Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend the Codes of Arbitration Procedure To Modify the Current Process Relating to the Expungement of Customer Dispute Information, 50170-50200 [2022-17430]

Download as PDF 50170 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–95455; File No. SR–FINRA– 2022–024] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend the Codes of Arbitration Procedure To Modify the Current Process Relating to the Expungement of Customer Dispute Information August 9, 2022. khammond on DSKJM1Z7X2PROD with NOTICES2 Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 29, 2022, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) 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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend the Code of Arbitration Procedure for Customer Disputes (‘‘Customer Code’’) and the Code of Arbitration Procedure for Industry Disputes (‘‘Industry Code’’) (together, ‘‘Codes’’) to modify the current process relating to the expungement of customer dispute information. The proposed rule change would amend the Codes to impose requirements on expungement requests (a) filed by an associated person during an investment-related, customerinitiated arbitration (‘‘customer arbitration’’), or filed by a party to the customer arbitration on behalf of an associated person (‘‘on-behalf-of request’’), or (b) filed by an associated person separate from a customer arbitration (‘‘straight-in request’’). Specifically, the proposed rule change would: (1) require that a straight-in request be decided by a three-person panel that is randomly selected from a roster of experienced public arbitrators with enhanced expungement training; 3 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Among other requirements, public arbitrators are not employed in the securities industry and do not devote 20 percent or more of their professional work to the securities industry or to parties in disputes concerning investment accounts or transactions or employment relationships within 2 17 VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 (2) prohibit parties to a straight-in request from agreeing to fewer than three arbitrators to consider their expungement requests, striking any of the selected arbitrators, stipulating to an arbitrator’s removal, or stipulating to the use of pre-selected arbitrators; (3) provide notification to state securities regulators of all expungement requests and a mechanism for state securities regulators to attend and participate in expungement hearings in straight-in requests; (4) impose strict time limits on the filing of straight-in requests; (5) codify and update the best practices in the Notice to Arbitrators and Parties on Expanded Expungement Guidance (‘‘Guidance’’) applicable to all expungement hearings, including amendments to establish additional requirements for expungement hearings, to facilitate customer attendance and participation in expungement hearings and to codify the panel’s 4 ability to request any evidence relevant to the expungement request; 5 (6) require the unanimous agreement of the panel to issue an award containing expungement relief; and (7) establish procedural requirements for filing expungement requests, including for on-behalf-of requests. The proposed rule change would also amend the Customer Code to specify procedures for requesting expungement of customer dispute information during simplified arbitrations. The text of the proposed rule change is available on FINRA’s website at https://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. 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, the financial industry. See FINRA Rules 12100(aa) and 13100(x). 4 Under the Codes, the term ‘‘panel’’ means the arbitration panel, whether it consists of one or more arbitrators. See FINRA Rules 12100(u) and 13100(s). Unless otherwise specified, the rule filing uses the term ‘‘panel’’ to mean either a panel or single arbitrator. 5 See FINRA Dispute Resolution Services, Notice to Arbitrators and Parties on Expanded Expungement Guidance, https://www.finra.org/ arbitration-and-mediation/notice-arbitrators-andparties-expanded-expungement-guidance (last updated Sept. 2017). PO 00000 Frm 00002 Fmt 4701 Sfmt 4703 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 I. Background and Discussion A. Overview Over the course of many years, FINRA has adopted a number of rules 6 governing the use of the arbitration forum administered by FINRA Dispute Resolution Services (‘‘DRS’’) to seek expungement of customer dispute information.7 These rules seek to balance the interests of securities regulators in having accurate and relevant information to fulfill their regulatory responsibilities; the interests of investors in having access to accurate and meaningful information about associated persons with whom they may entrust their money; the interests of broker-dealer firms in having accurate information for use in making informed employment decisions; and the interests of the brokerage community in having a fair process to address inaccurate customer dispute information. FINRA is concerned, however, that the current expungement process is not working as intended—as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules. As a result, over the past several years, FINRA has taken numerous, meaningful steps to address the concerns that FINRA and other interested parties have identified with the current expungement process 8 and to enhance that process, including by: • publishing Regulatory Notice 17–42 to seek comment on proposed changes 6 A chronology of the steps FINRA has taken to strengthen the expungement framework is available at https://www.finra.org/rules-guidance/key-topics/ expungement. 7 The DRS arbitration forum is operated in accordance with rules approved by the SEC and is subject to ongoing oversight by the SEC. Decisions in the DRS arbitration forum are made by independent arbitrators selected by the parties, not by DRS staff. In almost every arbitration proceeding seeking expungement of customer dispute information, all or a majority of the arbitrators reviewing requests for expungement are public arbitrators (who, among other requirements, have never been employed in the securities industry). See also supra note 3. DRS’s role in the arbitration process is to administer cases brought to the DRS arbitration forum in a neutral, efficient and fair manner. 8 See infra Item II.A.1.I.D., ‘‘Concerns With the Current Expungement Process,’’ (discussing concerns with the current expungement process). E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices khammond on DSKJM1Z7X2PROD with NOTICES2 to further enhance the current expungement process; 9 • amending FINRA rules to apply minimum fees to requests for expungement of customer dispute information to address concerns about practices to avoid fees that were intended to be applicable to expungement requests; 10 and • in September 2020, filing with the SEC a rule filing to make several significant enhancements to the current expungement process by establishing special arbitration procedures for expungement requests (‘‘2020 Rule Filing’’).11 On May 28, 2021, following discussions with SEC staff, FINRA withdrew the 2020 Rule Filing from the SEC in order to consider whether modifications to the filing were appropriate in response to concerns raised by SEC staff and commenters.12 9 Regulatory Notice 17–42 (December 2017) (‘‘Notice’’), https://www.finra.org/rules-guidance/ notices/17-42. The Notice requested comment on, among other things: establishing a roster of public chairpersons with additional training and experience from which a panel would be selected to decide straight-in requests; imposing time limits on when an associated person can request expungement in a straight-in request; limiting an associated person who is named as a party in a customer arbitration to one opportunity to request expungement, and that opportunity must be exercised during the customer arbitration; codifying a party’s ability to request expungement on behalf of an associated person who is the subject of a customer arbitration, but unnamed, and establishing procedures for such requests; and applying a minimum fee to expungement requests. 10 An expungement request is a non-monetary or not specified claim (‘‘non-monetary claim’’). The fees applicable to non-monetary claims are higher than those applicable to small monetary claims. See FINRA Rule 13900(a)(1). If an associated person files a straight-in request and does not add a monetary claim to the request, the associated person will be assessed the filing fee associated with a non-monetary claim. The Codes require that non-monetary claims are decided by a three-person panel unless the parties agree in writing to one arbitrator. See FINRA Rules 12401 and 13401. FINRA amended the Codes to apply minimum fees to expungement requests, whether the request is made as part of the customer arbitration or the associated person files a straight-in request. As a result of the amendments, parties requesting expungement can no longer avoid the fees intended for such requests under the Codes or automatically qualify for a single arbitrator. The amendments also apply a minimum process fee and member surcharge to straight-in requests, as well as a minimum hearing session fee to expungement-only hearings. See Securities Exchange Act Release No. 88945 (May 26, 2020), 85 FR 33212 (June 1, 2020) (Order Approving File No. SR–FINRA–2020–005); see also Regulatory Notice 20–25 (July 20, 2020) (announcing a September 14, 2020 effective date), https://www.finra.org/rules-guidance/notices/20-25. 11 See infra note 263. The 2020 Rule Filing, comments received in response to the filing and FINRA’s responses to the comments are discussed below in Item II.C. 12 See FINRA Statement on Temporary Withdrawal of Specialized Arbitrator Roster Rule Filing (May 28, 2021), https://www.finra.org/mediacenter/newsreleases/2021/finra-statementtemporary-withdrawal-specialized-arbitrator-roster. VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 50171 At that time, FINRA indicated its intent to continue pursuing enhancements to the current expungement process, while also continuing discussions with the North American Securities Administrators Association (‘‘NASAA’’) and other interested parties regarding a more fundamental redesign of the current expungement process, separate from and in addition to the changes included in the 2020 Rule Filing.13 FINRA believes the proposed amendments discussed below are responsive to the concerns that have been identified with the current expungement process and would help protect the integrity of the Central Registration Depository (‘‘CRD®’’), the central licensing and registration system used by the U.S. securities industry and its regulators,14 by making substantial improvements to the current expungement process. Key proposed changes include: ➢ For All Requests for Expungement of Customer Dispute Information: • Requiring that the panel deciding the expungement request issue an award containing expungement relief only if the panel unanimously finds that the information to be expunged is factually impossible, clearly erroneous or false, or that the associated person was not involved in the alleged misconduct. • Providing state securities regulators with notification of all expungement requests. • Requiring associated persons to appear at the expungement hearing in person or by video conference. • Facilitating customer attendance and participation by notifying customers of the time, date and place of any prehearing conferences and the expungement hearing; codifying that customers are entitled to attend and participate in prehearing conferences and the expungement hearing and to be represented, if they choose; and providing customers with access to all relevant documents filed in the arbitration. • Specifically authorizing the panel to request any documentary, testimonial or other evidence that it deems relevant from the broker-dealer firm or associated person seeking expungement. • Requiring that the panel provide enough detail in the award to explain its rationale for including expungement relief in the award. • Precluding an associated person from requesting expungement of customer dispute information if a panel previously considered the merits of, or a court previously denied, a request to expunge the same customer dispute information. • Prohibiting an associated person who withdraws an expungement request from refiling the request at a later date, thereby preventing ‘‘arbitrator shopping.’’ ➢ For Straight-in Requests: 15 • Imposing strict time limits within which associated persons may request expungement—DRS would deny the DRS arbitration forum if the expungement request is made: D more than three years after the date the customer complaint was initially reported in the CRD system (if the customer complaint does not evolve into a customer-initiated arbitration or civil litigation); or D more than two years after the close of the customer-initiated arbitration or civil litigation associated with the customer dispute information. • Requiring that straight-in requests be filed under the Industry Code against the broker-dealer firm at which the associated person was associated at the time of the events giving rise to the customer dispute. • Permitting an authorized representative of state securities regulators to attend and participate as a non-party in prehearing conferences and the expungement hearing to the same extent as customers could attend and participate. • Requiring that all straight-in requests be decided by a three-person panel, randomly selected from a roster of experienced public arbitrators with enhanced expungement training and with no significant ties to the industry (‘‘Special Arbitrator Roster’’). 13 See supra note 12. In addition, FINRA recently published a Discussion Paper on Expungement of Customer Dispute Information (April 2022) (‘‘Discussion Paper’’), https://www.finra.org/sites/ default/files/2022-04/Expungement_Discussion_ Paper.pdf. The Discussion Paper provides background and data regarding expungement of customer dispute information and explores potential alternatives to the current expungement process. The Discussion Paper also explains how the proposed changes in the 2020 Rule Filing would address key concerns with the current expungement process and that FINRA’s Board of Governors was continuing to consider further changes to enhance the 2020 Rule Filing. 14 See infra note 18 and accompanying text (discussing the CRD system). 15 As discussed in more detail below, under the proposed amendments, a straight-in request would include a request to expunge customer dispute information from the CRD system filed under the Industry Code: (1) by an associated person named in a customer arbitration after the customer arbitration closes other than by award or by award without a hearing; (2) arising from a customer complaint or civil litigation rather than a customer arbitration; or (3) by an associated person who was the subject of a customer arbitration, but unnamed, and where a named party in the customer arbitration did not request expungement on behalf of the unnamed associated person, or where a named party made an on-behalf-of request, but the customer arbitration closed other than by award or by award without a hearing. PO 00000 Frm 00003 Fmt 4701 Sfmt 4703 E:\FR\FM\15AUN2.SGM 15AUN2 50172 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices • Prohibiting the parties from: (1) agreeing to fewer than three arbitrators to consider their expungement requests; (2) striking any of the selected arbitrators; (3) stipulating to an arbitrator’s removal; or (4) stipulating to the use of pre-selected arbitrators.16 ➢ For Expungement Requests Considered During a Customer Arbitration: • Requiring an associated person named in a customer arbitration to request expungement during that customer arbitration or forfeit the opportunity to request expungement in any subsequent proceeding, thereby ensuring that the panel that hears the full merits of a customer arbitration also reviews a related expungement request. • Conditioning and limiting the ability of a party to a customer arbitration to request expungement during the customer arbitration on behalf of an associated person who is the subject of a customer arbitration, but unnamed, so that the associated person cannot later claim they were not aware of the prior expungement request made on their behalf. Prior to discussing each of the proposed amendments, FINRA provides below background information regarding the reporting of customer dispute information to the CRD system and its public disclosure through BrokerCheck®,17 the current process for requesting expungement through the DRS arbitration forum and concerns regarding the current process. B. Customer Dispute Information in the CRD System khammond on DSKJM1Z7X2PROD with NOTICES2 FINRA is mandated by federal statute to collect and maintain registration information about broker-dealer firms and their associated persons. To satisfy this statutory responsibility, FINRA operates the CRD system, the central licensing and registration system used by FINRA, the SEC, other self-regulatory organizations (‘‘SROs’’), state securities regulators and broker-dealer firms.18 16 Under the Codes, the DRS arbitrator selection process uses the Neutral List Selection System (‘‘NLSS’’), a computer algorithm, to generate lists of arbitrators on a random basis from DRS’s rosters of arbitrators for the selected hearing location. After the parties receive the arbitrator lists, the parties select their panel through a process of striking and ranking the arbitrators on the lists. Under the proposed amendments, NLSS would randomly select three arbitrators from the Special Arbitrator Roster to consider the straight-in request. The parties, whose interests may be aligned, would not have the ability to select the arbitrators. 17 See infra note 22 and accompanying text. 18 The concept for the CRD system was developed by FINRA jointly with NASAA. The CRD system fulfills FINRA’s statutory obligation to establish and maintain a system to collect and retain registration information set forth in Section 15A(i) of the VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 FINRA operates the CRD system pursuant to policies developed by FINRA and NASAA. FINRA, state securities regulators and the SEC use the CRD system as an important source of regulatory information to help inform registrations, examinations, investigations and disciplinary actions to protect investors and safeguard the markets. In addition, broker-dealer firms use information in the CRD system to help them make informed employment decisions.19 In general, the information in the CRD system is reported by registered brokerdealer firms, associated persons and regulatory authorities in response to questions on the uniform registration forms.20 These forms are used to collect registration information, which includes, among other things, administrative, regulatory, criminal history, financial and other information about associated persons, such as investment-related, customer-initiated arbitrations, civil litigations or customer complaints (i.e., ‘‘customer dispute information’’). Customer dispute information maintained in the CRD system is reported through Forms U4 and U5.21 Pursuant to rules approved by the SEC and pursuant to its statutory mandate, FINRA makes specific CRD information publicly available through BrokerCheck.22 BrokerCheck is a free Exchange Act. NASAA and state regulators play a critical role in the ongoing development and implementation of the CRD system. 19 As of December 31, 2021, over 60 million registrations for associated persons have been processed through the CRD system over a period spanning more than 20 years. 20 The uniform registration forms are Form BD (Uniform Application for Broker-Dealer Registration), Form BDW (Uniform Request for Broker-Dealer Withdrawal), Form BR (Uniform Branch Office Registration Form), Form U4 (Uniform Application for Securities Industry Registration or Transfer), Form U5 (Uniform Termination Notice for Securities Industry Registration) and Form U6 (Uniform Disciplinary Action Reporting Form). 21 FINRA, NASAA and state securities regulators developed Forms U4 and U5. Any amendments to these uniform registration forms require collaboration with, and agreement between FINRA, NASAA and state securities regulators before being filed with the SEC for approval. Several questions on Forms U4 and U5 require associated persons to disclose certain investment-related, customerinitiated arbitrations, civil litigations or customer complaints which allege sales practice violations. See Form U4, Question 14I, https://www.finra.org/ sites/default/files/form-u4.pdf and Form U5, Question 7E, https://www.finra.org/sites/default/ files/form-u5.pdf. 22 BrokerCheck fulfills FINRA’s statutory obligation under Section 15A(i) of the Exchange Act to establish and maintain a readily accessible electronic or other process, to receive and promptly respond to inquiries regarding registration information on, among others, broker-dealer firms and associated persons. A detailed description of the information made available through PO 00000 Frm 00004 Fmt 4701 Sfmt 4703 tool available on FINRA’s website to help investors make informed choices about the associated persons and brokerdealer firms with whom they may conduct business.23 As part of its statutory obligation, FINRA publishes on BrokerCheck extensive disclosure information, including customer dispute information for associated persons who are currently or were formerly registered with FINRA.24 The collection of registration information in the CRD system and the disclosure of the information through BrokerCheck serves three important purposes: (1) allowing investors to obtain information about an associated person or broker-dealer firm with whom they may do business; (2) providing securities regulators with a critical regulatory tool in overseeing the activities of associated persons and in detecting regulatory problems; and (3) providing broker-dealer firms with information for use in making informed employment decisions. The value of the information is dependent on its completeness and accuracy. The absence of accurate information, as well as the presence of clearly inaccurate information, decreases the reliability and hence the value of the disclosure regime. Sometimes, associated persons seek to remove, or ‘‘expunge,’’ customer dispute information from the CRD system and, thereby, from BrokerCheck. To do this, FINRA rules require that an associated person must obtain an order from a court of competent jurisdiction (1) directing such expungement or (2) confirming an arbitration award containing expungement relief.25 FINRA will expunge customer dispute information from the CRD system only pursuant to a court order. As discussed in more detail below, FINRA rules specify a narrow set of BrokerCheck is available at https://www.finra.org/ investors/about-brokercheck. 23 In 2021 alone, almost 38.3 million searches of firms and financial professionals were conducted on BrokerCheck. 24 As of December 31, 2021, BrokerCheck disclosed information about approximately 3,400 broker-dealer firms and approximately 612,000 associated persons. BrokerCheck also disclosed information about more than 17,000 broker-dealer firms and 548,000 associated persons formerly registered with FINRA. Formerly registered associated persons, although no longer in the securities industry in a registered capacity, may work in other investment-related industries or may seek to attain other positions of trust with potential investors. Pursuant to FINRA rules which are approved by the SEC, records for formerly registered associated persons are available in BrokerCheck for 10 years after an associated person leaves the brokerage industry, and associated persons who are the subject of disciplinary actions and certain other disclosure events remain on BrokerCheck permanently. 25 See FINRA Rule 2080. E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices circumstances in which expungement of customer dispute information from the CRD system is appropriate. An arbitrator considering an expungement request in the DRS arbitration forum must make a finding that the information to be expunged is factually impossible, clearly erroneous or false, or that the associated person was not involved in the alleged misconduct.26 When these standards were approved by the SEC, it was contemplated that expungement would be an extraordinary remedy that would be allowed only in these limited circumstances.27 C. Requesting Expungement Through the DRS Arbitration Forum The process of seeking expungement through the DRS arbitration forum originally developed when associated persons who were not found liable in a customer arbitration asked the panel in that same case to expunge the underlying customer dispute from the CRD system. Use of the DRS arbitration forum for expungement subsequently expanded when associated persons began requesting expungement through straight-in requests. Typically, these straight-in requests for expungement are filed after the customer arbitration settles or where a customer complaint has not evolved into a customer arbitration. Straight-in requests present inherent difficulties and panels deciding straight-in requests issue awards containing expungement relief more often than panels deciding expungement requests made in customer arbitrations.28 For either type of expungement request initiated in the DRS arbitration forum, an independent arbitrator or a panel of independent arbitrators decides whether the party requesting expungement has established one of the Rule 2080(b)(1) grounds for expungement.29 Pursuant to FINRA rules, in order to issue an award containing expungement relief, the panel shall first hold a recorded hearing session regarding the appropriateness of expungement of the customer dispute information, and in cases involving 26 See FINRA Rules 2080, 12805 and 13805. Securities Exchange Act Release No. 58886 (October 30, 2008), 73 FR 66086 (November 6, 2008) (Order Approving File No. SR–FINRA–2008–010). 28 From January 2016 to December 2021 (the ‘‘sample period’’), an arbitrator or panel issued awards containing expungement relief in response to 58 percent of requests made during a customer arbitration but issued awards containing expungement relief in response to 84 percent of straight-in requests. See infra Item II.B.2., ‘‘Economic Baseline,’’ for further discussion. 29 See infra note 31 and accompanying text (discussing the grounds for issuing an award containing expungement relief). khammond on DSKJM1Z7X2PROD with NOTICES2 27 See VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of the settlement.30 FINRA rules also require the panel to specify in the award which of the Rule 2080(b)(1) grounds serves as a basis for the expungement order and provide a brief written explanation of the reasons for its finding that one or more of the Rule 2080(b)(1) grounds applies to the facts of the case.31 Thus, to include expungement relief in an award, the panel must find that: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the associated person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.32 Arbitration awards are final and binding unless vacated based on one of the limited grounds set forth in applicable state or federal statutes.33 These FINRA rules are supplemented with extensive guidance and training provided to DRS’s independent arbitrators. DRS has enhanced its expungement training for arbitrators to emphasize the importance of the information in the CRD system and BrokerCheck, and to underscore the arbitrator’s important role in maintaining the relevancy and integrity 30 See FINRA Rules 12805 and 13805. supra note 30; see also Securities Exchange Act Release No. 58886 (October 30, 2008), 73 FR 66086, 66087 (November 6, 2008) (Order Approving File No. SR–FINRA–2008–010) (stating that new Rules 12805 and 13805 require the arbitration panel to indicate ‘‘which of the grounds for expungement in Rule [2080](b)(1)(A)–(C) serves as the basis for the expungement . . . ’’); Regulatory Notice 08–79 (December 2008) (stating that ‘‘[t]he arbitration panel must indicate which of the grounds for expungement under Rule [2080](b)(1)(A)–(C) serve as the basis for their expungement order, and provide a brief written explanation of the reasons for ordering expungement’’); FINRA Dispute Resolution Services Arbitrators Guide, p. 74, https://www.finra.org/sites/default/files/arbitratorsref-guide.pdf (explaining that ‘‘FINRA Rule 2080 establishes procedures to ensure that expungement occurs only when the arbitrators find and document one of [the three grounds that are listed in FINRA Rule 2080(b)]’’); Guidance, supra note 5. DRS’s Basic Arbitrator Training Program also explains that expungement may occur only after the arbitrators find and document one of these three grounds. See also infra note 162. 32 See FINRA Rules 2080(b)(1), 12805 and 13805. 33 Arbitration awards are subject to very limited judicial review under the Federal Arbitration Act and state arbitration statutes. A court of competent jurisdiction will typically confirm an award unless it is vacated or modified. Generally, an award that contains expungement of customer dispute information will not be vacated unless there is evidence that the panel exceeded its authority, was biased, or engaged in misconduct. See 9 U.S.C. 10 (providing grounds for vacatur of an arbitration award under the Federal Arbitration Act). 31 See PO 00000 Frm 00005 Fmt 4701 Sfmt 4703 50173 of the information in those systems. DRS requires arbitrators to take mandatory online training on expungement to be eligible to serve as an arbitrator. The training includes materials that arbitrators should review when considering expungement requests, with a particular focus on the Guidance, first published in 2013 and expanded further periodically thereafter.34 The Guidance explains the requirements of FINRA Rules 12805 and 13805 and provides arbitrators with best practices and recommendations to follow when deciding expungement requests.35 As stated above, FINRA will expunge customer dispute information from the CRD system only pursuant to a court order. FINRA Rule 2080, which was developed in close consultation with representatives of NASAA and state securities regulators, provides that associated persons seeking expungement of customer dispute information from the CRD system must obtain an order from a court of competent jurisdiction directing expungement relief or confirming an arbitration award that contains expungement relief.36 If a court directs 34 See Guidance, supra note 5. Guidance, supra note 5. DRS also periodically provides additional materials to arbitrators to keep them informed about any changes to the expungement rules or DRS arbitration forum practices. DRS offers an updated online ‘‘Neutral Workshop’’ on expungement, which further emphasizes the best practices described in the Guidance. A Neutral Workshop is an online discussion between or among experienced arbitrators on a specific arbitration topic, with a DRS staff member as a moderator. The discussions are posted on FINRA’s website as a free, educational tool. Additional information about expungement rules and DRS arbitration forum practices have been provided to arbitrators via a number of articles in a DRS staff quarterly newsletter, The Neutral Corner, which provides arbitrators and mediators with updates on important rules and procedures within the DRS arbitration forum and is distributed to FINRA neutrals (arbitrators and mediators) and published on FINRA’s website. See, e.g., The Neutral Corner Volume 1–2016 (Changes to Expungement Requests), https://www.finra.org/sites/default/files/ The_Neutral_Corner_Volume_1_2016_0.pdf; The Neutral Corner Volume 4–2015 (Questions and Answers: Parties Making Second Expungement Requests After Previous Denial), https:// www.finra.org/sites/default/files/The_ Neutral%20Corner_Volume_4_2015.pdf; The Neutral Corner Volume 1–2015 (Updated Expungement Guidance), https://www.finra.org/ sites/default/files/Neutral_Corner_Volume.1_ 2015.pdf; and The Neutral Corner Volume 3–2014 (Prohibited Conditions Relating to Expungement of Customer Dispute Information; Expanded Expungement Guidance; Questions and Answers: Expungement; Expungement Training: Updated to Include Rule 2081), https://www.finra.org/sites/ default/files/Neutral%20Corner_Volume%203_ 0.pdf. 36 FINRA Rule 2080(a). FINRA Rule 2080 also requires that FINRA be named as an additional 35 See E:\FR\FM\15AUN2.SGM Continued 15AUN2 50174 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices expungement or confirms an arbitration award containing expungement, the customer dispute information is removed from the CRD system, and is no longer made public through BrokerCheck. khammond on DSKJM1Z7X2PROD with NOTICES2 D. Concerns With the Current Expungement Process While commenters have raised concerns generally about associated persons’ use of the DRS arbitration forum to seek expungement, their concerns have been particularly focused on straight-in requests. Some of these concerns, however, also apply to expungement requests filed in customer arbitrations that settle, where the panel from the customer arbitration then holds a hearing to consider the expungement request.37 First, straight-in requests often involve aged customer dispute information reported on the associated person’s CRD record a number of years prior to the expungement request.38 As party in any court proceeding related to the expungement of customer dispute information, unless FINRA waives being named. See FINRA Rule 2080(b). 37 Concerns with the expungement process were previously considered by the FINRA Dispute Resolution Task Force (‘‘Task Force’’), whose members included representatives from the industry and the public with a broad range of interests in securities dispute resolution. See FINRA Dispute Resolution Task Force, https:// www.finra.org/arbitration-mediation/finra-disputeresolution-task-force. FINRA formed the Task Force to consider possible enhancements to the DRS arbitration and mediation forum. At the time, the Task Force noted that the majority of issues that arise in the expungement process are those involving settled cases that do not go to final resolution because in such cases: (1) the panel selected by the parties may not have heard the full merits of the customer dispute and, therefore, may not bring to bear any special insights in determining whether to grant an expungement request and (2) claimants or their counsel have little incentive to participate in an expungement hearing once their dispute has been settled. The Task Force unanimously recommended, in its final report, the creation of a special arbitration panel consisting of experienced arbitrators from the chairperson roster who have received enhanced training on expungement to decide expungement requests in settled customer arbitrations. See Final Report and Recommendations of the FINRA Dispute Resolution Task Force (Dec. 16, 2015), https://www.finra.org/ sites/default/files/Final-DR-task-force-report.pdf. The Task Force issued its final report with 51 recommendations. DRS has taken action on all of the 51 recommendations. See FINRA Dispute Resolution Task Force Recommendations Final Status Report (Jan. 15, 2019), https://www.finra.org/ sites/default/files/DR_task_report_status_ 011519.pdf. 38 FINRA rules provide that no claim shall be eligible for submission to arbitration under the Codes where six years have elapsed from the occurrence or event giving rise to the claim. See FINRA Rules 12206(a) and 13206(a). This six-year eligibility rule applies to all arbitration claims, including those requesting expungement of customer dispute information. The issue of eligibility may be raised in a motion by the parties or sua sponte by the arbitrators. See Horst v. FINRA, VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 a result, documents or information relating to the dispute may no longer be available.39 Second, although the Guidance provides that an arbitrator must ensure the customer has notice and an opportunity to participate in the expungement hearing, customers and their representatives typically do not participate in hearings in straight-in requests and, therefore, the panel may receive information only from the associated person requesting expungement.40 Third, the broker-dealer firm named in the straight-in request by the associated person may not have any relevant documents pertaining to the customer dispute because the event occurred while the associated person was employed at a different firm, or the respondent firm may support the expungement request because it has an interest in removing negative information from the associated person’s CRD record.41 Fourth, associated persons are also making repeated attempts to seek expungement of the same customer dispute information. For example, some associated persons make requests for expungement (by filing straight-in requests) after withdrawing or deciding not to pursue an expungement request made in the customer arbitration, presumably believing that another panel that has not heard the merits of the customer’s claim may be more likely to decide expungement in their favor. FINRA is concerned about this practice of ‘‘arbitrator shopping,’’ particularly No. A–18–777960–C (Dist. Ct. Nevada Oct. 25, 2018) (Order Denying Motion to Vacate Arbitration Award). In addition, FINRA Rules 12409 and 13413 provide that the arbitrators have the authority to interpret and determine the applicability of all provisions under the Codes. Thus, the decision of whether to dismiss a claim pursuant to this six-year eligibility rule is within the sole discretion of the panel. See Howsam v. Dean Witter Reynolds, 537 U.S. 79, 85–86 (2002) (finding that an arbitrator properly decides issues of eligibility). Such interpretations and decisions are final and binding upon the parties. 39 For example, during the sample period, approximately three-fifths of the 6,476 customer dispute information disclosures were sought to be expunged in straight-in requests that were filed six years or longer after the close of a customer arbitration or the initial reporting of the customer complaint. 40 See also supra note 37 (discussing similar concerns with expungement hearings in settled customer arbitrations). 41 FINRA rules do not currently specify who associated persons must name when filing a straight-in request. Typically, associated persons file their straight-in requests against the brokerdealer firm at which the associated person is currently employed. On rare occasions, straight-in requests are filed against a customer. As discussed below, the proposed amendments would prohibit these filings against the customer. See proposed Rule 12805(a)(3). PO 00000 Frm 00006 Fmt 4701 Sfmt 4703 when associated persons withdraw an original expungement request after the panel has been made aware of evidence that could result in the denial of the expungement request. FINRA has also observed that persons who are not named as a party in a customer arbitration may attempt to seek expungement (using straight-in requests) after expungement was denied in the customer arbitration to which they were not a party, claiming they were not aware of the expungement request in the customer arbitration.42 In addition, FINRA has observed that associated persons are moving to vacate arbitration awards that deny expungement relief and then seeking expungement in a new proceeding.43 As discussed in detail below, the proposed amendments would make significant enhancements to the current expungement process. These enhancements would address the concerns identified by FINRA, the Task Force and other interested parties and provide additional safeguards for ensuring that the information maintained in the CRD system and disclosed through BrokerCheck is accurate and complete.44 II. Proposed Rule Change Under the proposed rule change, an associated person would only be permitted to seek expungement of customer dispute information in the 42 In these circumstances, the customer arbitration is filed against the broker-dealer firm, without formally naming the associated person, but alleging that the associated person was involved in the alleged violation. In 2009, the SEC approved amendments to Forms U4 and U5 to require a broker-dealer firm to report allegations of sales practice violations made against an associated person in an arbitration or a civil litigation even when the associated person is not a named party in the proceeding. The information reported about such disputes is now maintained in the CRD system as part of the associated person’s record and is disclosed through BrokerCheck. See Securities Exchange Act Release No. 59916 (May 13, 2009), 74 FR 23750 (May 20, 2009) (Order Approving File No. SR–FINRA–2009–008). These ‘‘unnamed persons’’ may seek to expunge customer dispute information from the CRD system by: (1) asking a party to the customer arbitration, usually the firm, to request expungement on their behalf; (2) seeking to intervene in the customer arbitration; (3) initiating a new arbitration in which the unnamed person requests expungement and names the customer or firm as the respondent; or (4) seeking expungement in a court of competent jurisdiction. 43 If an award denying expungement is vacated and the associated person then seeks expungement in court, FINRA may oppose expungement in court if FINRA was not provided notice or an opportunity to be heard in the proceeding to vacate the award. 44 The proposed rule change would apply to all members, including members that are funding portals or have elected to be treated as capital acquisition brokers (‘‘CABs’’), given that the funding portal and CAB rule sets incorporate the impacted FINRA rules by reference. E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices DRS arbitration forum by complying with the requirements of proposed Rules 12805 (expungement requests in a customer arbitration), 13805 (straight-in requests under the Industry Code) or 12800(d) (expungement requests in a simplified customer arbitration). The discussion below of the proposed rule change is divided into seven areas: (A) requests for expungement under the Customer Code; (B) straight-in requests under the Industry Code and the Special Arbitrator Roster; (C) limitations on expungement requests; (D) requirements relating to all expungement hearings; (E) notifications to customers and to state securities regulators regarding expungement requests; (F) attendance and participation of an authorized representative of state securities regulators in straight-in requests; and (G) expungement requests during simplified customer arbitrations. A. Requests for Expungement Under the Customer Code FINRA Rule 12805 sets forth requirements that arbitrators must meet in order to issue an award containing expungement of customer dispute information under the Customer Code.45 The rule does not, however, provide guidance for associated persons on how and when they may request expungement during the customer arbitration, or on when arbitrators must make expungement determinations. The proposed rule change would amend FINRA Rule 12805 to set forth requirements for expungement requests filed by an associated person during a customer arbitration. 1. Expungement Requests During the Customer Arbitration khammond on DSKJM1Z7X2PROD with NOTICES2 a. By a Respondent Named in a Customer Arbitration Under current practice, an associated person who is named as a respondent in a customer arbitration (‘‘named associated person’’) may request expungement at any time during the 45 FINRA Rule 12805 provides that a panel must comply with the following requirements in order to grant expungement: (a) hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement; (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 2080 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 2080 grounds for expungement applies to the facts of the case; and (d) assess all DRS arbitration forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief. See also FINRA Rule 13805. VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 customer arbitration or separately from the customer arbitration in a straight-in request.46 If a named associated person requests expungement during the customer arbitration, does not withdraw the request and the case goes to hearing and closes by award, the panel in the customer arbitration will also decide the expungement request and include the decision as part of the award. If the customer arbitration does not close by award after a hearing (e.g., settles) and the associated person continues to pursue the expungement request, the panel from the customer arbitration will hold a hearing regarding the appropriateness of expungement.47 Under the proposed rule change, if a named associated person seeks to expunge customer dispute information associated with the customer’s statement of claim, the named associated person must make the expungement request during the customer arbitration.48 As discussed below, these requests would be subject to limitations on how and when the requests may be made.49 If the associated person does not request expungement of the customer dispute information associated with the customer’s statement of claim during the customer arbitration, the associated person would forfeit the opportunity to seek expungement of the same customer dispute information in any subsequent proceeding.50 The Director would be authorized to deny the DRS arbitration forum to requests made during a customer arbitration to expunge customer dispute information that is not associated with the customer’s 46 There are several ways in which a named associated person may request expungement during a customer arbitration. The request may be included in the answer to the statement of claim that must be submitted within 45 days of receipt of the statement of claim, and may include other claims and remedies requested. See FINRA Rules 12303(a) and (b); see also FINRA Rules 13303(a) and (b). The expungement request may also be included in other pleadings (e.g., a counterclaim, a cross claim, or a third party claim) and must be filed with the Director. See FINRA Rule 12100(x). The associated person may also request at any time during the case (outside of a pleading) that the panel consider the person’s expungement request during the hearing. Under FINRA Rule 12503, such a request is treated like a motion, which gives the other parties an opportunity to state objections. If there is an objection, the panel must decide the motion pursuant to FINRA Rule 12503(d)(5). See also FINRA Rules 13503 and 13503(d)(5). 47 See FINRA Rule 12805. 48 See proposed Rule 12805(a)(1)(A). The customer dispute information associated with a customer’s statement of claim would include a written customer complaint or civil litigation brought by the same customer that addresses the same allegations. 49 See proposed Rule 12805(a)(1)(B); see also infra Item II.A.1.II.C., ‘‘Limitations on Expungement Requests.’’ 50 See proposed Rule 12805(a)(1)(A). PO 00000 Frm 00007 Fmt 4701 Sfmt 4703 50175 statement of claim.51 The Director would also be authorized to deny the forum if a named associated person does not request expungement of the customer dispute information associated with the customer’s statement of claim during the customer arbitration but then seeks expungement of the same customer dispute information in a subsequent proceeding.52 FINRA is proposing to require that a named associated person request expungement of customer dispute information associated with a customer’s statement of claim during the customer arbitration because, if the arbitration closes by award after a hearing, the panel from the customer arbitration will be best situated to decide the related issue of expungement. Requiring the named associated person to request expungement in the customer arbitration increases the likelihood that a panel will have input from all parties and access to all of the evidence, testimony and other documents to make an informed decision on the expungement request. FINRA recognizes that this requirement could result in some named associated persons filing expungement requests to preserve their ability to make an expungement request, regardless of the potential outcome. FINRA believes, however, that the potential costs that would be incurred by associated persons, arbitrators and the DRS arbitration forum if named associated persons file expungement requests to preserve the ability to request expungement are appropriate given the potential benefit of having customer input and a complete factual record for the panel to decide an expungement request. i. Method of Requesting Expungement The proposed rule change would limit how and when expungement requests may be made during the customer arbitration. Under the proposed rule change, if a named associated person requests expungement during the customer arbitration, the request must be included in the answer or a separate pleading requesting expungement.53 If the request is included in the answer, it must be filed within 45 days of receipt 51 See proposed Rule 12203(b); see also infra Item II.A.1.II.C.3., ‘‘Director’s Authority to Deny the Forum.’’ 52 See proposed Rules 12805(a)(1)(A), 13203(b) and 13805(a)(2)(A)(vi); see also infra Item II.A.1.II.C.3., ‘‘Director’s Authority to Deny the Forum.’’ 53 See proposed Rule 12805(a)(1)(C)(i). FINRA Rules 12100(x) and 13100(v) would be amended to define a ‘‘separate document requesting expungement’’ as a pleading under the Codes. E:\FR\FM\15AUN2.SGM 15AUN2 50176 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices of the customer’s statement of claim in accordance with existing requirements under the Codes.54 If the named associated person requests expungement in a separate pleading requesting expungement, rather than the answer, the request must be filed no later than 60 days before the first scheduled hearing begins.55 The proposed deadline should provide the named associated person with enough time to assess the customer’s case and the potential merits of an expungement request and decide whether to file the request. The 60-day timeframe would also provide the parties to the customer arbitration with reasonable case preparation time, since the expungement issues will overlap with the issues raised by the customer’s claim. If a named associated person seeks to request expungement after the 60-day filing deadline, the associated person would be required to file a motion requesting an extension, which would be decided by the panel.56 ii. Required Contents of an Expungement Request Under the proposed rule change, a request for expungement by a named associated person in a customer arbitration must include the applicable filing fee under the Code.57 In addition, a named associated person would be required to provide the CRD number of the party requesting expungement, each CRD occurrence number that is the subject of the request and the case name and docket number associated with the customer dispute information.58 These requirements would help ensure that FINRA, the panel, and the parties understand who is requesting expungement and which customer dispute information is the subject of the request. The proposed rule change would also require the named associated person requesting expungement to explain whether expungement of the same customer dispute information was (i) previously requested and, if so (ii) how 54 See supra note 46. proposed Rule 12805(a)(1)(C)(i). 56 See proposed Rule 12805(a)(1)(C)(i). Pursuant to FINRA Rule 12503, if an associated person files a motion seeking an extension of the 60-day deadline, the opposing parties may state objections to extending the deadline, and the panel would decide the motion. 57 See proposed Rule 12805(a)(1)(C)(ii)a. 58 See proposed Rule 12805(a)(1)(C)(ii)b. through d. An occurrence is a disclosure event that is reported to the CRD system via one or more Disclosure Reporting Pages. Each occurrence contains details regarding a specific disclosure event. An occurrence can have as many as three sources reporting the same event: Forms U4, U5 and U6. khammond on DSKJM1Z7X2PROD with NOTICES2 55 See VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 it was decided.59 This requirement would assist with implementation of the proposed prohibition on parties making second requests for expungement, discussed in more detail below.60 This proposed requirement is also consistent with language in the existing Guidance stating that arbitrators should ask a party requesting expungement whether an arbitration panel or a court previously denied expungement of the customer dispute information at issue and, if there was a prior denial, the expungement request should be denied.61 Under the proposed rule change, if an expungement request fails to include any of the proposed requirements for requesting expungement, the request would be considered deficient and would not be served unless the deficiency is corrected.62 FINRA believes these proposed requirements for named associated persons requesting expungement are necessary for the timely consideration and orderly administration of expungement requests as well as to maintain the integrity of the CRD system. b. Expungement Requests by a Party Named in the Customer Arbitration On Behalf Of an Unnamed Person The Codes do not specifically address on-behalf-of requests, i.e., expungement requests made by a party named in a customer arbitration on behalf of an unnamed person.63 Under current practice, a party to a customer arbitration may file an on-behalf-of request for expungement during the customer arbitration. If the party (typically, a firm) files the request and the customer arbitration closes by award after a hearing, the panel will decide the expungement request and include the decision in the award. If the customer arbitration does not close by award after a hearing (e.g., settles), either the requesting party or the unnamed person could ask the panel to consider and decide the expungement request before it disbands. In this circumstance, the 59 See proposed Rule 12805(a)(1)(C)(ii)e. infra Item II.A.1.II.A.1.b.i., ‘‘Method of Requesting Expungement On Behalf Of an Unnamed Person.’’ 61 See Guidance, supra note 5. 62 See proposed Rules 12307(a)(8) through (11) and 12805(a)(1)(C)(ii). 63 The proposed rule change would define an unnamed person as ‘‘an associated person, including a formerly associated person, who is identified in a Form U4, Form U5, or Form U6, as having been the subject of an investment-related, customer-initiated arbitration claim that alleged that the associated person or formerly associated person was involved in one or more sales practice violations, but who is not named as a respondent in the arbitration.’’ See proposed Rule 12100(ff). 60 See PO 00000 Frm 00008 Fmt 4701 Sfmt 4703 panel from the customer arbitration will hold a hearing regarding the appropriateness of expungement.64 The proposed rule change would codify the ability of a party to the customer arbitration to file an on-behalfof request during a customer arbitration.65 Under the proposed rule change, a party to a customer arbitration may file an on-behalf-of request that seeks to expunge customer dispute information associated with the customer’s statement of claim, provided the request is eligible for arbitration under proposed Rule 12805.66 Filing an on-behalf-of request would be permissive, not mandatory.67 However, as discussed below, if the named party and the unnamed person agree to such a request, FINRA would require them to sign a form consenting to the on-behalfof request which would help ensure that the unnamed person is fully aware of the request and that the firm is agreeing to represent the unnamed person for the purpose of requesting expungement during the customer arbitration. i. Method of Requesting Expungement On Behalf Of an Unnamed Person The unnamed person would be required to consent to the on-behalf-of request in writing.68 In particular, the party filing an on-behalf-of request would be required to submit a signed Form Requesting Expungement on Behalf of an Unnamed Person (‘‘Form’’) and a statement requesting expungement with the Director.69 The proposed rule change would not require that an on-behalf-of request be included in an answer or a separate pleading requesting expungement (although it could be), since the request seeks relief on behalf of a person who is not a party to the arbitration. However, the party making the request would be required to file the request, which would include the Form, no later than 60 days before the first scheduled hearing.70 By filing and serving the expungement request on behalf of the unnamed person, the requesting party would be agreeing to represent the unnamed person and the unnamed person’s interests and to pursue the request for expungement on 64 See FINRA Rule 12805. proposed Rule 12805(a)(2). 66 See proposed Rule 12805(a)(2)(B). 67 See proposed Rule 12805(a)(2)(A). 68 See proposed Rule 12805(a)(2)(A). 69 See proposed Rule 12805(a)(2)(C)(i) and (ii). The unnamed person whose CRD record would be expunged and the party requesting expungement on the unnamed person’s behalf must sign the Form. 70 See proposed Rule 12805(a)(2)(C)(iii). The 60day deadline is the same as the proposed deadline for a named associated person to request expungement through a separate pleading requesting expungement in a customer arbitration. 65 See E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices behalf of the unnamed person during the customer arbitration.71 FINRA believes that requiring the submission of the Form would help address the issue of an unnamed person not being made aware of the on-behalfof request. As discussed above, FINRA is concerned that some associated persons are filing arbitration claims seeking expungement of the same customer dispute information that was the subject of a previous denial by a panel of an on-behalf-of request.72 By signing the Form, the unnamed person would be consenting to the on-behalf-of request and agreeing to be bound by the panel’s decision on the request.73 In addition, the Form would provide that, if the customer arbitration closes by award after a hearing, the unnamed person would be barred from filing a request for expungement for the same customer dispute information in a subsequent proceeding. The unnamed person’s signature would serve as acknowledgement of this consequence. ii. Required Contents of an On-Behalf-Of Expungement Request Under the proposed rule change, an on-behalf-of request would be required to include the same elements as a request for expungement by a named associated person during a customer arbitration.74 Thus, the party requesting expungement on behalf of an unnamed person (typically, the firm) would be required to provide the applicable filing fee; the CRD number of the unnamed person; each CRD occurrence number that is the subject of the request; the case name and docket number associated with the customer dispute information; and an explanation of whether expungement of the same customer dispute information was (i) previously requested and, if so (ii) how it was decided. In addition, as discussed above, the party requesting expungement would be required to include the Form, signed by the unnamed person whose CRD record is 71 See proposed Rule 12805(a)(2)(D)(iii). supra note 42 and accompanying text. 73 See proposed Rule 12805(a)(2)(D)(i). By signing the Form, the unnamed person would also be agreeing to maintain the confidentiality of documents and information from the customer arbitration to which the unnamed person is given access and to adhere to any confidentiality agreements or orders associated with the customer arbitration. See proposed Rule 12805(a)(2)(D)(ii). The breach of this provision by the unnamed person could potentially subject the unnamed person to a claim for damages by an aggrieved party. 