connection with a settlement agreement has met the criteria promulgated
under Rule 2130(b)(1)(A)-(C), and FINRA notes that the proposal
requires the arbitrators, if expungement is ordered, to set forth a
written explanation regarding that decision.
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\42\ See Second Response.
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Argument 10: The effect of the proposal, combined with the current
rule, is that there will be greater potential for broker-dealer misuse
because (i) it will be more difficult to expunge defamatory information
filed on CRD and will increase the power that FINRA member firms have
over employees; and (ii) allegations by a whistleblower-employee of a
FINRA member firm of criminal activities by the FINRA member firm or
its senior executives can be expunged without judicial approval.\43\
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\43\ See Sathianathan letter.
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Response: FINRA stated in its First Response that Argument 10 is
outside the scope of the filing.
IV. Discussion and Commission Findings
After careful review of the proposal and consideration of the
comment letters and FINRA's response to the comment letters, the
Commission finds that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to FINRA.\44\ In particular, the Commission finds that the
proposed rule change is consistent with Section 15A(b)(6) of the
Act,\45\ which requires, among other things, that FINRA's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest.
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\44\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\45\ 15 U.S.C. 78o-3(b)(6).
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The Commission finds that the proposed rule change is reasonably
designed to accomplish these ends by establishing procedures that
arbitrators must follow when considering whether to grant requests for
expungement either in connection with arbitration or with a settlement
agreement, thus making the expungement process more transparent. The
additional procedures, such as the required review of settlement
documents, and the written explanation of the regulatory basis and
reason for granting expungement, in the proposed rule are designed to
help assure that the expungement process is not abused. This, in turn,
should help ensure that investors and regulators have access to all
relevant data in the CRD.
The Commission believes that FINRA has adequately addressed the
issues raised by the commenters. The CRD is an important regulatory
tool as well as an important tool for investors who seek information
about associated persons and member firms.\46\ Once information is
removed from CRD via expungement it is lost to both the regulators and
the investing public. Therefore, the Commission takes seriously the
concerns raised by the commenters. The commenters raised concerns both
of a general nature and of a specific nature. The general concerns
related to the integrity of the CRD, who should make the decision to
grant expungement, and the frequency with which expungement is granted.
The specific concerns related to whether the new rules will result in
findings that can be used in a subsequent legal proceeding based on the
doctrine of collateral estoppel and the meaning of the standards in the
new rules and how the standards will be applied.
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\46\ See, e.g., https://www.finra.org/Investors/ToolsCalculators/
BrokerCheck/index.htm.
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The Commission agrees with FINRA that the comments about existing
Rule 2130 and the expungement process itself, as well as comments with
respect to whether arbitrators are the proper parties to decide if
information should be expunged from CRD, are technically outside the
scope of the proposed rule change.\47\ The Commission notes, however,
that FINRA has stated repeatedly that expungement is meant to be an
extraordinary remedy,\48\ and recognizes it ``should be used only when
the expunged information has no meaningful regulatory or investor
protection value.'' \49\ The Commission agrees with FINRA that
expungement should be an extraordinary remedy. Information that is
expunged from CRD is permanently deleted and thus no
[[Page 66090]]
longer available to regulators or the investing public.
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\47\ Another commenter's concern which FINRA stated was outside
the scope of the proposal was the belief that under the proposal,
allegations by a whistleblower-employee of a member firm of criminal
activities by either the FINRA member firm or senior executives of a
FINRA member firm could be expunged without judicial approval. The
Commission urges all persons to report allegations of criminal
activity to the relevant authority, regardless of the rules
governing expungement. Furthermore, the Commission notes that
criminal activity does not qualify for expungement under the current
rule, and thus would not be more easily expunged under FINRA's
proposed rules. As noted above, the arbitrator could not make an
affirmative finding that one of the conditions for waiver was met,
and FINRA would have to oppose the expungement. The Commission
expects FINRA to review any allegations of misuse of the CRD by
member firms. This is particularly important in light of the ruling
in New York that broker-dealer firms have absolute immunity for
statements made on U4 and U5. See Rosenberg v. MetLife, Inc., 493
F.3d 290 (2d Cir. N.Y., June 14, 2007). CRD should not be used by
broker-dealers against registered representatives. Such actions
would violate FINRA rules.
\48\ See, e.g., NASD Notice to Members 01-65 (October 2001)
(NASD Seeks Comment On Proposed Rules And Policies Relating To
Expungement Of Information From The Central Registration
Depository); Securities Exchange Act Release No. 47435 (March 4,
2003), 68 FR 11435 (March 10, 2003); Second Response.