74 See proposed Rule 12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i); see also supra Item II.A.1.II.A.1.a.ii., ‘‘Required Contents of an Expungement Request.’’ khammond on DSKJM1Z7X2PROD with NOTICES2 72 See VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 the subject of the expungement request and the party filing the request. c. Deciding Expungement Requests during Customer Arbitrations The proposed amendments would require that if a named associated person or a party on behalf of an unnamed person has requested expungement during a customer arbitration and the case closes by award after a hearing, the panel from the customer arbitration must decide the expungement request during the customer arbitration in accordance with Rule 12805(c) and issue its decision on the request in the same award.75 If the customer arbitration closes other than by award (e.g., settles) or by award without a hearing, the panel would not consider the expungement request.76 Instead, to seek expungement relief, the associated person would need to file a straight-in request to expunge the customer dispute information associated with the customer arbitration as a new claim under proposed Rule 13805 against the member firm at which the associated person was associated at the time the customer dispute arose.77 A panel from the Special Arbitrator Roster would decide the straight-in request, as discussed in more detail below.78 i. Panel Decides the Expungement Request if the Customer’s Arbitration Closes by Award After a Hearing Currently, if a named associated person requests expungement, or a party files an on-behalf-of request, and the customer’s claim closes by award after a hearing, the panel may consider and decide the expungement request during the customer arbitration and issue its decision in the award. If, however, the party requesting expungement does not raise the issue of expungement during the hearing, the panel may not decide the request and may deem it withdrawn.79 In this instance, the associated person may seek to file the request again at a later date. 75 See proposed Rules 12805(a)(1)(D)(i) and (a)(2)(E)(i). 76 See proposed Rules 12805(a)(1)(D)(ii) and (a)(2)(E)(ii). 77 Under the Codes, a ‘‘member’’ includes any broker or dealer admitted to membership in FINRA, whether or not the membership has been terminated, suspended, cancelled, revoked, the member has been expelled or barred from FINRA or the member is otherwise defunct. See FINRA Rules 12100(s) and 13100(q); see also Securities Exchange Act Release No. 88254 (February 20, 2020), 85 FR 11157 (February 26, 2020) (Order Approving File No. SR–FINRA–2019–027). 78 See infra Item II.A.1.II.B.2., ‘‘Panel from the Special Arbitrator Roster Decides Requests Filed Under the Industry Code.’’ 79 See FINRA Rules 12702 and 13702. PO 00000 Frm 00009 Fmt 4701 Sfmt 4703 50177 Under the proposed rule change, if a named associated person requests expungement or a party files an onbehalf-of request during a customer arbitration and the customer’s claim closes by award after a hearing, the panel in the customer arbitration would be required to consider and decide the expungement request and issue its decision in the same award.80 This would help ensure that the panel from the customer’s arbitration—which has received input from all parties, reviewed the pleadings, and considered the evidence on the merits—would decide the expungement request.81 The proposed rule change would require the panel to decide the request even if the requesting party withdraws or fails to pursue the request. In this instance, the panel would deny the expungement request with prejudice.82 This would prevent associated persons from withdrawing expungement requests to avoid having their requests decided by the panel that heard the evidence on the customer’s arbitration claim, then seeking to re-file the request and receiving a potentially more favorable decision from a different set of arbitrators. ii. Panel Does Not Decide Expungement if the Customer’s Arbitration Closes Other Than by Award or by Award Without a Hearing Currently, if a named associated person requests expungement or a party files an on-behalf-of request, the customer arbitration does not close by award after a hearing (e.g., settles) and the requesting party continues to pursue the expungement request, the panel from the customer arbitration will hold a hearing regarding the appropriateness of expungement.83 If the named associated person or party requesting expungement does not request that the panel hold a separate hearing to decide the expungement request, the panel may deem the request withdrawn, and the associated person may seek to file the request again at a later date. The proposed rule change would provide that if, during a customer arbitration, a named associated person requests expungement or a party files an on-behalf-of request and the customer arbitration closes other than by award or by award without a hearing, the panel from the customer arbitration would not be permitted to decide the expungement 80 See proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i). 81 See proposed Rules 12805(a)(1)(D) and 12805(a)(2)(E). 82 See proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i). 83 See FINRA Rule 12805. E:\FR\FM\15AUN2.SGM 15AUN2 50178 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices khammond on DSKJM1Z7X2PROD with NOTICES2 request.84 Instead, the associated person would be required to seek expungement by filing a request to expunge the same customer dispute information as a straight-in request against the member firm at which the person was associated at the time the customer dispute arose under proposed Rule 13805, where a panel that is randomly selected from the Special Arbitrator Roster would decide the request.85 FINRA believes this approach reflects the importance of maintaining the integrity of information in the CRD system. When the customer arbitration closes other than by award or by award without a hearing, the panel selected by the parties in the customer arbitration may not have heard the presentation of the evidence on the merits of the case and, therefore, may not bring to bear any special insights in determining whether to issue an award containing expungement relief. In addition, customers or their representatives have little incentive to attend and participate in an expungement hearing once their case has settled. Requiring that an associated person file the expungement request as a straight-in request under the Industry Code to be heard and decided by a three-person panel that is randomly selected from the Special Arbitrator Roster would strengthen the expungement framework. As discussed in more detail below, while keeping in mind the importance of maintaining the integrity of information in the CRD system, this corps of experienced and specially trained arbitrators would follow the procedures set forth in proposed Rule 13805 to decide whether one or more of three grounds—the same three grounds contained in FINRA Rule 2080(b)(1)—exist in order to issue an award containing expungement relief. 2. No Intervening in Customer Arbitrations To Request Expungement The proposed amendments would prohibit unnamed persons from intervening in a customer arbitration and requesting expungement.86 If the associated person is neither a party to the arbitration nor the subject of an onbehalf-of request by another party to the arbitration, the associated person should not be able to intervene in the customers’ arbitration to request expungement. In these circumstances, the associated person’s conduct is unlikely to be fully addressed by the parties during the customer arbitration, and FINRA does not believe that the customer should have the presentation of their case interrupted or delayed by an associated person’s intervention to request expungement. In addition, there have been instances in customer arbitrations in which the unnamed person learns that the customer’s arbitration case is nearing conclusion. The associated person then files a motion to intervene in the case to ask the panel to consider an expungement request. As an unnamed person, the individual is not a party to the case and, therefore, has not made any arguments in support of the expungement request. Further, if the motion is granted, the parties to the case will be required to wait for a decision on the expungement request (which may necessitate another hearing) before their dispute is resolved, causing delay and additional cost to the parties. Accordingly, under the proposed rule change, unnamed persons would be prohibited from intervening in a customer arbitration and requesting expungement. Instead, the unnamed person would be able to file the request as a new claim against the member firm at which the person was associated at the time the customer dispute arose under proposed Rule 13805, where a panel from the Special Arbitrator Roster would decide the request.87 3. No Straight-In Requests Against Customers The proposed amendments would also prohibit an associated person from filing a straight-in request against a customer.88 Currently, straight-in requests are rarely filed against a customer.89 FINRA does not believe that customers should be compelled to attend or participate in a separate proceeding to decide an expungement request after the customer has resolved their arbitration claim or civil litigation. Accordingly, the proposed amendments would prohibit an associated person from filing a straight-in request against a customer. As discussed below, however, under the proposed rule change, customers would have the option to attend and participate in expungement hearings in straight-in 87 See proposed Rule 12805(a)(2)(E)(iii)b. proposed Rule 12805(a)(3). 89 During the sample period, FINRA is able to identify requests to expunge 11,619 customer dispute information disclosures from the CRD system. Of those, 6,476 were sought to be expunged in straight-in requests; 116 were sought to be expunged in straight-in requests filed against a customer. See infra Item II.B.2., ‘‘Economic Baseline,’’ for further discussion. 88 See 84 See proposed Rules 12805(a)(1)(D)(ii)a. and 12805(a)(2)(E)(ii)a. 85 See proposed Rules 12805(a)(1)(D)(ii)b. and 12805(a)(2)(E)(ii)b.; see also infra Item II.A.1.II.B.2., ‘‘Panel from the Special Arbitrator Roster Decides Requests Filed Under the Industry Code.’’ 86 See proposed Rules 12805(a)(2)(E)(iii) and 12800(d)(2)(D). VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4703 requests, and the proposed rule change would include provisions to facilitate such attendance and participation. B. Straight-In Requests Under the Industry Code and the Special Arbitrator Roster Under the proposed rule change, all requests to expunge customer dispute information that is not associated with a customer arbitration would be required to be filed as a straight-in request under proposed Rule 13805.90 In addition, an associated person could request expungement of customer dispute information associated with a customer arbitration under proposed Rule 13805 if: (1) the associated person is named in the arbitration or is the subject of an on-behalf-of request and the customer arbitration closes other than by award or by award without a hearing; or (2) the associated person is the subject of a customer arbitration, but is neither named in the arbitration nor the subject of an on-behalf-of request, and the customer arbitration closes for any reason. If an associated person requests expungement under proposed Rule 13805, a three-person panel randomly selected from the Special Arbitrator Roster in accordance with proposed Rule 13806 would decide the expungement request.91 1. Filing a Straight-In Request Under the Industry Code a. Applicability Under the proposed rule change, an associated person requesting expungement of customer dispute information as a straight-in request under the Industry Code must file a statement of claim in accordance with FINRA Rule 13302 against the member firm at which the person was associated at the time the customer dispute arose, unless the request is ineligible for arbitration under proposed Rule 13805(a)(2).92 The only way to request expungement of customer dispute information under the Industry Code 90 See proposed Rules 12805(a)(1)(A) and 13805(a)(1). As discussed above, under proposed Rule 12805, an associated person may request expungement in a customer arbitration of a customer complaint or civil litigation associated with a customer’s statement of claim. See supra note 48 and accompanying text. 91 See infra Item II.A.1.II.B.2.a. and b. (discussing eligibility requirements for and composition of the Special Arbitrator Roster). 92 See proposed Rule 13805(a)(1). FINRA Rule 13302 provides, in relevant part, that to initiate an arbitration, a claimant must file with the Director a signed and dated Submission Agreement, and a statement of claim specifying the relevant facts and remedies requested. E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices would be to file the request under proposed Rule 13805. The requirement that the associated person file the straight-in request against the member firm at which the person was associated at the time the customer dispute arose would help ensure that there is a connection between the respondent firm and the subject matter of the expungement request. For example, the firm at which the person requesting expungement was associated at the time the dispute arose should have knowledge of the dispute and access to documents or other evidence relating to the dispute. In addition, the proposed requirement would help ensure that the panel from the Special Arbitrator Roster would be able to request evidence from the member firm with information that is relevant to the expungement request. If the requisite connection is not present, the Director would be authorized to deny the use of the DRS arbitration forum for the request.93 b. Required Contents of Straight-In Requests The required contents of a straight-in request would be the same as those required for expungement requests filed under proposed Rule 12805.94 Thus, the associated person’s straight-in request would be required to contain the applicable filing fee; 95 the CRD number of the party requesting expungement; each CRD occurrence number that is the subject of the request; the case name and docket number associated with the customer dispute information, if applicable; and an explanation of whether expungement of the same customer dispute information was previously requested and, if so, how it was decided.96 In addition, as discussed below, the proposed rule change would impose limitations on when such requests may be made.97 93 See proposed Rule 13203(b). proposed Rule 13805(a)(3); see also supra Item II.A.1.II.A.1.a.ii., ‘‘Required Contents of an Expungement Request.’’ 95 FINRA would not assess a second filing fee when an associated person files a straight-in request if the associated person, or the requesting party in the case of an on-behalf-of request, had previously paid the filing fee to request expungement of the same customer dispute information during a customer arbitration. 96 See proposed Rule 13805(a)(3). If an expungement request under the Industry Code fails to include any of the proposed requirements for requesting expungement, the request would be considered deficient and would not be served unless the deficiency is corrected. See proposed Rules 13307(a)(7) through (11). 97 See infra Item II.A.1.II.C., ‘‘Limitations on Expungement Requests.’’ As discussed in more detail below, the straight-in request would be ineligible for arbitration under the Industry Code if: (1) a panel held a hearing to consider the merits of khammond on DSKJM1Z7X2PROD with NOTICES2 94 See VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 2. Panel From the Special Arbitrator Roster Decides Requests Filed Under the Industry Code If a straight-in request is filed in accordance with proposed Rule 13805, a three-person panel randomly selected from the Special Arbitrator Roster pursuant to proposed Rule 13806 would be required to hold an expungement hearing, decide the expungement request and issue an award.98 The proposed amendments would also provide that if the associated person withdraws or does not pursue the request, the panel would be required to deny the expungement request with prejudice.99 This requirement would foreclose the ability of associated persons to withdraw expungement requests to avoid having their requests decided by a panel that they believe does not favor their request, and then seek to re-file the request with the hope of obtaining a potentially more favorable decision from a different panel. a. Eligibility Requirements for the Special Arbitrator Roster The proposed rule change would include several requirements to help ensure that arbitrators on the Special Arbitrator Roster have the qualifications and training to decide straight-in requests. First, arbitrators on the Special Arbitrator Roster would be public arbitrators who are eligible for the chairperson roster.100 Public arbitrators are not employed in the securities industry and do not devote 20 percent or more of their professional work to the securities industry or to parties in disputes concerning investment accounts or transactions or employment relationships within the financial industry.101 Arbitrators are eligible for the chairperson roster if they have completed chairperson training the associated person’s request for expungement of the same customer dispute information; (2) a court of competent jurisdiction previously denied the associated person’s request to expunge the same customer dispute information; (3) the customer arbitration or civil litigation or customer complaint associated with the customer dispute information is not closed; (4) more than two years have elapsed since the customer arbitration or civil litigation associated with the customer dispute information has closed; (5) there was no customer arbitration or civil litigation associated with the customer dispute information and more than three years have elapsed since the date that the customer complaint was initially reported to the CRD system; or (6) a named associated person is prohibited from seeking expungement because they did not request expungement in the associated customer arbitration under proposed Rule 12805(a)(1)(A). See proposed Rule 13805(a)(2). 98 See proposed Rule 13805(a)(4). 99 See proposed Rule 13805(a)(4). 100 See proposed Rule 13806(b). 101 See supra note 3. PO 00000 Frm 00011 Fmt 4701 Sfmt 4703 50179 provided by FINRA and: (1) have a law degree and are a member of a bar of at least one jurisdiction and have served as an arbitrator through award on at least one arbitration administered by an SRO in which hearings were held; or (2) have served as an arbitrator through award on at least three arbitrations administered by an SRO in which hearings were held.102 These requirements would help ensure that the persons conducting the expungement hearing are impartial and experienced in managing and conducting arbitration hearings in the DRS arbitration forum.103 Second, the public chairpersons must have evidenced successful completion of, and agreement with, enhanced expungement training provided by FINRA.104 FINRA currently provides an Expungement Training module for arbitrators.105 This training, however, would be expanded for arbitrators seeking to qualify for the Special Arbitrator Roster. This would allow FINRA to further emphasize with the arbitrators on the Special Arbitrator Roster the unique, distinct role they play in determining whether to issue an award containing expungement relief, and that expungement should be issued in limited circumstances and only if the arbitrators unanimously find that the information to be expunged is factually impossible, clearly erroneous or false, or that the associated person was not involved in the alleged misconduct. Third, arbitrators on the Special Arbitrator Roster would also be required to have served as an arbitrator through award on at least four customer arbitrations administered by FINRA or by another SRO in which a hearing was held.106 FINRA believes that if an arbitrator has served on four arbitrations through to award, it would indicate that the arbitrator has gained the knowledge 102 See FINRA Rules 12400(c) and 13400(c). For purposes of this proposed rule change, public arbitrators who are eligible for the chairperson roster would include those arbitrators who have met the chairperson eligibility requirements of FINRA Rules 12400(c) or 13400(c), regardless of whether they have already served as a chair on an arbitration case. 103 The Task Force suggested that the arbitrators on its recommended special arbitration panel be chair-qualified, in part because of the training that arbitrators must complete before they can be added to the chairperson roster. See FINRA, Advanced Arbitrator Training, https://www.finra.org/ arbitration-mediation/advanced-arbitrator-training; see also supra note 37. 104 See proposed Rule 13806(b)(2)(A). 105 See supra note 35 and accompanying text. 106 See proposed Rule 13806(b)(2)(B). This requirement would not be satisfied by serving on arbitrations administered under the special proceeding option of the simplified arbitration rules. See FINRA Rule 12800(c)(3)(B). E:\FR\FM\15AUN2.SGM 15AUN2 50180 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices and experience in the DRS arbitration forum to conduct hearings.107 b. Composition of the Panel khammond on DSKJM1Z7X2PROD with NOTICES2 To minimize the potential for influence in the arbitrator selection process by the associated person and member firm, whose interests may be aligned, and to help ensure the development of a more complete factual record, the proposed rule change would require NLSS to select randomly the three public chairpersons from the Special Arbitrator Roster to decide a straight-in request filed by an associated person.108 The parties would not be permitted to agree to fewer than three arbitrators. The parties also would not be permitted to strike any arbitrators selected by NLSS nor stipulate to their removal,109 but would be permitted to challenge an arbitrator selected for cause.110 If an arbitrator is removed, NLSS would randomly select a replacement.111 The current process for selecting arbitrators—striking and combining ranked lists—would not be appropriate to use to select arbitrators to decide straight-in requests.112 In arbitrations outside of the expungement context, the parties are typically adverse, which means that during arbitrator selection, each side may rank arbitrators on the lists whom they believe may be favorable to their case. The adversarial nature of the proceedings serves to minimize the impact of each party’s influence in arbitrator selection. In contrast, a straight-in request filed by an associated person against a firm is less likely to be adversarial in nature. FINRA believes that the proposed rule change would prevent the associated person and member firm from collaboratively seeking to influence the outcome of the expungement request through arbitrator selection. FINRA recognizes that the proposed arbitrator selection process for straightin requests would also limit the associated person and member firm’s input on arbitrator selection for reasons that may be unrelated to whether the arbitrator would potentially be sympathetic to the expungement request, such as their perception of the 107 In 2021, 87 percent of FINRA customer arbitrations closed other than by award. 108 See proposed Rule 13806(b)(1). The first arbitrator selected would be the chair of the panel. See proposed Rule 13806(b)(3). 109 The parties also would not be permitted to stipulate to the use of pre-selected arbitrators (i.e., arbitrators that the parties find on their own to use in their cases). See proposed Rule 13806(b)(1). 110 See proposed Rule 13806(b)(4). 111 See proposed Rule 13806(b)(4). 112 See generally FINRA Rules 13403 and 13404. VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 arbitrator’s competence or efficiency. However, the arbitrators on the Special Arbitrator Roster would have the experience, qualifications and training necessary to conduct a fair and impartial expungement hearing in accordance with the proposed rules, and to make their determination based on a complete factual record developed during the expungement hearing. FINRA believes that the higher standards that the arbitrators must meet to serve on the Special Arbitrator Roster should mitigate the impact of the absence of party input on the selection of arbitrators. In addition, associated persons and member firms would still be permitted to challenge any arbitrator for cause.113 C. Limitations on Expungement Requests Currently, Rules 12805 and 13805 do not address when a party would not be permitted to file an expungement request in the DRS arbitration forum.114 The Guidance, however, describes several circumstances in which an expungement request should be ineligible for arbitration. The proposed rule change would incorporate the limitations contained in the Guidance and add time limits to when an associated person may file a straight-in request. 1. Limitations Applicable to Both Straight-In Requests and Expungement Requests During a Customer Arbitration The Guidance provides that if a panel or a court has issued an award or decision denying an associated person’s expungement request, the associated person may not request expungement of the same customer dispute information in another arbitration proceeding. In particular, the Guidance states that arbitrators should ask a party requesting expungement whether an arbitration panel or a court previously denied expungement of the customer dispute information at issue and, if there has been a prior denial, the arbitration panel must deny the expungement request.115 The proposed rule change would codify the Guidance by providing that an associated person may not file a request for expungement of customer dispute information if (1) a panel held a hearing to consider the merits of the associated person’s expungement request for the same customer dispute information or (2) a court of competent 113 See proposed Rule 13806(b)(4). see supra note 38 (describing time limits that apply to all arbitration claims, including expungement requests). 115 See Guidance, supra note 5. 114 But PO 00000 Frm 00012 Fmt 4701 Sfmt 4703 jurisdiction previously denied the associated person’s request to expunge the same customer dispute information.116 These proposed amendments would prevent an associated person from forum shopping, or seeking to return to the DRS arbitration forum to garner a favorable outcome on his or her expungement request.117 2. Limitations Applicable to Straight-In Requests Only As discussed below, under the proposed amendments, four additional limitations would apply to straight-in requests. a. No Straight-In Request if the Customer Arbitration, Civil Litigation or Customer Complaint Has Not Closed The Guidance provides that an associated person may not file a separate request for expungement of customer dispute information arising from a customer arbitration until the customer arbitration has concluded. The proposed rule change would codify and expand upon this limitation in the Guidance by providing that an associated person may not file a straight-in request under proposed Rule 13805 if the customer arbitration, civil litigation or customer complaint associated with the customer dispute information has not closed.118 The proposed rule change would prevent an associated person from filing a straight-in request while a customer arbitration or civil litigation associated with the customer dispute information that is the subject of the straight-in request is pending. It would also prevent potentially inconsistent expungement decisions on related customer dispute information. The proposed rule change would also help ensure that the panel which will decide the straight-in request is able to consider the final factual record from the customer arbitration or civil litigation. 116 See proposed Rules 12805(a)(1)(B)(i) and (ii) and 13805(a)(2)(A)(i) and (ii). The proposed rule change would require that the requesting party provide information about previous expungement requests and how such requests were decided. See proposed Rules 12805(a)(1)(C)(ii)e. and 13805(a)(3)(E). 117 FINRA notes that if a panel holds a hearing that addresses the merits of an associated person’s request for expungement, the Director would be authorized to deny the DRS arbitration forum to any subsequent request by the associated person or another party on behalf of the associated person to expunge the same customer dispute information. See proposed Rules 12203(b) and 13203(b). 118 See proposed Rule 13805(a)(2)(A)(iii). E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices and aged expungement requests in one straight-in request.124 b. Straight-In Request Prohibited if Named Associated Person Did Not Request Expungement in Customer Arbitration Under the proposed change, an associated person who is named in a customer arbitration must request expungement during the arbitration or forfeit the ability to seek to expunge the customer dispute information associated with the customer’s statement of claim in any subsequent proceeding.119 Accordingly, the proposed rule change would prohibit these associated persons from filing a straight-in request under the Industry Code seeking to expunge the customer dispute information associated with the customer’s statement of claim.120 c. Time Limits Applicable to Disclosures Arising After the Effective Date of the Proposed Rule Change khammond on DSKJM1Z7X2PROD with NOTICES2 FINRA is aware that many straight-in requests are filed many years after the customer arbitration closes or the customer complaint is reported in the CRD system.121 To encourage prompt filing of expungement requests, the proposed amendments would establish time limits for expungement requests that are specifically tied to the closure of customer arbitrations and civil litigations, or the reporting of customer complaints in the CRD system, as applicable.122 The proposed time limits should help encourage customer attendance and participation in expungement proceedings and help ensure that straight-in requests are brought before relevant evidence and testimony becomes stale or unavailable.123 The proposed time limits may also curtail the common practice of bundling multiple unrelated 119 See supra Item II.A.1.II.A.1.a., ‘‘Expungement Requests During the Customer Arbitration, By a Respondent Named in a Customer Arbitration,’’ and accompanying text. 120 See proposed Rule 13805(a)(2)(A)(vi). 121 See supra note 39. 122 FINRA Rules 12206 and 13206 provide that no claim shall be eligible for submission to arbitration where six years have elapsed from the occurrence or event giving rise to the claim. Under these Rules, the panel has discretion to determine if the claim, including an expungement request, is eligible for arbitration. See supra note 38. As discussed below, if the proposed rule change is approved by the Commission, this six-year eligibility rule would continue to apply to requests to expunge customer dispute information that arose prior to the effective date of the proposed rule change. 123 All customers from a customer arbitration or civil litigation, and all customers who initiated a customer complaint, would be notified of the expungement request and encouraged to attend and provide their input. See proposed Rule 13805(b)(1)(A). VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 (i) Two Years From the Close of a Customer Arbitration or Civil Litigation Under the proposed rule change, an associated person would be permitted to file a straight-in request within two years of the close of a customer arbitration or a civil litigation associated with the customer dispute information.125 The proposed amendments would allow an associated person to request expungement of customer dispute information associated with the customer arbitration or civil litigation—including any associated customer complaint disclosures—within two years after the customer arbitration or civil litigation closes.126 A two-year limitation period would allow the associated person sufficient time to determine whether to seek expungement by filing a straight-in request and provide a reasonable amount of time for the associated person to gather the documents, information and other resources required to file the expungement request. In addition, a two-year period would help ensure that the expungement hearing is held close enough in time to the customer arbitration or civil litigation, when information regarding the customer arbitration or civil litigation is available and in a timeframe that could increase the likelihood for the customer to attend and participate if the customer chooses to do so. The two-year time limit may also curtail the common practice of bundling multiple unrelated and aged expungement requests in one straight-in request. (ii) Three Years From the Date a Customer Complaint Is Reported to the CRD System Under the proposed rule change, an associated person would be prohibited from filing a straight-in request to expunge a customer complaint where more than three years have elapsed since the customer complaint was initially reported to the CRD system and there was no customer arbitration or civil litigation associated with the 124 For example, under the proposed time limits, associated persons would not have been able to include all customer dispute information disclosures in 44 percent of the straight-in requests. See infra Item II.B.3.D, ‘‘Time Limits for Filing Straight-in Requests—Quantitative Description.’’ 125 See proposed Rule 13805(a)(2)(A)(iv). 126 With respect to requests to expunge customer dispute information associated with a customer arbitration, an associated person would be permitted to file a straight-in request under this two-year time limitation only if expungement of the customer dispute information was not required to be decided during the customer arbitration. PO 00000 Frm 00013 Fmt 4701 Sfmt 4703 50181 customer dispute information.127 This means that if no customer arbitration or civil litigation associated with the customer complaint is filed, the associated person would have three years from the date the customer complaint was initially reported in the CRD system to file the expungement request.128 The three-year time limitation would help ensure that the expungement hearing is held close in time to the events that gave rise to the customer dispute and increase the likelihood of customer attendance and participation. Three years should also provide sufficient time for firms to complete their investigation of the complaint, for associated persons to develop a sense of whether the complaint may evolve into an arbitration or civil litigation, and for the associated person to gather the necessary resources and determine whether to seek expungement. The three-year time limitation may also curtail requests to expunge customer complaints that are filed many years after first being reported to the CRD system and the bundling of multiple unrelated and aged disclosures in a single expungement request. As discussed above, the Codes provide that no claim shall be eligible for submission to arbitration where six years have elapsed from the occurrence or event giving rise to the claim.129 As a result of this six-year eligibility rule, a customer arbitration may be filed after an associated person has filed and received an award in connection with a customer complaint associated with the customer arbitration. To avoid unfairly impacting a customer arbitration filed after a panel has issued an award on a request to expunge a customer complaint associated with the customer arbitration, the proposed rule change would provide that a prior expungement award shall not be admissible in the customer arbitration.130 127 See proposed Rule 13805(a)(2)(A)(v). customer complaint can be reported to the CRD system via a Form U4 or Form U5. Pursuant to FINRA Rule 1010, an associated person should be made aware of the filing of a Form U4 and any amendments thereto by the associated person’s member firm. In addition, Article V, Section 3 of the FINRA By-Laws requires that a member firm provide an associated person a copy of an amended Form U5, including one reporting a customer complaint involving the associated person. FINRA also provides several methods for associated persons and former associated persons to check their records, including online through BrokerCheck. 129 See supra note 38. 130 See proposed Rules 12604(c) and 13604(c). 128 A E:\FR\FM\15AUN2.SGM 15AUN2 50182 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices khammond on DSKJM1Z7X2PROD with NOTICES2 d. Time Limits Applicable to Disclosures Arising on or Prior to the Effective Date of the Proposed Rule Change The proposed amendments would also establish time limits for requests to expunge customer dispute information arising from customer arbitrations and civil litigations that close, and for customer complaints that were initially reported to the CRD system, on or prior to the effective date of the proposed rule change. Specifically, the proposed amendments would provide that if an expungement request is otherwise eligible under the six-year limitation period of FINRA Rule 13206(a), an associated person would be permitted to file a straight-in request under the Industry Code if: (1) the request for expungement is made within two years of the effective date of proposed rule change, and the disclosure to be expunged is associated with a customer arbitration or civil litigation that closed on or prior to the effective date; 131 or (2) the request for expungement is made within three years of the effective date of the proposed rule change, and the disclosure to be expunged is associated with a customer complaint initially reported to the CRD system on or prior to its effective date.132 3. Director’s Authority To Deny the Forum The Codes provide the Director with authority to decline the use of the DRS arbitration forum if the Director determines that ‘‘given the purposes of FINRA and the intent of the Code, the subject matter of the dispute is inappropriate, or that accepting the matter would pose a risk to the health or safety of arbitrators, staff, or parties or their representatives.’’ 133 To ensure additional safeguards around the expungement process, the proposed rule change would provide the Director with express authority to decline the use of the DRS arbitration forum if an associated person files an expungement request that the Director determines is ineligible for arbitration under proposed Rules 12805 and 13805.134 For example, the Director would decline the use of the DRS arbitration forum if an expungement request is ineligible under the proposed time limitations. The Director would also decline the use of the DRS arbitration forum if a panel has previously considered the merits of, or 131 See proposed Rule 13805(a)(2)(B)(i). proposed Rule 13805(a)(2)(B)(ii). 133 See FINRA Rules 12203 and 13203. 134 See proposed Rules 12203(b) and 13203(b). 132 See VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 a court has previously decided, an expungement request associated with the same customer dispute information. The Director would also decline the use of the DRS arbitration forum if an associated person was named as a respondent in a customer arbitration but did not request expungement; if an associated person requested expungement but withdrew or did not pursue the expungement request; or if a party to a customer arbitration requested expungement on behalf of an unnamed person but the party withdrew or did not pursue an expungement request on behalf of the unnamed person. The proposed rule change would also provide the Director with express authority to decline the use of the DRS arbitration forum if the Director determines that the expungement request was not filed under, or considered in the DRS arbitration forum in accordance with, proposed Rules 12805 or 13805.135 For example, the Director may decline the use of the DRS arbitration forum if the Director determines that a panel is proposing to issue an award containing expungement of customer dispute information other than pursuant to proposed Rules 12805, 12800(d) and (e) or 13805, as applicable. The Director may also decline the use of the DRS arbitration forum if an associated person seeks expungement of customer dispute information other than pursuant to proposed Rules 12805, 12800(d) and (e) or 13805, as applicable. D. Requirements Relating to All Expungement Hearings FINRA Rules 12805 and 13805 currently provide a list of requirements panels must follow in order to issue an award containing expungement relief.136 In addition, the Guidance provides best practices that arbitrators should follow when deciding expungement requests. To further guide the arbitrators’ decision-making, the proposed rule change would expand the expungement hearing requirements currently in FINRA Rules 12805 and 13805 and incorporate relevant provisions from the Guidance. The proposed requirements would apply to all expungement hearings.137 135 See proposed Rules 12203(c) and 13203(c). supra note 45. 137 See proposed Rules 12805(c) and 13805(c). The proposed requirements for expungement hearings would apply to expungement hearings held during a customer arbitration under proposed Rule 12805, a simplified customer arbitration under proposed Rule 12800 (see infra Item II.A.1.II.G., ‘‘Expungement Requests During Simplified Customer Arbitrations’’) and a straight-in request under proposed Rule 13805, unless otherwise specified. 136 See PO 00000 Frm 00014 Fmt 4701 Sfmt 4703 1. Recorded Hearing Sessions The Codes require a panel that is deciding an expungement request to hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement.138 The proposed rule change would provide that the panel must hold one or more separate recorded hearing sessions regarding the expungement request, clarifying that the panel would not be limited in the number of hearing sessions it should hold to decide the expungement request.139 The proposed amendments would also remove the specific reference to the hearing being held by telephone or in person because, as discussed below, the participants in the hearing may appear by different methods. 2. Associated Person’s Appearance The proposed rule change would require the associated person whose information in the CRD system is the subject of the expungement request to appear in person or by video conference at the expungement hearing.140 A party requesting expungement on behalf of an unnamed person or the party’s representative would also be required to appear in person or by video conference at the hearing. The panel would determine the method of appearance. As the associated person is seeking the permanent removal of information from the CRD system, FINRA believes the associated person should be required to appear in person or by video conference at the expungement hearing and be available to respond to questions. Requiring that the associated person’s appearance be in person or by video conference would help the panel assess the associated person’s credibility, which may be particularly important if the request is unopposed. 3. Customer’s Attendance and Participation During the Expungement Hearing The Guidance states that it is important to allow customers and their representatives to participate in the expungement hearing if they wish to do so.141 Specifically, the Guidance provides that arbitrators should: 138 See FINRA Rules 12805(a) and 13805(a). proposed Rules 12805(c)(1) and 13805(c)(1). 140 See proposed Rules 12805(c)(2) and 13805(c)(2). 141 The Guidance directs arbitrators to permit customers and their counsel to participate in the expungement hearing. See Guidance, supra note 5. FINRA Rules 12208 and 13208 permit a party to be represented pro se, by an attorney or by a person who is not an attorney. Accordingly, the proposed amendments use the term ‘‘representative’’ rather 139 See E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices khammond on DSKJM1Z7X2PROD with NOTICES2 • Allow the customer and their representative to appear at the expungement hearing; • Allow the customer to testify (telephonically, in person, or other method) at the expungement hearing; • Allow the representative for the customer or a pro se customer to introduce documents and evidence at the expungement hearing; • Allow the representative for the customer or a pro se customer to crossexamine the associated person or other witnesses called by the party seeking expungement; and • Allow the representative for the customer or a pro se customer to present opening and closing arguments if the panel allows any party to present such arguments. The proposed rule change would codify these provisions of the Guidance. The proposed rule change would make clear that all customers whose customer arbitrations, civil litigations or customer complaints are a subject of the expungement request are entitled to representation and may attend and participate in the expungement hearing.142 These customers would also be entitled to attend and participate in any prehearing conferences held for straight-in requests.143 Because expungement requests may otherwise be unopposed, FINRA believes that the customers should be allowed to attend and participate in the entirety of the expungement hearing and any prehearing conferences. The proposed rule change would provide that the customer could choose to attend and participate by telephone, in person or by video conference.144 Customer attendance and participation during an expungement hearing than ‘‘counsel.’’ See also Securities Arbitration— Should You Hire an Attorney? (Jan. 3, 2019), https://www.finra.org/investors/insights/securitiesarbitration; How to Find an Attorney, https:// www.finra.org/arbitration-mediation/how-findattorney; and Resources for Investors Representing Themselves, https://www.finra.org/arbitrationmediation/resources-investors-representingthemselves. 142 See proposed Rules 12805(c)(3)(A), 12805(c)(4), 13805(c)(3)(A) and 13805(c)(4). The proposed rule change would make clear that customers also have the option to provide their position on the expungement request in writing in lieu of attending the hearing. 143 See proposed Rule 13805(c)(3)(A). A prehearing conference is any hearing session, including an Initial Prehearing Conference (‘‘IPHC’’), that takes place before the hearing on the merits begins. See FINRA Rules 12100(y) and 13100(w); see also FINRA Rules 12500 and 13500. Under the proposal, all customers whose customer arbitrations, civil litigations or customer complaints are a subject of the straight-in request would be entitled to representation at prehearing conferences. See proposed Rule 13805(c)(4). 144 See proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B). VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 provides the panel with important information and perspective that it might not otherwise receive. By providing customers with options for how to attend and participate in hearings, FINRA seeks to encourage customer attendance and participation by making it easier for customers to do so. The proposed rule change would also specify ways in which the customer must be allowed to attend and participate in the expungement hearing. First, the proposed rule change would provide that customers or customers’ representatives must be allowed to introduce evidence during the expungement hearing.145 If the customer or customer’s representative introduces any evidence at the expungement hearing, a party could state objections to the introduction of the evidence during the expungement hearing.146 Second, the customers and the customers’ witnesses would be allowed to testify at the expungement hearing and be questioned by the customer or customer’s representative.147 If customers or their witnesses testify, the associated person or a party requesting expungement on behalf of an unnamed person would be allowed to conduct cross-examination.148 Third, the customer or customer’s representative would be permitted to state objections to evidence and crossexamine the associated person or party requesting expungement on behalf of an unnamed person and any other witnesses called during the expungement hearing.149 Fourth, the customer or customer’s representative would be permitted to present opening and closing arguments if the panel permits any party to present such arguments.150 FINRA believes the proposal strikes the right balance of allowing the customer to attend and participate in the hearing and giving the associated person or party requesting expungement on behalf of an unnamed person the opportunity to substantiate arguments in support of the expungement request. 145 See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A). 146 See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A). 147 See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B). 148 See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B). 149 See proposed Rules 12805(c)(5)(C) and 13805(c)(5)(C). 150 See proposed Rules 12805(c)(5)(D) and 13805(c)(5)(D). PO 00000 Frm 00015 Fmt 4701 Sfmt 4703 50183 4. Panel Requests for Additional Documents or Evidence Arbitrators on the panel do not conduct their own research when hearing an arbitration case; instead, they review the materials provided by the parties. If they need more information, they can request it from the parties. In deciding an expungement request, particularly in cases that settle before an evidentiary hearing or in cases where the customer does not attend or participate in the expungement hearing, the panel’s role as fact finder is critical. Given this significant role, the panel must ensure that it has all of the information necessary to make a fully informed decision on the expungement request on the basis of a complete factual record. Thus, the proposed rule change would codify the ability of the panel to request from the associated person, the party requesting expungement on behalf of an unnamed person and the member firm at which the person was associated at the time the customer dispute arose, as applicable, any documentary, testimonial or other evidence that the panel deems relevant to the expungement request.151 This would allow the panel, for example, to require the associated person to produce documents that the panel deems relevant at the prehearing conference, to testify in response to questions by the panel at the hearing or to provide transcripts of previously obtained witness testimony. 5. Review of Settlement Documents Current FINRA Rules 12805(b) and 13805(b) provide that, in the event a customer dispute is resolved by settlement, the panel considering the expungement request must review the settlement documents and consider the amount of payments made to any party and any other terms and conditions of the settlement.152 The proposed rule 151 See proposed Rules 12805(c)(6) and 13805(c)(7). The Guidance also suggests that arbitrators should ask the associated person seeking expungement or the party seeking expungement on an associated person’s behalf to provide a current copy of the BrokerCheck report for the person whose record would be expunged, paying particular attention to the ‘‘Disclosure Events’’ section of the report. See Guidance, supra note 5. FINRA continues to encourage arbitrators to request a current copy of the associated person’s BrokerCheck report. 152 The panel must review settlement documents that are related to the customer dispute information that is the subject of the expungement request, regardless of whether the associated person was a party to the settlement. E:\FR\FM\15AUN2.SGM 15AUN2 50184 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices change would retain this requirement.153 In addition, the Guidance encourages arbitrators to inquire and fully consider whether a party conditioned a settlement of a customer dispute upon an agreement not to oppose the request for expungement in cases in which the customer does not attend or participate in the expungement hearing or the requesting party states that a customer has indicated that the customer will not oppose the expungement request. Because conditioned settlements violate FINRA Rule 2081 and may be grounds to deny an expungement request, the proposed rule change would codify the language in the Guidance.154 khammond on DSKJM1Z7X2PROD with NOTICES2 6. Unanimous Decision To Issue an Award Containing Expungement Relief Current FINRA Rules 12805 and 13805 require that, in order to issue an award containing expungement of customer dispute information, the panel must indicate in the arbitration award which of the FINRA Rule 2080 grounds for expungement serves as the basis for its expungement order. Consistent with arbitration cases generally, the panel may award expungement based on a majority decision of the arbitrators.155 The proposed rule change would require that the arbitrators agree unanimously to issue an award containing expungement relief.156 Although the vast majority of expungement decisions are already unanimous,157 FINRA believes that this change would help protect the integrity of the information in the CRD system and help ensure that the expungement process operates as intended—as a remedy that is appropriate only in 153 See proposed Rules 12805(c)(7) and 13805(c)(8). FINRA Rule 2081 provides that no member firm or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to consent to, or not to oppose, the member’s or associated person’s request to expunge such customer dispute information from the CRD system. See also Prohibited Conditions Relating to Expungement of Customer Dispute Information FAQ, https:// www.finra.org/arbitration-mediation/faq/ prohibited-conditions-relating-expungementcustomer-dispute-information. 154 See proposed Rules 12805(c)(7) and 13805(c)(8). 155 See FINRA Rules 12410 and 13414. 156 See proposed Rules 12805(c)(8)(A) and 13805(c)(9)(A). FINRA notes that when deciding a customer’s claims, a majority decision of the arbitrators would continue to be sufficient. 157 During the sample period, in arbitrations decided by a three-person arbitration panel and involving an expungement request, the panel decision was unanimous (not unanimous) in 98 percent (two percent) of arbitrations. In one percent of the arbitrations, the decision awarding expungement was not unanimous and would not have been permitted under the proposed change. VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 limited circumstances in accordance with the narrow standards in FINRA rules.158 To further protect the integrity of the information in the CRD system, the proposed amendments would also provide that in order to issue an award containing expungement relief, the unanimous finding must be that one or more of the grounds for expungement enumerated in the proposed rule has been established: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the associated person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.159 To help ensure there is no confusion as to which standard the arbitrators must apply, the proposed rule change would also state that the panel shall not issue, and the Director shall not serve, an award containing expungement relief based on any other grounds.160 The Codes, which include FINRA Rules 12805 and 13805, govern the processes by which all arbitration cases are administered in the DRS arbitration forum.161 Accordingly, the three grounds referenced in proposed Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i) on which a panel must unanimously make a finding to issue an award containing expungement relief would be the exclusive grounds upon which a panel could award expungement in the DRS arbitration forum.162 158 See supra note 27 and accompanying text. proposed Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i). 160 See proposed Rules 12805(c)(8)(A)(ii) and 13805(c)(9)(A)(ii). FINRA further notes that it would be inappropriate to award expungement of customer dispute information that is associated with a customer arbitration or civil litigation in which the associated person was found liable. In this circumstance, the liability finding would be inconsistent with a finding that one of the three grounds has been established to issue an award containing expungement relief. 161 See FINRA Rules 12101 and 13101 (describing how the Codes apply to disputes submitted to arbitration). 162 FINRA Rule 2080 is not part of the Codes, and FINRA is not proposing amendments to FINRA Rule 2080 at this time. With this proposed rule change, FINRA is proposing to codify the grounds identified in FINRA Rule 2080(b)(1) as the exclusive grounds upon which an arbitration panel may issue an award containing expungement of customer dispute information from the CRD system. See also supra note 31 (discussing prior statements by the SEC and FINRA that expungement may occur only after the arbitrators find that one or more of the grounds in FINRA Rule 2080(b)(1) serves as the basis for the expungement award). The discretionary standard in FINRA Rule 2080(b)(2) would not be a basis for a panel to award expungement relief in the DRS arbitration forum. FINRA Rule 2080(b)(2) provides ‘‘FINRA’’—not arbitrators in the DRS arbitration forum—the 159 See PO 00000 Frm 00016 Fmt 4701 Sfmt 4703 7. Contents of the Expungement Award The panel is currently required to provide a ‘‘brief’’ written explanation of the reasons for its finding that one or more of the grounds for expungement applies to the facts of the case.163 The proposed rule change would retain the requirement to provide the written explanation, but would remove the word ‘‘brief’’ such that the panel would be required to provide enough detail in the award to explain its rationale for awarding expungement relief.164 As the Guidance suggests, the panel’s explanation must be complete and not solely a recitation of one of the FINRA Rule 2080(b)(1) grounds or language provided in the expungement request. For the same reason, the proposed rule change would incorporate language from the Guidance that the panel’s explanation should identify any specific documentary, testimonial or other evidence on which the panel relied in awarding expungement relief.165 8. Evidentiary Weight of Decision of Customer or Authorized Representative Not To Attend or Participate The proposed amendments would also instruct the panel that the decision of a customer or an authorized representative of state securities regulators (‘‘authorized representative’’) not to attend or participate in the expungement hearing shall not be material to the determination of whether expungement is appropriate.166 FINRA is aware that some panels have indicated in expungement awards that a customer did not appear at the ability, ‘‘in [FINRA’s] sole discretion and under extraordinary circumstances,’’ to waive the obligation to name FINRA as an additional party to a court proceeding related to expungement of customer dispute information from CRD if FINRA ‘‘determines that: (A) the expungement relief and accompanying findings on which it is based are meritorious; and (B) the expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.’’ Although FINRA is not proposing to amend FINRA Rule 2080 at this time, it is considering whether enhancements to the current expungement process through changes to FINRA Rule 2080 may be warranted. See Discussion Paper, supra note 13 (exploring potential alternatives to the current expungement process, including potential changes to FINRA Rule 2080). 163 See FINRA Rules 12805(c) and 13805(c). 164 See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B). 165 See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B). 166 See proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C); see also infra Item II.A.1.II.F., ‘‘Attendance and Participation of an Authorized Representative of State Securities Regulators in Straight-in Requests’’ (discussing the attendance and participation in straight-in requests of an authorized representative of state securities regulators). E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices expungement hearing. A customer or an authorized representative may not attend, participate in or appear at an expungement hearing for a variety of reasons that may be unrelated to the merits of the expungement request. Accordingly, FINRA believes that a customer’s or an authorized representative’s decision not to attend or participate should not be given any evidentiary weight by the panel when making the expungement determination. 9. Forum Fees The proposed rule change would retain the current requirements in FINRA Rules 12805(d) and 13805(d) that address how DRS arbitration forum fees are assessed in expungement hearings. Specifically, the panel must assess against the parties requesting expungement all DRS arbitration forum fees for each hearing session in which the sole topic is the determination of the appropriateness of expungement.167 E. Notifications to Customers and to State Securities Regulators Regarding Expungement Requests 2. Notifications to the Customer by the Director khammond on DSKJM1Z7X2PROD with NOTICES2 1. Notification to Customers by the Associated Person The Guidance suggests that when a straight-in request is filed against a firm, arbitrators order the associated person to provide a copy of the statement of claim to the customers involved in the customer dispute that gave rise to the customer dispute information maintained in the CRD system. This helps ensure that the customers know about the expungement request and have an opportunity to attend and participate in the expungement hearing or provide a position in writing on the associated person’s request. The proposed rule change would codify this practice in the Industry Code by requiring that the associated person serve all customers whose customer arbitrations, civil litigations or customer complaints are a subject of the expungement request with a copy of the statement of claim requesting expungement and any answer.168 The associated person would be required to serve a copy of the statement of claim and a copy of any answer within 10 days of filing.169 The panel would be authorized to decide whether extraordinary circumstances exist that 167 See proposed Rules 12805(c)(9) and 13805(c)(10). 168 See proposed Rule 13805(b)(1)(A)(i) and (ii). This requirement would apply to straight-in requests filed under the Industry Code; notice to customers would not be necessary for requests filed under proposed Rule 12805 of the Customer Code as the customer would be a named party. 169 See proposed Rule 13805(b)(1)(A)(ii). VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 make service on the customers impracticable.170 Given the associated person’s personal interest in obtaining expungement, FINRA believes that the panel should review all documents that the associated person used to inform the customers about the expungement request as well as any customer responses received. Accordingly, the proposed rule change would require the associated person to file with the panel proof of service for the statement of claim and any answers, copies of all documents provided by the associated person to the customers, and copies of all communications sent by the associated person to the customers and any responses received from the customers.171 The proposed requirement would also help ensure that the associated person does not attempt to dissuade a customer from attending or participating in the expungement hearing. Customer attendance and participation in expungement hearings helps the panel fully develop a record on which to decide the expungement request. Accordingly, the proposed rule change would require the Director to notify all customers whose customer arbitrations, civil litigations or customer complaints are a subject of the expungement request, of the time, date and place of any prehearing conferences and the expungement hearing.172 The Director would include language in the notice to encourage the customer to attend and participate in the expungement hearing. The associated person would be required to provide a current address for the customer,173 or the expungement request would be considered deficient and would not be served.174 The Director’s notice to the customer would serve as a reminder of the expungement request and would provide the customer with timely notice of any prehearing conferences and expungement hearings so that customers 170 See proposed Rule 13805(b)(1)(A)(i). proposed Rule 13805(b)(1)(A)(iv). 172 See proposed Rule 13805(b)(1)(B)(i). This requirement would apply to straight-in requests filed under the Industry Code; notice to customers would not be necessary for requests filed under proposed Rule 12805 of the Customer Code as the customer would be a named party. See also infra Item II.A.1.II.G.3., ‘‘Customer Notification of Expungement Hearings during Simplified Arbitrations’’ (discussing customer notification of expungement hearings in connection with simplified arbitrations). 173 See proposed Rule 13805(b)(1)(B)(i). 174 See proposed Rule 13307(a)(7). 171 See PO 00000 Frm 00017 Fmt 4701 Sfmt 4703 50185 may plan and prepare to attend and participate if they choose. The Director would also provide the notified customers with access to all documents that are relevant to (a) the expungement request that are filed in the straight-in request and (b) any prior customer arbitration brought by the customer that is a subject of the expungement request.175 This would provide the customer with access to the key documents surrounding the request for expungement prior to their attendance and participation in the expungement hearing. 3. Notifications to State Securities Regulators The proposed rule change would require FINRA to notify state securities regulators, in the manner determined by the Director in collaboration with state securities regulators, of an expungement request within 15 days of receiving an expungement request.176 The proposed notification requirement would help ensure that state securities regulators are timely notified of expungement requests. F. Attendance and Participation of an Authorized Representative of State Securities Regulators in Straight-In Requests The current expungement process does not include a mechanism to facilitate state securities regulator involvement in expungement hearings in the DRS arbitration forum. The proposed rule change would provide a mechanism for an authorized representative to provide the state securities regulators’ position or positions on an expungement request in writing or by attending and participating in the expungement hearing in person or by video conference.177 This attendance and participation by an authorized representative of the state securities regulators would be limited to straight175 See proposed Rule 13805(b)(1)(B)(ii). FINRA would provide customers with access to the documents through the DR Portal. The DR Portal has two parts: the DR Neutral Portal is for FINRA neutrals serving on the Dispute Resolution roster, and the DR Party Portal is for arbitration and mediation case participants. Once registered on the DR Portal, parties may use the portal to, among other things, file an arbitration claim, view case documents, submit documents to FINRA and send documents to other portal case participants, and schedule hearing dates. See FINRA Dispute Resolution Services, DR Portal, https:// www.finra.org/arbitration-mediation/dr-portal. 176 See proposed Rules 12800(f)(1), 12805(b) and 13805(b)(2)(A). FINRA would make this notification in connection with expungement requests under the Customer and Industry Codes. Such notification could be achieved by notifying NASAA of the expungement requests. 177 See proposed Rule 13805(c)(6)(A). E:\FR\FM\15AUN2.SGM 15AUN2 50186 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices khammond on DSKJM1Z7X2PROD with NOTICES2 in requests, where the panel may otherwise only hear evidence from the party requesting expungement. At the same time as providing notification to state securities regulators of a straight-in request, the Director would provide state securities regulators with access to all documents relevant to (a) the expungement request filed in the arbitration requesting expungement relief and (b) any other customer arbitration brought under the Customer Code that is associated with the customer dispute information that is a subject of the expungement request.178 Providing state securities regulators with these documents would help facilitate a determination of whether to attend and participate in the expungement hearing. If the Director receives notification from an authorized representative no later than 30 days after the last answer is due that the authorized representative intends to attend and participate in the expungement hearing, the Director shall notify the authorized representative of the time, date and place of any prehearing conferences and the expungement hearing.179 At the expungement hearing, the authorized representative would be permitted to: (1) introduce documentary, testimonial, or other evidence; (2) cross-examine witnesses; and (3) present opening and closing arguments if the panel allows any party to present such arguments.180 The other persons appearing at the expungement hearing could state objections to the authorized representative’s evidence and crossexamine the authorized representative’s witnesses.181 The authorized representative would not be considered a party to the proceeding and their attendance and participation would be limited to what is authorized by proposed Rule 13805(c)(6).182 In addition, the panel would not be permitted to allow the attendance or participation of the authorized representative to materially delay the scheduling of the expungement hearing.183 178 See proposed Rule 13805(b)(2)(B). The state securities regulators’ access to the documents would be subject to confidentiality restrictions. Outside of the DRS arbitration process, state securities regulators could choose to seek access to additional documents and information pursuant to their separate authority. 179 See proposed Rule 13805(b)(3). 180 See proposed Rule 13805(c)(6)(B). 181 See proposed Rule 13805(c)(6)(C). 182 As such, an authorized representative would not be entitled to seek discovery from the parties through the DRS arbitration forum, file motions, or seek to postpone a hearing. 183 See proposed Rule 13805(c)(6)(A). VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 Allowing an authorized representative to attend and participate in straight-in requests may provide meaningful opposition to the expungement request, which might otherwise be unopposed, and thus help create a more complete factual record for the panel to rely upon to decide the expungement request. NASAA and state securities regulators have a shared interest with FINRA in protecting the integrity of the information contained in the CRD system, as it is a crucial tool in their registration and oversight responsibilities. According to NASAA, ‘‘[s]tate securities regulators are often legally obligated to maintain the information in the CRD system as a state record. Much of the information in the CRD system is filed with state securities regulators as part of the registration and qualification process, or filed by state securities regulators themselves. The Uniform Securities Acts, which form the basis of most state securities statutes, generally provide that securities regulators must retain all information filed as part of a registration application or as an amendment to the information filed as part of the application.’’ 184 Thus, NASAA has indicated that expungement of customer dispute information potentially implicates the public records obligations of state governments.185 The proposal would not allow an authorized representative to attend or participate in a customer arbitration where expungement has been requested; such attendance or participation could substantially disrupt the customer’s case and would be less impactful, as the panel hears the customer’s evidence on the merits. FINRA believes that the proposed rule change strikes the appropriate balance between respecting states’ interest in the information in the CRD system and maintaining the integrity of the arbitration process. G. Expungement Requests During Simplified Customer Arbitrations Customer arbitrations involving $50,000 or less, called simplified arbitrations, are governed by FINRA Rule 12800. FINRA Rule 12800 provides customers with expedited procedures to make the DRS arbitration forum economically feasible for these smaller claims. Simplified arbitrations are 184 Brief of Amicus Curiae North American Securities Administrators Association, Inc. in Support of the Division of Securities and Retail Franchising, at 6–7, https://www.nasaa.org/wpcontent/uploads/2021/06/Brief-of-Amicus-CuriaeNASAA-in-Support-of-the-Div-of-Securities-andRetail-Franchising-06.23.21.pdf. 185 See supra note 184. PO 00000 Frm 00018 Fmt 4701 Sfmt 4703 decided on the pleadings and other materials submitted by the parties, unless the customer requests a hearing.186 Further, a single arbitrator from the public chairperson roster is appointed to consider and decide simplified arbitrations, unless the parties agree in writing otherwise.187 The customer who files a simplified arbitration determines how the claim will be decided. In particular, the customer has the option of having the case decided in one of three ways: (1) without a hearing (referred to as ‘‘on the papers’’), where the arbitrator decides the case on the pleadings or other materials; (2) in an ‘‘Option One’’ full hearing, in which prehearings and hearings on the merits take place pursuant to the regular provisions of the Code; or (3) in an ‘‘Option Two’’ special proceeding, whereby the parties present their case in a hearing to the arbitrator in a compressed timeframe, so that the hearings last no longer than one day.188 Currently, named associated persons and parties requesting expungement on behalf of unnamed persons request expungement during simplified arbitrations. FINRA Rule 12800 does not, however, expressly address how an expungement request should be filed or considered during a simplified arbitration. The proposed rule change would codify an associated person’s ability to request expungement when named as a respondent in a simplified arbitration, and for other parties to request expungement on behalf of an unnamed person. The proposed rule change would also establish procedures for requesting and considering expungement requests in simplified arbitrations that are consistent with the expedited nature of these proceedings.189 186 See FINRA Rule 12800(a). FINRA Rule 12800(b). The parties could agree to have a three-person panel decide the simplified case. For ease of reference, when discussing expungement requests in simplified arbitrations under the proposed rule change, the rule filing uses the term ‘‘arbitrator,’’ unless otherwise specified, to mean either a panel or single arbitrator. 188 See FINRA Rule 12800(c). Among the customer arbitrations that closed in 2021, 14 percent were simplified cases. Among the simplified customer cases which closed, 23 percent closed on the papers, four percent closed with a full hearing, and four percent closed by special proceeding. The remaining 69 percent closed by other means including by settlement and withdrawal. 189 See proposed Rules 12800(d) and (e). Under the proposed rule change, an associated person would not be permitted to request expungement in a simplified arbitration administered under the Industry Code, FINRA Rule 13800. All expungement requests under the Industry Code must be filed in accordance with proposed Rule 13805. 187 See E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices 1. Requesting Expungement The proposed rule change would permit a named associated person to request expungement, or a party to file an on-behalf-of request, during a simplified arbitration. As discussed in more detail below, unlike in a nonsimplified arbitration, if expungement is not requested during the simplified arbitration, the associated person would be permitted to request it as a straightin request filed under the Industry Code.190 khammond on DSKJM1Z7X2PROD with NOTICES2 a. By a Named Associated Person During the Simplified Arbitration Under the proposed rule change, an associated person named as a respondent in a simplified arbitration could request expungement during the arbitration of the customer dispute information associated with the customer’s statement of claim, provided the request is eligible for arbitration.191 If a named associated person requests expungement during a simplified arbitration, the proposed rule change would require the request to be filed in an answer or a separate pleading requesting expungement.192 If the named associated person requests expungement in a pleading other than an answer, the request must be filed within 30 days after the date FINRA notifies the parties of the appointment of the arbitrator.193 Given the expedited nature of the simplified arbitration process, tying the request to these milestones would ensure that parties receive timely notice of the expungement request so that they may prepare their cases accordingly. The request would be required to include the same information as a request filed in a non-simplified arbitration.194 190 See infra Item II.A.1.II.G.1.c., ‘‘When No Expungement Request is Filed in a Simplified Arbitration.’’ 191 See proposed Rule 12800(d)(1)(A). The limitations that apply to expungement requests filed by a named associated person under proposed Rule 12805(a)(1)(B) would apply to these requests. See supra Item II.A.1.II.C., ‘‘Limitations on Expungement Requests.’’ 192 See proposed Rule 12800(d)(1)(B)(i). A respondent’s answer must be submitted within 45 days of receipt of the statement of claim. See supra note 46. 193 See proposed Rule 12800(d)(1)(B)(i). When FINRA notifies the parties when an arbitrator has been appointed, FINRA informs the parties that they have 30 days from the date of notification to submit additional documents or other information before the case is submitted to the arbitrator. 194 See proposed Rules 12800(d)(1)(B)(i) and 12805(a)(1)(C)(ii). Thus, the associated person’s expungement request would be required to contain the applicable filing fee; the CRD number of the party requesting expungement; each CRD occurrence number that is the subject of the request; the case name and docket number associated with the customer dispute information; and an VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 To limit arbitrator shopping, the arbitrator would be required to decide an expungement request once it is filed by the associated person.195 If an associated person withdraws or does not pursue the request after filing, the arbitrator would be required to deny the request with prejudice so that it could not be re-filed.196 b. By a Party on Behalf of an Unnamed Person Under the proposed amendments, the requirements for a party to file an onbehalf-of request during a simplified arbitration would be the same as the requirements for a named associated person filing an expungement request during a simplified arbitration. A named party would only be able to file an onbehalf-of request during a simplified arbitration with the consent of the unnamed person.197 As with on-behalfof requests filed in customer arbitrations under proposed Rule 12805(a)(2), the unnamed person who would benefit from the expungement request must consent to such filing by signing the Form.198 To limit arbitrator shopping, the arbitrator would be required to decide an on-behalf-of request once it is filed by the requesting party.199 If the requesting party withdraws or does not pursue the on-behalf-of request after filing, the arbitrator would be required to deny the request with prejudice so that it could not be re-filed.200 c. When No Expungement Request Is Filed in a Simplified Arbitration If expungement is not requested during the simplified arbitration under proposed Rule 12800(d), the associated person would be able to file a straightin request under proposed Rule 13805 and have the request decided by a threeperson panel randomly selected from the Special Arbitrator Roster.201 The request would be subject to the limitations on whether and when such explanation of whether expungement of the same customer dispute information was previously requested and, if so, how it was decided. 195 See proposed Rules 12800(d)(1)(B)(ii) and 12800(e)(1). 196 See proposed Rule 12800(d)(1)(C). 197 See proposed Rule 12800(d)(2)(A). 198 See proposed Rule 12800(d)(2). The request must also meet the same requirements as an onbehalf-of request filed under proposed Rule 12805(a)(2). See proposed Rules 12805(a)(1)(C)(ii), 12805(a)(2)(C)(ii) and 12805(a)(2)(D); see also supra Item II.A.1.II.A.1.b., ‘‘Expungement Requests By a Party Named in the Customer Arbitration On Behalf Of an Unnamed Person.’’ 199 See proposed Rules 12800(d)(2)(B)(ii) and 12800(e)(1). 200 See proposed Rule 12800(d)(2)(C). 201 See proposed Rules 12800(e)(2), 13805(a)(1) and 13806. PO 00000 Frm 00019 Fmt 4701 Sfmt 4703 50187 requests may be filed under the Industry Code.202 Due to the expedited nature of simplified arbitrations, FINRA believes that fairness dictates that the associated person have the option to seek expungement separately under the Industry Code and have the expungement request decided by a panel randomly selected from the Special Arbitrator Roster. In simplified arbitrations, there may be less discovery, and the customer can dictate the extent of the evidence presented to the arbitrator. The customer may, for example, determine to have the arbitration decided on the papers. Because there may be less information available for the arbitrator to evaluate an expungement request during a simplified arbitration—even when the simplified arbitration results in an award—the associated person would retain the ability to choose to file the request as a straight-in request under the Industry Code.203 2. Deciding Expungement Requests During Simplified Arbitrations If a named associated person or party on behalf of an unnamed person requests expungement during a simplified arbitration, the arbitrator would be required to decide the expungement request, regardless of how the simplified arbitration closes (e.g., even if the arbitration settles).204 As discussed in more detail below, arbitrators deciding expungement requests in simplified arbitrations would be experienced public arbitrators who would be required to evidence successful completion of, and agreement with, the enhanced expungement training provided by DRS prior to considering and deciding the expungement request. Under the proposed rule change, how and when the expungement request is decided would depend on which option the customer selects to decide the simplified arbitration. a. No Hearing or Option Two Special Proceeding If the customer opts not to have a hearing or chooses an Option Two special proceeding, the arbitrator would decide the customer’s dispute first and 202 See proposed Rule 13805(a)(2); see also supra Item II.A.1.II.C., ‘‘Limitations on Expungement Requests.’’ 203 This would allow the associated person to obtain and present evidence from the member firm at which they were associated at the time the customer dispute arose without interfering with the simplified customer arbitration process. See proposed Rule 13805(a)(1) and FINRA Rule 13506. 204 See proposed Rule 12800(e)(1). E:\FR\FM\15AUN2.SGM 15AUN2 50188 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices issue an award.205 After the customer’s dispute is decided, the arbitrator must hold a separate expungement-only hearing to consider and decide the expungement request and issue a separate, subsequent award.206 The arbitrator would decide the customer’s dispute first and issue an award to minimize any delays in resolving the customer arbitration and any delays in potential recovery that a customer may be awarded. Further, because the customer arbitration may not be as fully developed when an ‘‘on the papers’’ or special proceeding is requested, the arbitrator would conduct a separate expungement-only hearing to develop the factual record and make a fully informed decision on the expungement request, and could request any documentary, testimonial or other evidence it deems relevant to the expungement request. b. Option One Hearing khammond on DSKJM1Z7X2PROD with NOTICES2 If the customer chooses to have a full ‘‘Option One’’ hearing on his or her claim and it closes by award, the arbitrator would be required to consider and decide the expungement request during the customer arbitration and include the decision on the expungement request in the same award as the decision on the customer arbitration.207 This process would be the same as deciding an expungement request during a non-simplified customer arbitration that closes by award after a hearing, where the customer’s claim and expungement request are addressed during the customer arbitration. If the customer arbitration closes other than by award or by award without a hearing, the arbitrator would be required to hold a separate expungement-only hearing to consider and decide the expungement request and issue a separate award containing the decision on the expungement request.208 The arbitrator would conduct a separate expungement-only hearing to develop the factual record and make a fully informed decision on the expungement request. FINRA does not believe that it is necessary for a panel from the Special Arbitrator Roster to decide an expungement request if a simplified 205 See proposed FINRA Rule 12800(e)(1)(A). proposed Rule 12800(e)(1)(A). The arbitrator must conduct the expungement hearing pursuant to proposed Rule 12805(c). The expungement award must meet the requirements of proposed Rule 12805(c)(8), and the DRS arbitration forum fees would be assessed pursuant to proposed Rule 12805(c)(9). 207 See proposed Rule 12800(e)(1)(B)(i). 208 See proposed Rule 12800(e)(1)(B)(ii). 206 See VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 customer arbitration is decided on the papers, in an Option Two special proceeding, or if the simplified customer arbitration closes other than by award or by award without a hearing. FINRA believes that the public chairpersons who decide simplified arbitrations would be fully capable of making appropriate expungement decisions on the basis of their experience.209 In addition, the public chairperson would be required to evidence successful completion of, and agreement with, the enhanced expungement training provided by DRS prior to considering and deciding the expungement request and, therefore, would have the same enhanced expungement training as the arbitrators on the Special Arbitrator Roster. If the Commission approves the proposed rule change, FINRA notes, however, that it will continue to monitor expungement requests and decisions in simplified arbitrations to determine if such requests should be decided by the Special Arbitrator Roster. 3. Customer Notification of Expungement Hearings During Simplified Arbitrations The Director would notify all customers from the simplified arbitration of the separate expungementonly hearing.210 The Director’s notice would serve as a reminder of the expungement request and would provide the customers with timely notice of the expungement hearing so that the customers and their representatives may plan and prepare to attend and participate if they choose. H. Non-Substantive Changes FINRA is also proposing to amend the Codes to make non-substantive, technical changes to the rules impacted by the proposed rule change. For example, the proposed rule change would require the renumbering of paragraphs and the updating of crossreferences in the rules impacted by the proposed rule change. In addition, the title of Part VIII of the Customer Code would be amended to add a reference to ‘‘Expungement Proceedings.’’ Similarly, the title of Part VIII of the Industry Code would be amended to add a reference to ‘‘Expungement Proceedings’’ and ‘‘Promissory Note Proceedings.’’ FINRA believes the proposed changes to the titles would more accurately reflect the contents of Part VIII of the Customer and Industry Codes. FINRA is also proposing to re-number current FINRA 209 See 210 See PO 00000 supra note 102 and accompanying text. proposed Rule 12800(f)(2). Frm 00020 Fmt 4701 Sfmt 4703 Rule 13806 (Promissory Note Proceedings) as new FINRA Rule 13807, without substantive change to the current rule language and to amend FINRA Rule 13214 to change the cross references from Rules 13806(d)(1) and 13806(f) to Rules 13807(d)(1) and 13807(f), respectively. Finally, FINRA would also amend FINRA Rule 13600 to change the cross reference from Rule 13806(e)(1) to Rule 13807(e)(1). If the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice following Commission approval. 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,211 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 proposed rule change seeks to balance the interests of securities regulators in having accurate and relevant information to fulfill their regulatory responsibilities; the interests of investors in having access to accurate and meaningful information about associated persons with whom they may entrust their money; the interests of member firms in having accurate information for use in making informed employment decisions; and the interests of the brokerage community in having a fair process to address inaccurate customer dispute information. The proposed rule change will help ensure that the expungement process works as intended—as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules. The current expungement framework has limitations that can make deciding straight-in requests more challenging, particularly if the customer or customer’s representative does not attend and participate in the hearing. By having three specially trained and randomly selected arbitrators available to ask questions, request evidence and generally to serve as fact-finders in the absence of customer input, the proposed rule change will help ensure that a more complete factual record is created to support the arbitrators’ expungement decision. In addition, the proposed rule change will specifically authorize all panels that consider expungement requests to request any documentary, 211 15 E:\FR\FM\15AUN2.SGM U.S.C. 78o. 15AUN2 khammond on DSKJM1Z7X2PROD with NOTICES2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices testimonial or other evidence that they deem relevant to the expungement request from a member firm or associated person. To further support the development of a more complete factual record, the proposed rule change will require that the associated person appear at the expungement hearing in person or by video conference. The proposed rule change will also codify the Guidance as rules that arbitrators and parties must follow and facilitate the attendance and participation of customers in all expungement hearings, and by state securities regulators, through an authorized representative, in expungement hearings in straight-in requests. If they attend and participate, customer and authorized representative attendance and participation will provide arbitrators with additional insight to make more informed decisions on expungement requests. In the absence of such input, however, the proposal will clarify that a customer or authorized representative’s decision not to attend or participate in the expungement hearing is not evidence that is material to the determination of whether expungement is appropriate. The proposed rule change will also maintain the integrity of the information in the CRD system by imposing strict time limits on the filing of straight-in requests. The DRS arbitration forum will be denied if the expungement request is made more than two years after the close of the customer arbitration or civil litigation associated with the customer dispute information or three years after the date the customer complaint was initially reported in the CRD system. These changes will ensure that expungement requests are timely filed and will curtail the bundling of multiple aged, and often unrelated, disclosures in a single arbitration. The proposed rule change will also protect investors and the public interest by requiring arbitrators to unanimously agree to issue an award containing expungement relief, to make their finding for expungement relief based on one or more of three grounds specified in the proposed rule change, to identify the specific grounds on which that relief is based and to provide a more detailed explanation in the award of those grounds. In addition, the proposed rule change will foreclose a practice that has emerged in the existing expungement process where parties seek expungement after a prior denial by a court or arbitration panel of a request to expunge the same customer dispute information, or where parties withdraw or do not pursue an expungement VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 request and then make another request for expungement of the same customer dispute information before a potentially more favorable fact finder. The proposed rule change imposes procedures and requirements around when and how a party may request expungement, and expressly provides that omission of certain of the requirements will make the expungement request deficient. Further, the proposed rule change provides the Director with express authority to deny the DRS arbitration forum if an expungement request is ineligible for arbitration under the proposed rules or if a request to expunge customer dispute information is not filed under, or considered in accordance with, the requirements of the proposed rules. Thus, FINRA believes the proposed rule change will add tighter controls, additional safeguards and more transparency to the expungement process. In addition, the process of requesting expungement during a simplified arbitration will be codified to help ensure that customers are aware they can attend and participate in the expungement hearing and how an expungement request will affect (and not affect) their arbitration claims. By expressly incorporating the practice of requesting expungement during simplified proceedings, the proposed amendments add consistency and transparency to the rules and provide more guidance to the arbitrators and the parties requesting expungement. For these reasons, the proposed rule change represents a significant step towards addressing concerns with the current expungement framework. FINRA believes that these changes will help to maintain the accuracy and integrity of the information in the CRD system and BrokerCheck, while also protecting associated persons from the publication of inaccurate information about them. 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. Economic Impact Assessment FINRA has undertaken an economic impact assessment to analyze the regulatory need for the proposed rule change, its potential economic impacts, including anticipated costs, benefits and distributional and competitive effects, relative to the current baseline, and the alternatives FINRA considered in PO 00000 Frm 00021 Fmt 4701 Sfmt 4703 50189 assessing how best to meet FINRA’s regulatory objectives. 1. Regulatory Need The proposed rule change would address concerns relating to the expungement process that are not consistent with the regulatory intent to permit expungement in limited circumstances in accordance with the narrow standards in FINRA rules. The concerns include the timing of expungement requests, the resulting impact on customer attendance and participation in expungement hearings, and the ultimate impact on expungement decisions made when customers do not attend or participate and the panel receives information only from the associated person requesting expungement. The concerns also include the selection of arbitrators to hear straight-in requests when the associated person files a statement of claim against a member firm whose interest in expungement might be aligned with the associated person, and requests to expunge the same customer dispute information in multiple proceedings. The proposed rule change would also codify and expand upon the provisions of the Guidance to help ensure that arbitrators and parties are adhering to these procedures for all expungement requests. 2. Economic Baseline The economic baseline for the proposed rule change includes the current provisions under the Codes that address the process for parties to seek expungement relief. The economic baseline includes the recent amendments to the Codes to apply minimum fees to expungement requests.212 In addition, because arbitrators are generally believed to be adhering to the best practices and recommendations that are a part of the Guidance, the economic baseline also includes the Guidance.213 The proposed rule change is expected to affect associated persons and other parties to expungement requests including member firms, customers, state securities regulators, and arbitrators. The proposed rule change is also expected to affect users of customer dispute information contained in the CRD system and displayed through BrokerCheck.214 212 See supra note 10. Guidance, supra note 5. 214 Users of customer dispute information include investors, member firms and other companies in the financial services industry; associated persons or individuals seeking employment in the brokerage 213 See E:\FR\FM\15AUN2.SGM Continued 15AUN2 50190 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices khammond on DSKJM1Z7X2PROD with NOTICES2 The customer dispute information contained in the CRD system is submitted by registered securities firms in response to questions on the uniform registration forms.215 The customer dispute information must be reported regardless of the merit of the allegations. FINRA makes specific CRD information disclosed by firms publicly available through BrokerCheck.216 The information in BrokerCheck can be valuable to current and prospective customers to learn about the conduct of associated persons.217 Current and prospective customers may not select or remain engaged with an associated person or a member firm that employs an associated person with a record of customer disputes. Similarly, member firms and other companies in the financial services industry may use the information when making employment decisions. In this manner, the customer dispute information contained in the CRD system (and displayed through BrokerCheck) may positively or negatively affect the business and professional opportunities of associated persons. Where the information is reliable, it also provides for customer protections and information useful for member firms.218 A negative impact on the business and professional opportunities of associated persons may be appropriate and consistent with investor protection, such as when the customer dispute information has merit. A negative impact may be inappropriate, however, if, for example, the customer dispute information is factually impossible, clearly erroneous or false, or the associated person was not involved in the alleged misconduct. Regardless of the merit, associated persons have an incentive to remove customer dispute information from the CRD system and its public display through BrokerCheck. industry; and FINRA, state securities regulators, and other regulators. 215 See supra notes 20 and 21 and accompanying text for additional discussion of the uniform registration forms and the information contained in the CRD system. Some of the information may involve pending actions or allegations that have not been resolved or proven. 216 See supra note 22 and accompanying text. 217 Recent academic studies provide evidence that the past disciplinary and other regulatory events associated with a firm or individual can be predictive of similar future events. See Hammad Qureshi & Jonathan Sokobin, Do Investors Have Valuable Information About Brokers? FINRA Office of the Chief Economist Working Paper, Aug. 2015; see also Mark Egan, Gregor Matvos, & Amit Seru, The Market for Financial Adviser Misconduct, 127(1) Journal of Political Economy 233–295 (2019). 218 FINRA, state securities regulators, and other regulators also use customer dispute information submitted to the CRD system to regulate associated persons. See supra Item II.A.1.I.B., ‘‘Customer Dispute Information in the CRD System.’’ VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 An associated person, or a party onbehalf-of an unnamed person, typically begins the process to remove customer dispute information from the CRD system by filing an expungement request in the DRS arbitration forum. During the sample period (January 2016 through December 2021), FINRA is able to identify requests to expunge 11,619 customer dispute information disclosures in the DRS arbitration forum.219 More than one customer dispute information disclosure may be sought to be expunged in a single arbitration, and multiple expungement requests may relate to the same arbitration, civil litigation, or complaint if the dispute relates to more than one associated person. The 11,619 customer dispute information disclosures consist of 5,143 disclosures (44 percent) that were sought to be expunged during a customer arbitration, and 6,476 disclosures (56 percent) that were sought to be expunged in a straight-in request.220 The 5,143 disclosures sought to be expunged during a customer arbitration include 4,714 sought to be expunged during a non-simplified customer arbitration and 429 sought to be expunged during a simplified customer arbitration. The associated person was a named party for 2,322 of the 5,143 disclosures (45 percent), and an unnamed party for 2,821 of the 5,143 disclosures (55 percent). The 6,476 customer dispute information disclosures sought to be expunged in a straight-in request include 116 disclosures where the associated person named the customer as a respondent. Associated persons often file a straight-in request long after the close of the customer arbitration or civil litigation or the initial reporting of the customer complaint to the CRD system. For example, approximately three-fifths of customer dispute information disclosures that were sought to be expunged in straight-in requests were filed more than six years after the close of a customer arbitration or the initial reporting of the customer complaint.221 As of December 2021, 10,156 of the 11,619 customer dispute information 219 The 11,619 requests to expunge customer dispute information disclosures include some requests to expunge the same customer dispute information disclosure in more than one arbitration. 220 Fifty requests to expunge customer dispute information were made during industry arbitrations that were not straight-in requests. To simplify the analysis, FINRA excludes these 50 requests from the sample. 221 A six-year time-period from the time-period start date reflects the six-year eligibility rule which applies to all arbitration claims, including those claims requesting expungement of customer dispute information. See supra note 38. PO 00000 Frm 00022 Fmt 4701 Sfmt 4703 disclosures were sought to be expunged in an arbitration that closed.222 The 10,156 disclosures consist of 4,346 disclosures (43 percent) sought to be expunged during a customer arbitration and 5,810 disclosures (57 percent) sought to be expunged in a straight-in request. A panel made a decision in arbitrations relating to 6,997 of the 10,156 disclosures in arbitrations that closed and made no decision in arbitrations relating to the remaining 3,159 disclosures. A single arbitrator made a decision in arbitrations relating to 5,311 of the 6,997 disclosures, and a (two- or) three-person panel made a decision in arbitrations relating to the remaining 1,686 disclosures. For the customer arbitrations, the decision by a panel may relate to the arbitration, an expungement request, or both. For the straight-in requests, the decision would relate to the expungement request only. In arbitrations where no decision on the merits of the customer case or an expungement request was made, the requests were either not eligible, withdrawn, or otherwise not pursued by the associated person or party that filed the request. Overall, 5,443 of the customer dispute information disclosures sought to be expunged resulted in a panel issuing an award containing expungement relief. The 5,443 disclosures reflect 54 percent of the 10,156 disclosures sought to be expunged in arbitrations that closed, and 78 percent of the 6,997 disclosures sought to be expunged in arbitrations where a panel made a decision.223 The percentage of expungement requests that are awarded is higher when the panel receives information only from the associated person or other party requesting expungement. The panel is likely to receive information only from the party requesting expungement when (1) the customer arbitration is resolved without a hearing on the merits (e.g., settles), or (2) an associated person files a straight-in request against a member firm. In both circumstances, the customer has little incentive to attend or participate in an expungement hearing and, in the experience of FINRA staff, generally does not. 222 In order to focus on the rate at which panels award expungement under different scenarios, the remaining discussion considers only arbitrations in the sample period that closed. 223 Another recent academic study provides evidence that associated persons who receive an award containing expungement relief in the DRS arbitration forum are ‘‘3.3 times as likely to engage in new misconduct as the average broker.’’ See Colleen Honigsberg & Matthew Jacob, Deleting Misconduct: The Expungement of BrokerCheck Records, 139(3) Journal of Financial Economics 800–831 (2021): 800–831. E:\FR\FM\15AUN2.SGM 15AUN2 khammond on DSKJM1Z7X2PROD with NOTICES2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices Among the 6,997 disclosures sought to be expunged in arbitrations where a panel made a decision, 1,632 disclosures were sought to be expunged during a non-simplified or simplified customer arbitration, and 5,365 disclosures were sought to be expunged in a straight-in request. A panel awarded expungement for 943 of the 1,632 disclosures (58 percent) sought to be expunged during a customer arbitration. This includes 267 of the 632 disclosures (42 percent) sought to be expunged during a customer arbitration that resolved after a hearing on the merits, and 676 of the 1,000 disclosures (68 percent) sought to be expunged during a customer arbitration not resolved after a hearing on the merits. A panel awarded expungement for 4,500 of the 5,365 disclosures sought to be expunged in a straight-in request (84 percent). In general, whether an associated person obtains an award containing expungement relief does not appear to be significantly impacted by the number of arbitrators deciding the request. For example, among the 1,632 disclosures sought to be expunged during a nonsimplified or simplified customer arbitration, a similar percentage of requests were awarded by a one-person panel (279 of 490 disclosures, or 57 percent) as were awarded by a threeperson panel (664 of 1,142 disclosures, or 58 percent). In addition, among the 5,365 disclosures sought to be expunged in straight-in requests, a similar percentage of requests were awarded by a one-person panel (4,035 of 4,821 disclosures, or 84 percent) as were awarded by a three-person panel (465 of 544 disclosures, or 85 percent). Requests to expunge older customer dispute information also are awarded at a similar rate to requests to expunge more recent customer dispute information. FINRA measures the age of customer dispute information from either the close of the customer arbitration or civil litigation, or, if no customer arbitration or civil litigation, from the initial reporting of the customer complaint to the CRD system (i.e., time limit start date). Among the 5,365 customer dispute information disclosures sought to be expunged in straight-in requests, a similar percentage resulted in an award that were filed less than six years from the time limit start date (1,673 of 1,984 disclosures, or 84 percent) as were filed more than six years from the time limit start date (2,827 of 3,381 disclosures, or 84 percent). Factors other than, or in combination with, the number of arbitrators deciding the expungement request or the timing VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 of the expungement request, however, may affect whether an associated person receives an award containing expungement relief. These factors include the merits of the request, the attendance and participation by customers or the availability of documents or information relating to the dispute, and the potential influence of associated persons and member firms on the selection of the panel who decides the request. As stated above, FINRA will expunge customer dispute information from the CRD system only pursuant to a court order. If the panel awards expungement, then the firm or associated person must confirm the arbitration award in a court of competent jurisdiction and serve the confirmed award on FINRA.224 As of December 2021, FINRA had removed 4,717 customer dispute information disclosures from the CRD system from the possible 5,443 disclosures (87 percent) for which a panel issued an award containing expungement relief. Firms or associated persons may have not yet sought or obtained a court order for the remaining disputes. There also may be instances where expungement was sought and awarded by a panel, but a court order was never obtained. During the sample period, approximately one-third of the 4,717 customer dispute information disclosures (1,447, or 31 percent) that were expunged were submitted to the CRD system. The 1,447 customer dispute information disclosures reflect five percent of the total number of customer dispute information disclosures submitted to the CRD system during the sample period (approximately 31,900). The remaining 3,270 customer dispute information disclosures were submitted to the CRD system prior to the sample period. The number of customer dispute information disclosures expunged during the sample period that were submitted to the CRD system prior to 2016 suggests that associated persons may yet still expunge customer dispute information disclosures submitted to the CRD system during the sample period. The five percent of expunged customer dispute information disclosures should therefore be considered a lower bound for the share of customer dispute information disclosures submitted during the sample period that may ultimately be expunged. An associated person may seek a court order directing expungement of customer dispute information without first seeking expungement through arbitration (‘‘direct-to-court 224 See PO 00000 supra note 25 and accompanying text. Frm 00023 Fmt 4701 Sfmt 4703 50191 expungement cases’’). During the sample period, associated persons sought expungement of 194 customer dispute information disclosures in direct-to-court expungement cases, or less than 2 percent of the customer dispute information disclosures that were sought to be expunged in the DRS arbitration forum. As of December 2021, court proceedings had concluded for 173 of those disclosures and proceedings remained ongoing for 21 disclosures. One hundred seven of the 173 disclosures (62 percent) were ordered expunged by a court and 66 disclosures (38 percent) were not ordered to be expunged. 3. Economic Impact A. Overview The proposed rule change would codify the best practices described in the Guidance.225 Codifying the best practices in the Guidance should clarify among parties how the practices should be applied, including what is permitted during the expungement hearing and the responsibilities of the parties and the panel when expungement is requested.226 In addition, parties may incur fewer costs from the codification of the practices, including the costs from actions or decisions (e.g., requesting expungement of customer dispute information that was previously denied in another arbitration or court) that would be denied by an arbitration panel pursuant to the Guidance. Based on FINRA staff observations, arbitrators are generally believed to be adhering to these best practices and, therefore, codifying them should not result in new material economic impacts. To the extent that some arbitrators currently do not adhere to these best practices, codifying them should increase the consistency of the forum and may impact associated persons, customers, and member firms. The proposed rule change would also introduce other changes to the Codes that expand upon or that are not a part of the Guidance. The proposed rule change would restrict when an associated person is permitted to request expungement in the DRS arbitration forum. In general, the proposed rule change would also require a panel from a customer arbitration who decides the underlying customer dispute or a panel from the Special Arbitrator Roster to decide an 225 See Guidance, supra note 5. the Guidance may also help inform customers more generally of the practices that the forum has implemented to encourage and facilitate customer attendance and participation in expungement hearings. 226 Codifying E:\FR\FM\15AUN2.SGM 15AUN2 50192 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices expungement request. Three-person arbitration panels would also be required to unanimously agree to issuing an award containing expungement relief. Finally, the proposed rule change would address the participation by associated persons, customers, and state securities regulators in expungement hearings. These changes may result in new material economic benefits and costs to associated persons, customers, and member firms. FINRA discusses these impacts below and quantifies them when doing so is feasible and informative. khammond on DSKJM1Z7X2PROD with NOTICES2 B. Expungement Requests During Customer Arbitrations The proposed rule change would set forth requirements for expungement requests made during customer arbitrations. The proposed rule change would establish different requirements for non-simplified customer arbitrations and simplified customer arbitrations, and for associated persons named or unnamed to a (non-simplified or simplified) customer arbitration. i. Expungement Requests by Named Associated Persons During NonSimplified Customer Arbitrations The proposed rule change would require an associated person named in a non-simplified customer arbitration to request expungement during the customer arbitration of the customer dispute information in the CRD system that is associated with the customer’s statement of claim.227 During the sample period, associated persons named in a non-simplified customer arbitration sought to expunge 1,622 of the 4,346 disclosures that associated persons sought to expunge in a customer arbitration that closed. Otherwise, the associated person would forfeit the opportunity to seek expungement of the same customer dispute information in any subsequent proceeding. The panel from a nonsimplified customer arbitration would decide the request if the arbitration closes by award after a hearing.228 The proposed rule change would help ensure that, if possible, the panel that decides a non-simplified customer arbitration, with input from all parties and access to all evidence, testimony and documents, would also decide an expungement request relating to the same underlying dispute. These arbitrators or panels would be best situated to decide the related issue of expungement, and thereby help ensure 227 See 228 See proposed Rule 12805(a)(1)(A). proposed Rule 12805(a)(1)(D)(i). VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 that expungement awards and the customer dispute information contained in the CRD system reflect the conduct of associated persons. The proposed rule change would impose time limits on when an expungement request can be filed during a non-simplified customer arbitration.229 The proposed time limits may increase the ability of customers to address the expungement request during the customer arbitration. The proposed time limits, however, may cause a named associated person to lose the ability to assess the additional information that arises during a customer arbitration within sixty days of the hearing on the merits. In this case, the associated person must either incur the costs of filing a request for expungement based on potentially more limited information about whether the request will be successful or lose their ability to seek expungement in the DRS arbitration forum. Consequently, associated persons may incur costs to preserve their ability to request expungement in the DRS arbitration forum.230 ii. Expungement Requests During a NonSimplified Customer Arbitration That Closes Other Than by Award or by Award Without a Hearing As described above, during the sample period, associated persons named in a non-simplified customer arbitration sought to expunge 1,622 of the 4,346 disclosures that associated persons sought to expunge in a customer arbitration that closed. The 1,622 disclosures include 1,285 disclosures that were sought to be expunged in a non-simplified customer arbitration that closed other than by award or by award without a hearing. Associated persons who request expungement during a non-simplified customer arbitration (either as a named party or as an unnamed party that consents to an on-behalf-of request) that closes other than by award or by award without a hearing (and would not have their expungement request decided as part of the customer arbitration) would incur additional costs to file and resolve a straight-in request (e.g., legal fees).231 229 See proposed Rule 12805(a)(1)(C)(i). the proposed rule change, a party that does not file an expungement request at least 60 days before the first scheduled hearing begins could file a motion seeking an extension. See supra note 229. The motion, however, may be opposed by another party and denied by the panel. 231 Associated persons who would otherwise request expungement as a counterclaim during an industry arbitration, which is rare, would instead be required to file a straight-in request under proposed Rule 13805. These associated persons and member 230 Under PO 00000 Frm 00024 Fmt 4701 Sfmt 4703 Associated persons would also incur a delay in receiving a decision on the request. The member firm with which the associated person was associated at the time the customer dispute arose would also incur the legal and forum fees corresponding to the straight-in request.232 The costs to file and resolve a straightin request following the conclusion of the customer arbitration would be imposed by the proposed rule change if the requests would have otherwise been decided as part of the non-simplified customer arbitration. The costs would not be imposed by the proposed rule change, however, if associated persons would have filed a straight-in request after the close of the non-simplified customer arbitration regardless of the proposed restrictions. The additional costs for an associated person to file and resolve a straight-in request after the close of a nonsimplified customer arbitration (that closes other than by award or by award without a hearing) may reduce the likelihood that parties settle a customer arbitration or the amount for which parties settle. For example, associated persons may factor the cost to resolve a separate straight-in request into the decision to settle or arbitrate. In addition, even if the parties settle the dispute, associated persons may consider the cost to file and resolve a separate straight-in request when determining the amount at which they are willing to settle. The customers to an arbitration which does not settle may incur additional costs to instead arbitrate the claim.233 firms with which the associated persons were associated would incur similar costs. 