\49\ See Rule 2130 Frequently Asked Questions, https://
www.finra.org/Industry/Compliance/Registration/CRD/FilingGuidance/
P005224.
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Under Rule 2130, FINRA must be named as a party when a respondent
is seeking confirmation from a court of an expungement award. FINRA can
waive its right to be named as a party in the court confirmation
process, if it makes an affirmative determination consistent with Rule
2130.\50\ The Commission believes that FINRA should use its authority
to review expungement requests to ensure that expungement is an
extraordinary remedy.\51\
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\50\ Rule 2130(b)(2), however, does allow for exceptions under
extraordinary circumstances.
\51\ FINRA also provides the states with all requests for
expungement and petitions so that the states have an opportunity to
review them and/or participate in the hearing. The ability for FINRA
and the states to participate in the expungement process is critical
so that information that should remain in CRD is not expunged. The
Commission expects that all regulators will take these
responsibilities seriously and work cooperatively as the new rule is
implemented, and thereafter. See, e.g., UBS Financial Services, Inc.
v. Gibson, 851 N.Y.S.2d 75 (N.Y. Sup. Ct.)(consolidated with Johnson
v. Summit Equities, Inc., 238 N.Y.L.J. 109 (Nov. 15, 2007));
Zaferiou v. Holgado, Index No. 102996/07 (N.Y. Sup. Ct. April 14,
2008); Matter of Kay v. Abrams, 853 N.Y.S.2d 862 (N.Y. Sup. Ct. Feb.
21, 2008); and Karsner v. Lothian, 532 F.3d 876 (D.C. Cir. July 15,
2008).
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With respect to the issue of whether an associated person or member
will be able to use the arbitrators' written findings on expungement as
collateral estoppel in a subsequent legal proceeding against the
customer, FINRA believes that the high evidentiary standard that
applies in such cases, and the fact that most customers are represented
by legal counsel, should address this issue. The Commission believes
that this is a reasonable assessment and conclusion regarding this
potential situation.
As discussed, the Commission believes that having accurate and
complete information in the CRD is vital; information that has
regulatory value or that could assist investors in protecting
themselves should not be removed from CRD.\52\ Because of the central
role that arbitrators have in the expungement process, the Commission
believes that it is critical for arbitrators to be well-informed
regarding FINRA's rules governing expungement. FINRA stated that this
proposal is part of its ``continuing effort to ensure that arbitrators
evaluate fully each request for expungement.'' \53\ The Commission
believes that the training and education FINRA provides in conjunction
with the proposed rule change will be critical to the implementation
and proper application of the rules. Proper training of arbitrators
should help make expungement the extraordinary remedy that it was meant
to be and should convey to the arbitrators the importance of their role
in maintaining the integrity of the CRD.
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\52\ FINRA routinely advises investors to check CRD before they
decide to do business with a firm or a broker. See e.g., https://
www.finra.org/Investors/SmartInvesting/GettingStarted/
SelectingInvestmentProfessional/index.htm; https://www.finra.org/
Investors/ProtectYourself/InvestorAlerts/FraudsAndScams/P01492; and
https://www.finra.org/Investors/ProtectYourself/BeforeYouInvest/
AvoidProblemswithYourBroker/index.htm.
\53\ See Second Response.
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FINRA noted that it has requested comment on amendments to address
the issue of complaints that do not name a registered representative as
a party. FINRA stated that it expects to file these changes with the
Commission shortly.\54\ The Commission does not believe that it would
be in the interest of investors to delay approval of the instant
proposal while that rule change is being considered by FINRA; however
given the interrelationship of the issues, the Commission urges FINRA
to submit this filing as soon as possible so that this information will
be recorded in CRD.
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\54\ Id.
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In conclusion, the Commission believes that the proposed rule is
consistent with the Act and will help assure that accurate information
will remain in CRD and inaccurate information will be expunged. Given
the importance of CRD for regulators and to customers who want to get
information about registered persons or member firms before they do
business with them, the Commission urges FINRA in its regulatory role
to monitor how this rule is applied by arbitrators to assure that it is
achieving its goals, and to propose additional changes, if needed.
V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to FINRA, and, in
particular, with Section 15A(b)(6) of the Act.\55\
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\55\ Id.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\56\ that the proposed rule change (SR-FINRA-2008-010) is approved.
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\56\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\57\
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\57\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-26442 Filed 11-5-08; 8:45 am]
BILLING CODE 8011-01-P