232 Associated persons would not incur an additional filing fee to file the straight-in expungement request. See supra note 95. Consistent with the fees associated with non-monetary claims, the parties to a straight-in request would incur the minimum hearing session fee of $1,150 for each session the panel conducts to decide the expungement request. The member firm at which the individuals were associated at the time the customer dispute arose would also be assessed a minimum surcharge fee of $2,000 and a minimum process fee of $3,850. See FINRA Rules 13901, 13902, and 13903 for the fee amounts related to non-monetary claims in the DRS arbitration forum. 233 FINRA notes, however, that the determination regarding whether to settle a customer arbitration can depend on a number of factors, including the parties’ respective estimates of the additional costs they would incur to continue the customer arbitration, the value that the associated person places on expungement, the associated person’s estimate of the likelihood that the associated person could obtain expungement in the customer arbitration compared to in a straight-in request, and the estimated cost to pursue the straight-in request. Other proposed amendments may similarly factor into the decision to settle, such as the potential for customer or state securities regulator attendance and participation in expungement hearings in straight-in requests. E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices iii. Expungement Requests by Unnamed Persons in Non-Simplified Customer Arbitrations and by Named and Unnamed Persons in Simplified Customer Arbitrations khammond on DSKJM1Z7X2PROD with NOTICES2 The proposed rule change would not require an unnamed person in a nonsimplified customer arbitration, an associated person named in a simplified customer arbitration, or an unnamed person in a simplified customer arbitration to request expungement of the customer dispute information during the arbitration.234 Instead, like today, these associated persons may wait until after the conclusion of the arbitration to request expungement as a straight-in request.235 During the sample period, unnamed persons in nonsimplified customer arbitrations, associated persons named in simplified customer arbitrations, and unnamed persons in simplified customer arbitrations sought to expunge 2,724 of the 4,346 disclosures that associated persons sought to expunge in a customer arbitration that closed. The option to wait until after the customer arbitration has concluded to request expungement is not a new benefit created by the proposed rule change, but is instead currently permitted under the Codes. FINRA believes that an unnamed person in a non-simplified customer arbitration, an associated person named to a simplified customer arbitration, or an unnamed person in a simplified customer arbitration should have the option to seek expungement as a straight-in request and have their request decided by a panel from the Special Arbitrator Roster. Associated persons (or parties on behalf of unnamed persons) who are not required and choose not to request expungement during a customer arbitration may incur additional costs to file and resolve a straight-in request. The member firms with which the associated persons were associated at the time the customer dispute arose would also incur additional costs. Any incremental costs from not filing an expungement request during a customer arbitration, however, are not imposed by the proposed rule change. Instead, they 234 See proposed Rules 12805(a)(2)(A), 12800(d)(1)(A), and 12800(d)(2)(A). Unnamed persons would also be prohibited from intervening in a non-simplified or simplified customer arbitration and requesting expungement. See proposed Rules 12805(a)(2)(E)(iii)(a) and 12800(d)(2)(D). 235 The requirement to wait until after the close of the customer arbitration would help ensure that the panel from the Special Arbitrator Roster is aware of the outcome of the customer arbitration when deciding the request. VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 are borne at the discretion of the parties who make the determination of when to request expungement, and are similar to the costs they incur under the Codes today. The proposed time limits to request expungement during a customer arbitration may impose costs on associated persons (or parties on behalf of unnamed persons) who are not required but choose to request expungement.236 Associated persons who are not able to have their expungement request decided during a customer arbitration (e.g., because the case settles) and instead file a straightin request as a result of the proposed time limits would incur a delay in receiving a decision on the expungement request. Similar to today, associated persons would incur the legal and forum fees associated with the request, and the member firms with which the associated persons were associated at the time the customer dispute arose would also incur legal and forum fees associated with the straightin request. C. Time Limits for Filing Straight-In Requests For customer dispute information reported to the CRD system after the effective date of the proposed rule change, the proposed rule change would require an associated person to file a straight-in request within two years of a customer arbitration or civil litigation closing, or, if there is no customer arbitration or civil litigation, within three years from the initial reporting of the customer complaint to the CRD system.237 The proposed time limits may better facilitate customer attendance and participation in the proceedings and the likelihood that the panel from the 236 Under the proposed rule change, a party onbehalf-of an unnamed person would be required to request expungement during a non-simplified arbitration no later than 60 days before the first scheduled hearing, and a named associated person or a party on-behalf-of an unnamed person would be required to request expungement during a simplified arbitration within 30 days of the date that FINRA provides notice of arbitrator appointment. See proposed Rules 12805(a)(2)(C)(iii) and 12800(d)(1)(B)(i). 237 See proposed Rules 13805(a)(2)(A)(iv) and 13805(a)(2)(A)(v). The proposed rule change would also impose a two-year time limit for requests to expunge customer dispute information that arose from a customer arbitration or civil litigation that closed on or prior to the effective date of the proposed rule change, or, if no customer arbitration or civil litigation, a three-year time limit to request expungement of customer dispute information arising from a customer complaint initially reported to the CRD system on or prior to the effective date of the proposed rule change. See proposed Rules 13805(a)(2)(B)(i) and 13805(a)(2)(B)(ii). These time limits would run from the effective date of the proposed rule change. PO 00000 Frm 00025 Fmt 4701 Sfmt 4703 50193 Special Arbitrator Roster receives testimony and other evidence relevant to deciding an expungement request. In addition, the time limits would help ensure that the expungement hearing is held close in time to the customer arbitration or civil litigation, or the events that led to the customer dispute information disclosure, and foreclose the option of an associated person to choose the timing of a straight-in request to potentially reduce the likelihood of customer attendance and participation. Similar to the other amendments proposed herein, an increase in customer attendance and participation may provide a panel from the Special Arbitrator Roster with additional information to decide an expungement request and help ensure the accuracy of the customer dispute information contained in the CRD system and displayed through BrokerCheck. The proposed time limits, however, may constrain an associated person from filing a straight-in request. Associated persons who would otherwise delay the filing of a straightin request may incur additional costs to file a straight-in request within the required time limits. Similar to the costs which may result from the proposed time limits to request expungement during a customer arbitration, associated persons who become constrained to file a straight-in request within the proposed time limits may incur indirect costs (as described above). The proposed time limits to file a straight-in request may also constrain an associated person from seeking expungement of multiple customer dispute information disclosures in the same straight-in request (i.e., in the same arbitration). Associated persons who may become constrained include those waiting for additional customers to make complaints or for a customer arbitration or civil litigation to close. The disclosures associated persons may want to include in the same straight-in request may relate to the provision of similar investment advice or services or market events resulting in multiple customer losses. Associated persons who become constrained from seeking to expunge multiple customer dispute information disclosures in the same straight-in request because of the proposed time limits and who still seek expungement of all customer dispute information disclosures would be required to file the requests in more than one arbitration. These associated persons would incur additional legal and forum fees for each additional arbitration. The member firm E:\FR\FM\15AUN2.SGM 15AUN2 50194 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices khammond on DSKJM1Z7X2PROD with NOTICES2 at which the individual was associated at the time the customer disputes arose would also incur additional legal and forum fees for each additional arbitration. Associated persons who seek to expunge customer dispute information disclosures from a longer time period may be more likely to become constrained and incur these additional costs than associated persons who seek to expunge customer dispute information disclosures from a shorter time period. Associated persons who are waiting until the close of a customer arbitration or civil litigation to seek to expunge multiple customer dispute information disclosures in the same arbitration may consider the anticipated costs to file an additional straight-in request when offering a settlement amount to customers. Associated persons could offer a higher settlement amount reflective of these anticipated costs, and customers may similarly seek to negotiate a higher settlement amount.238 Finally, the three-year time limit may increase the likelihood that an associated person seeks expungement of a customer complaint only for the customer then to file a related claim in arbitration. If the associated person were to seek expungement of a customer dispute information disclosure associated with the subsequent customer arbitration, either during the customer arbitration or as a straight-in request, then the associated person would incur the additional costs of the second request. If the associated person seeks expungement as a straight-in request, then the member firm with which the associated person was associated at the time the customer dispute arose would also incur costs associated with the request. D. Time Limits for Filing Straight-In Requests—Quantitative Description As discussed as part of the Economic Baseline, 6,476 customer dispute information disclosures were sought to be expunged in straight-in requests during the sample period. The following estimates demonstrate that for the majority of these straight-in requests, the request would not have been permitted under the proposed time limits and associated persons would not have been able to include more than one customer dispute information disclosure in the same straight-in request. The estimates, however, do not account for the potential change in the behavior of associated persons—associated persons 238 Other factors may influence the decision of parties to settle or arbitrate the dispute. See supra note 233. VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 would have incentive under the proposed amendments to file the straight-in requests within the proposed time limits or otherwise lose the ability to file a request in the forum.239 Among the 6,476 customer dispute information disclosures that associated persons sought to expunge in straight-in requests, 2,135 of the disclosures related to a previous (non-simplified or simplified) customer arbitration (of the same underlying dispute). Six-hundred ten of the disclosures (29 percent) were sought to be expunged in straight-in requests filed within the two-year time limit and would have been permitted under the proposed rule change. The remaining 4,341 of the 6,476 disclosures did not relate to a previous (nonsimplified or simplified) customer arbitration (of the same underlying dispute). Seven-hundred ninety-eight of the disclosures (18 percent) were sought to be expunged in straight-in requests within three years from the initial reporting of the disclosure to the CRD system and would have been permitted under the proposed rule change. As discussed above, the expungement of more than one customer dispute information disclosure can be sought in a single arbitration, and the proposed time limits may limit the ability of an associated person to seek expungement of multiple customer dispute information disclosures in the same straight-in request. The 6,476 customer dispute information disclosures sought to be expunged in straight-in requests were made in 3,177 arbitrations. Associated persons included more than one customer dispute information disclosure in 1,384 of the 3,177 straightin requests (44 percent). In total, associated persons sought the expungement of 4,683 customer dispute information disclosures (72 percent of the 6,476 customer dispute disclosures) in the 1,384 straight-in requests. Under the proposed time limits, associated persons would not have been able to include all of the customer dispute information disclosures in at least 614 of the 1,384 straight-in requests (44 percent). In 556 of the 614 straight-in requests (91 percent), the associated person included at least one customer dispute information disclosure that was six years or longer from its respective time limit start date. Also, in 374 of the 614 straight-in requests (61 percent), the associated person would not have been able to include in the 239 The following estimates also do not account for the number of straight-in requests of customer dispute information arising from a previous (nonsimplified or simplified) customer arbitration which, under the proposed rule change, would have been decided as part of the customer arbitration. PO 00000 Frm 00026 Fmt 4701 Sfmt 4703 same straight-in request one or more customer dispute information disclosures that related to a customer arbitration. E. Arbitrators or Panels Deciding Expungement Requests The proposed rule change would require that the panel from a nonsimplified customer arbitration decide expungement requests during the arbitration if the arbitration closes by award after a hearing.240 In addition, the proposed rule change would require the arbitrator from a simplified customer arbitration to decide an expungement request if it is requested—at a full hearing, in a separate expungement-only hearing after the simplified arbitration closes if the arbitration is decided ‘‘on the papers,’’ or in a special proceeding.241 The proposed rule change would also require that a randomly selected three-person arbitration panel from the Special Arbitrator Roster decide straight-in requests.242 Finally, the proposed rule change would require that a threeperson arbitration panel unanimously agree to issue an award containing expungement relief.243 The proposed rule change may place a panel in a better position to determine whether to award expungement of customer dispute information, and thereby help ensure the accuracy of the customer dispute information contained in the CRD system. In general, the panel that decides a request would either hear the full merits of the customer arbitration or have additional training and qualifications when they may receive information only from the party requesting expungement. Panels from the Special Arbitrator Roster would also be able to request any evidence that they deem relevant from the associated person and member firm at which the associated person was associated at the time the customer dispute arose. As discussed above, straight-in requests where customers typically do not attend or participate in the expungement hearing often lack appreciable opposition. A panel from the Special Arbitrator Roster, with three arbitrators to ask questions, request evidence, and serve generally as fact finders in the absence of customer input, may help ensure that a complete factual record is created to support a 240 See proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i). 241 See proposed Rules 12800(e)(1)(A) and 12800(e)(1)(B)(ii). 242 See proposed Rule 13806(b)(1). 243 See proposed Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i). E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices khammond on DSKJM1Z7X2PROD with NOTICES2 decision and the decision reflects the merits of the request. The proposed rule change would also reduce the potential influence of associated persons and member firms on the selection of the panel that decides a straight-in request. First, parties to the straight-in request would not be permitted to strike or rank any arbitrators randomly selected to create a panel from the Special Arbitrator Roster, thereby limiting the ability of an associated person and member firm with which the associated person was associated at the time the customer dispute arose to together select arbitrators who are more likely to award expungement. To the extent that the associated person and the member firm’s interests are aligned and both seek to increase the likelihood that an award containing expungement relief is issued, they would together be expected to select arbitrators who may be more likely to award expungement.244 Second, an associated person would not be permitted to withdraw a request and seek expungement of the same customer dispute information in a subsequent arbitration.245 Associated persons may exercise this option if they believe that they have a higher probability of obtaining an expungement award with a different arbitrator or panel in another arbitration, and in particular if the associated person files a straight-in request against the member firm with which the individual was associated at the time the customer dispute arose. Among the expungement requests during the sample period, FINRA has identified 282 attempts to expunge a previously withdrawn or denied request to expunge.246 Both the initial request 244 Honigsberg and Jacob also find evidence that suggests parties can use previous expungement decisions to determine the potential likelihood that an arbitrator will award expungement. See supra note 223. 245 See proposed Rules 12805(a)(2)(A), Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i). The inability to withdraw a request also includes the requirement that a case be closed with prejudice if an associated person withdraws a straight-in request after a panel from the Special Arbitrator Roster is appointed. See proposed Rule 13805(a)(4). In the sample period, an associated person withdrew 292 of the 5,810 straight-in requests (five percent) filed in cases that closed. The 292 straight-in requests include 240 requests where a panel was appointed. 246 The 282 subsequent requests include 261 previous requests that were withdrawn or otherwise not pursued by the associated person or party that filed the request, 17 previous requests by a named person that were denied, one previous request on behalf of an unnamed person that was denied, and three previous requests determined by the panel to be ineligible for arbitration. A panel issued an award containing expungement relief in 167 of the 282 subsequent expungement requests (59 percent) and denied 20 requests (seven percent). One of the awards containing expungement relief relates to the VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 and the subsequent request were made during the sample period. Additional subsequent expungement requests may have been filed during the sample period if the initial expungement request was made prior to the sample period (i.e., before January 2016). These 282 attempts can therefore be considered a lower bound for the number of these requests during the sample period. Under the proposed rule change, the grounds under which a panel may award expungement would not change.247 The proposed rule change, however, would likely increase the number of expungement requests decided by a three-person panel and would require that the panel decide unanimously whether to issue an award containing expungement relief. FINRA expects that the unanimity requirement would tend to reduce the number of awards containing expungement relief with less or less certain merit. F. Arbitrators or Panels Deciding Expungement Requests—Quantitative Description As discussed as part of the Economic Baseline, 10,156 of the 11,619 customer dispute information disclosures sought to be expunged during the sample period were filed in an arbitration that closed. Among the 10,156 disclosures, 9,030 (89 percent) would have required a panel from the Special Arbitrator Roster. The 9,030 disclosures include 5,088 disclosures sought to be expunged during a non-simplified customer arbitration that closed by award without a hearing or other than by award, and 3,942 sought to be expunged in a straight-in request that did not relate to a previous (non-simplified or simplified) customer arbitration. previous request on behalf of the unnamed person that was denied. Another of the awards containing expungement relief relates to the previous request that was deficient and therefore not decided. Fortythree subsequent expungement requests were withdrawn or deficient and, therefore, not decided. Finally, 52 subsequent expungement requests were still pending as of the end of the sample period. In 115 of the 282 subsequent expungement requests, the associated person was an unnamed party in the first arbitration. A similar measure in the Discussion Paper describes 193 attempts to expunge the same customer dispute information in more than one arbitration. See supra note 13. The measure described herein reflects an updated methodology. 247 See supra note 31 and accompanying text; see also proposed Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i). The proposed rule change would also instruct the panel not to consider the decision of the customer or authorized representative not to attend or participate in an expungement hearing as material to the determination of whether expungement is appropriate. This may help ensure expungement decisions are based on the merits of the request. See proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C). PO 00000 Frm 00027 Fmt 4701 Sfmt 4703 50195 A panel from a (non-simplified or simplified) customer arbitration would have been required to make a decision on the requests to expunge 1,025 of the 10,156 customer dispute information disclosures (10 percent). The 1,025 disclosures include 499 disclosures that were requested to be expunged during a non-simplified customer arbitration that closed by award after a hearing, 400 requested to be expunged during a simplified customer arbitration, and 126 requested to be expunged in a straightin request to expunge customer dispute information arising from a previous non-simplified customer arbitration that closed by award after a hearing. Finally, a panel from the Special Arbitrator Roster, or an arbitrator from a simplified customer arbitration, would have been required to make the decision with respect to the remaining 101 disclosures that associated persons sought to expunge in a straight-in request and that related to customer dispute information arising from a previous simplified customer arbitration. The panel that would have decided the request is dependent on whether an associated person, or a party on-behalf-of an associated person, would have requested expungement during the simplified arbitration. A three-person panel made expungement decisions in 1,051 customer or industry arbitrations. The panel decision was unanimous in 1,030 of the 1,051 arbitrations (98 percent), but not unanimous in 21 arbitrations (2 percent). In 11 of the 21 arbitrations, or one percent of the 1,051 arbitrations, one of the three arbitrators opposed an expungement decision awarding expungement. These 11 awards would not have been permitted under the proposed rule change. Since unanimous agreement is not currently required, however, current data on unanimous agreement may not reflect the extent to which unanimity would occur once it is required. The extent to which decisions may differ under the proposed rule change is therefore not known. G. Attendance and Participation in Expungement Hearings As discussed above, the proposed rule change may facilitate customer attendance and participation by restricting when a named associated person, or a party on-behalf-of an unnamed person, may request expungement. Other proposed amendments may facilitate the attendance and participation of customers or authorized representatives of states securities regulators in expungement hearings. Attendance and participation by customers or E:\FR\FM\15AUN2.SGM 15AUN2 50196 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices khammond on DSKJM1Z7X2PROD with NOTICES2 authorized representatives may increase the likelihood that a panel reviews a more complete factual record when deciding a request, and ultimately help ensure the accuracy of the customer dispute information contained in the CRD system. The proposed rule change would provide customers the option to attend and participate in an expungement hearing using whichever method is convenient for them (i.e., by telephone, by video conference or in person).248 The proposed rule change would also codify elements of the Guidance that require associated persons to notify a customer of a straight-in request,249 and for the panel to permit the customer to testify, cross-examine the associated person and other witnesses, present evidence at the hearing and make opening and closing arguments.250 An authorized representative of state securities regulators would similarly be permitted to attend and participate in prehearing conferences and expungement hearings in straight-in requests.251 If an authorized representative presents additional information at the expungement hearing, including information that may not otherwise be available, the panel may receive a more complete factual record on which to base their decision. 248 See proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B). 249 See proposed Rule 13805(b)(1)(A)(i) through (iii). The proposed rule change would also require the associated person to file with the panel all documents provided to the customers. This would help ensure that customers have knowledge of the straight-in request, and are not dissuaded from attending or participating in the expungement hearing as a result of the notification from the associated person. See proposed Rule 13805(b)(1)(A)(iv). The Director would also provide the notified customers with access to documents relevant to the expungement request filed in the arbitration, which may help in their preparation for the expungement hearing. See proposed Rule 13805(b)(1)(B)(ii). 250 Other amendments to the proposed rule change would also help encourage customer attendance and participation in simplified customer arbitrations and straight-in requests. For example, the proposed rule change would allow customers to be represented at an expungement hearing and thereby mitigate any potential concern they may have regarding a direct confrontation with the associated person. See proposed Rules 12805(c)(4) and 13805(c)(4). In addition, the proposed rule change provides that the Director would notify the customer of the time and place of any prehearing conferences and the expungement hearing of a straight-in request. See proposed Rule 13805(b)(1)(B)(i). 251 See proposed Rule 13805(c)(6). The proposed rule change also provides that FINRA would notify state securities regulators within 15 days of receiving a request for expungement. See proposed Rules 12805(b) and 13805(b)(2). State securities regulators would therefore have the time to review and decide whether to oppose a straight-in request, or review and decide whether to oppose confirmation in court of an award from a customer arbitration containing expungement relief. VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 The magnitude of these effects would increase with the likelihood the authorized representative attends, participates and presents new evidence, such as when concerns arise regarding the merits of an expungement request. Customers and authorized representatives of state securities regulators may incur costs to attend and participate in the expungement hearings. These costs, however, would be optional and at their own discretion. Associated persons may factor in the potential for customer and state securities regulator attendance and participation in a straight-in request when deciding whether to settle a nonsimplified customer arbitration.252 The proposed rule change would require an associated person (or the party requesting expungement on behalf of an unnamed person) to appear by video conference or in-person at an expungement hearing.253 This requirement would help the panel assess the associated person’s credibility and allow them to ask questions of an associated person and observe their responses. An associated person would also be permitted to cross-examine and seek information from customers who testify.254 This may provide associated persons with the opportunity to substantiate their arguments in support of their expungement request. Associated persons may incur costs to appear at an expungement hearing. The costs include the time and expense to appear, and other direct and indirect costs (e.g., opportunity costs) associated with the associated person’s appearance. The costs would depend on the method of appearance (i.e., by video conference or in-person), which, under the proposed rule change, would be determined by the panel. Associated persons who appear in-person would incur the time and expense to travel to and from the hearing location. Associated persons who live further away from the hearing location, or are less able to travel, would incur greater costs to appear in-person. Associated persons who instead appear by video conference would not incur travel costs. These associated persons, however, may perceive that they are less able to provide effective testimony. These perceived costs may be mitigated by the ability of parties to file a motion seeking to appear in-person. 252 See supra Item II.A.1.II.F., ‘‘Attendance and Participation of an Authorized Representative of State Securities Regulators in Straight-in Requests,’’ and accompanying text. 253 See proposed Rules 12805(c)(2) and 13805(c)(2). 254 See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B). PO 00000 Frm 00028 Fmt 4701 Sfmt 4703 H. Impact on Business and Professional Opportunities As a result of the proposed rule change, associated persons may determine that the additional costs to seek expungement relief are higher than the anticipated benefits. In addition, although the proposed rule change is intended to help ensure arbitrators award expungement when appropriate as it relates to the merits of the request, the likelihood that an associated person receives an award containing expungement relief may decrease because of the likely increase in the number of three-person panels deciding expungement requests and the requirement that such decisions be unanimous. This may lead associated persons not to seek expungement, including in some instances when expungement is likely to be awarded. Associated persons who are not able to seek expungement of customer dispute information from the CRD system, or are delayed in doing so, may experience a loss of business and professional opportunities. The loss of business and professional opportunities by one associated person, however, may be the gain of another. Associated persons who may benefit in this regard include those who still determine that the additional costs to seek expungement relief under the proposed rule change is less than the anticipated benefits and continue to seek expungement of customer dispute information, and other associated persons who do not have similar disclosures. An associated person may seek expungement of customer dispute information in a direct-to-court expungement case. The proposed rule change may result in associated persons seeking expungement in more direct-tocourt expungement cases. For some associated persons, the anticipated costs to first go through arbitration under the proposed rule change may be greater than the similar costs to seek expungement in a direct-to-court expungement case. Associated persons who would otherwise first go through arbitration because of the proposed rule change may incur additional costs relative to today to seek expungement relief. The number of associated persons who would instead seek expungement in a direct-to-court expungement case is dependent not only on the additional costs under the proposed rule change, but the costs an associated person would expect to incur in court to initiate an expungement proceeding. This information is generally not E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices khammond on DSKJM1Z7X2PROD with NOTICES2 publicly available, and accordingly the potential effect of the proposed rule change on direct-to-court expungement cases is not measured and is uncertain. I. Other Economic Effects Finally, the proposed rule change may have other marginal economic effects. First, the prohibition of a subsequent expungement request would decrease the potential inefficient allocation of resources resulting from a subsequent request that would have resulted in the same decision (i.e., denial) as the first. The resources of the forum allocated to the additional expungement request could instead be used for other claims or requests that were not previously adjudicated or for other purposes.255 Second, the proposed rule change may increase the efficiency of the forum by requiring that a party provide certain information when filing an expungement request. The information includes identification of the customer dispute information that is the subject of the request, and whether expungement of the same customer dispute information was previously requested and, if so, how it was decided. This would increase the efficiency of the forum by enabling FINRA to identify and track a request through the expungement process, and by alerting arbitrators and FINRA to another expungement request of the same customer dispute information. The efficiency of the forum would also increase by requiring an unnamed person to consent to an on-behalf-of expungement request in writing. This would help ensure that an unnamed person is aware of the request and prevent another expungement request by the unnamed person of the same customer dispute information. In addition, the proposed rule change may affect the value of the customer dispute information to describe the conduct of associated persons. The change in the value of the information depends on the merit of the disclosures that would have otherwise been expunged. The merit of these disclosures also depends on many factors which are difficult to predict. These factors include the incentive of parties to file an expungement request under the proposed rule change, the decisions by the panel to issue an award containing expungement relief dependent on the information that becomes available, and the merit of the customer dispute information that would have otherwise been sought to be 255 The resources relate to the specific costs to administer the claim, as well as the overall attendant costs to administer the forum. VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 expunged. The effect of the proposed rule change on the extent to which the customer dispute information available in the CRD system accurately describes the conduct of associated persons is, therefore, uncertain. 4. Alternatives Considered Alternatives to the proposed rule change include amendments that were proposed in Regulatory Notice 17–42 and the 2020 Rule Filing.256 For example, an alternative to the proposed rule change, which was proposed in the 2020 Rule Filing, could be to limit when a party can file an expungement request during a non-simplified customer arbitration to 30 days before the first scheduled hearing session. Thirty days may reduce the likelihood that an associated person files an expungement request based on more limited information about whether the request would be successful. Thirty days, however, may not provide associated persons adequate time to address any filing deficiencies before the request is served on the other parties. In addition, customers would have less time to consider the request before the first scheduled hearing session. Another alternative to the proposed rule change could be to include different time limits for an associated person to file a straight-in request. In the Notice, FINRA proposed a one-year time limit for associated persons to file a straight-in request after the close of a customer arbitration or, if no arbitration or civil litigation, after the initial reporting of the customer complaint to the CRD system.257 In the 2020 Rule Filing, FINRA proposed a two-year time limit for associated persons to file a straight-in request after the close of a customer case, or, if no arbitration or civil litigation, a six-year time limit for associated persons to file a straight-in request after the initial reporting of the customer complaint.258 In general, shorter (longer) time limits may further facilitate (impede) customer attendance and participation in the proceedings and the likelihood that the panel from the Special Arbitrator Roster receives evidence and testimony from the customer to consider when deciding an expungement request. Shorter (longer) time limits, however, may further (less) constrain an associated person from filing a straight-in request or including more than one expungement request in the same straight-in request. 256 See supra notes 9 and 11. supra note 9. 258 See supra note 11. 257 See PO 00000 Frm 00029 Fmt 4701 Sfmt 4703 50197 For example, the percentage of associated persons who would not have been able to include all customer dispute information disclosures in the same straight-in request would be lower if the proposed rule change imposed a six-year rather than three-year time limit on requesting expungement of customer complaints.259 As discussed above, FINRA believes that the proposed time limits would facilitate customer attendance and participation while providing associated persons sufficient opportunity to file a straight-in request. Other alternatives relate to the panel’s decision to issue an award containing expungement relief. In the 2020 Rule Filing, FINRA proposed allowing a majority decision by a three-person panel, not a unanimous decision (as proposed herein), to issue an award containing expungement relief.260 A majority decision would be consistent with what is required for other threeperson panel decisions in customer and industry arbitrations. FINRA determined, however, that a unanimous decision by a three-person panel would better help protect the integrity of the information in the CRD system. In the Notice, FINRA proposed that a panel find that the customer dispute information has ‘‘no investor protection or regulatory value’’ in order to issue an award containing expungement relief.261 This alternative may increase the difficulty for an associated person to receive an expungement award, and may cause associated persons not to seek expungement where expungement is likely (or unlikely) to be awarded. In addition, some commenters to the Notice raised concerns that the standard 259 Under these alternative time limits, associated persons would not have been able to include all expungement requests in at least 426 of the 1,384 arbitrations (31 percent). This estimate is 13 percent less than the similar calculation but with the time limits proposed herein (44 percent). See supra Item II.B.3.D., ‘‘Time Limits for Filing Straight-in Requests—Quantitative Description.’’ As mentioned above, these estimates do not account for the potential change in the behavior of associated persons as a result of the proposed rule change. The estimates also do not account for the number of straight-in requests of customer dispute information arising from a previous customer arbitration which, under the proposed rule change, may have been decided as part of the customer arbitration. 260 See supra note 11. 261 See supra note 9. In its Order approving NASD Rule 2130 (now FINRA Rule 2080), which describes the current findings that arbitrators must make to issue an award containing expungement relief, the SEC stated that ‘‘it believes the proposal strikes the appropriate balance between permitting members and associated persons to remove information from the CRD system that holds no regulatory value, while at the same time preserving information on the CRD system that is valuable to investors and regulators.’’ See Securities Exchange Act Release No. 48933 (December 16, 2003) 68 FR 74667, 74672 (December 24, 2003) (Order Approving File No. SR– NASD–2002–168). E:\FR\FM\15AUN2.SGM 15AUN2 50198 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices may, if codified, create confusion among arbitrators and the potential for inconsistent application among different arbitrators and panels. After considering the concerns, FINRA determined not to propose that the panel must find ‘‘no investor protection or regulatory value’’ to issue an award containing expungement relief. Finally, other alternatives relate to the appearance of parties at expungement hearings. The proposed rule change could have allowed an associated person to appear at an expungement hearing by telephone, as an alternative to appearance in person or by video conference. Although associated persons may incur fewer costs to appear by telephone, FINRA believes appearance by telephone may reduce the ability of arbitrators to assess the credibility of associated persons when deciding an expungement request. The proposed rule change could have provided a mechanism for an authorized representative of state securities regulators to attend and participate in expungement hearings when expungement is requested during a customer arbitration (simplified or nonsimplified). FINRA determined not to propose allowing an authorized representative to attend or participate in a customer arbitration in which expungement is requested because such attendance and participation could delay or disrupt the customer’s case and would be less impactful. Unlike many straight-in requests, customer cases are opposed and the panel would have the benefit of hearing the customer’s evidence on the merits. khammond on DSKJM1Z7X2PROD with NOTICES2 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others In December 2017, FINRA published Regulatory Notice 17–42, requesting comment on proposed amendments to the current expungement process.262 FINRA received 70 comments in response to the Notice. FINRA responded to these comments in the 2020 Rule Filing, which it filed with the Commission on September 22, 2020.263 The 2020 Rule Filing proposed several significant enhancements to the current expungement process, including: • establishing time limits within which associated persons may file straight-in requests; 262 See supra note 9. Securities Exchange Act Release No. 90000 (September 25, 2020), 85 FR 62142 (October 1, 2020) (Notice of Filing of File No. SR–FINRA– 2020–030). 263 See VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 • providing state securities regulators with notification of expungement requests at the time of filing of the requests; • requiring that all straight-in requests be decided by a three-person panel, randomly selected from a roster of experienced public arbitrators with enhanced expungement training; • prohibiting parties to straight-in requests from (1) agreeing to fewer than three arbitrators to review their expungement requests, (2) striking any of the selected arbitrators, (3) stipulating to an arbitrator’s removal or (4) stipulating to the use of pre-selected arbitrators; • requiring an associated person named in a customer arbitration to request expungement during the customer arbitration; • preventing an associated person from getting ‘‘two bites at the apple’’ by conditioning and limiting the ability of a party to a customer arbitration to file an on-behalf-of request and precluding an associated person from requesting expungement of customer dispute information if a panel or a court previously denied a request to expunge the same customer dispute information; • prohibiting an associated person who withdraws an expungement request from refiling the same request at a later date; • facilitating customer attendance and participation in straight-in requests by notifying customers of the time, date and place of any prehearing conferences and the expungement hearing, and making clear that customers are entitled to appear with representation at prehearing conferences and the expungement hearing; • providing customers who seek to attend and participate in straight-in requests with access to all relevant documents filed in the arbitration; • specifically authorizing the panel to request any documentary, testimonial or other evidence that it deems relevant from the broker-dealer firm or associated person seeking expungement; • requiring that the associated person requesting expungement appear personally at the expungement hearing; and • requiring that the panel deciding the expungement request provide enough detail in the award to explain its rationale for including expungement relief in the award. The Commission ultimately received 19 comments from 13 commenters in connection with the 2020 Rule Filing. The SEC received eight comment letters in response to the initial 2020 Rule PO 00000 Frm 00030 Fmt 4701 Sfmt 4703 Filing.264 On December 18, 2020, FINRA responded to the comments and filed Partial Amendment No. 1.265 On December 28, 2020, the SEC published a notice and order in the Federal Register to solicit comments on the 2020 Rule Filing and to institute proceedings to determine whether to approve or disapprove the proposed rule change as modified by Partial Amendment No. 1.266 The SEC received nine comment letters in response to the Order.267 On April 9, 2021 FINRA filed 264 Letter from Steven B. Caruso, Maddox Hargett & Caruso, P.C., to Vanessa Countryman, Secretary, SEC, dated September 28, 2020; letter from Benjamin P. Edwards, Associate Professor of Law, University of Nevada, Las Vegas, William S. Boyd School of Law, to J. Matthew DeLesDernier, Assistant Secretary, SEC, dated October 12, 2020 (‘‘Edwards 1’’); letter from Dochtor D. Kennedy, President & Founder, AdvisorLaw, LLC, to J. Matthew DeLesDernier, Assistant Secretary, SEC, dated October 22, 2020 (‘‘AdvisorLaw’’); letter from Lisa Hopkins, President, NASAA, to Vanessa Countryman, Secretary, SEC, dated October 22, 2020 (‘‘NASAA 1’’); letter from Amanda Skrelja, Paige Guarino, William Lapadula, and Zachary Dukoff, Legal Interns & Elissa Germaine, Supervising Attorney, John Jay Legal Services, Inc., Elizabeth Haub School of Law, PACE University, to J. Matthew DeLesDernier, Assistant Secretary, SEC, dated October 22, 2020; letter from Kevin M. Carroll, Managing Director and Associate General Counsel, SIFMA, to Vanessa A. Countryman, Secretary, SEC, dated October 22, 2020; letter from Ruben Huertero, Legal Intern & Christine Lazaro, Director of the Securities Arbitration Clinic and Professor of Clinical Legal Education, St. John’s University School of Law, to Vanessa Countryman, Secretary, SEC, dated October 22, 2020; and letter from David P. Meyer, President, Public Investors Advocate Bar Association, to Brent J. Fields, Secretary, SEC, dated October 23, 2020 (‘‘PIABA 1’’). The comment letters are available at https:// www.sec.gov/comments/sr-finra-2020-030/ srfinra2020030.htm. 265 Letter from Mignon McLemore, Assistant General Counsel, FINRA to Vanessa Countryman, Secretary, SEC, dated December 18, 2020, https:// www.sec.gov/comments/sr-finra-2020-030/ srfinra2020030-8163215-226938.pdf. 266 See Securities Exchange Act Release No. 90734 (December 18, 2020), 85 FR 84396 (December 28, 2020) (Order Instituting Proceedings to Determine Whether to Approve or Disapprove File No. SR–FINRA–2020–030) (‘‘Order’’). 267 Letter from Julius Z. Frager, to SEC, dated January 7, 2021; letter from Professor Lisa Miller, CEO, Lex Law Corporation, to Vanessa Countryman, Secretary, SEC, dated January 7, 2021; letter from Lisa Hopkins, President, NASAA, to Vanessa Countryman, Secretary, SEC, dated January 18, 2021 (‘‘NASAA 2’’); letter from Benjamin P. Edwards, Associate Professor of Law, University of Nevada, Las Vegas, William S. Boyd School of Law, to J. Matthew DeLesDernier, Assistant Secretary, SEC, dated January 19, 2021; letter from Jason R. Doss, President & Celiza Branganc¸a, Vice-President, the PIABA Foundation, Inc., to J. Matthew DeLesDernier, Assistant Secretary, SEC, dated January 19, 2021 (‘‘PIABA Foundation’’) (PIABA Foundation is a separate entity from PIABA); letter from Kevin M. Carroll, Managing Director and Associate General Counsel, SIFMA, to Vanessa A. Countryman, Secretary, SEC, dated January 19, 2021; letter from Lisa Hopkins, President, NASAA, to Vanessa Countryman, Secretary, SEC, dated January 28, 2021; letter from Barbara Roper, Director of Investor Protection, Consumer Federation of America, to Vanessa A. Countryman, E:\FR\FM\15AUN2.SGM 15AUN2 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices khammond on DSKJM1Z7X2PROD with NOTICES2 its response to the comments on the Order and Partial Amendment No. 2.268 On May 18, 2021, FINRA filed a third response to comments.269 In general, the commenters on the 2020 Rule Filing suggested that the proposed changes to the expungement process would be beneficial. However, most of the commenters recommended alternative approaches or modifications to further protect the information in the CRD system and address the fact that many straight-in requests are unopposed. The commenters’ recommendations generally focused on replacing the current expungement process with an administrative process; allowing state securities regulators to participate in expungement hearings in the DRS arbitration forum; embedding an independent advocate into the expungement process in the DRS arbitration forum; requiring that associated persons meet a higher standard to obtain an expungement award; requiring a unanimous decision of the arbitrators to award expungement; providing financial incentives to encourage customer participation in expungement proceedings; shortening the time limits within which associated persons may request expungement; and requiring that the associated person appear at the expungement hearing in person. Some commenters, in contrast, suggested that the proposed time limits were arbitrarily short; that the arbitrators should be required to provide an explanation when denying expungement; or that the arbitrators should not be limited to awarding expungement on the grounds set forth in FINRA Rule 2080(b)(1). On May 28, 2021, following discussions with SEC staff, FINRA withdrew the 2020 Rule Filing and Partial Amendments Nos. 1 and 2 in order to consider whether modifications Secretary, SEC, dated February 1, 2021; and letter from David P. Meyer, President, PIABA, to J. Matthew DeLesDernier, Assistant Secretary, SEC, dated February 2, 2021 (‘‘PIABA 2). The comment letters are available at https://www.sec.gov/ comments/sr-finra-2020-030/srfinra2020030.htm. 268 Letter from Mignon McLemore, Associate General Counsel, FINRA to Vanessa Countryman, Secretary, SEC, dated April 9, 2021, https:// www.sec.gov/comments/sr-finra-2020-030/ srfinra2020030-8658196-235191.pdf. 269 Letter from Mignon McLemore, Associate General Counsel, FINRA to Vanessa Countryman, Secretary, SEC, dated May 18, 2021 (‘‘Response’’), https://www.sec.gov/comments/sr-finra-2020-030/ srfinra2020030-8811356-238001.pdf. Following the Response and prior to the deadline for Commission action on the 2020 Rule Filing, the SEC received one additional comment letter. See letter from David P. Meyer, President, PIABA, Jason R. Doss, President, PIABA Foundation & Lisa Branganc¸a, Vice-President, PIABA Foundation, to J. Matthew DeLesDernier, Assistant Secretary, SEC, dated May 19, 2021 (‘‘PIABA 3’’). VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 to the proposal would be appropriate in response to concerns raised by the commenters and SEC staff.270 While the proposed rule change retains many of the significant enhancements proposed in the 2020 Rule Filing, the proposed rule change makes several key additional changes that would materially mitigate a number of the concerns with the current expungement process identified above and by commenters on the 2020 Rule Filing. These additional enhancements include: (1) providing a mechanism for state securities regulators to attend and participate in expungement hearings in straight-in requests; 271 (2) requiring that arbitrators unanimously agree to issue an award containing expungement relief based on one or more grounds specified in the rule; 272 (3) shortening the time period for requesting expungement of a customer complaint from six years to 270 Withdrawal of Proposed Rule Change (May 28, 2021), https://www.finra.org/sites/default/files/ 2021-05/SR-FINRA-2020-030-Withdrawal.pdf. Following FINRA’s withdrawal of the 2020 Rule Filing, the SEC received two additional comment letters. See letter from Kevin M. Carroll, Managing Director and Associate General Counsel, SIFMA, to Vanessa A. Countryman, Secretary, SEC, dated May 6, 2022 and letter from Anonymous, to J. Matthew DeLesDernier, Assistant Secretary, SEC, dated July 19, 2021. 271 In the 2020 Rule Filing, FINRA did not provide a mechanism for state securities regulators to attend and participate in expungement hearings. NASAA 1 stated that the 2020 Rule Filing ‘‘fail[ed] to provide a pathway to contest the expungement relief during the arbitration should a state determine it is appropriate to do so.’’ NASAA 2 also stated that notification would ‘‘allow NASAA members additional time to evaluate the request and determine the appropriate regulatory response, including but not limited to investigations, enforcement actions, or intervention in subsequent court proceedings seeking to confirm an award.’’ In addition, PIABA 2 and the PIABA Foundation stated that the 2020 Rule Filing ‘‘should provide state securities regulators with notice of the expungement request at the time that the petition for expungement is filed and give them a meaningful opportunity to participate in the arbitration proceeding—either by permitting them to intervene in the arbitrations directly or permitting them to participate indirectly through’’ an independent advocate. See also PIABA 3 (stating that ‘‘state securities regulators and customers [should] have a meaningful opportunity to participate in these expungement proceedings directly or through an advocate so that, when appropriate, evidence opposing expungement can be presented to arbitrators.’’). 272 Consistent with arbitration cases generally, the 2020 Rule Filing would have required a majority decision of the arbitrators to award expungement. See FINRA Rules 12904(a) and 13904(a). PIABA 1 and NASAA 1 suggested that a majority decision was inconsistent with expungement being an extraordinary remedy, that it undercut the goal of helping to preserve valuable information in the CRD system, and that a divided panel decision would indicate that there is doubt that the associated person has met this high burden. Similarly, Edwards 1 stated that allowing majority decisions ‘‘insufficiently protects the public’s vital interest in information’’ and ‘‘fails to communicate that expungement should only be recommended in truly extraordinary cases.’’ PO 00000 Frm 00031 Fmt 4701 Sfmt 4703 50199 three years after the date a customer complaint is initially reported in the CRD system; 273 and (4) requiring an associated person who is seeking expungement to appear at the expungement hearing in person or by video conference to further enhance the ability of the arbitrator or panel to assess the credibility of the associated person.274 Each of the proposed changes is discussed in detail above under Item II.A.1.II. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 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 or disapprove 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: 273 In the 2020 Rule Filing, FINRA proposed time limits to request expungement in straight-in requests: (1) within two years of the close of a customer arbitration or civil litigation that gave rise to the customer dispute information and (2) within six years of the date a customer complaint was initially reported in the CRD system. PIABA 1 and NASAA 1 supported a shorter one-year time limit for all expungement requests. PIABA 1 stated that the longer time provided in the 2020 Rule Filing would ‘‘degrade the quality of evidence for a panel to consider in making an expungement determination and decrease the likelihood that the customer will participate in the hearing.’’ PIABA 1 also stated that firms do not ‘‘need six years to complete investigations of customer complaints and close them in the CRD system (emphasis in original).’’ Contra AdvisorLaw (stating that the proposed limitations in the 2020 Rule Filing were ‘‘arbitrary’’ and that ‘‘the accuracy of the information contained within the CRD system has no relationship to the age of that information’’). 274 The 2020 Rule Filing would have allowed the arbitrators to determine whether the associated person would appear at the expungement hearing by telephone, in person or by video conference. NASAA 1 commented that the associated person should appear in person and that they should not be able to appear ‘‘by telephone or, as a matter of course, videoconference.’’ E:\FR\FM\15AUN2.SGM 15AUN2 50200 Federal Register / Vol. 87, No. 156 / Monday, August 15, 2022 / Notices Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FINRA–2022–024 on the subject line. khammond on DSKJM1Z7X2PROD with NOTICES2 Paper Comments • 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–FINRA–2022–024. This file number should be included on the subject line if email 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 VerDate Sep<11>2014 17:41 Aug 12, 2022 Jkt 256001 internet website (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 website viewing and printing 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 such filing also will be available for inspection and copying at the principal office of PO 00000 Frm 00032 Fmt 4701 Sfmt 9990 FINRA. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA– 2022–024 and should be submitted on or before September 6, 2022. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.275 J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2022–17430 Filed 8–12–22; 8:45 am] BILLING CODE 8011–01–P 275 17 E:\FR\FM\15AUN2.SGM CFR 200.30–3(a)(12). 15AUN2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 87, Number 156 (Monday, August 15, 2022)]
[Notices]
[Pages 50170-50200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-17430]



[[Page 50169]]

Vol. 87

Monday,

No. 156

August 15, 2022

Part II





 Securities and Exchange Commission





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Self-Regulatory Organizations; Financial Industry Regulatory Authority, 
Inc.; Notice of Filing of a Proposed Rule Change To Amend the Codes of 
Arbitration Procedure To Modify the Current Process Relating to the 
Expungement of Customer Dispute Information; Notice

Federal Register / Vol. 87 , No. 156 / Monday, August 15, 2022 / 
Notices

[[Page 50170]]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95455; File No. SR-FINRA-2022-024]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
the Codes of Arbitration Procedure To Modify the Current Process 
Relating to the Expungement of Customer Dispute Information

August 9, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on July 29, 2022, the Financial Industry 
Regulatory Authority, Inc. (``FINRA'') 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code'') and the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code'') (together, 
``Codes'') to modify the current process relating to the expungement of 
customer dispute information.
    The proposed rule change would amend the Codes to impose 
requirements on expungement requests (a) filed by an associated person 
during an investment-related, customer-initiated arbitration 
(``customer arbitration''), or filed by a party to the customer 
arbitration on behalf of an associated person (``on-behalf-of 
request''), or (b) filed by an associated person separate from a 
customer arbitration (``straight-in request''). Specifically, the 
proposed rule change would: (1) require that a straight-in request be 
decided by a three-person panel that is randomly selected from a roster 
of experienced public arbitrators with enhanced expungement training; 
\3\ (2) prohibit parties to a straight-in request from agreeing to 
fewer than three arbitrators to consider their expungement requests, 
striking any of the selected arbitrators, stipulating to an 
arbitrator's removal, or stipulating to the use of pre-selected 
arbitrators; (3) provide notification to state securities regulators of 
all expungement requests and a mechanism for state securities 
regulators to attend and participate in expungement hearings in 
straight-in requests; (4) impose strict time limits on the filing of 
straight-in requests; (5) codify and update the best practices in the 
Notice to Arbitrators and Parties on Expanded Expungement Guidance 
(``Guidance'') applicable to all expungement hearings, including 
amendments to establish additional requirements for expungement 
hearings, to facilitate customer attendance and participation in 
expungement hearings and to codify the panel's \4\ ability to request 
any evidence relevant to the expungement request; \5\ (6) require the 
unanimous agreement of the panel to issue an award containing 
expungement relief; and (7) establish procedural requirements for 
filing expungement requests, including for on-behalf-of requests. The 
proposed rule change would also amend the Customer Code to specify 
procedures for requesting expungement of customer dispute information 
during simplified arbitrations.
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    \3\ Among other requirements, public arbitrators are not 
employed in the securities industry and do not devote 20 percent or 
more of their professional work to the securities industry or to 
parties in disputes concerning investment accounts or transactions 
or employment relationships within the financial industry. See FINRA 
Rules 12100(aa) and 13100(x).
    \4\ Under the Codes, the term ``panel'' means the arbitration 
panel, whether it consists of one or more arbitrators. See FINRA 
Rules 12100(u) and 13100(s). Unless otherwise specified, the rule 
filing uses the term ``panel'' to mean either a panel or single 
arbitrator.
    \5\ See FINRA Dispute Resolution Services, Notice to Arbitrators 
and Parties on Expanded Expungement Guidance, https://www.finra.org/arbitration-and-mediation/notice-arbitrators-and-parties-expanded-expungement-guidance (last updated Sept. 2017).
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    The text of the proposed rule change is available on FINRA's 
website at https://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

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
I. Background and Discussion
A. Overview
    Over the course of many years, FINRA has adopted a number of rules 
\6\ governing the use of the arbitration forum administered by FINRA 
Dispute Resolution Services (``DRS'') to seek expungement of customer 
dispute information.\7\ These rules seek to balance the interests of 
securities regulators in having accurate and relevant information to 
fulfill their regulatory responsibilities; the interests of investors 
in having access to accurate and meaningful information about 
associated persons with whom they may entrust their money; the 
interests of broker-dealer firms in having accurate information for use 
in making informed employment decisions; and the interests of the 
brokerage community in having a fair process to address inaccurate 
customer dispute information.
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    \6\ A chronology of the steps FINRA has taken to strengthen the 
expungement framework is available at https://www.finra.org/rules-guidance/key-topics/expungement.
    \7\ The DRS arbitration forum is operated in accordance with 
rules approved by the SEC and is subject to ongoing oversight by the 
SEC. Decisions in the DRS arbitration forum are made by independent 
arbitrators selected by the parties, not by DRS staff. In almost 
every arbitration proceeding seeking expungement of customer dispute 
information, all or a majority of the arbitrators reviewing requests 
for expungement are public arbitrators (who, among other 
requirements, have never been employed in the securities industry). 
See also supra note 3. DRS's role in the arbitration process is to 
administer cases brought to the DRS arbitration forum in a neutral, 
efficient and fair manner.
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    FINRA is concerned, however, that the current expungement process 
is not working as intended--as a remedy that is appropriate only in 
limited circumstances in accordance with the narrow standards in FINRA 
rules. As a result, over the past several years, FINRA has taken 
numerous, meaningful steps to address the concerns that FINRA and other 
interested parties have identified with the current expungement process 
\8\ and to enhance that process, including by:
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    \8\ See infra Item II.A.1.I.D., ``Concerns With the Current 
Expungement Process,'' (discussing concerns with the current 
expungement process).
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     publishing Regulatory Notice 17-42 to seek comment on 
proposed changes

[[Page 50171]]

to further enhance the current expungement process; \9\
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    \9\ Regulatory Notice 17-42 (December 2017) (``Notice''), 
https://www.finra.org/rules-guidance/notices/17-42. The Notice 
requested comment on, among other things: establishing a roster of 
public chairpersons with additional training and experience from 
which a panel would be selected to decide straight-in requests; 
imposing time limits on when an associated person can request 
expungement in a straight-in request; limiting an associated person 
who is named as a party in a customer arbitration to one opportunity 
to request expungement, and that opportunity must be exercised 
during the customer arbitration; codifying a party's ability to 
request expungement on behalf of an associated person who is the 
subject of a customer arbitration, but unnamed, and establishing 
procedures for such requests; and applying a minimum fee to 
expungement requests.
---------------------------------------------------------------------------

     amending FINRA rules to apply minimum fees to requests for 
expungement of customer dispute information to address concerns about 
practices to avoid fees that were intended to be applicable to 
expungement requests; \10\ and
---------------------------------------------------------------------------

    \10\ An expungement request is a non-monetary or not specified 
claim (``non-monetary claim''). The fees applicable to non-monetary 
claims are higher than those applicable to small monetary claims. 
See FINRA Rule 13900(a)(1). If an associated person files a 
straight-in request and does not add a monetary claim to the 
request, the associated person will be assessed the filing fee 
associated with a non-monetary claim. The Codes require that non-
monetary claims are decided by a three-person panel unless the 
parties agree in writing to one arbitrator. See FINRA Rules 12401 
and 13401. FINRA amended the Codes to apply minimum fees to 
expungement requests, whether the request is made as part of the 
customer arbitration or the associated person files a straight-in 
request. As a result of the amendments, parties requesting 
expungement can no longer avoid the fees intended for such requests 
under the Codes or automatically qualify for a single arbitrator. 
The amendments also apply a minimum process fee and member surcharge 
to straight-in requests, as well as a minimum hearing session fee to 
expungement-only hearings. See Securities Exchange Act Release No. 
88945 (May 26, 2020), 85 FR 33212 (June 1, 2020) (Order Approving 
File No. SR-FINRA-2020-005); see also Regulatory Notice 20-25 (July 
20, 2020) (announcing a September 14, 2020 effective date), https://www.finra.org/rules-guidance/notices/20-25.
---------------------------------------------------------------------------

     in September 2020, filing with the SEC a rule filing to 
make several significant enhancements to the current expungement 
process by establishing special arbitration procedures for expungement 
requests (``2020 Rule Filing'').\11\
---------------------------------------------------------------------------

    \11\ See infra note 263. The 2020 Rule Filing, comments received 
in response to the filing and FINRA's responses to the comments are 
discussed below in Item II.C.
---------------------------------------------------------------------------

    On May 28, 2021, following discussions with SEC staff, FINRA 
withdrew the 2020 Rule Filing from the SEC in order to consider whether 
modifications to the filing were appropriate in response to concerns 
raised by SEC staff and commenters.\12\ At that time, FINRA indicated 
its intent to continue pursuing enhancements to the current expungement 
process, while also continuing discussions with the North American 
Securities Administrators Association (``NASAA'') and other interested 
parties regarding a more fundamental redesign of the current 
expungement process, separate from and in addition to the changes 
included in the 2020 Rule Filing.\13\
---------------------------------------------------------------------------

    \12\ See FINRA Statement on Temporary Withdrawal of Specialized 
Arbitrator Roster Rule Filing (May 28, 2021), https://www.finra.org/media-center/newsreleases/2021/finra-statement-temporary-withdrawal-specialized-arbitrator-roster.
    \13\ See supra note 12. In addition, FINRA recently published a 
Discussion Paper on Expungement of Customer Dispute Information 
(April 2022) (``Discussion Paper''), https://www.finra.org/sites/default/files/2022-04/Expungement_Discussion_Paper.pdf. The 
Discussion Paper provides background and data regarding expungement 
of customer dispute information and explores potential alternatives 
to the current expungement process. The Discussion Paper also 
explains how the proposed changes in the 2020 Rule Filing would 
address key concerns with the current expungement process and that 
FINRA's Board of Governors was continuing to consider further 
changes to enhance the 2020 Rule Filing.
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    FINRA believes the proposed amendments discussed below are 
responsive to the concerns that have been identified with the current 
expungement process and would help protect the integrity of the Central 
Registration Depository (``CRD[supreg]''), the central licensing and 
registration system used by the U.S. securities industry and its 
regulators,\14\ by making substantial improvements to the current 
expungement process. Key proposed changes include:
---------------------------------------------------------------------------

    \14\ See infra note 18 and accompanying text (discussing the CRD 
system).
---------------------------------------------------------------------------

    [rtarr8] For All Requests for Expungement of Customer Dispute 
Information:
     Requiring that the panel deciding the expungement request 
issue an award containing expungement relief only if the panel 
unanimously finds that the information to be expunged is factually 
impossible, clearly erroneous or false, or that the associated person 
was not involved in the alleged misconduct.
     Providing state securities regulators with notification of 
all expungement requests.
     Requiring associated persons to appear at the expungement 
hearing in person or by video conference.
     Facilitating customer attendance and participation by 
notifying customers of the time, date and place of any prehearing 
conferences and the expungement hearing; codifying that customers are 
entitled to attend and participate in prehearing conferences and the 
expungement hearing and to be represented, if they choose; and 
providing customers with access to all relevant documents filed in the 
arbitration.
     Specifically authorizing the panel to request any 
documentary, testimonial or other evidence that it deems relevant from 
the broker-dealer firm or associated person seeking expungement.
     Requiring that the panel provide enough detail in the 
award to explain its rationale for including expungement relief in the 
award.
     Precluding an associated person from requesting 
expungement of customer dispute information if a panel previously 
considered the merits of, or a court previously denied, a request to 
expunge the same customer dispute information.
     Prohibiting an associated person who withdraws an 
expungement request from refiling the request at a later date, thereby 
preventing ``arbitrator shopping.''
    [rtarr8] For Straight-in Requests: \15\
---------------------------------------------------------------------------

    \15\ As discussed in more detail below, under the proposed 
amendments, a straight-in request would include a request to expunge 
customer dispute information from the CRD system filed under the 
Industry Code: (1) by an associated person named in a customer 
arbitration after the customer arbitration closes other than by 
award or by award without a hearing; (2) arising from a customer 
complaint or civil litigation rather than a customer arbitration; or 
(3) by an associated person who was the subject of a customer 
arbitration, but unnamed, and where a named party in the customer 
arbitration did not request expungement on behalf of the unnamed 
associated person, or where a named party made an on-behalf-of 
request, but the customer arbitration closed other than by award or 
by award without a hearing.
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     Imposing strict time limits within which associated 
persons may request expungement--DRS would deny the DRS arbitration 
forum if the expungement request is made:
    [ssquf] more than three years after the date the customer complaint 
was initially reported in the CRD system (if the customer complaint 
does not evolve into a customer-initiated arbitration or civil 
litigation); or
    [ssquf] more than two years after the close of the customer-
initiated arbitration or civil litigation associated with the customer 
dispute information.
     Requiring that straight-in requests be filed under the 
Industry Code against the broker-dealer firm at which the associated 
person was associated at the time of the events giving rise to the 
customer dispute.
     Permitting an authorized representative of state 
securities regulators to attend and participate as a non-party in 
prehearing conferences and the expungement hearing to the same extent 
as customers could attend and participate.
     Requiring that all straight-in requests be decided by a 
three-person panel, randomly selected from a roster of experienced 
public arbitrators with enhanced expungement training and with no 
significant ties to the industry (``Special Arbitrator Roster'').

[[Page 50172]]

     Prohibiting the parties from: (1) agreeing to fewer than 
three arbitrators to consider their expungement requests; (2) striking 
any of the selected arbitrators; (3) stipulating to an arbitrator's 
removal; or (4) stipulating to the use of pre-selected arbitrators.\16\
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    \16\ Under the Codes, the DRS arbitrator selection process uses 
the Neutral List Selection System (``NLSS''), a computer algorithm, 
to generate lists of arbitrators on a random basis from DRS's 
rosters of arbitrators for the selected hearing location. After the 
parties receive the arbitrator lists, the parties select their panel 
through a process of striking and ranking the arbitrators on the 
lists. Under the proposed amendments, NLSS would randomly select 
three arbitrators from the Special Arbitrator Roster to consider the 
straight-in request. The parties, whose interests may be aligned, 
would not have the ability to select the arbitrators.
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    [rtarr8] For Expungement Requests Considered During a Customer 
Arbitration:
     Requiring an associated person named in a customer 
arbitration to request expungement during that customer arbitration or 
forfeit the opportunity to request expungement in any subsequent 
proceeding, thereby ensuring that the panel that hears the full merits 
of a customer arbitration also reviews a related expungement request.
     Conditioning and limiting the ability of a party to a 
customer arbitration to request expungement during the customer 
arbitration on behalf of an associated person who is the subject of a 
customer arbitration, but unnamed, so that the associated person cannot 
later claim they were not aware of the prior expungement request made 
on their behalf.
    Prior to discussing each of the proposed amendments, FINRA provides 
below background information regarding the reporting of customer 
dispute information to the CRD system and its public disclosure through 
BrokerCheck[supreg],\17\ the current process for requesting expungement 
through the DRS arbitration forum and concerns regarding the current 
process.
---------------------------------------------------------------------------

    \17\ See infra note 22 and accompanying text.
---------------------------------------------------------------------------

B. Customer Dispute Information in the CRD System
    FINRA is mandated by federal statute to collect and maintain 
registration information about broker-dealer firms and their associated 
persons. To satisfy this statutory responsibility, FINRA operates the 
CRD system, the central licensing and registration system used by 
FINRA, the SEC, other self-regulatory organizations (``SROs''), state 
securities regulators and broker-dealer firms.\18\ FINRA operates the 
CRD system pursuant to policies developed by FINRA and NASAA. FINRA, 
state securities regulators and the SEC use the CRD system as an 
important source of regulatory information to help inform 
registrations, examinations, investigations and disciplinary actions to 
protect investors and safeguard the markets. In addition, broker-dealer 
firms use information in the CRD system to help them make informed 
employment decisions.\19\
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    \18\ The concept for the CRD system was developed by FINRA 
jointly with NASAA. The CRD system fulfills FINRA's statutory 
obligation to establish and maintain a system to collect and retain 
registration information set forth in Section 15A(i) of the Exchange 
Act. NASAA and state regulators play a critical role in the ongoing 
development and implementation of the CRD system.
    \19\ As of December 31, 2021, over 60 million registrations for 
associated persons have been processed through the CRD system over a 
period spanning more than 20 years.
---------------------------------------------------------------------------

    In general, the information in the CRD system is reported by 
registered broker-dealer firms, associated persons and regulatory 
authorities in response to questions on the uniform registration 
forms.\20\ These forms are used to collect registration information, 
which includes, among other things, administrative, regulatory, 
criminal history, financial and other information about associated 
persons, such as investment-related, customer-initiated arbitrations, 
civil litigations or customer complaints (i.e., ``customer dispute 
information''). Customer dispute information maintained in the CRD 
system is reported through Forms U4 and U5.\21\
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    \20\ The uniform registration forms are Form BD (Uniform 
Application for Broker-Dealer Registration), Form BDW (Uniform 
Request for Broker-Dealer Withdrawal), Form BR (Uniform Branch 
Office Registration Form), Form U4 (Uniform Application for 
Securities Industry Registration or Transfer), Form U5 (Uniform 
Termination Notice for Securities Industry Registration) and Form U6 
(Uniform Disciplinary Action Reporting Form).
    \21\ FINRA, NASAA and state securities regulators developed 
Forms U4 and U5. Any amendments to these uniform registration forms 
require collaboration with, and agreement between FINRA, NASAA and 
state securities regulators before being filed with the SEC for 
approval. Several questions on Forms U4 and U5 require associated 
persons to disclose certain investment-related, customer-initiated 
arbitrations, civil litigations or customer complaints which allege 
sales practice violations. See Form U4, Question 14I, https://www.finra.org/sites/default/files/form-u4.pdf and Form U5, Question 
7E, https://www.finra.org/sites/default/files/form-u5.pdf.
---------------------------------------------------------------------------

    Pursuant to rules approved by the SEC and pursuant to its statutory 
mandate, FINRA makes specific CRD information publicly available 
through BrokerCheck.\22\ BrokerCheck is a free tool available on 
FINRA's website to help investors make informed choices about the 
associated persons and broker-dealer firms with whom they may conduct 
business.\23\ As part of its statutory obligation, FINRA publishes on 
BrokerCheck extensive disclosure information, including customer 
dispute information for associated persons who are currently or were 
formerly registered with FINRA.\24\
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    \22\ BrokerCheck fulfills FINRA's statutory obligation under 
Section 15A(i) of the Exchange Act to establish and maintain a 
readily accessible electronic or other process, to receive and 
promptly respond to inquiries regarding registration information on, 
among others, broker-dealer firms and associated persons. A detailed 
description of the information made available through BrokerCheck is 
available at https://www.finra.org/investors/about-brokercheck.
    \23\ In 2021 alone, almost 38.3 million searches of firms and 
financial professionals were conducted on BrokerCheck.
    \24\ As of December 31, 2021, BrokerCheck disclosed information 
about approximately 3,400 broker-dealer firms and approximately 
612,000 associated persons. BrokerCheck also disclosed information 
about more than 17,000 broker-dealer firms and 548,000 associated 
persons formerly registered with FINRA. Formerly registered 
associated persons, although no longer in the securities industry in 
a registered capacity, may work in other investment-related 
industries or may seek to attain other positions of trust with 
potential investors. Pursuant to FINRA rules which are approved by 
the SEC, records for formerly registered associated persons are 
available in BrokerCheck for 10 years after an associated person 
leaves the brokerage industry, and associated persons who are the 
subject of disciplinary actions and certain other disclosure events 
remain on BrokerCheck permanently.
---------------------------------------------------------------------------

    The collection of registration information in the CRD system and 
the disclosure of the information through BrokerCheck serves three 
important purposes: (1) allowing investors to obtain information about 
an associated person or broker-dealer firm with whom they may do 
business; (2) providing securities regulators with a critical 
regulatory tool in overseeing the activities of associated persons and 
in detecting regulatory problems; and (3) providing broker-dealer firms 
with information for use in making informed employment decisions. The 
value of the information is dependent on its completeness and accuracy. 
The absence of accurate information, as well as the presence of clearly 
inaccurate information, decreases the reliability and hence the value 
of the disclosure regime.
    Sometimes, associated persons seek to remove, or ``expunge,'' 
customer dispute information from the CRD system and, thereby, from 
BrokerCheck. To do this, FINRA rules require that an associated person 
must obtain an order from a court of competent jurisdiction (1) 
directing such expungement or (2) confirming an arbitration award 
containing expungement relief.\25\ FINRA will expunge customer dispute 
information from the CRD system only pursuant to a court order.
---------------------------------------------------------------------------

    \25\ See FINRA Rule 2080.
---------------------------------------------------------------------------

    As discussed in more detail below, FINRA rules specify a narrow set 
of

[[Page 50173]]

circumstances in which expungement of customer dispute information from 
the CRD system is appropriate. An arbitrator considering an expungement 
request in the DRS arbitration forum must make a finding that the 
information to be expunged is factually impossible, clearly erroneous 
or false, or that the associated person was not involved in the alleged 
misconduct.\26\ When these standards were approved by the SEC, it was 
contemplated that expungement would be an extraordinary remedy that 
would be allowed only in these limited circumstances.\27\
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    \26\ See FINRA Rules 2080, 12805 and 13805.
    \27\ See Securities Exchange Act Release No. 58886 (October 30, 
2008), 73 FR 66086 (November 6, 2008) (Order Approving File No. SR-
FINRA-2008-010).
---------------------------------------------------------------------------

C. Requesting Expungement Through the DRS Arbitration Forum
    The process of seeking expungement through the DRS arbitration 
forum originally developed when associated persons who were not found 
liable in a customer arbitration asked the panel in that same case to 
expunge the underlying customer dispute from the CRD system. Use of the 
DRS arbitration forum for expungement subsequently expanded when 
associated persons began requesting expungement through straight-in 
requests. Typically, these straight-in requests for expungement are 
filed after the customer arbitration settles or where a customer 
complaint has not evolved into a customer arbitration. Straight-in 
requests present inherent difficulties and panels deciding straight-in 
requests issue awards containing expungement relief more often than 
panels deciding expungement requests made in customer arbitrations.\28\
---------------------------------------------------------------------------

    \28\ From January 2016 to December 2021 (the ``sample period''), 
an arbitrator or panel issued awards containing expungement relief 
in response to 58 percent of requests made during a customer 
arbitration but issued awards containing expungement relief in 
response to 84 percent of straight-in requests. See infra Item 
II.B.2., ``Economic Baseline,'' for further discussion.
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    For either type of expungement request initiated in the DRS 
arbitration forum, an independent arbitrator or a panel of independent 
arbitrators decides whether the party requesting expungement has 
established one of the Rule 2080(b)(1) grounds for expungement.\29\ 
Pursuant to FINRA rules, in order to issue an award containing 
expungement relief, the panel shall first hold a recorded hearing 
session regarding the appropriateness of expungement of the customer 
dispute information, and in cases involving settlements, review 
settlement documents and consider the amount of payments made to any 
party and any other terms and conditions of the settlement.\30\
---------------------------------------------------------------------------

    \29\ See infra note 31 and accompanying text (discussing the 
grounds for issuing an award containing expungement relief).
    \30\ See FINRA Rules 12805 and 13805.
---------------------------------------------------------------------------

    FINRA rules also require the panel to specify in the award which of 
the Rule 2080(b)(1) grounds serves as a basis for the expungement order 
and provide a brief written explanation of the reasons for its finding 
that one or more of the Rule 2080(b)(1) grounds applies to the facts of 
the case.\31\ Thus, to include expungement relief in an award, the 
panel must find that: (1) the claim, allegation or information is 
factually impossible or clearly erroneous; (2) the associated person 
was not involved in the alleged investment-related sales practice 
violation, forgery, theft, misappropriation or conversion of funds; or 
(3) the claim, allegation or information is false.\32\ Arbitration 
awards are final and binding unless vacated based on one of the limited 
grounds set forth in applicable state or federal statutes.\33\
---------------------------------------------------------------------------

    \31\ See supra note 30; see also Securities Exchange Act Release 
No. 58886 (October 30, 2008), 73 FR 66086, 66087 (November 6, 2008) 
(Order Approving File No. SR-FINRA-2008-010) (stating that new Rules 
12805 and 13805 require the arbitration panel to indicate ``which of 
the grounds for expungement in Rule [2080](b)(1)(A)-(C) serves as 
the basis for the expungement . . . ''); Regulatory Notice 08-79 
(December 2008) (stating that ``[t]he arbitration panel must 
indicate which of the grounds for expungement under Rule 
[2080](b)(1)(A)-(C) serve as the basis for their expungement order, 
and provide a brief written explanation of the reasons for ordering 
expungement''); FINRA Dispute Resolution Services Arbitrators Guide, 
p. 74, https://www.finra.org/sites/default/files/arbitrators-ref-guide.pdf (explaining that ``FINRA Rule 2080 establishes procedures 
to ensure that expungement occurs only when the arbitrators find and 
document one of [the three grounds that are listed in FINRA Rule 
2080(b)]''); Guidance, supra note 5. DRS's Basic Arbitrator Training 
Program also explains that expungement may occur only after the 
arbitrators find and document one of these three grounds. See also 
infra note 162.
    \32\ See FINRA Rules 2080(b)(1), 12805 and 13805.
    \33\ Arbitration awards are subject to very limited judicial 
review under the Federal Arbitration Act and state arbitration 
statutes. A court of competent jurisdiction will typically confirm 
an award unless it is vacated or modified. Generally, an award that 
contains expungement of customer dispute information will not be 
vacated unless there is evidence that the panel exceeded its 
authority, was biased, or engaged in misconduct. See 9 U.S.C. 10 
(providing grounds for vacatur of an arbitration award under the 
Federal Arbitration Act).
---------------------------------------------------------------------------

    These FINRA rules are supplemented with extensive guidance and 
training provided to DRS's independent arbitrators. DRS has enhanced 
its expungement training for arbitrators to emphasize the importance of 
the information in the CRD system and BrokerCheck, and to underscore 
the arbitrator's important role in maintaining the relevancy and 
integrity of the information in those systems. DRS requires arbitrators 
to take mandatory online training on expungement to be eligible to 
serve as an arbitrator. The training includes materials that 
arbitrators should review when considering expungement requests, with a 
particular focus on the Guidance, first published in 2013 and expanded 
further periodically thereafter.\34\ The Guidance explains the 
requirements of FINRA Rules 12805 and 13805 and provides arbitrators 
with best practices and recommendations to follow when deciding 
expungement requests.\35\
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    \34\ See Guidance, supra note 5.
    \35\ See Guidance, supra note 5. DRS also periodically provides 
additional materials to arbitrators to keep them informed about any 
changes to the expungement rules or DRS arbitration forum practices. 
DRS offers an updated online ``Neutral Workshop'' on expungement, 
which further emphasizes the best practices described in the 
Guidance. A Neutral Workshop is an online discussion between or 
among experienced arbitrators on a specific arbitration topic, with 
a DRS staff member as a moderator. The discussions are posted on 
FINRA's website as a free, educational tool. Additional information 
about expungement rules and DRS arbitration forum practices have 
been provided to arbitrators via a number of articles in a DRS staff 
quarterly newsletter, The Neutral Corner, which provides arbitrators 
and mediators with updates on important rules and procedures within 
the DRS arbitration forum and is distributed to FINRA neutrals 
(arbitrators and mediators) and published on FINRA's website. See, 
e.g., The Neutral Corner Volume 1-2016 (Changes to Expungement 
Requests), https://www.finra.org/sites/default/files/The_Neutral_Corner_Volume_1_2016_0.pdf; The Neutral Corner Volume 4-
2015 (Questions and Answers: Parties Making Second Expungement 
Requests After Previous Denial), https://www.finra.org/sites/default/files/The_Neutral%20Corner_Volume_4_2015.pdf; The Neutral 
Corner Volume 1-2015 (Updated Expungement Guidance), https://www.finra.org/sites/default/files/Neutral_Corner_Volume.1_2015.pdf; 
and The Neutral Corner Volume 3-2014 (Prohibited Conditions Relating 
to Expungement of Customer Dispute Information; Expanded Expungement 
Guidance; Questions and Answers: Expungement; Expungement Training: 
Updated to Include Rule 2081), https://www.finra.org/sites/default/files/Neutral%20Corner_Volume%203_0.pdf.
---------------------------------------------------------------------------

    As stated above, FINRA will expunge customer dispute information 
from the CRD system only pursuant to a court order. FINRA Rule 2080, 
which was developed in close consultation with representatives of NASAA 
and state securities regulators, provides that associated persons 
seeking expungement of customer dispute information from the CRD system 
must obtain an order from a court of competent jurisdiction directing 
expungement relief or confirming an arbitration award that contains 
expungement relief.\36\ If a court directs

[[Page 50174]]

expungement or confirms an arbitration award containing expungement, 
the customer dispute information is removed from the CRD system, and is 
no longer made public through BrokerCheck.
---------------------------------------------------------------------------

    \36\ FINRA Rule 2080(a). FINRA Rule 2080 also requires that 
FINRA be named as an additional party in any court proceeding 
related to the expungement of customer dispute information, unless 
FINRA waives being named. See FINRA Rule 2080(b).
---------------------------------------------------------------------------

D. Concerns With the Current Expungement Process
    While commenters have raised concerns generally about associated 
persons' use of the DRS arbitration forum to seek expungement, their 
concerns have been particularly focused on straight-in requests. Some 
of these concerns, however, also apply to expungement requests filed in 
customer arbitrations that settle, where the panel from the customer 
arbitration then holds a hearing to consider the expungement 
request.\37\
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    \37\ Concerns with the expungement process were previously 
considered by the FINRA Dispute Resolution Task Force (``Task 
Force''), whose members included representatives from the industry 
and the public with a broad range of interests in securities dispute 
resolution. See FINRA Dispute Resolution Task Force, https://www.finra.org/arbitration-mediation/finra-dispute-resolution-task-force. FINRA formed the Task Force to consider possible enhancements 
to the DRS arbitration and mediation forum. At the time, the Task 
Force noted that the majority of issues that arise in the 
expungement process are those involving settled cases that do not go 
to final resolution because in such cases: (1) the panel selected by 
the parties may not have heard the full merits of the customer 
dispute and, therefore, may not bring to bear any special insights 
in determining whether to grant an expungement request and (2) 
claimants or their counsel have little incentive to participate in 
an expungement hearing once their dispute has been settled. The Task 
Force unanimously recommended, in its final report, the creation of 
a special arbitration panel consisting of experienced arbitrators 
from the chairperson roster who have received enhanced training on 
expungement to decide expungement requests in settled customer 
arbitrations. See Final Report and Recommendations of the FINRA 
Dispute Resolution Task Force (Dec. 16, 2015), https://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf. The Task Force 
issued its final report with 51 recommendations. DRS has taken 
action on all of the 51 recommendations. See FINRA Dispute 
Resolution Task Force Recommendations Final Status Report (Jan. 15, 
2019), https://www.finra.org/sites/default/files/DR_task_report_status_011519.pdf.
---------------------------------------------------------------------------

    First, straight-in requests often involve aged customer dispute 
information reported on the associated person's CRD record a number of 
years prior to the expungement request.\38\ As a result, documents or 
information relating to the dispute may no longer be available.\39\
---------------------------------------------------------------------------

    \38\ FINRA rules provide that no claim shall be eligible for 
submission to arbitration under the Codes where six years have 
elapsed from the occurrence or event giving rise to the claim. See 
FINRA Rules 12206(a) and 13206(a). This six-year eligibility rule 
applies to all arbitration claims, including those requesting 
expungement of customer dispute information. The issue of 
eligibility may be raised in a motion by the parties or sua sponte 
by the arbitrators. See Horst v. FINRA, No. A-18-777960-C (Dist. Ct. 
Nevada Oct. 25, 2018) (Order Denying Motion to Vacate Arbitration 
Award). In addition, FINRA Rules 12409 and 13413 provide that the 
arbitrators have the authority to interpret and determine the 
applicability of all provisions under the Codes. Thus, the decision 
of whether to dismiss a claim pursuant to this six-year eligibility 
rule is within the sole discretion of the panel. See Howsam v. Dean 
Witter Reynolds, 537 U.S. 79, 85-86 (2002) (finding that an 
arbitrator properly decides issues of eligibility). Such 
interpretations and decisions are final and binding upon the 
parties.
    \39\ For example, during the sample period, approximately three-
fifths of the 6,476 customer dispute information disclosures were 
sought to be expunged in straight-in requests that were filed six 
years or longer after the close of a customer arbitration or the 
initial reporting of the customer complaint.
---------------------------------------------------------------------------

    Second, although the Guidance provides that an arbitrator must 
ensure the customer has notice and an opportunity to participate in the 
expungement hearing, customers and their representatives typically do 
not participate in hearings in straight-in requests and, therefore, the 
panel may receive information only from the associated person 
requesting expungement.\40\
---------------------------------------------------------------------------

    \40\ See also supra note 37 (discussing similar concerns with 
expungement hearings in settled customer arbitrations).
---------------------------------------------------------------------------

    Third, the broker-dealer firm named in the straight-in request by 
the associated person may not have any relevant documents pertaining to 
the customer dispute because the event occurred while the associated 
person was employed at a different firm, or the respondent firm may 
support the expungement request because it has an interest in removing 
negative information from the associated person's CRD record.\41\
---------------------------------------------------------------------------

    \41\ FINRA rules do not currently specify who associated persons 
must name when filing a straight-in request. Typically, associated 
persons file their straight-in requests against the broker-dealer 
firm at which the associated person is currently employed. On rare 
occasions, straight-in requests are filed against a customer. As 
discussed below, the proposed amendments would prohibit these 
filings against the customer. See proposed Rule 12805(a)(3).
---------------------------------------------------------------------------

    Fourth, associated persons are also making repeated attempts to 
seek expungement of the same customer dispute information. For example, 
some associated persons make requests for expungement (by filing 
straight-in requests) after withdrawing or deciding not to pursue an 
expungement request made in the customer arbitration, presumably 
believing that another panel that has not heard the merits of the 
customer's claim may be more likely to decide expungement in their 
favor. FINRA is concerned about this practice of ``arbitrator 
shopping,'' particularly when associated persons withdraw an original 
expungement request after the panel has been made aware of evidence 
that could result in the denial of the expungement request.
    FINRA has also observed that persons who are not named as a party 
in a customer arbitration may attempt to seek expungement (using 
straight-in requests) after expungement was denied in the customer 
arbitration to which they were not a party, claiming they were not 
aware of the expungement request in the customer arbitration.\42\ In 
addition, FINRA has observed that associated persons are moving to 
vacate arbitration awards that deny expungement relief and then seeking 
expungement in a new proceeding.\43\
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    \42\ In these circumstances, the customer arbitration is filed 
against the broker-dealer firm, without formally naming the 
associated person, but alleging that the associated person was 
involved in the alleged violation. In 2009, the SEC approved 
amendments to Forms U4 and U5 to require a broker-dealer firm to 
report allegations of sales practice violations made against an 
associated person in an arbitration or a civil litigation even when 
the associated person is not a named party in the proceeding. The 
information reported about such disputes is now maintained in the 
CRD system as part of the associated person's record and is 
disclosed through BrokerCheck. See Securities Exchange Act Release 
No. 59916 (May 13, 2009), 74 FR 23750 (May 20, 2009) (Order 
Approving File No. SR-FINRA-2009-008).
    These ``unnamed persons'' may seek to expunge customer dispute 
information from the CRD system by: (1) asking a party to the 
customer arbitration, usually the firm, to request expungement on 
their behalf; (2) seeking to intervene in the customer arbitration; 
(3) initiating a new arbitration in which the unnamed person 
requests expungement and names the customer or firm as the 
respondent; or (4) seeking expungement in a court of competent 
jurisdiction.
    \43\ If an award denying expungement is vacated and the 
associated person then seeks expungement in court, FINRA may oppose 
expungement in court if FINRA was not provided notice or an 
opportunity to be heard in the proceeding to vacate the award.
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    As discussed in detail below, the proposed amendments would make 
significant enhancements to the current expungement process. These 
enhancements would address the concerns identified by FINRA, the Task 
Force and other interested parties and provide additional safeguards 
for ensuring that the information maintained in the CRD system and 
disclosed through BrokerCheck is accurate and complete.\44\
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    \44\ The proposed rule change would apply to all members, 
including members that are funding portals or have elected to be 
treated as capital acquisition brokers (``CABs''), given that the 
funding portal and CAB rule sets incorporate the impacted FINRA 
rules by reference.
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II. Proposed Rule Change
    Under the proposed rule change, an associated person would only be 
permitted to seek expungement of customer dispute information in the

[[Page 50175]]

DRS arbitration forum by complying with the requirements of proposed 
Rules 12805 (expungement requests in a customer arbitration), 13805 
(straight-in requests under the Industry Code) or 12800(d) (expungement 
requests in a simplified customer arbitration). The discussion below of 
the proposed rule change is divided into seven areas: (A) requests for 
expungement under the Customer Code; (B) straight-in requests under the 
Industry Code and the Special Arbitrator Roster; (C) limitations on 
expungement requests; (D) requirements relating to all expungement 
hearings; (E) notifications to customers and to state securities 
regulators regarding expungement requests; (F) attendance and 
participation of an authorized representative of state securities 
regulators in straight-in requests; and (G) expungement requests during 
simplified customer arbitrations.
A. Requests for Expungement Under the Customer Code
    FINRA Rule 12805 sets forth requirements that arbitrators must meet 
in order to issue an award containing expungement of customer dispute 
information under the Customer Code.\45\ The rule does not, however, 
provide guidance for associated persons on how and when they may 
request expungement during the customer arbitration, or on when 
arbitrators must make expungement determinations. The proposed rule 
change would amend FINRA Rule 12805 to set forth requirements for 
expungement requests filed by an associated person during a customer 
arbitration.
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    \45\ FINRA Rule 12805 provides that a panel must comply with the 
following requirements in order to grant expungement: (a) hold a 
recorded hearing session (by telephone or in person) regarding the 
appropriateness of expungement; (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 2080 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 2080 grounds for expungement applies to the 
facts of the case; and (d) assess all DRS arbitration forum fees for 
hearing sessions in which the sole topic is the determination of the 
appropriateness of expungement against the parties requesting 
expungement relief. See also FINRA Rule 13805.
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1. Expungement Requests During the Customer Arbitration
a. By a Respondent Named in a Customer Arbitration
    Under current practice, an associated person who is named as a 
respondent in a customer arbitration (``named associated person'') may 
request expungement at any time during the customer arbitration or 
separately from the customer arbitration in a straight-in request.\46\ 
If a named associated person requests expungement during the customer 
arbitration, does not withdraw the request and the case goes to hearing 
and closes by award, the panel in the customer arbitration will also 
decide the expungement request and include the decision as part of the 
award. If the customer arbitration does not close by award after a 
hearing (e.g., settles) and the associated person continues to pursue 
the expungement request, the panel from the customer arbitration will 
hold a hearing regarding the appropriateness of expungement.\47\
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    \46\ There are several ways in which a named associated person 
may request expungement during a customer arbitration. The request 
may be included in the answer to the statement of claim that must be 
submitted within 45 days of receipt of the statement of claim, and 
may include other claims and remedies requested. See FINRA Rules 
12303(a) and (b); see also FINRA Rules 13303(a) and (b). The 
expungement request may also be included in other pleadings (e.g., a 
counterclaim, a cross claim, or a third party claim) and must be 
filed with the Director. See FINRA Rule 12100(x). The associated 
person may also request at any time during the case (outside of a 
pleading) that the panel consider the person's expungement request 
during the hearing. Under FINRA Rule 12503, such a request is 
treated like a motion, which gives the other parties an opportunity 
to state objections. If there is an objection, the panel must decide 
the motion pursuant to FINRA Rule 12503(d)(5). See also FINRA Rules 
13503 and 13503(d)(5).
    \47\ See FINRA Rule 12805.
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    Under the proposed rule change, if a named associated person seeks 
to expunge customer dispute information associated with the customer's 
statement of claim, the named associated person must make the 
expungement request during the customer arbitration.\48\ As discussed 
below, these requests would be subject to limitations on how and when 
the requests may be made.\49\ If the associated person does not request 
expungement of the customer dispute information associated with the 
customer's statement of claim during the customer arbitration, the 
associated person would forfeit the opportunity to seek expungement of 
the same customer dispute information in any subsequent proceeding.\50\ 
The Director would be authorized to deny the DRS arbitration forum to 
requests made during a customer arbitration to expunge customer dispute 
information that is not associated with the customer's statement of 
claim.\51\ The Director would also be authorized to deny the forum if a 
named associated person does not request expungement of the customer 
dispute information associated with the customer's statement of claim 
during the customer arbitration but then seeks expungement of the same 
customer dispute information in a subsequent proceeding.\52\
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    \48\ See proposed Rule 12805(a)(1)(A). The customer dispute 
information associated with a customer's statement of claim would 
include a written customer complaint or civil litigation brought by 
the same customer that addresses the same allegations.
    \49\ See proposed Rule 12805(a)(1)(B); see also infra Item 
II.A.1.II.C., ``Limitations on Expungement Requests.''
    \50\ See proposed Rule 12805(a)(1)(A).
    \51\ See proposed Rule 12203(b); see also infra Item 
II.A.1.II.C.3., ``Director's Authority to Deny the Forum.''
    \52\ See proposed Rules 12805(a)(1)(A), 13203(b) and 
13805(a)(2)(A)(vi); see also infra Item II.A.1.II.C.3., ``Director's 
Authority to Deny the Forum.''
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    FINRA is proposing to require that a named associated person 
request expungement of customer dispute information associated with a 
customer's statement of claim during the customer arbitration because, 
if the arbitration closes by award after a hearing, the panel from the 
customer arbitration will be best situated to decide the related issue 
of expungement. Requiring the named associated person to request 
expungement in the customer arbitration increases the likelihood that a 
panel will have input from all parties and access to all of the 
evidence, testimony and other documents to make an informed decision on 
the expungement request.
    FINRA recognizes that this requirement could result in some named 
associated persons filing expungement requests to preserve their 
ability to make an expungement request, regardless of the potential 
outcome. FINRA believes, however, that the potential costs that would 
be incurred by associated persons, arbitrators and the DRS arbitration 
forum if named associated persons file expungement requests to preserve 
the ability to request expungement are appropriate given the potential 
benefit of having customer input and a complete factual record for the 
panel to decide an expungement request.
i. Method of Requesting Expungement
    The proposed rule change would limit how and when expungement 
requests may be made during the customer arbitration. Under the 
proposed rule change, if a named associated person requests expungement 
during the customer arbitration, the request must be included in the 
answer or a separate pleading requesting expungement.\53\ If the 
request is included in the answer, it must be filed within 45 days of 
receipt

[[Page 50176]]

of the customer's statement of claim in accordance with existing 
requirements under the Codes.\54\ If the named associated person 
requests expungement in a separate pleading requesting expungement, 
rather than the answer, the request must be filed no later than 60 days 
before the first scheduled hearing begins.\55\ The proposed deadline 
should provide the named associated person with enough time to assess 
the customer's case and the potential merits of an expungement request 
and decide whether to file the request. The 60-day timeframe would also 
provide the parties to the customer arbitration with reasonable case 
preparation time, since the expungement issues will overlap with the 
issues raised by the customer's claim. If a named associated person 
seeks to request expungement after the 60-day filing deadline, the 
associated person would be required to file a motion requesting an 
extension, which would be decided by the panel.\56\
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    \53\ See proposed Rule 12805(a)(1)(C)(i). FINRA Rules 12100(x) 
and 13100(v) would be amended to define a ``separate document 
requesting expungement'' as a pleading under the Codes.
    \54\ See supra note 46.
    \55\ See proposed Rule 12805(a)(1)(C)(i).
    \56\ See proposed Rule 12805(a)(1)(C)(i). Pursuant to FINRA Rule 
12503, if an associated person files a motion seeking an extension 
of the 60-day deadline, the opposing parties may state objections to 
extending the deadline, and the panel would decide the motion.
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ii. Required Contents of an Expungement Request
    Under the proposed rule change, a request for expungement by a 
named associated person in a customer arbitration must include the 
applicable filing fee under the Code.\57\ In addition, a named 
associated person would be required to provide the CRD number of the 
party requesting expungement, each CRD occurrence number that is the 
subject of the request and the case name and docket number associated 
with the customer dispute information.\58\ These requirements would 
help ensure that FINRA, the panel, and the parties understand who is 
requesting expungement and which customer dispute information is the 
subject of the request.
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    \57\ See proposed Rule 12805(a)(1)(C)(ii)a.
    \58\ See proposed Rule 12805(a)(1)(C)(ii)b. through d. An 
occurrence is a disclosure event that is reported to the CRD system 
via one or more Disclosure Reporting Pages. Each occurrence contains 
details regarding a specific disclosure event. An occurrence can 
have as many as three sources reporting the same event: Forms U4, U5 
and U6.
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    The proposed rule change would also require the named associated 
person requesting expungement to explain whether expungement of the 
same customer dispute information was (i) previously requested and, if 
so (ii) how it was decided.\59\ This requirement would assist with 
implementation of the proposed prohibition on parties making second 
requests for expungement, discussed in more detail below.\60\ This 
proposed requirement is also consistent with language in the existing 
Guidance stating that arbitrators should ask a party requesting 
expungement whether an arbitration panel or a court previously denied 
expungement of the customer dispute information at issue and, if there 
was a prior denial, the expungement request should be denied.\61\
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    \59\ See proposed Rule 12805(a)(1)(C)(ii)e.
    \60\ See infra Item II.A.1.II.A.1.b.i., ``Method of Requesting 
Expungement On Behalf Of an Unnamed Person.''
    \61\ See Guidance, supra note 5.
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    Under the proposed rule change, if an expungement request fails to 
include any of the proposed requirements for requesting expungement, 
the request would be considered deficient and would not be served 
unless the deficiency is corrected.\62\
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    \62\ See proposed Rules 12307(a)(8) through (11) and 
12805(a)(1)(C)(ii).
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    FINRA believes these proposed requirements for named associated 
persons requesting expungement are necessary for the timely 
consideration and orderly administration of expungement requests as 
well as to maintain the integrity of the CRD system.
b. Expungement Requests by a Party Named in the Customer Arbitration On 
Behalf Of an Unnamed Person
    The Codes do not specifically address on-behalf-of requests, i.e., 
expungement requests made by a party named in a customer arbitration on 
behalf of an unnamed person.\63\ Under current practice, a party to a 
customer arbitration may file an on-behalf-of request for expungement 
during the customer arbitration. If the party (typically, a firm) files 
the request and the customer arbitration closes by award after a 
hearing, the panel will decide the expungement request and include the 
decision in the award. If the customer arbitration does not close by 
award after a hearing (e.g., settles), either the requesting party or 
the unnamed person could ask the panel to consider and decide the 
expungement request before it disbands. In this circumstance, the panel 
from the customer arbitration will hold a hearing regarding the 
appropriateness of expungement.\64\
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    \63\ The proposed rule change would define an unnamed person as 
``an associated person, including a formerly associated person, who 
is identified in a Form U4, Form U5, or Form U6, as having been the 
subject of an investment-related, customer-initiated arbitration 
claim that alleged that the associated person or formerly associated 
person was involved in one or more sales practice violations, but 
who is not named as a respondent in the arbitration.'' See proposed 
Rule 12100(ff).
    \64\ See FINRA Rule 12805.
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    The proposed rule change would codify the ability of a party to the 
customer arbitration to file an on-behalf-of request during a customer 
arbitration.\65\ Under the proposed rule change, a party to a customer 
arbitration may file an on-behalf-of request that seeks to expunge 
customer dispute information associated with the customer's statement 
of claim, provided the request is eligible for arbitration under 
proposed Rule 12805.\66\ Filing an on-behalf-of request would be 
permissive, not mandatory.\67\ However, as discussed below, if the 
named party and the unnamed person agree to such a request, FINRA would 
require them to sign a form consenting to the on-behalf-of request 
which would help ensure that the unnamed person is fully aware of the 
request and that the firm is agreeing to represent the unnamed person 
for the purpose of requesting expungement during the customer 
arbitration.
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    \65\ See proposed Rule 12805(a)(2).
    \66\ See proposed Rule 12805(a)(2)(B).
    \67\ See proposed Rule 12805(a)(2)(A).
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i. Method of Requesting Expungement On Behalf Of an Unnamed Person
    The unnamed person would be required to consent to the on-behalf-of 
request in writing.\68\ In particular, the party filing an on-behalf-of 
request would be required to submit a signed Form Requesting 
Expungement on Behalf of an Unnamed Person (``Form'') and a statement 
requesting expungement with the Director.\69\ The proposed rule change 
would not require that an on-behalf-of request be included in an answer 
or a separate pleading requesting expungement (although it could be), 
since the request seeks relief on behalf of a person who is not a party 
to the arbitration. However, the party making the request would be 
required to file the request, which would include the Form, no later 
than 60 days before the first scheduled hearing.\70\ By filing and 
serving the expungement request on behalf of the unnamed person, the 
requesting party would be agreeing to represent the unnamed person and 
the unnamed person's interests and to pursue the request for 
expungement on

[[Page 50177]]

behalf of the unnamed person during the customer arbitration.\71\
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    \68\ See proposed Rule 12805(a)(2)(A).
    \69\ See proposed Rule 12805(a)(2)(C)(i) and (ii). The unnamed 
person whose CRD record would be expunged and the party requesting 
expungement on the unnamed person's behalf must sign the Form.
    \70\ See proposed Rule 12805(a)(2)(C)(iii). The 60-day deadline 
is the same as the proposed deadline for a named associated person 
to request expungement through a separate pleading requesting 
expungement in a customer arbitration.
    \71\ See proposed Rule 12805(a)(2)(D)(iii).
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    FINRA believes that requiring the submission of the Form would help 
address the issue of an unnamed person not being made aware of the on-
behalf-of request. As discussed above, FINRA is concerned that some 
associated persons are filing arbitration claims seeking expungement of 
the same customer dispute information that was the subject of a 
previous denial by a panel of an on-behalf-of request.\72\ By signing 
the Form, the unnamed person would be consenting to the on-behalf-of 
request and agreeing to be bound by the panel's decision on the 
request.\73\ In addition, the Form would provide that, if the customer 
arbitration closes by award after a hearing, the unnamed person would 
be barred from filing a request for expungement for the same customer 
dispute information in a subsequent proceeding. The unnamed person's 
signature would serve as acknowledgement of this consequence.
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    \72\ See supra note 42 and accompanying text.
    \73\ See proposed Rule 12805(a)(2)(D)(i). By signing the Form, 
the unnamed person would also be agreeing to maintain the 
confidentiality of documents and information from the customer 
arbitration to which the unnamed person is given access and to 
adhere to any confidentiality agreements or orders associated with 
the customer arbitration. See proposed Rule 12805(a)(2)(D)(ii). The 
breach of this provision by the unnamed person could potentially 
subject the unnamed person to a claim for damages by an aggrieved 
party.
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ii. Required Contents of an On-Behalf-Of Expungement Request
    Under the proposed rule change, an on-behalf-of request would be 
required to include the same elements as a request for expungement by a 
named associated person during a customer arbitration.\74\ Thus, the 
party requesting expungement on behalf of an unnamed person (typically, 
the firm) would be required to provide the applicable filing fee; the 
CRD number of the unnamed person; each CRD occurrence number that is 
the subject of the request; the case name and docket number associated 
with the customer dispute information; and an explanation of whether 
expungement of the same customer dispute information was (i) previously 
requested and, if so (ii) how it was decided. In addition, as discussed 
above, the party requesting expungement would be required to include 
the Form, signed by the unnamed person whose CRD record is the subject 
of the expungement request and the party filing the request.
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    \74\ See proposed Rule 12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i); 
see also supra Item II.A.1.II.A.1.a.ii., ``Required Contents of an 
Expungement Request.''
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c. Deciding Expungement Requests during Customer Arbitrations
    The proposed amendments would require that if a named associated 
person or a party on behalf of an unnamed person has requested 
expungement during a customer arbitration and the case closes by award 
after a hearing, the panel from the customer arbitration must decide 
the expungement request during the customer arbitration in accordance 
with Rule 12805(c) and issue its decision on the request in the same 
award.\75\ If the customer arbitration closes other than by award 
(e.g., settles) or by award without a hearing, the panel would not 
consider the expungement request.\76\ Instead, to seek expungement 
relief, the associated person would need to file a straight-in request 
to expunge the customer dispute information associated with the 
customer arbitration as a new claim under proposed Rule 13805 against 
the member firm at which the associated person was associated at the 
time the customer dispute arose.\77\ A panel from the Special 
Arbitrator Roster would decide the straight-in request, as discussed in 
more detail below.\78\
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    \75\ See proposed Rules 12805(a)(1)(D)(i) and (a)(2)(E)(i).
    \76\ See proposed Rules 12805(a)(1)(D)(ii) and (a)(2)(E)(ii).
    \77\ Under the Codes, a ``member'' includes any broker or dealer 
admitted to membership in FINRA, whether or not the membership has 
been terminated, suspended, cancelled, revoked, the member has been 
expelled or barred from FINRA or the member is otherwise defunct. 
See FINRA Rules 12100(s) and 13100(q); see also Securities Exchange 
Act Release No. 88254 (February 20, 2020), 85 FR 11157 (February 26, 
2020) (Order Approving File No. SR-FINRA-2019-027).
    \78\ See infra Item II.A.1.II.B.2., ``Panel from the Special 
Arbitrator Roster Decides Requests Filed Under the Industry Code.''
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i. Panel Decides the Expungement Request if the Customer's Arbitration 
Closes by Award After a Hearing
    Currently, if a named associated person requests expungement, or a 
party files an on-behalf-of request, and the customer's claim closes by 
award after a hearing, the panel may consider and decide the 
expungement request during the customer arbitration and issue its 
decision in the award. If, however, the party requesting expungement 
does not raise the issue of expungement during the hearing, the panel 
may not decide the request and may deem it withdrawn.\79\ In this 
instance, the associated person may seek to file the request again at a 
later date.
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    \79\ See FINRA Rules 12702 and 13702.
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    Under the proposed rule change, if a named associated person 
requests expungement or a party files an on-behalf-of request during a 
customer arbitration and the customer's claim closes by award after a 
hearing, the panel in the customer arbitration would be required to 
consider and decide the expungement request and issue its decision in 
the same award.\80\ This would help ensure that the panel from the 
customer's arbitration--which has received input from all parties, 
reviewed the pleadings, and considered the evidence on the merits--
would decide the expungement request.\81\
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    \80\ See proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i).
    \81\ See proposed Rules 12805(a)(1)(D) and 12805(a)(2)(E).
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    The proposed rule change would require the panel to decide the 
request even if the requesting party withdraws or fails to pursue the 
request. In this instance, the panel would deny the expungement request 
with prejudice.\82\ This would prevent associated persons from 
withdrawing expungement requests to avoid having their requests decided 
by the panel that heard the evidence on the customer's arbitration 
claim, then seeking to re-file the request and receiving a potentially 
more favorable decision from a different set of arbitrators.
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    \82\ See proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i).
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ii. Panel Does Not Decide Expungement if the Customer's Arbitration 
Closes Other Than by Award or by Award Without a Hearing
    Currently, if a named associated person requests expungement or a 
party files an on-behalf-of request, the customer arbitration does not 
close by award after a hearing (e.g., settles) and the requesting party 
continues to pursue the expungement request, the panel from the 
customer arbitration will hold a hearing regarding the appropriateness 
of expungement.\83\ If the named associated person or party requesting 
expungement does not request that the panel hold a separate hearing to 
decide the expungement request, the panel may deem the request 
withdrawn, and the associated person may seek to file the request again 
at a later date.
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    \83\ See FINRA Rule 12805.
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    The proposed rule change would provide that if, during a customer 
arbitration, a named associated person requests expungement or a party 
files an on-behalf-of request and the customer arbitration closes other 
than by award or by award without a hearing, the panel from the 
customer arbitration would not be permitted to decide the expungement

[[Page 50178]]

request.\84\ Instead, the associated person would be required to seek 
expungement by filing a request to expunge the same customer dispute 
information as a straight-in request against the member firm at which 
the person was associated at the time the customer dispute arose under 
proposed Rule 13805, where a panel that is randomly selected from the 
Special Arbitrator Roster would decide the request.\85\
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    \84\ See proposed Rules 12805(a)(1)(D)(ii)a. and 
12805(a)(2)(E)(ii)a.
    \85\ See proposed Rules 12805(a)(1)(D)(ii)b. and 
12805(a)(2)(E)(ii)b.; see also infra Item II.A.1.II.B.2., ``Panel 
from the Special Arbitrator Roster Decides Requests Filed Under the 
Industry Code.''
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    FINRA believes this approach reflects the importance of maintaining 
the integrity of information in the CRD system. When the customer 
arbitration closes other than by award or by award without a hearing, 
the panel selected by the parties in the customer arbitration may not 
have heard the presentation of the evidence on the merits of the case 
and, therefore, may not bring to bear any special insights in 
determining whether to issue an award containing expungement relief. In 
addition, customers or their representatives have little incentive to 
attend and participate in an expungement hearing once their case has 
settled. Requiring that an associated person file the expungement 
request as a straight-in request under the Industry Code to be heard 
and decided by a three-person panel that is randomly selected from the 
Special Arbitrator Roster would strengthen the expungement framework. 
As discussed in more detail below, while keeping in mind the importance 
of maintaining the integrity of information in the CRD system, this 
corps of experienced and specially trained arbitrators would follow the 
procedures set forth in proposed Rule 13805 to decide whether one or 
more of three grounds--the same three grounds contained in FINRA Rule 
2080(b)(1)--exist in order to issue an award containing expungement 
relief.
2. No Intervening in Customer Arbitrations To Request Expungement
    The proposed amendments would prohibit unnamed persons from 
intervening in a customer arbitration and requesting expungement.\86\ 
If the associated person is neither a party to the arbitration nor the 
subject of an on-behalf-of request by another party to the arbitration, 
the associated person should not be able to intervene in the customers' 
arbitration to request expungement. In these circumstances, the 
associated person's conduct is unlikely to be fully addressed by the 
parties during the customer arbitration, and FINRA does not believe 
that the customer should have the presentation of their case 
interrupted or delayed by an associated person's intervention to 
request expungement. In addition, there have been instances in customer 
arbitrations in which the unnamed person learns that the customer's 
arbitration case is nearing conclusion. The associated person then 
files a motion to intervene in the case to ask the panel to consider an 
expungement request. As an unnamed person, the individual is not a 
party to the case and, therefore, has not made any arguments in support 
of the expungement request. Further, if the motion is granted, the 
parties to the case will be required to wait for a decision on the 
expungement request (which may necessitate another hearing) before 
their dispute is resolved, causing delay and additional cost to the 
parties.
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    \86\ See proposed Rules 12805(a)(2)(E)(iii) and 12800(d)(2)(D).
---------------------------------------------------------------------------

    Accordingly, under the proposed rule change, unnamed persons would 
be prohibited from intervening in a customer arbitration and requesting 
expungement. Instead, the unnamed person would be able to file the 
request as a new claim against the member firm at which the person was 
associated at the time the customer dispute arose under proposed Rule 
13805, where a panel from the Special Arbitrator Roster would decide 
the request.\87\
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    \87\ See proposed Rule 12805(a)(2)(E)(iii)b.
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3. No Straight-In Requests Against Customers
    The proposed amendments would also prohibit an associated person 
from filing a straight-in request against a customer.\88\ Currently, 
straight-in requests are rarely filed against a customer.\89\ FINRA 
does not believe that customers should be compelled to attend or 
participate in a separate proceeding to decide an expungement request 
after the customer has resolved their arbitration claim or civil 
litigation. Accordingly, the proposed amendments would prohibit an 
associated person from filing a straight-in request against a customer. 
As discussed below, however, under the proposed rule change, customers 
would have the option to attend and participate in expungement hearings 
in straight-in requests, and the proposed rule change would include 
provisions to facilitate such attendance and participation.
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    \88\ See proposed Rule 12805(a)(3).
    \89\ During the sample period, FINRA is able to identify 
requests to expunge 11,619 customer dispute information disclosures 
from the CRD system. Of those, 6,476 were sought to be expunged in 
straight-in requests; 116 were sought to be expunged in straight-in 
requests filed against a customer. See infra Item II.B.2., 
``Economic Baseline,'' for further discussion.
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B. Straight-In Requests Under the Industry Code and the Special 
Arbitrator Roster
    Under the proposed rule change, all requests to expunge customer 
dispute information that is not associated with a customer arbitration 
would be required to be filed as a straight-in request under proposed 
Rule 13805.\90\ In addition, an associated person could request 
expungement of customer dispute information associated with a customer 
arbitration under proposed Rule 13805 if: (1) the associated person is 
named in the arbitration or is the subject of an on-behalf-of request 
and the customer arbitration closes other than by award or by award 
without a hearing; or (2) the associated person is the subject of a 
customer arbitration, but is neither named in the arbitration nor the 
subject of an on-behalf-of request, and the customer arbitration closes 
for any reason. If an associated person requests expungement under 
proposed Rule 13805, a three-person panel randomly selected from the 
Special Arbitrator Roster in accordance with proposed Rule 13806 would 
decide the expungement request.\91\
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    \90\ See proposed Rules 12805(a)(1)(A) and 13805(a)(1). As 
discussed above, under proposed Rule 12805, an associated person may 
request expungement in a customer arbitration of a customer 
complaint or civil litigation associated with a customer's statement 
of claim. See supra note 48 and accompanying text.
    \91\ See infra Item II.A.1.II.B.2.a. and b. (discussing 
eligibility requirements for and composition of the Special 
Arbitrator Roster).
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1. Filing a Straight-In Request Under the Industry Code
a. Applicability
    Under the proposed rule change, an associated person requesting 
expungement of customer dispute information as a straight-in request 
under the Industry Code must file a statement of claim in accordance 
with FINRA Rule 13302 against the member firm at which the person was 
associated at the time the customer dispute arose, unless the request 
is ineligible for arbitration under proposed Rule 13805(a)(2).\92\ The 
only way to request expungement of customer dispute information under 
the Industry Code

[[Page 50179]]

would be to file the request under proposed Rule 13805.
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    \92\ See proposed Rule 13805(a)(1). FINRA Rule 13302 provides, 
in relevant part, that to initiate an arbitration, a claimant must 
file with the Director a signed and dated Submission Agreement, and 
a statement of claim specifying the relevant facts and remedies 
requested.
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    The requirement that the associated person file the straight-in 
request against the member firm at which the person was associated at 
the time the customer dispute arose would help ensure that there is a 
connection between the respondent firm and the subject matter of the 
expungement request. For example, the firm at which the person 
requesting expungement was associated at the time the dispute arose 
should have knowledge of the dispute and access to documents or other 
evidence relating to the dispute. In addition, the proposed requirement 
would help ensure that the panel from the Special Arbitrator Roster 
would be able to request evidence from the member firm with information 
that is relevant to the expungement request. If the requisite 
connection is not present, the Director would be authorized to deny the 
use of the DRS arbitration forum for the request.\93\
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    \93\ See proposed Rule 13203(b).
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b. Required Contents of Straight-In Requests
    The required contents of a straight-in request would be the same as 
those required for expungement requests filed under proposed Rule 
12805.\94\ Thus, the associated person's straight-in request would be 
required to contain the applicable filing fee; \95\ the CRD number of 
the party requesting expungement; each CRD occurrence number that is 
the subject of the request; the case name and docket number associated 
with the customer dispute information, if applicable; and an 
explanation of whether expungement of the same customer dispute 
information was previously requested and, if so, how it was 
decided.\96\ In addition, as discussed below, the proposed rule change 
would impose limitations on when such requests may be made.\97\
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    \94\ See proposed Rule 13805(a)(3); see also supra Item 
II.A.1.II.A.1.a.ii., ``Required Contents of an Expungement 
Request.''
    \95\ FINRA would not assess a second filing fee when an 
associated person files a straight-in request if the associated 
person, or the requesting party in the case of an on-behalf-of 
request, had previously paid the filing fee to request expungement 
of the same customer dispute information during a customer 
arbitration.
    \96\ See proposed Rule 13805(a)(3). If an expungement request 
under the Industry Code fails to include any of the proposed 
requirements for requesting expungement, the request would be 
considered deficient and would not be served unless the deficiency 
is corrected. See proposed Rules 13307(a)(7) through (11).
    \97\ See infra Item II.A.1.II.C., ``Limitations on Expungement 
Requests.'' As discussed in more detail below, the straight-in 
request would be ineligible for arbitration under the Industry Code 
if: (1) a panel held a hearing to consider the merits of the 
associated person's request for expungement of the same customer 
dispute information; (2) a court of competent jurisdiction 
previously denied the associated person's request to expunge the 
same customer dispute information; (3) the customer arbitration or 
civil litigation or customer complaint associated with the customer 
dispute information is not closed; (4) more than two years have 
elapsed since the customer arbitration or civil litigation 
associated with the customer dispute information has closed; (5) 
there was no customer arbitration or civil litigation associated 
with the customer dispute information and more than three years have 
elapsed since the date that the customer complaint was initially 
reported to the CRD system; or (6) a named associated person is 
prohibited from seeking expungement because they did not request 
expungement in the associated customer arbitration under proposed 
Rule 12805(a)(1)(A). See proposed Rule 13805(a)(2).
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2. Panel From the Special Arbitrator Roster Decides Requests Filed 
Under the Industry Code
    If a straight-in request is filed in accordance with proposed Rule 
13805, a three-person panel randomly selected from the Special 
Arbitrator Roster pursuant to proposed Rule 13806 would be required to 
hold an expungement hearing, decide the expungement request and issue 
an award.\98\ The proposed amendments would also provide that if the 
associated person withdraws or does not pursue the request, the panel 
would be required to deny the expungement request with prejudice.\99\ 
This requirement would foreclose the ability of associated persons to 
withdraw expungement requests to avoid having their requests decided by 
a panel that they believe does not favor their request, and then seek 
to re-file the request with the hope of obtaining a potentially more 
favorable decision from a different panel.
---------------------------------------------------------------------------

    \98\ See proposed Rule 13805(a)(4).
    \99\ See proposed Rule 13805(a)(4).
---------------------------------------------------------------------------

a. Eligibility Requirements for the Special Arbitrator Roster
    The proposed rule change would include several requirements to help 
ensure that arbitrators on the Special Arbitrator Roster have the 
qualifications and training to decide straight-in requests.
    First, arbitrators on the Special Arbitrator Roster would be public 
arbitrators who are eligible for the chairperson roster.\100\ Public 
arbitrators are not employed in the securities industry and do not 
devote 20 percent or more of their professional work to the securities 
industry or to parties in disputes concerning investment accounts or 
transactions or employment relationships within the financial 
industry.\101\ Arbitrators are eligible for the chairperson roster if 
they have completed chairperson training provided by FINRA and: (1) 
have a law degree and are a member of a bar of at least one 
jurisdiction and have served as an arbitrator through award on at least 
one arbitration administered by an SRO in which hearings were held; or 
(2) have served as an arbitrator through award on at least three 
arbitrations administered by an SRO in which hearings were held.\102\ 
These requirements would help ensure that the persons conducting the 
expungement hearing are impartial and experienced in managing and 
conducting arbitration hearings in the DRS arbitration forum.\103\
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    \100\ See proposed Rule 13806(b).
    \101\ See supra note 3.
    \102\ See FINRA Rules 12400(c) and 13400(c). For purposes of 
this proposed rule change, public arbitrators who are eligible for 
the chairperson roster would include those arbitrators who have met 
the chairperson eligibility requirements of FINRA Rules 12400(c) or 
13400(c), regardless of whether they have already served as a chair 
on an arbitration case.
    \103\ The Task Force suggested that the arbitrators on its 
recommended special arbitration panel be chair-qualified, in part 
because of the training that arbitrators must complete before they 
can be added to the chairperson roster. See FINRA, Advanced 
Arbitrator Training, https://www.finra.org/arbitration-mediation/advanced-arbitrator-training; see also supra note 37.
---------------------------------------------------------------------------

    Second, the public chairpersons must have evidenced successful 
completion of, and agreement with, enhanced expungement training 
provided by FINRA.\104\ FINRA currently provides an Expungement 
Training module for arbitrators.\105\ This training, however, would be 
expanded for arbitrators seeking to qualify for the Special Arbitrator 
Roster. This would allow FINRA to further emphasize with the 
arbitrators on the Special Arbitrator Roster the unique, distinct role 
they play in determining whether to issue an award containing 
expungement relief, and that expungement should be issued in limited 
circumstances and only if the arbitrators unanimously find that the 
information to be expunged is factually impossible, clearly erroneous 
or false, or that the associated person was not involved in the alleged 
misconduct.
---------------------------------------------------------------------------

    \104\ See proposed Rule 13806(b)(2)(A).
    \105\ See supra note 35 and accompanying text.
---------------------------------------------------------------------------

    Third, arbitrators on the Special Arbitrator Roster would also be 
required to have served as an arbitrator through award on at least four 
customer arbitrations administered by FINRA or by another SRO in which 
a hearing was held.\106\ FINRA believes that if an arbitrator has 
served on four arbitrations through to award, it would indicate that 
the arbitrator has gained the knowledge

[[Page 50180]]

and experience in the DRS arbitration forum to conduct hearings.\107\
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    \106\ See proposed Rule 13806(b)(2)(B). This requirement would 
not be satisfied by serving on arbitrations administered under the 
special proceeding option of the simplified arbitration rules. See 
FINRA Rule 12800(c)(3)(B).
    \107\ In 2021, 87 percent of FINRA customer arbitrations closed 
other than by award.
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b. Composition of the Panel
    To minimize the potential for influence in the arbitrator selection 
process by the associated person and member firm, whose interests may 
be aligned, and to help ensure the development of a more complete 
factual record, the proposed rule change would require NLSS to select 
randomly the three public chairpersons from the Special Arbitrator 
Roster to decide a straight-in request filed by an associated 
person.\108\ The parties would not be permitted to agree to fewer than 
three arbitrators. The parties also would not be permitted to strike 
any arbitrators selected by NLSS nor stipulate to their removal,\109\ 
but would be permitted to challenge an arbitrator selected for 
cause.\110\ If an arbitrator is removed, NLSS would randomly select a 
replacement.\111\
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    \108\ See proposed Rule 13806(b)(1). The first arbitrator 
selected would be the chair of the panel. See proposed Rule 
13806(b)(3).
    \109\ The parties also would not be permitted to stipulate to 
the use of pre-selected arbitrators (i.e., arbitrators that the 
parties find on their own to use in their cases). See proposed Rule 
13806(b)(1).
    \110\ See proposed Rule 13806(b)(4).
    \111\ See proposed Rule 13806(b)(4).
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    The current process for selecting arbitrators--striking and 
combining ranked lists--would not be appropriate to use to select 
arbitrators to decide straight-in requests.\112\ In arbitrations 
outside of the expungement context, the parties are typically adverse, 
which means that during arbitrator selection, each side may rank 
arbitrators on the lists whom they believe may be favorable to their 
case. The adversarial nature of the proceedings serves to minimize the 
impact of each party's influence in arbitrator selection. In contrast, 
a straight-in request filed by an associated person against a firm is 
less likely to be adversarial in nature. FINRA believes that the 
proposed rule change would prevent the associated person and member 
firm from collaboratively seeking to influence the outcome of the 
expungement request through arbitrator selection.
---------------------------------------------------------------------------

    \112\ See generally FINRA Rules 13403 and 13404.
---------------------------------------------------------------------------

    FINRA recognizes that the proposed arbitrator selection process for 
straight-in requests would also limit the associated person and member 
firm's input on arbitrator selection for reasons that may be unrelated 
to whether the arbitrator would potentially be sympathetic to the 
expungement request, such as their perception of the arbitrator's 
competence or efficiency. However, the arbitrators on the Special 
Arbitrator Roster would have the experience, qualifications and 
training necessary to conduct a fair and impartial expungement hearing 
in accordance with the proposed rules, and to make their determination 
based on a complete factual record developed during the expungement 
hearing. FINRA believes that the higher standards that the arbitrators 
must meet to serve on the Special Arbitrator Roster should mitigate the 
impact of the absence of party input on the selection of arbitrators. 
In addition, associated persons and member firms would still be 
permitted to challenge any arbitrator for cause.\113\
---------------------------------------------------------------------------

    \113\ See proposed Rule 13806(b)(4).
---------------------------------------------------------------------------

C. Limitations on Expungement Requests
    Currently, Rules 12805 and 13805 do not address when a party would 
not be permitted to file an expungement request in the DRS arbitration 
forum.\114\ The Guidance, however, describes several circumstances in 
which an expungement request should be ineligible for arbitration. The 
proposed rule change would incorporate the limitations contained in the 
Guidance and add time limits to when an associated person may file a 
straight-in request.
---------------------------------------------------------------------------

    \114\ But see supra note 38 (describing time limits that apply 
to all arbitration claims, including expungement requests).
---------------------------------------------------------------------------

1. Limitations Applicable to Both Straight-In Requests and Expungement 
Requests During a Customer Arbitration
    The Guidance provides that if a panel or a court has issued an 
award or decision denying an associated person's expungement request, 
the associated person may not request expungement of the same customer 
dispute information in another arbitration proceeding. In particular, 
the Guidance states that arbitrators should ask a party requesting 
expungement whether an arbitration panel or a court previously denied 
expungement of the customer dispute information at issue and, if there 
has been a prior denial, the arbitration panel must deny the 
expungement request.\115\
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    \115\ See Guidance, supra note 5.
---------------------------------------------------------------------------

    The proposed rule change would codify the Guidance by providing 
that an associated person may not file a request for expungement of 
customer dispute information if (1) a panel held a hearing to consider 
the merits of the associated person's expungement request for the same 
customer dispute information or (2) a court of competent jurisdiction 
previously denied the associated person's request to expunge the same 
customer dispute information.\116\ These proposed amendments would 
prevent an associated person from forum shopping, or seeking to return 
to the DRS arbitration forum to garner a favorable outcome on his or 
her expungement request.\117\
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    \116\ See proposed Rules 12805(a)(1)(B)(i) and (ii) and 
13805(a)(2)(A)(i) and (ii). The proposed rule change would require 
that the requesting party provide information about previous 
expungement requests and how such requests were decided. See 
proposed Rules 12805(a)(1)(C)(ii)e. and 13805(a)(3)(E).
    \117\ FINRA notes that if a panel holds a hearing that addresses 
the merits of an associated person's request for expungement, the 
Director would be authorized to deny the DRS arbitration forum to 
any subsequent request by the associated person or another party on 
behalf of the associated person to expunge the same customer dispute 
information. See proposed Rules 12203(b) and 13203(b).
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2. Limitations Applicable to Straight-In Requests Only
    As discussed below, under the proposed amendments, four additional 
limitations would apply to straight-in requests.
a. No Straight-In Request if the Customer Arbitration, Civil Litigation 
or Customer Complaint Has Not Closed
    The Guidance provides that an associated person may not file a 
separate request for expungement of customer dispute information 
arising from a customer arbitration until the customer arbitration has 
concluded. The proposed rule change would codify and expand upon this 
limitation in the Guidance by providing that an associated person may 
not file a straight-in request under proposed Rule 13805 if the 
customer arbitration, civil litigation or customer complaint associated 
with the customer dispute information has not closed.\118\
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    \118\ See proposed Rule 13805(a)(2)(A)(iii).
---------------------------------------------------------------------------

    The proposed rule change would prevent an associated person from 
filing a straight-in request while a customer arbitration or civil 
litigation associated with the customer dispute information that is the 
subject of the straight-in request is pending. It would also prevent 
potentially inconsistent expungement decisions on related customer 
dispute information. The proposed rule change would also help ensure 
that the panel which will decide the straight-in request is able to 
consider the final factual record from the customer arbitration or 
civil litigation.

[[Page 50181]]

b. Straight-In Request Prohibited if Named Associated Person Did Not 
Request Expungement in Customer Arbitration
    Under the proposed change, an associated person who is named in a 
customer arbitration must request expungement during the arbitration or 
forfeit the ability to seek to expunge the customer dispute information 
associated with the customer's statement of claim in any subsequent 
proceeding.\119\ Accordingly, the proposed rule change would prohibit 
these associated persons from filing a straight-in request under the 
Industry Code seeking to expunge the customer dispute information 
associated with the customer's statement of claim.\120\
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    \119\ See supra Item II.A.1.II.A.1.a., ``Expungement Requests 
During the Customer Arbitration, By a Respondent Named in a Customer 
Arbitration,'' and accompanying text.
    \120\ See proposed Rule 13805(a)(2)(A)(vi).
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c. Time Limits Applicable to Disclosures Arising After the Effective 
Date of the Proposed Rule Change
    FINRA is aware that many straight-in requests are filed many years 
after the customer arbitration closes or the customer complaint is 
reported in the CRD system.\121\ To encourage prompt filing of 
expungement requests, the proposed amendments would establish time 
limits for expungement requests that are specifically tied to the 
closure of customer arbitrations and civil litigations, or the 
reporting of customer complaints in the CRD system, as applicable.\122\ 
The proposed time limits should help encourage customer attendance and 
participation in expungement proceedings and help ensure that straight-
in requests are brought before relevant evidence and testimony becomes 
stale or unavailable.\123\ The proposed time limits may also curtail 
the common practice of bundling multiple unrelated and aged expungement 
requests in one straight-in request.\124\
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    \121\ See supra note 39.
    \122\ FINRA Rules 12206 and 13206 provide that no claim shall be 
eligible for submission to arbitration where six years have elapsed 
from the occurrence or event giving rise to the claim. Under these 
Rules, the panel has discretion to determine if the claim, including 
an expungement request, is eligible for arbitration. See supra note 
38. As discussed below, if the proposed rule change is approved by 
the Commission, this six-year eligibility rule would continue to 
apply to requests to expunge customer dispute information that arose 
prior to the effective date of the proposed rule change.
    \123\ All customers from a customer arbitration or civil 
litigation, and all customers who initiated a customer complaint, 
would be notified of the expungement request and encouraged to 
attend and provide their input. See proposed Rule 13805(b)(1)(A).
    \124\ For example, under the proposed time limits, associated 
persons would not have been able to include all customer dispute 
information disclosures in 44 percent of the straight-in requests. 
See infra Item II.B.3.D, ``Time Limits for Filing Straight-in 
Requests--Quantitative Description.''
---------------------------------------------------------------------------

(i) Two Years From the Close of a Customer Arbitration or Civil 
Litigation
    Under the proposed rule change, an associated person would be 
permitted to file a straight-in request within two years of the close 
of a customer arbitration or a civil litigation associated with the 
customer dispute information.\125\ The proposed amendments would allow 
an associated person to request expungement of customer dispute 
information associated with the customer arbitration or civil 
litigation--including any associated customer complaint disclosures--
within two years after the customer arbitration or civil litigation 
closes.\126\
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    \125\ See proposed Rule 13805(a)(2)(A)(iv).
    \126\ With respect to requests to expunge customer dispute 
information associated with a customer arbitration, an associated 
person would be permitted to file a straight-in request under this 
two-year time limitation only if expungement of the customer dispute 
information was not required to be decided during the customer 
arbitration.
---------------------------------------------------------------------------

    A two-year limitation period would allow the associated person 
sufficient time to determine whether to seek expungement by filing a 
straight-in request and provide a reasonable amount of time for the 
associated person to gather the documents, information and other 
resources required to file the expungement request. In addition, a two-
year period would help ensure that the expungement hearing is held 
close enough in time to the customer arbitration or civil litigation, 
when information regarding the customer arbitration or civil litigation 
is available and in a timeframe that could increase the likelihood for 
the customer to attend and participate if the customer chooses to do 
so. The two-year time limit may also curtail the common practice of 
bundling multiple unrelated and aged expungement requests in one 
straight-in request.
(ii) Three Years From the Date a Customer Complaint Is Reported to the 
CRD System
    Under the proposed rule change, an associated person would be 
prohibited from filing a straight-in request to expunge a customer 
complaint where more than three years have elapsed since the customer 
complaint was initially reported to the CRD system and there was no 
customer arbitration or civil litigation associated with the customer 
dispute information.\127\ This means that if no customer arbitration or 
civil litigation associated with the customer complaint is filed, the 
associated person would have three years from the date the customer 
complaint was initially reported in the CRD system to file the 
expungement request.\128\
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    \127\ See proposed Rule 13805(a)(2)(A)(v).
    \128\ A customer complaint can be reported to the CRD system via 
a Form U4 or Form U5. Pursuant to FINRA Rule 1010, an associated 
person should be made aware of the filing of a Form U4 and any 
amendments thereto by the associated person's member firm. In 
addition, Article V, Section 3 of the FINRA By-Laws requires that a 
member firm provide an associated person a copy of an amended Form 
U5, including one reporting a customer complaint involving the 
associated person. FINRA also provides several methods for 
associated persons and former associated persons to check their 
records, including online through BrokerCheck.
---------------------------------------------------------------------------

    The three-year time limitation would help ensure that the 
expungement hearing is held close in time to the events that gave rise 
to the customer dispute and increase the likelihood of customer 
attendance and participation. Three years should also provide 
sufficient time for firms to complete their investigation of the 
complaint, for associated persons to develop a sense of whether the 
complaint may evolve into an arbitration or civil litigation, and for 
the associated person to gather the necessary resources and determine 
whether to seek expungement. The three-year time limitation may also 
curtail requests to expunge customer complaints that are filed many 
years after first being reported to the CRD system and the bundling of 
multiple unrelated and aged disclosures in a single expungement 
request.
    As discussed above, the Codes provide that no claim shall be 
eligible for submission to arbitration where six years have elapsed 
from the occurrence or event giving rise to the claim.\129\ As a result 
of this six-year eligibility rule, a customer arbitration may be filed 
after an associated person has filed and received an award in 
connection with a customer complaint associated with the customer 
arbitration. To avoid unfairly impacting a customer arbitration filed 
after a panel has issued an award on a request to expunge a customer 
complaint associated with the customer arbitration, the proposed rule 
change would provide that a prior expungement award shall not be 
admissible in the customer arbitration.\130\
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    \129\ See supra note 38.
    \130\ See proposed Rules 12604(c) and 13604(c).

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[[Page 50182]]

d. Time Limits Applicable to Disclosures Arising on or Prior to the 
Effective Date of the Proposed Rule Change
    The proposed amendments would also establish time limits for 
requests to expunge customer dispute information arising from customer 
arbitrations and civil litigations that close, and for customer 
complaints that were initially reported to the CRD system, on or prior 
to the effective date of the proposed rule change.
    Specifically, the proposed amendments would provide that if an 
expungement request is otherwise eligible under the six-year limitation 
period of FINRA Rule 13206(a), an associated person would be permitted 
to file a straight-in request under the Industry Code if: (1) the 
request for expungement is made within two years of the effective date 
of proposed rule change, and the disclosure to be expunged is 
associated with a customer arbitration or civil litigation that closed 
on or prior to the effective date; \131\ or (2) the request for 
expungement is made within three years of the effective date of the 
proposed rule change, and the disclosure to be expunged is associated 
with a customer complaint initially reported to the CRD system on or 
prior to its effective date.\132\
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    \131\ See proposed Rule 13805(a)(2)(B)(i).
    \132\ See proposed Rule 13805(a)(2)(B)(ii).
---------------------------------------------------------------------------

3. Director's Authority To Deny the Forum
    The Codes provide the Director with authority to decline the use of 
the DRS arbitration forum if the Director determines that ``given the 
purposes of FINRA and the intent of the Code, the subject matter of the 
dispute is inappropriate, or that accepting the matter would pose a 
risk to the health or safety of arbitrators, staff, or parties or their 
representatives.'' \133\
---------------------------------------------------------------------------

    \133\ See FINRA Rules 12203 and 13203.
---------------------------------------------------------------------------

    To ensure additional safeguards around the expungement process, the 
proposed rule change would provide the Director with express authority 
to decline the use of the DRS arbitration forum if an associated person 
files an expungement request that the Director determines is ineligible 
for arbitration under proposed Rules 12805 and 13805.\134\ For example, 
the Director would decline the use of the DRS arbitration forum if an 
expungement request is ineligible under the proposed time limitations. 
The Director would also decline the use of the DRS arbitration forum if 
a panel has previously considered the merits of, or a court has 
previously decided, an expungement request associated with the same 
customer dispute information. The Director would also decline the use 
of the DRS arbitration forum if an associated person was named as a 
respondent in a customer arbitration but did not request expungement; 
if an associated person requested expungement but withdrew or did not 
pursue the expungement request; or if a party to a customer arbitration 
requested expungement on behalf of an unnamed person but the party 
withdrew or did not pursue an expungement request on behalf of the 
unnamed person.
---------------------------------------------------------------------------

    \134\ See proposed Rules 12203(b) and 13203(b).
---------------------------------------------------------------------------

    The proposed rule change would also provide the Director with 
express authority to decline the use of the DRS arbitration forum if 
the Director determines that the expungement request was not filed 
under, or considered in the DRS arbitration forum in accordance with, 
proposed Rules 12805 or 13805.\135\ For example, the Director may 
decline the use of the DRS arbitration forum if the Director determines 
that a panel is proposing to issue an award containing expungement of 
customer dispute information other than pursuant to proposed Rules 
12805, 12800(d) and (e) or 13805, as applicable. The Director may also 
decline the use of the DRS arbitration forum if an associated person 
seeks expungement of customer dispute information other than pursuant 
to proposed Rules 12805, 12800(d) and (e) or 13805, as applicable.
---------------------------------------------------------------------------

    \135\ See proposed Rules 12203(c) and 13203(c).
---------------------------------------------------------------------------

D. Requirements Relating to All Expungement Hearings
    FINRA Rules 12805 and 13805 currently provide a list of 
requirements panels must follow in order to issue an award containing 
expungement relief.\136\ In addition, the Guidance provides best 
practices that arbitrators should follow when deciding expungement 
requests. To further guide the arbitrators' decision-making, the 
proposed rule change would expand the expungement hearing requirements 
currently in FINRA Rules 12805 and 13805 and incorporate relevant 
provisions from the Guidance. The proposed requirements would apply to 
all expungement hearings.\137\
---------------------------------------------------------------------------

    \136\ See supra note 45.
    \137\ See proposed Rules 12805(c) and 13805(c). The proposed 
requirements for expungement hearings would apply to expungement 
hearings held during a customer arbitration under proposed Rule 
12805, a simplified customer arbitration under proposed Rule 12800 
(see infra Item II.A.1.II.G., ``Expungement Requests During 
Simplified Customer Arbitrations'') and a straight-in request under 
proposed Rule 13805, unless otherwise specified.
---------------------------------------------------------------------------

1. Recorded Hearing Sessions
    The Codes require a panel that is deciding an expungement request 
to hold a recorded hearing session (by telephone or in person) 
regarding the appropriateness of expungement.\138\ The proposed rule 
change would provide that the panel must hold one or more separate 
recorded hearing sessions regarding the expungement request, clarifying 
that the panel would not be limited in the number of hearing sessions 
it should hold to decide the expungement request.\139\ The proposed 
amendments would also remove the specific reference to the hearing 
being held by telephone or in person because, as discussed below, the 
participants in the hearing may appear by different methods.
---------------------------------------------------------------------------

    \138\ See FINRA Rules 12805(a) and 13805(a).
    \139\ See proposed Rules 12805(c)(1) and 13805(c)(1).
---------------------------------------------------------------------------

2. Associated Person's Appearance
    The proposed rule change would require the associated person whose 
information in the CRD system is the subject of the expungement request 
to appear in person or by video conference at the expungement 
hearing.\140\ A party requesting expungement on behalf of an unnamed 
person or the party's representative would also be required to appear 
in person or by video conference at the hearing. The panel would 
determine the method of appearance.
---------------------------------------------------------------------------

    \140\ See proposed Rules 12805(c)(2) and 13805(c)(2).
---------------------------------------------------------------------------

    As the associated person is seeking the permanent removal of 
information from the CRD system, FINRA believes the associated person 
should be required to appear in person or by video conference at the 
expungement hearing and be available to respond to questions. Requiring 
that the associated person's appearance be in person or by video 
conference would help the panel assess the associated person's 
credibility, which may be particularly important if the request is 
unopposed.
3. Customer's Attendance and Participation During the Expungement 
Hearing
    The Guidance states that it is important to allow customers and 
their representatives to participate in the expungement hearing if they 
wish to do so.\141\ Specifically, the Guidance provides that 
arbitrators should:
---------------------------------------------------------------------------

    \141\ The Guidance directs arbitrators to permit customers and 
their counsel to participate in the expungement hearing. See 
Guidance, supra note 5. FINRA Rules 12208 and 13208 permit a party 
to be represented pro se, by an attorney or by a person who is not 
an attorney. Accordingly, the proposed amendments use the term 
``representative'' rather than ``counsel.'' See also Securities 
Arbitration--Should You Hire an Attorney? (Jan. 3, 2019), https://www.finra.org/investors/insights/securities-arbitration; How to Find 
an Attorney, https://www.finra.org/arbitration-mediation/how-find-attorney; and Resources for Investors Representing Themselves, 
https://www.finra.org/arbitration-mediation/resources-investors-representing-themselves.

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[[Page 50183]]

     Allow the customer and their representative to appear at 
the expungement hearing;
     Allow the customer to testify (telephonically, in person, 
or other method) at the expungement hearing;
     Allow the representative for the customer or a pro se 
customer to introduce documents and evidence at the expungement 
hearing;
     Allow the representative for the customer or a pro se 
customer to cross-examine the associated person or other witnesses 
called by the party seeking expungement; and
     Allow the representative for the customer or a pro se 
customer to present opening and closing arguments if the panel allows 
any party to present such arguments.
    The proposed rule change would codify these provisions of the 
Guidance. The proposed rule change would make clear that all customers 
whose customer arbitrations, civil litigations or customer complaints 
are a subject of the expungement request are entitled to representation 
and may attend and participate in the expungement hearing.\142\ These 
customers would also be entitled to attend and participate in any 
prehearing conferences held for straight-in requests.\143\ Because 
expungement requests may otherwise be unopposed, FINRA believes that 
the customers should be allowed to attend and participate in the 
entirety of the expungement hearing and any prehearing conferences.
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    \142\ See proposed Rules 12805(c)(3)(A), 12805(c)(4), 
13805(c)(3)(A) and 13805(c)(4). The proposed rule change would make 
clear that customers also have the option to provide their position 
on the expungement request in writing in lieu of attending the 
hearing.
    \143\ See proposed Rule 13805(c)(3)(A). A prehearing conference 
is any hearing session, including an Initial Prehearing Conference 
(``IPHC''), that takes place before the hearing on the merits 
begins. See FINRA Rules 12100(y) and 13100(w); see also FINRA Rules 
12500 and 13500. Under the proposal, all customers whose customer 
arbitrations, civil litigations or customer complaints are a subject 
of the straight-in request would be entitled to representation at 
prehearing conferences. See proposed Rule 13805(c)(4).
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    The proposed rule change would provide that the customer could 
choose to attend and participate by telephone, in person or by video 
conference.\144\ Customer attendance and participation during an 
expungement hearing provides the panel with important information and 
perspective that it might not otherwise receive. By providing customers 
with options for how to attend and participate in hearings, FINRA seeks 
to encourage customer attendance and participation by making it easier 
for customers to do so.
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    \144\ See proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B).
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    The proposed rule change would also specify ways in which the 
customer must be allowed to attend and participate in the expungement 
hearing. First, the proposed rule change would provide that customers 
or customers' representatives must be allowed to introduce evidence 
during the expungement hearing.\145\ If the customer or customer's 
representative introduces any evidence at the expungement hearing, a 
party could state objections to the introduction of the evidence during 
the expungement hearing.\146\
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    \145\ See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).
    \146\ See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).
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    Second, the customers and the customers' witnesses would be allowed 
to testify at the expungement hearing and be questioned by the customer 
or customer's representative.\147\ If customers or their witnesses 
testify, the associated person or a party requesting expungement on 
behalf of an unnamed person would be allowed to conduct cross-
examination.\148\
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    \147\ See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B).
    \148\ See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B).
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    Third, the customer or customer's representative would be permitted 
to state objections to evidence and cross-examine the associated person 
or party requesting expungement on behalf of an unnamed person and any 
other witnesses called during the expungement hearing.\149\
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    \149\ See proposed Rules 12805(c)(5)(C) and 13805(c)(5)(C).
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    Fourth, the customer or customer's representative would be 
permitted to present opening and closing arguments if the panel permits 
any party to present such arguments.\150\
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    \150\ See proposed Rules 12805(c)(5)(D) and 13805(c)(5)(D).
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    FINRA believes the proposal strikes the right balance of allowing 
the customer to attend and participate in the hearing and giving the 
associated person or party requesting expungement on behalf of an 
unnamed person the opportunity to substantiate arguments in support of 
the expungement request.
4. Panel Requests for Additional Documents or Evidence
    Arbitrators on the panel do not conduct their own research when 
hearing an arbitration case; instead, they review the materials 
provided by the parties. If they need more information, they can 
request it from the parties. In deciding an expungement request, 
particularly in cases that settle before an evidentiary hearing or in 
cases where the customer does not attend or participate in the 
expungement hearing, the panel's role as fact finder is critical. Given 
this significant role, the panel must ensure that it has all of the 
information necessary to make a fully informed decision on the 
expungement request on the basis of a complete factual record.
    Thus, the proposed rule change would codify the ability of the 
panel to request from the associated person, the party requesting 
expungement on behalf of an unnamed person and the member firm at which 
the person was associated at the time the customer dispute arose, as 
applicable, any documentary, testimonial or other evidence that the 
panel deems relevant to the expungement request.\151\ This would allow 
the panel, for example, to require the associated person to produce 
documents that the panel deems relevant at the prehearing conference, 
to testify in response to questions by the panel at the hearing or to 
provide transcripts of previously obtained witness testimony.
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    \151\ See proposed Rules 12805(c)(6) and 13805(c)(7). The 
Guidance also suggests that arbitrators should ask the associated 
person seeking expungement or the party seeking expungement on an 
associated person's behalf to provide a current copy of the 
BrokerCheck report for the person whose record would be expunged, 
paying particular attention to the ``Disclosure Events'' section of 
the report. See Guidance, supra note 5. FINRA continues to encourage 
arbitrators to request a current copy of the associated person's 
BrokerCheck report.
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5. Review of Settlement Documents
    Current FINRA Rules 12805(b) and 13805(b) provide that, in the 
event a customer dispute is resolved by settlement, the panel 
considering the expungement request must review the settlement 
documents and consider the amount of payments made to any party and any 
other terms and conditions of the settlement.\152\ The proposed rule

[[Page 50184]]

change would retain this requirement.\153\
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    \152\ The panel must review settlement documents that are 
related to the customer dispute information that is the subject of 
the expungement request, regardless of whether the associated person 
was a party to the settlement.
    \153\ See proposed Rules 12805(c)(7) and 13805(c)(8). FINRA Rule 
2081 provides that no member firm or associated person shall 
condition or seek to condition settlement of a dispute with a 
customer on, or to otherwise compensate the customer for, the 
customer's agreement to consent to, or not to oppose, the member's 
or associated person's request to expunge such customer dispute 
information from the CRD system. See also Prohibited Conditions 
Relating to Expungement of Customer Dispute Information FAQ, https://www.finra.org/arbitration-mediation/faq/prohibited-conditions-relating-expungement-customer-dispute-information.
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    In addition, the Guidance encourages arbitrators to inquire and 
fully consider whether a party conditioned a settlement of a customer 
dispute upon an agreement not to oppose the request for expungement in 
cases in which the customer does not attend or participate in the 
expungement hearing or the requesting party states that a customer has 
indicated that the customer will not oppose the expungement request. 
Because conditioned settlements violate FINRA Rule 2081 and may be 
grounds to deny an expungement request, the proposed rule change would 
codify the language in the Guidance.\154\
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    \154\ See proposed Rules 12805(c)(7) and 13805(c)(8).
---------------------------------------------------------------------------

6. Unanimous Decision To Issue an Award Containing Expungement Relief
    Current FINRA Rules 12805 and 13805 require that, in order to issue 
an award containing expungement of customer dispute information, the 
panel must indicate in the arbitration award which of the FINRA Rule 
2080 grounds for expungement serves as the basis for its expungement 
order. Consistent with arbitration cases generally, the panel may award 
expungement based on a majority decision of the arbitrators.\155\
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    \155\ See FINRA Rules 12410 and 13414.
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    The proposed rule change would require that the arbitrators agree 
unanimously to issue an award containing expungement relief.\156\ 
Although the vast majority of expungement decisions are already 
unanimous,\157\ FINRA believes that this change would help protect the 
integrity of the information in the CRD system and help ensure that the 
expungement process operates as intended--as a remedy that is 
appropriate only in limited circumstances in accordance with the narrow 
standards in FINRA rules.\158\
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    \156\ See proposed Rules 12805(c)(8)(A) and 13805(c)(9)(A). 
FINRA notes that when deciding a customer's claims, a majority 
decision of the arbitrators would continue to be sufficient.
    \157\ During the sample period, in arbitrations decided by a 
three-person arbitration panel and involving an expungement request, 
the panel decision was unanimous (not unanimous) in 98 percent (two 
percent) of arbitrations. In one percent of the arbitrations, the 
decision awarding expungement was not unanimous and would not have 
been permitted under the proposed change.
    \158\ See supra note 27 and accompanying text.
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    To further protect the integrity of the information in the CRD 
system, the proposed amendments would also provide that in order to 
issue an award containing expungement relief, the unanimous finding 
must be that one or more of the grounds for expungement enumerated in 
the proposed rule has been established: (1) the claim, allegation or 
information is factually impossible or clearly erroneous; (2) the 
associated person was not involved in the alleged investment-related 
sales practice violation, forgery, theft, misappropriation or 
conversion of funds; or (3) the claim, allegation or information is 
false.\159\ To help ensure there is no confusion as to which standard 
the arbitrators must apply, the proposed rule change would also state 
that the panel shall not issue, and the Director shall not serve, an 
award containing expungement relief based on any other grounds.\160\
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    \159\ See proposed Rules 12805(c)(8)(A)(i) and 
13805(c)(9)(A)(i).
    \160\ See proposed Rules 12805(c)(8)(A)(ii) and 
13805(c)(9)(A)(ii). FINRA further notes that it would be 
inappropriate to award expungement of customer dispute information 
that is associated with a customer arbitration or civil litigation 
in which the associated person was found liable. In this 
circumstance, the liability finding would be inconsistent with a 
finding that one of the three grounds has been established to issue 
an award containing expungement relief.
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    The Codes, which include FINRA Rules 12805 and 13805, govern the 
processes by which all arbitration cases are administered in the DRS 
arbitration forum.\161\ Accordingly, the three grounds referenced in 
proposed Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i) on which a panel 
must unanimously make a finding to issue an award containing 
expungement relief would be the exclusive grounds upon which a panel 
could award expungement in the DRS arbitration forum.\162\
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    \161\ See FINRA Rules 12101 and 13101 (describing how the Codes 
apply to disputes submitted to arbitration).
    \162\ FINRA Rule 2080 is not part of the Codes, and FINRA is not 
proposing amendments to FINRA Rule 2080 at this time. With this 
proposed rule change, FINRA is proposing to codify the grounds 
identified in FINRA Rule 2080(b)(1) as the exclusive grounds upon 
which an arbitration panel may issue an award containing expungement 
of customer dispute information from the CRD system. See also supra 
note 31 (discussing prior statements by the SEC and FINRA that 
expungement may occur only after the arbitrators find that one or 
more of the grounds in FINRA Rule 2080(b)(1) serves as the basis for 
the expungement award). The discretionary standard in FINRA Rule 
2080(b)(2) would not be a basis for a panel to award expungement 
relief in the DRS arbitration forum. FINRA Rule 2080(b)(2) provides 
``FINRA''--not arbitrators in the DRS arbitration forum--the 
ability, ``in [FINRA's] sole discretion and under extraordinary 
circumstances,'' to waive the obligation to name FINRA as an 
additional party to a court proceeding related to expungement of 
customer dispute information from CRD if FINRA ``determines that: 
(A) the expungement relief and accompanying findings on which it is 
based are meritorious; and (B) the expungement would have no 
material adverse effect on investor protection, the integrity of the 
CRD system or regulatory requirements.''
    Although FINRA is not proposing to amend FINRA Rule 2080 at this 
time, it is considering whether enhancements to the current 
expungement process through changes to FINRA Rule 2080 may be 
warranted. See Discussion Paper, supra note 13 (exploring potential 
alternatives to the current expungement process, including potential 
changes to FINRA Rule 2080).
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7. Contents of the Expungement Award
    The panel is currently required to provide a ``brief'' written 
explanation of the reasons for its finding that one or more of the 
grounds for expungement applies to the facts of the case.\163\ The 
proposed rule change would retain the requirement to provide the 
written explanation, but would remove the word ``brief'' such that the 
panel would be required to provide enough detail in the award to 
explain its rationale for awarding expungement relief.\164\ As the 
Guidance suggests, the panel's explanation must be complete and not 
solely a recitation of one of the FINRA Rule 2080(b)(1) grounds or 
language provided in the expungement request. For the same reason, the 
proposed rule change would incorporate language from the Guidance that 
the panel's explanation should identify any specific documentary, 
testimonial or other evidence on which the panel relied in awarding 
expungement relief.\165\
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    \163\ See FINRA Rules 12805(c) and 13805(c).
    \164\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B).
    \165\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B).
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8. Evidentiary Weight of Decision of Customer or Authorized 
Representative Not To Attend or Participate
    The proposed amendments would also instruct the panel that the 
decision of a customer or an authorized representative of state 
securities regulators (``authorized representative'') not to attend or 
participate in the expungement hearing shall not be material to the 
determination of whether expungement is appropriate.\166\ FINRA is 
aware that some panels have indicated in expungement awards that a 
customer did not appear at the

[[Page 50185]]

expungement hearing. A customer or an authorized representative may not 
attend, participate in or appear at an expungement hearing for a 
variety of reasons that may be unrelated to the merits of the 
expungement request. Accordingly, FINRA believes that a customer's or 
an authorized representative's decision not to attend or participate 
should not be given any evidentiary weight by the panel when making the 
expungement determination.
---------------------------------------------------------------------------

    \166\ See proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C); see 
also infra Item II.A.1.II.F., ``Attendance and Participation of an 
Authorized Representative of State Securities Regulators in 
Straight-in Requests'' (discussing the attendance and participation 
in straight-in requests of an authorized representative of state 
securities regulators).
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9. Forum Fees
    The proposed rule change would retain the current requirements in 
FINRA Rules 12805(d) and 13805(d) that address how DRS arbitration 
forum fees are assessed in expungement hearings. Specifically, the 
panel must assess against the parties requesting expungement all DRS 
arbitration forum fees for each hearing session in which the sole topic 
is the determination of the appropriateness of expungement.\167\
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    \167\ See proposed Rules 12805(c)(9) and 13805(c)(10).
---------------------------------------------------------------------------

E. Notifications to Customers and to State Securities Regulators 
Regarding Expungement Requests
1. Notification to Customers by the Associated Person
    The Guidance suggests that when a straight-in request is filed 
against a firm, arbitrators order the associated person to provide a 
copy of the statement of claim to the customers involved in the 
customer dispute that gave rise to the customer dispute information 
maintained in the CRD system. This helps ensure that the customers know 
about the expungement request and have an opportunity to attend and 
participate in the expungement hearing or provide a position in writing 
on the associated person's request. The proposed rule change would 
codify this practice in the Industry Code by requiring that the 
associated person serve all customers whose customer arbitrations, 
civil litigations or customer complaints are a subject of the 
expungement request with a copy of the statement of claim requesting 
expungement and any answer.\168\ The associated person would be 
required to serve a copy of the statement of claim and a copy of any 
answer within 10 days of filing.\169\ The panel would be authorized to 
decide whether extraordinary circumstances exist that make service on 
the customers impracticable.\170\
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    \168\ See proposed Rule 13805(b)(1)(A)(i) and (ii). This 
requirement would apply to straight-in requests filed under the 
Industry Code; notice to customers would not be necessary for 
requests filed under proposed Rule 12805 of the Customer Code as the 
customer would be a named party.
    \169\ See proposed Rule 13805(b)(1)(A)(ii).
    \170\ See proposed Rule 13805(b)(1)(A)(i).
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    Given the associated person's personal interest in obtaining 
expungement, FINRA believes that the panel should review all documents 
that the associated person used to inform the customers about the 
expungement request as well as any customer responses received. 
Accordingly, the proposed rule change would require the associated 
person to file with the panel proof of service for the statement of 
claim and any answers, copies of all documents provided by the 
associated person to the customers, and copies of all communications 
sent by the associated person to the customers and any responses 
received from the customers.\171\ The proposed requirement would also 
help ensure that the associated person does not attempt to dissuade a 
customer from attending or participating in the expungement hearing.
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    \171\ See proposed Rule 13805(b)(1)(A)(iv).
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2. Notifications to the Customer by the Director
    Customer attendance and participation in expungement hearings helps 
the panel fully develop a record on which to decide the expungement 
request. Accordingly, the proposed rule change would require the 
Director to notify all customers whose customer arbitrations, civil 
litigations or customer complaints are a subject of the expungement 
request, of the time, date and place of any prehearing conferences and 
the expungement hearing.\172\
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    \172\ See proposed Rule 13805(b)(1)(B)(i). This requirement 
would apply to straight-in requests filed under the Industry Code; 
notice to customers would not be necessary for requests filed under 
proposed Rule 12805 of the Customer Code as the customer would be a 
named party. See also infra Item II.A.1.II.G.3., ``Customer 
Notification of Expungement Hearings during Simplified 
Arbitrations'' (discussing customer notification of expungement 
hearings in connection with simplified arbitrations).
---------------------------------------------------------------------------

    The Director would include language in the notice to encourage the 
customer to attend and participate in the expungement hearing. The 
associated person would be required to provide a current address for 
the customer,\173\ or the expungement request would be considered 
deficient and would not be served.\174\ The Director's notice to the 
customer would serve as a reminder of the expungement request and would 
provide the customer with timely notice of any prehearing conferences 
and expungement hearings so that customers may plan and prepare to 
attend and participate if they choose.
---------------------------------------------------------------------------

    \173\ See proposed Rule 13805(b)(1)(B)(i).
    \174\ See proposed Rule 13307(a)(7).
---------------------------------------------------------------------------

    The Director would also provide the notified customers with access 
to all documents that are relevant to (a) the expungement request that 
are filed in the straight-in request and (b) any prior customer 
arbitration brought by the customer that is a subject of the 
expungement request.\175\ This would provide the customer with access 
to the key documents surrounding the request for expungement prior to 
their attendance and participation in the expungement hearing.
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    \175\ See proposed Rule 13805(b)(1)(B)(ii). FINRA would provide 
customers with access to the documents through the DR Portal. The DR 
Portal has two parts: the DR Neutral Portal is for FINRA neutrals 
serving on the Dispute Resolution roster, and the DR Party Portal is 
for arbitration and mediation case participants. Once registered on 
the DR Portal, parties may use the portal to, among other things, 
file an arbitration claim, view case documents, submit documents to 
FINRA and send documents to other portal case participants, and 
schedule hearing dates. See FINRA Dispute Resolution Services, DR 
Portal, https://www.finra.org/arbitration-mediation/dr-portal.
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3. Notifications to State Securities Regulators
    The proposed rule change would require FINRA to notify state 
securities regulators, in the manner determined by the Director in 
collaboration with state securities regulators, of an expungement 
request within 15 days of receiving an expungement request.\176\ The 
proposed notification requirement would help ensure that state 
securities regulators are timely notified of expungement requests.
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    \176\ See proposed Rules 12800(f)(1), 12805(b) and 
13805(b)(2)(A). FINRA would make this notification in connection 
with expungement requests under the Customer and Industry Codes. 
Such notification could be achieved by notifying NASAA of the 
expungement requests.
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F. Attendance and Participation of an Authorized Representative of 
State Securities Regulators in Straight-In Requests
    The current expungement process does not include a mechanism to 
facilitate state securities regulator involvement in expungement 
hearings in the DRS arbitration forum. The proposed rule change would 
provide a mechanism for an authorized representative to provide the 
state securities regulators' position or positions on an expungement 
request in writing or by attending and participating in the expungement 
hearing in person or by video conference.\177\ This attendance and 
participation by an authorized representative of the state securities 
regulators would be limited to straight-

[[Page 50186]]

in requests, where the panel may otherwise only hear evidence from the 
party requesting expungement.
---------------------------------------------------------------------------

    \177\ See proposed Rule 13805(c)(6)(A).
---------------------------------------------------------------------------

    At the same time as providing notification to state securities 
regulators of a straight-in request, the Director would provide state 
securities regulators with access to all documents relevant to (a) the 
expungement request filed in the arbitration requesting expungement 
relief and (b) any other customer arbitration brought under the 
Customer Code that is associated with the customer dispute information 
that is a subject of the expungement request.\178\ Providing state 
securities regulators with these documents would help facilitate a 
determination of whether to attend and participate in the expungement 
hearing.
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    \178\ See proposed Rule 13805(b)(2)(B). The state securities 
regulators' access to the documents would be subject to 
confidentiality restrictions. Outside of the DRS arbitration 
process, state securities regulators could choose to seek access to 
additional documents and information pursuant to their separate 
authority.
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    If the Director receives notification from an authorized 
representative no later than 30 days after the last answer is due that 
the authorized representative intends to attend and participate in the 
expungement hearing, the Director shall notify the authorized 
representative of the time, date and place of any prehearing 
conferences and the expungement hearing.\179\ At the expungement 
hearing, the authorized representative would be permitted to: (1) 
introduce documentary, testimonial, or other evidence; (2) cross-
examine witnesses; and (3) present opening and closing arguments if the 
panel allows any party to present such arguments.\180\ The other 
persons appearing at the expungement hearing could state objections to 
the authorized representative's evidence and cross-examine the 
authorized representative's witnesses.\181\
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    \179\ See proposed Rule 13805(b)(3).
    \180\ See proposed Rule 13805(c)(6)(B).
    \181\ See proposed Rule 13805(c)(6)(C).
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    The authorized representative would not be considered a party to 
the proceeding and their attendance and participation would be limited 
to what is authorized by proposed Rule 13805(c)(6).\182\ In addition, 
the panel would not be permitted to allow the attendance or 
participation of the authorized representative to materially delay the 
scheduling of the expungement hearing.\183\
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    \182\ As such, an authorized representative would not be 
entitled to seek discovery from the parties through the DRS 
arbitration forum, file motions, or seek to postpone a hearing.
    \183\ See proposed Rule 13805(c)(6)(A).
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    Allowing an authorized representative to attend and participate in 
straight-in requests may provide meaningful opposition to the 
expungement request, which might otherwise be unopposed, and thus help 
create a more complete factual record for the panel to rely upon to 
decide the expungement request. NASAA and state securities regulators 
have a shared interest with FINRA in protecting the integrity of the 
information contained in the CRD system, as it is a crucial tool in 
their registration and oversight responsibilities. According to NASAA, 
``[s]tate securities regulators are often legally obligated to maintain 
the information in the CRD system as a state record. Much of the 
information in the CRD system is filed with state securities regulators 
as part of the registration and qualification process, or filed by 
state securities regulators themselves. The Uniform Securities Acts, 
which form the basis of most state securities statutes, generally 
provide that securities regulators must retain all information filed as 
part of a registration application or as an amendment to the 
information filed as part of the application.'' \184\ Thus, NASAA has 
indicated that expungement of customer dispute information potentially 
implicates the public records obligations of state governments.\185\
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    \184\ Brief of Amicus Curiae North American Securities 
Administrators Association, Inc. in Support of the Division of 
Securities and Retail Franchising, at 6-7, https://www.nasaa.org/wp-content/uploads/2021/06/Brief-of-Amicus-Curiae-NASAA-in-Support-of-the-Div-of-Securities-and-Retail-Franchising-06.23.21.pdf.
    \185\ See supra note 184.
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    The proposal would not allow an authorized representative to attend 
or participate in a customer arbitration where expungement has been 
requested; such attendance or participation could substantially disrupt 
the customer's case and would be less impactful, as the panel hears the 
customer's evidence on the merits.
    FINRA believes that the proposed rule change strikes the 
appropriate balance between respecting states' interest in the 
information in the CRD system and maintaining the integrity of the 
arbitration process.
G. Expungement Requests During Simplified Customer Arbitrations
    Customer arbitrations involving $50,000 or less, called simplified 
arbitrations, are governed by FINRA Rule 12800. FINRA Rule 12800 
provides customers with expedited procedures to make the DRS 
arbitration forum economically feasible for these smaller claims. 
Simplified arbitrations are decided on the pleadings and other 
materials submitted by the parties, unless the customer requests a 
hearing.\186\ Further, a single arbitrator from the public chairperson 
roster is appointed to consider and decide simplified arbitrations, 
unless the parties agree in writing otherwise.\187\
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    \186\ See FINRA Rule 12800(a).
    \187\ See FINRA Rule 12800(b). The parties could agree to have a 
three-person panel decide the simplified case. For ease of 
reference, when discussing expungement requests in simplified 
arbitrations under the proposed rule change, the rule filing uses 
the term ``arbitrator,'' unless otherwise specified, to mean either 
a panel or single arbitrator.
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    The customer who files a simplified arbitration determines how the 
claim will be decided. In particular, the customer has the option of 
having the case decided in one of three ways: (1) without a hearing 
(referred to as ``on the papers''), where the arbitrator decides the 
case on the pleadings or other materials; (2) in an ``Option One'' full 
hearing, in which prehearings and hearings on the merits take place 
pursuant to the regular provisions of the Code; or (3) in an ``Option 
Two'' special proceeding, whereby the parties present their case in a 
hearing to the arbitrator in a compressed timeframe, so that the 
hearings last no longer than one day.\188\
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    \188\ See FINRA Rule 12800(c). Among the customer arbitrations 
that closed in 2021, 14 percent were simplified cases. Among the 
simplified customer cases which closed, 23 percent closed on the 
papers, four percent closed with a full hearing, and four percent 
closed by special proceeding. The remaining 69 percent closed by 
other means including by settlement and withdrawal.
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    Currently, named associated persons and parties requesting 
expungement on behalf of unnamed persons request expungement during 
simplified arbitrations. FINRA Rule 12800 does not, however, expressly 
address how an expungement request should be filed or considered during 
a simplified arbitration. The proposed rule change would codify an 
associated person's ability to request expungement when named as a 
respondent in a simplified arbitration, and for other parties to 
request expungement on behalf of an unnamed person. The proposed rule 
change would also establish procedures for requesting and considering 
expungement requests in simplified arbitrations that are consistent 
with the expedited nature of these proceedings.\189\
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    \189\ See proposed Rules 12800(d) and (e). Under the proposed 
rule change, an associated person would not be permitted to request 
expungement in a simplified arbitration administered under the 
Industry Code, FINRA Rule 13800. All expungement requests under the 
Industry Code must be filed in accordance with proposed Rule 13805.

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[[Page 50187]]

1. Requesting Expungement
    The proposed rule change would permit a named associated person to 
request expungement, or a party to file an on-behalf-of request, during 
a simplified arbitration. As discussed in more detail below, unlike in 
a non-simplified arbitration, if expungement is not requested during 
the simplified arbitration, the associated person would be permitted to 
request it as a straight-in request filed under the Industry Code.\190\
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    \190\ See infra Item II.A.1.II.G.1.c., ``When No Expungement 
Request is Filed in a Simplified Arbitration.''
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a. By a Named Associated Person During the Simplified Arbitration
    Under the proposed rule change, an associated person named as a 
respondent in a simplified arbitration could request expungement during 
the arbitration of the customer dispute information associated with the 
customer's statement of claim, provided the request is eligible for 
arbitration.\191\
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    \191\ See proposed Rule 12800(d)(1)(A). The limitations that 
apply to expungement requests filed by a named associated person 
under proposed Rule 12805(a)(1)(B) would apply to these requests. 
See supra Item II.A.1.II.C., ``Limitations on Expungement 
Requests.''
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    If a named associated person requests expungement during a 
simplified arbitration, the proposed rule change would require the 
request to be filed in an answer or a separate pleading requesting 
expungement.\192\ If the named associated person requests expungement 
in a pleading other than an answer, the request must be filed within 30 
days after the date FINRA notifies the parties of the appointment of 
the arbitrator.\193\ Given the expedited nature of the simplified 
arbitration process, tying the request to these milestones would ensure 
that parties receive timely notice of the expungement request so that 
they may prepare their cases accordingly. The request would be required 
to include the same information as a request filed in a non-simplified 
arbitration.\194\
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    \192\ See proposed Rule 12800(d)(1)(B)(i). A respondent's answer 
must be submitted within 45 days of receipt of the statement of 
claim. See supra note 46.
    \193\ See proposed Rule 12800(d)(1)(B)(i). When FINRA notifies 
the parties when an arbitrator has been appointed, FINRA informs the 
parties that they have 30 days from the date of notification to 
submit additional documents or other information before the case is 
submitted to the arbitrator.
    \194\ See proposed Rules 12800(d)(1)(B)(i) and 
12805(a)(1)(C)(ii). Thus, the associated person's expungement 
request would be required to contain the applicable filing fee; the 
CRD number of the party requesting expungement; each CRD occurrence 
number that is the subject of the request; the case name and docket 
number associated with the customer dispute information; and an 
explanation of whether expungement of the same customer dispute 
information was previously requested and, if so, how it was decided.
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    To limit arbitrator shopping, the arbitrator would be required to 
decide an expungement request once it is filed by the associated 
person.\195\ If an associated person withdraws or does not pursue the 
request after filing, the arbitrator would be required to deny the 
request with prejudice so that it could not be re-filed.\196\
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    \195\ See proposed Rules 12800(d)(1)(B)(ii) and 12800(e)(1).
    \196\ See proposed Rule 12800(d)(1)(C).
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b. By a Party on Behalf of an Unnamed Person
    Under the proposed amendments, the requirements for a party to file 
an on-behalf-of request during a simplified arbitration would be the 
same as the requirements for a named associated person filing an 
expungement request during a simplified arbitration. A named party 
would only be able to file an on-behalf-of request during a simplified 
arbitration with the consent of the unnamed person.\197\ As with on-
behalf-of requests filed in customer arbitrations under proposed Rule 
12805(a)(2), the unnamed person who would benefit from the expungement 
request must consent to such filing by signing the Form.\198\
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    \197\ See proposed Rule 12800(d)(2)(A).
    \198\ See proposed Rule 12800(d)(2). The request must also meet 
the same requirements as an on-behalf-of request filed under 
proposed Rule 12805(a)(2). See proposed Rules 12805(a)(1)(C)(ii), 
12805(a)(2)(C)(ii) and 12805(a)(2)(D); see also supra Item 
II.A.1.II.A.1.b., ``Expungement Requests By a Party Named in the 
Customer Arbitration On Behalf Of an Unnamed Person.''
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    To limit arbitrator shopping, the arbitrator would be required to 
decide an on-behalf-of request once it is filed by the requesting 
party.\199\ If the requesting party withdraws or does not pursue the 
on-behalf-of request after filing, the arbitrator would be required to 
deny the request with prejudice so that it could not be re-filed.\200\
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    \199\ See proposed Rules 12800(d)(2)(B)(ii) and 12800(e)(1).
    \200\ See proposed Rule 12800(d)(2)(C).
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c. When No Expungement Request Is Filed in a Simplified Arbitration
    If expungement is not requested during the simplified arbitration 
under proposed Rule 12800(d), the associated person would be able to 
file a straight-in request under proposed Rule 13805 and have the 
request decided by a three-person panel randomly selected from the 
Special Arbitrator Roster.\201\ The request would be subject to the 
limitations on whether and when such requests may be filed under the 
Industry Code.\202\
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    \201\ See proposed Rules 12800(e)(2), 13805(a)(1) and 13806.
    \202\ See proposed Rule 13805(a)(2); see also supra Item 
II.A.1.II.C., ``Limitations on Expungement Requests.''
---------------------------------------------------------------------------

    Due to the expedited nature of simplified arbitrations, FINRA 
believes that fairness dictates that the associated person have the 
option to seek expungement separately under the Industry Code and have 
the expungement request decided by a panel randomly selected from the 
Special Arbitrator Roster. In simplified arbitrations, there may be 
less discovery, and the customer can dictate the extent of the evidence 
presented to the arbitrator. The customer may, for example, determine 
to have the arbitration decided on the papers. Because there may be 
less information available for the arbitrator to evaluate an 
expungement request during a simplified arbitration--even when the 
simplified arbitration results in an award--the associated person would 
retain the ability to choose to file the request as a straight-in 
request under the Industry Code.\203\
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    \203\ This would allow the associated person to obtain and 
present evidence from the member firm at which they were associated 
at the time the customer dispute arose without interfering with the 
simplified customer arbitration process. See proposed Rule 
13805(a)(1) and FINRA Rule 13506.
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2. Deciding Expungement Requests During Simplified Arbitrations
    If a named associated person or party on behalf of an unnamed 
person requests expungement during a simplified arbitration, the 
arbitrator would be required to decide the expungement request, 
regardless of how the simplified arbitration closes (e.g., even if the 
arbitration settles).\204\ As discussed in more detail below, 
arbitrators deciding expungement requests in simplified arbitrations 
would be experienced public arbitrators who would be required to 
evidence successful completion of, and agreement with, the enhanced 
expungement training provided by DRS prior to considering and deciding 
the expungement request.
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    \204\ See proposed Rule 12800(e)(1).
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    Under the proposed rule change, how and when the expungement 
request is decided would depend on which option the customer selects to 
decide the simplified arbitration.
a. No Hearing or Option Two Special Proceeding
    If the customer opts not to have a hearing or chooses an Option Two 
special proceeding, the arbitrator would decide the customer's dispute 
first and

[[Page 50188]]

issue an award.\205\ After the customer's dispute is decided, the 
arbitrator must hold a separate expungement-only hearing to consider 
and decide the expungement request and issue a separate, subsequent 
award.\206\
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    \205\ See proposed FINRA Rule 12800(e)(1)(A).
    \206\ See proposed Rule 12800(e)(1)(A). The arbitrator must 
conduct the expungement hearing pursuant to proposed Rule 12805(c). 
The expungement award must meet the requirements of proposed Rule 
12805(c)(8), and the DRS arbitration forum fees would be assessed 
pursuant to proposed Rule 12805(c)(9).
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    The arbitrator would decide the customer's dispute first and issue 
an award to minimize any delays in resolving the customer arbitration 
and any delays in potential recovery that a customer may be awarded. 
Further, because the customer arbitration may not be as fully developed 
when an ``on the papers'' or special proceeding is requested, the 
arbitrator would conduct a separate expungement-only hearing to develop 
the factual record and make a fully informed decision on the 
expungement request, and could request any documentary, testimonial or 
other evidence it deems relevant to the expungement request.
b. Option One Hearing
    If the customer chooses to have a full ``Option One'' hearing on 
his or her claim and it closes by award, the arbitrator would be 
required to consider and decide the expungement request during the 
customer arbitration and include the decision on the expungement 
request in the same award as the decision on the customer 
arbitration.\207\ This process would be the same as deciding an 
expungement request during a non-simplified customer arbitration that 
closes by award after a hearing, where the customer's claim and 
expungement request are addressed during the customer arbitration.
---------------------------------------------------------------------------

    \207\ See proposed Rule 12800(e)(1)(B)(i).
---------------------------------------------------------------------------

    If the customer arbitration closes other than by award or by award 
without a hearing, the arbitrator would be required to hold a separate 
expungement-only hearing to consider and decide the expungement request 
and issue a separate award containing the decision on the expungement 
request.\208\ The arbitrator would conduct a separate expungement-only 
hearing to develop the factual record and make a fully informed 
decision on the expungement request.
---------------------------------------------------------------------------

    \208\ See proposed Rule 12800(e)(1)(B)(ii).
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    FINRA does not believe that it is necessary for a panel from the 
Special Arbitrator Roster to decide an expungement request if a 
simplified customer arbitration is decided on the papers, in an Option 
Two special proceeding, or if the simplified customer arbitration 
closes other than by award or by award without a hearing. FINRA 
believes that the public chairpersons who decide simplified 
arbitrations would be fully capable of making appropriate expungement 
decisions on the basis of their experience.\209\ In addition, the 
public chairperson would be required to evidence successful completion 
of, and agreement with, the enhanced expungement training provided by 
DRS prior to considering and deciding the expungement request and, 
therefore, would have the same enhanced expungement training as the 
arbitrators on the Special Arbitrator Roster.
---------------------------------------------------------------------------

    \209\ See supra note 102 and accompanying text.
---------------------------------------------------------------------------

    If the Commission approves the proposed rule change, FINRA notes, 
however, that it will continue to monitor expungement requests and 
decisions in simplified arbitrations to determine if such requests 
should be decided by the Special Arbitrator Roster.
3. Customer Notification of Expungement Hearings During Simplified 
Arbitrations
    The Director would notify all customers from the simplified 
arbitration of the separate expungement-only hearing.\210\ The 
Director's notice would serve as a reminder of the expungement request 
and would provide the customers with timely notice of the expungement 
hearing so that the customers and their representatives may plan and 
prepare to attend and participate if they choose.
---------------------------------------------------------------------------

    \210\ See proposed Rule 12800(f)(2).
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H. Non-Substantive Changes
    FINRA is also proposing to amend the Codes to make non-substantive, 
technical changes to the rules impacted by the proposed rule change. 
For example, the proposed rule change would require the renumbering of 
paragraphs and the updating of cross-references in the rules impacted 
by the proposed rule change. In addition, the title of Part VIII of the 
Customer Code would be amended to add a reference to ``Expungement 
Proceedings.'' Similarly, the title of Part VIII of the Industry Code 
would be amended to add a reference to ``Expungement Proceedings'' and 
``Promissory Note Proceedings.'' FINRA believes the proposed changes to 
the titles would more accurately reflect the contents of Part VIII of 
the Customer and Industry Codes. FINRA is also proposing to re-number 
current FINRA Rule 13806 (Promissory Note Proceedings) as new FINRA 
Rule 13807, without substantive change to the current rule language and 
to amend FINRA Rule 13214 to change the cross references from Rules 
13806(d)(1) and 13806(f) to Rules 13807(d)(1) and 13807(f), 
respectively. Finally, FINRA would also amend FINRA Rule 13600 to 
change the cross reference from Rule 13806(e)(1) to Rule 13807(e)(1).
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\211\ 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.
---------------------------------------------------------------------------

    \211\ 15 U.S.C. 78o.
---------------------------------------------------------------------------

    The proposed rule change seeks to balance the interests of 
securities regulators in having accurate and relevant information to 
fulfill their regulatory responsibilities; the interests of investors 
in having access to accurate and meaningful information about 
associated persons with whom they may entrust their money; the 
interests of member firms in having accurate information for use in 
making informed employment decisions; and the interests of the 
brokerage community in having a fair process to address inaccurate 
customer dispute information. The proposed rule change will help ensure 
that the expungement process works as intended--as a remedy that is 
appropriate only in limited circumstances in accordance with the narrow 
standards in FINRA rules.
    The current expungement framework has limitations that can make 
deciding straight-in requests more challenging, particularly if the 
customer or customer's representative does not attend and participate 
in the hearing. By having three specially trained and randomly selected 
arbitrators available to ask questions, request evidence and generally 
to serve as fact-finders in the absence of customer input, the proposed 
rule change will help ensure that a more complete factual record is 
created to support the arbitrators' expungement decision. In addition, 
the proposed rule change will specifically authorize all panels that 
consider expungement requests to request any documentary,

[[Page 50189]]

testimonial or other evidence that they deem relevant to the 
expungement request from a member firm or associated person.
    To further support the development of a more complete factual 
record, the proposed rule change will require that the associated 
person appear at the expungement hearing in person or by video 
conference. The proposed rule change will also codify the Guidance as 
rules that arbitrators and parties must follow and facilitate the 
attendance and participation of customers in all expungement hearings, 
and by state securities regulators, through an authorized 
representative, in expungement hearings in straight-in requests. If 
they attend and participate, customer and authorized representative 
attendance and participation will provide arbitrators with additional 
insight to make more informed decisions on expungement requests. In the 
absence of such input, however, the proposal will clarify that a 
customer or authorized representative's decision not to attend or 
participate in the expungement hearing is not evidence that is material 
to the determination of whether expungement is appropriate.
    The proposed rule change will also maintain the integrity of the 
information in the CRD system by imposing strict time limits on the 
filing of straight-in requests. The DRS arbitration forum will be 
denied if the expungement request is made more than two years after the 
close of the customer arbitration or civil litigation associated with 
the customer dispute information or three years after the date the 
customer complaint was initially reported in the CRD system. These 
changes will ensure that expungement requests are timely filed and will 
curtail the bundling of multiple aged, and often unrelated, disclosures 
in a single arbitration.
    The proposed rule change will also protect investors and the public 
interest by requiring arbitrators to unanimously agree to issue an 
award containing expungement relief, to make their finding for 
expungement relief based on one or more of three grounds specified in 
the proposed rule change, to identify the specific grounds on which 
that relief is based and to provide a more detailed explanation in the 
award of those grounds.
    In addition, the proposed rule change will foreclose a practice 
that has emerged in the existing expungement process where parties seek 
expungement after a prior denial by a court or arbitration panel of a 
request to expunge the same customer dispute information, or where 
parties withdraw or do not pursue an expungement request and then make 
another request for expungement of the same customer dispute 
information before a potentially more favorable fact finder. The 
proposed rule change imposes procedures and requirements around when 
and how a party may request expungement, and expressly provides that 
omission of certain of the requirements will make the expungement 
request deficient. Further, the proposed rule change provides the 
Director with express authority to deny the DRS arbitration forum if an 
expungement request is ineligible for arbitration under the proposed 
rules or if a request to expunge customer dispute information is not 
filed under, or considered in accordance with, the requirements of the 
proposed rules. Thus, FINRA believes the proposed rule change will add 
tighter controls, additional safeguards and more transparency to the 
expungement process.
    In addition, the process of requesting expungement during a 
simplified arbitration will be codified to help ensure that customers 
are aware they can attend and participate in the expungement hearing 
and how an expungement request will affect (and not affect) their 
arbitration claims. By expressly incorporating the practice of 
requesting expungement during simplified proceedings, the proposed 
amendments add consistency and transparency to the rules and provide 
more guidance to the arbitrators and the parties requesting 
expungement.
    For these reasons, the proposed rule change represents a 
significant step towards addressing concerns with the current 
expungement framework. FINRA believes that these changes will help to 
maintain the accuracy and integrity of the information in the CRD 
system and BrokerCheck, while also protecting associated persons from 
the publication of inaccurate information about them.

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.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment to analyze the 
regulatory need for the proposed rule change, its potential economic 
impacts, including anticipated costs, benefits and distributional and 
competitive effects, relative to the current baseline, and the 
alternatives FINRA considered in assessing how best to meet FINRA's 
regulatory objectives.
1. Regulatory Need
    The proposed rule change would address concerns relating to the 
expungement process that are not consistent with the regulatory intent 
to permit expungement in limited circumstances in accordance with the 
narrow standards in FINRA rules. The concerns include the timing of 
expungement requests, the resulting impact on customer attendance and 
participation in expungement hearings, and the ultimate impact on 
expungement decisions made when customers do not attend or participate 
and the panel receives information only from the associated person 
requesting expungement. The concerns also include the selection of 
arbitrators to hear straight-in requests when the associated person 
files a statement of claim against a member firm whose interest in 
expungement might be aligned with the associated person, and requests 
to expunge the same customer dispute information in multiple 
proceedings. The proposed rule change would also codify and expand upon 
the provisions of the Guidance to help ensure that arbitrators and 
parties are adhering to these procedures for all expungement requests.
2. Economic Baseline
    The economic baseline for the proposed rule change includes the 
current provisions under the Codes that address the process for parties 
to seek expungement relief. The economic baseline includes the recent 
amendments to the Codes to apply minimum fees to expungement 
requests.\212\ In addition, because arbitrators are generally believed 
to be adhering to the best practices and recommendations that are a 
part of the Guidance, the economic baseline also includes the 
Guidance.\213\ The proposed rule change is expected to affect 
associated persons and other parties to expungement requests including 
member firms, customers, state securities regulators, and arbitrators. 
The proposed rule change is also expected to affect users of customer 
dispute information contained in the CRD system and displayed through 
BrokerCheck.\214\
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    \212\ See supra note 10.
    \213\ See Guidance, supra note 5.
    \214\ Users of customer dispute information include investors, 
member firms and other companies in the financial services industry; 
associated persons or individuals seeking employment in the 
brokerage industry; and FINRA, state securities regulators, and 
other regulators.

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[[Page 50190]]

    The customer dispute information contained in the CRD system is 
submitted by registered securities firms in response to questions on 
the uniform registration forms.\215\ The customer dispute information 
must be reported regardless of the merit of the allegations. FINRA 
makes specific CRD information disclosed by firms publicly available 
through BrokerCheck.\216\
---------------------------------------------------------------------------

    \215\ See supra notes 20 and 21 and accompanying text for 
additional discussion of the uniform registration forms and the 
information contained in the CRD system. Some of the information may 
involve pending actions or allegations that have not been resolved 
or proven.
    \216\ See supra note 22 and accompanying text.
---------------------------------------------------------------------------

    The information in BrokerCheck can be valuable to current and 
prospective customers to learn about the conduct of associated 
persons.\217\ Current and prospective customers may not select or 
remain engaged with an associated person or a member firm that employs 
an associated person with a record of customer disputes. Similarly, 
member firms and other companies in the financial services industry may 
use the information when making employment decisions. In this manner, 
the customer dispute information contained in the CRD system (and 
displayed through BrokerCheck) may positively or negatively affect the 
business and professional opportunities of associated persons. Where 
the information is reliable, it also provides for customer protections 
and information useful for member firms.\218\
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    \217\ Recent academic studies provide evidence that the past 
disciplinary and other regulatory events associated with a firm or 
individual can be predictive of similar future events. See Hammad 
Qureshi & Jonathan Sokobin, Do Investors Have Valuable Information 
About Brokers? FINRA Office of the Chief Economist Working Paper, 
Aug. 2015; see also Mark Egan, Gregor Matvos, & Amit Seru, The 
Market for Financial Adviser Misconduct, 127(1) Journal of Political 
Economy 233-295 (2019).
    \218\ FINRA, state securities regulators, and other regulators 
also use customer dispute information submitted to the CRD system to 
regulate associated persons. See supra Item II.A.1.I.B., ``Customer 
Dispute Information in the CRD System.''
---------------------------------------------------------------------------

    A negative impact on the business and professional opportunities of 
associated persons may be appropriate and consistent with investor 
protection, such as when the customer dispute information has merit. A 
negative impact may be inappropriate, however, if, for example, the 
customer dispute information is factually impossible, clearly erroneous 
or false, or the associated person was not involved in the alleged 
misconduct. Regardless of the merit, associated persons have an 
incentive to remove customer dispute information from the CRD system 
and its public display through BrokerCheck.
    An associated person, or a party on-behalf-of an unnamed person, 
typically begins the process to remove customer dispute information 
from the CRD system by filing an expungement request in the DRS 
arbitration forum. During the sample period (January 2016 through 
December 2021), FINRA is able to identify requests to expunge 11,619 
customer dispute information disclosures in the DRS arbitration 
forum.\219\ More than one customer dispute information disclosure may 
be sought to be expunged in a single arbitration, and multiple 
expungement requests may relate to the same arbitration, civil 
litigation, or complaint if the dispute relates to more than one 
associated person.
---------------------------------------------------------------------------

    \219\ The 11,619 requests to expunge customer dispute 
information disclosures include some requests to expunge the same 
customer dispute information disclosure in more than one 
arbitration.
---------------------------------------------------------------------------

    The 11,619 customer dispute information disclosures consist of 
5,143 disclosures (44 percent) that were sought to be expunged during a 
customer arbitration, and 6,476 disclosures (56 percent) that were 
sought to be expunged in a straight-in request.\220\ The 5,143 
disclosures sought to be expunged during a customer arbitration include 
4,714 sought to be expunged during a non-simplified customer 
arbitration and 429 sought to be expunged during a simplified customer 
arbitration. The associated person was a named party for 2,322 of the 
5,143 disclosures (45 percent), and an unnamed party for 2,821 of the 
5,143 disclosures (55 percent). The 6,476 customer dispute information 
disclosures sought to be expunged in a straight-in request include 116 
disclosures where the associated person named the customer as a 
respondent.
---------------------------------------------------------------------------

    \220\ Fifty requests to expunge customer dispute information 
were made during industry arbitrations that were not straight-in 
requests. To simplify the analysis, FINRA excludes these 50 requests 
from the sample.
---------------------------------------------------------------------------

    Associated persons often file a straight-in request long after the 
close of the customer arbitration or civil litigation or the initial 
reporting of the customer complaint to the CRD system. For example, 
approximately three-fifths of customer dispute information disclosures 
that were sought to be expunged in straight-in requests were filed more 
than six years after the close of a customer arbitration or the initial 
reporting of the customer complaint.\221\
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    \221\ A six-year time-period from the time-period start date 
reflects the six-year eligibility rule which applies to all 
arbitration claims, including those claims requesting expungement of 
customer dispute information. See supra note 38.
---------------------------------------------------------------------------

    As of December 2021, 10,156 of the 11,619 customer dispute 
information disclosures were sought to be expunged in an arbitration 
that closed.\222\ The 10,156 disclosures consist of 4,346 disclosures 
(43 percent) sought to be expunged during a customer arbitration and 
5,810 disclosures (57 percent) sought to be expunged in a straight-in 
request. A panel made a decision in arbitrations relating to 6,997 of 
the 10,156 disclosures in arbitrations that closed and made no decision 
in arbitrations relating to the remaining 3,159 disclosures. A single 
arbitrator made a decision in arbitrations relating to 5,311 of the 
6,997 disclosures, and a (two- or) three-person panel made a decision 
in arbitrations relating to the remaining 1,686 disclosures. For the 
customer arbitrations, the decision by a panel may relate to the 
arbitration, an expungement request, or both. For the straight-in 
requests, the decision would relate to the expungement request only. In 
arbitrations where no decision on the merits of the customer case or an 
expungement request was made, the requests were either not eligible, 
withdrawn, or otherwise not pursued by the associated person or party 
that filed the request.
---------------------------------------------------------------------------

    \222\ In order to focus on the rate at which panels award 
expungement under different scenarios, the remaining discussion 
considers only arbitrations in the sample period that closed.
---------------------------------------------------------------------------

    Overall, 5,443 of the customer dispute information disclosures 
sought to be expunged resulted in a panel issuing an award containing 
expungement relief. The 5,443 disclosures reflect 54 percent of the 
10,156 disclosures sought to be expunged in arbitrations that closed, 
and 78 percent of the 6,997 disclosures sought to be expunged in 
arbitrations where a panel made a decision.\223\ The percentage of 
expungement requests that are awarded is higher when the panel receives 
information only from the associated person or other party requesting 
expungement. The panel is likely to receive information only from the 
party requesting expungement when (1) the customer arbitration is 
resolved without a hearing on the merits (e.g., settles), or (2) an 
associated person files a straight-in request against a member firm. In 
both circumstances, the customer has little incentive to attend or 
participate in an expungement hearing and, in the experience of FINRA 
staff, generally does not.
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    \223\ Another recent academic study provides evidence that 
associated persons who receive an award containing expungement 
relief in the DRS arbitration forum are ``3.3 times as likely to 
engage in new misconduct as the average broker.'' See Colleen 
Honigsberg & Matthew Jacob, Deleting Misconduct: The Expungement of 
BrokerCheck Records, 139(3) Journal of Financial Economics 800-831 
(2021): 800-831.

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[[Page 50191]]

    Among the 6,997 disclosures sought to be expunged in arbitrations 
where a panel made a decision, 1,632 disclosures were sought to be 
expunged during a non-simplified or simplified customer arbitration, 
and 5,365 disclosures were sought to be expunged in a straight-in 
request. A panel awarded expungement for 943 of the 1,632 disclosures 
(58 percent) sought to be expunged during a customer arbitration. This 
includes 267 of the 632 disclosures (42 percent) sought to be expunged 
during a customer arbitration that resolved after a hearing on the 
merits, and 676 of the 1,000 disclosures (68 percent) sought to be 
expunged during a customer arbitration not resolved after a hearing on 
the merits. A panel awarded expungement for 4,500 of the 5,365 
disclosures sought to be expunged in a straight-in request (84 
percent).
    In general, whether an associated person obtains an award 
containing expungement relief does not appear to be significantly 
impacted by the number of arbitrators deciding the request. For 
example, among the 1,632 disclosures sought to be expunged during a 
non-simplified or simplified customer arbitration, a similar percentage 
of requests were awarded by a one-person panel (279 of 490 disclosures, 
or 57 percent) as were awarded by a three-person panel (664 of 1,142 
disclosures, or 58 percent). In addition, among the 5,365 disclosures 
sought to be expunged in straight-in requests, a similar percentage of 
requests were awarded by a one-person panel (4,035 of 4,821 
disclosures, or 84 percent) as were awarded by a three-person panel 
(465 of 544 disclosures, or 85 percent).
    Requests to expunge older customer dispute information also are 
awarded at a similar rate to requests to expunge more recent customer 
dispute information. FINRA measures the age of customer dispute 
information from either the close of the customer arbitration or civil 
litigation, or, if no customer arbitration or civil litigation, from 
the initial reporting of the customer complaint to the CRD system 
(i.e., time limit start date). Among the 5,365 customer dispute 
information disclosures sought to be expunged in straight-in requests, 
a similar percentage resulted in an award that were filed less than six 
years from the time limit start date (1,673 of 1,984 disclosures, or 84 
percent) as were filed more than six years from the time limit start 
date (2,827 of 3,381 disclosures, or 84 percent).
    Factors other than, or in combination with, the number of 
arbitrators deciding the expungement request or the timing of the 
expungement request, however, may affect whether an associated person 
receives an award containing expungement relief. These factors include 
the merits of the request, the attendance and participation by 
customers or the availability of documents or information relating to 
the dispute, and the potential influence of associated persons and 
member firms on the selection of the panel who decides the request.
    As stated above, FINRA will expunge customer dispute information 
from the CRD system only pursuant to a court order. If the panel awards 
expungement, then the firm or associated person must confirm the 
arbitration award in a court of competent jurisdiction and serve the 
confirmed award on FINRA.\224\ As of December 2021, FINRA had removed 
4,717 customer dispute information disclosures from the CRD system from 
the possible 5,443 disclosures (87 percent) for which a panel issued an 
award containing expungement relief. Firms or associated persons may 
have not yet sought or obtained a court order for the remaining 
disputes. There also may be instances where expungement was sought and 
awarded by a panel, but a court order was never obtained.
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    \224\ See supra note 25 and accompanying text.
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    During the sample period, approximately one-third of the 4,717 
customer dispute information disclosures (1,447, or 31 percent) that 
were expunged were submitted to the CRD system. The 1,447 customer 
dispute information disclosures reflect five percent of the total 
number of customer dispute information disclosures submitted to the CRD 
system during the sample period (approximately 31,900). The remaining 
3,270 customer dispute information disclosures were submitted to the 
CRD system prior to the sample period. The number of customer dispute 
information disclosures expunged during the sample period that were 
submitted to the CRD system prior to 2016 suggests that associated 
persons may yet still expunge customer dispute information disclosures 
submitted to the CRD system during the sample period. The five percent 
of expunged customer dispute information disclosures should therefore 
be considered a lower bound for the share of customer dispute 
information disclosures submitted during the sample period that may 
ultimately be expunged.
    An associated person may seek a court order directing expungement 
of customer dispute information without first seeking expungement 
through arbitration (``direct-to-court expungement cases''). During the 
sample period, associated persons sought expungement of 194 customer 
dispute information disclosures in direct-to-court expungement cases, 
or less than 2 percent of the customer dispute information disclosures 
that were sought to be expunged in the DRS arbitration forum. As of 
December 2021, court proceedings had concluded for 173 of those 
disclosures and proceedings remained ongoing for 21 disclosures. One 
hundred seven of the 173 disclosures (62 percent) were ordered expunged 
by a court and 66 disclosures (38 percent) were not ordered to be 
expunged.
3. Economic Impact
A. Overview
    The proposed rule change would codify the best practices described 
in the Guidance.\225\ Codifying the best practices in the Guidance 
should clarify among parties how the practices should be applied, 
including what is permitted during the expungement hearing and the 
responsibilities of the parties and the panel when expungement is 
requested.\226\ In addition, parties may incur fewer costs from the 
codification of the practices, including the costs from actions or 
decisions (e.g., requesting expungement of customer dispute information 
that was previously denied in another arbitration or court) that would 
be denied by an arbitration panel pursuant to the Guidance. Based on 
FINRA staff observations, arbitrators are generally believed to be 
adhering to these best practices and, therefore, codifying them should 
not result in new material economic impacts. To the extent that some 
arbitrators currently do not adhere to these best practices, codifying 
them should increase the consistency of the forum and may impact 
associated persons, customers, and member firms.
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    \225\ See Guidance, supra note 5.
    \226\ Codifying the Guidance may also help inform customers more 
generally of the practices that the forum has implemented to 
encourage and facilitate customer attendance and participation in 
expungement hearings.
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    The proposed rule change would also introduce other changes to the 
Codes that expand upon or that are not a part of the Guidance. The 
proposed rule change would restrict when an associated person is 
permitted to request expungement in the DRS arbitration forum. In 
general, the proposed rule change would also require a panel from a 
customer arbitration who decides the underlying customer dispute or a 
panel from the Special Arbitrator Roster to decide an

[[Page 50192]]

expungement request. Three-person arbitration panels would also be 
required to unanimously agree to issuing an award containing 
expungement relief. Finally, the proposed rule change would address the 
participation by associated persons, customers, and state securities 
regulators in expungement hearings. These changes may result in new 
material economic benefits and costs to associated persons, customers, 
and member firms. FINRA discusses these impacts below and quantifies 
them when doing so is feasible and informative.
B. Expungement Requests During Customer Arbitrations
    The proposed rule change would set forth requirements for 
expungement requests made during customer arbitrations. The proposed 
rule change would establish different requirements for non-simplified 
customer arbitrations and simplified customer arbitrations, and for 
associated persons named or unnamed to a (non-simplified or simplified) 
customer arbitration.
i. Expungement Requests by Named Associated Persons During Non-
Simplified Customer Arbitrations
    The proposed rule change would require an associated person named 
in a non-simplified customer arbitration to request expungement during 
the customer arbitration of the customer dispute information in the CRD 
system that is associated with the customer's statement of claim.\227\ 
During the sample period, associated persons named in a non-simplified 
customer arbitration sought to expunge 1,622 of the 4,346 disclosures 
that associated persons sought to expunge in a customer arbitration 
that closed. Otherwise, the associated person would forfeit the 
opportunity to seek expungement of the same customer dispute 
information in any subsequent proceeding. The panel from a non-
simplified customer arbitration would decide the request if the 
arbitration closes by award after a hearing.\228\
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    \227\ See proposed Rule 12805(a)(1)(A).
    \228\ See proposed Rule 12805(a)(1)(D)(i).
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    The proposed rule change would help ensure that, if possible, the 
panel that decides a non-simplified customer arbitration, with input 
from all parties and access to all evidence, testimony and documents, 
would also decide an expungement request relating to the same 
underlying dispute. These arbitrators or panels would be best situated 
to decide the related issue of expungement, and thereby help ensure 
that expungement awards and the customer dispute information contained 
in the CRD system reflect the conduct of associated persons.
    The proposed rule change would impose time limits on when an 
expungement request can be filed during a non-simplified customer 
arbitration.\229\ The proposed time limits may increase the ability of 
customers to address the expungement request during the customer 
arbitration. The proposed time limits, however, may cause a named 
associated person to lose the ability to assess the additional 
information that arises during a customer arbitration within sixty days 
of the hearing on the merits. In this case, the associated person must 
either incur the costs of filing a request for expungement based on 
potentially more limited information about whether the request will be 
successful or lose their ability to seek expungement in the DRS 
arbitration forum. Consequently, associated persons may incur costs to 
preserve their ability to request expungement in the DRS arbitration 
forum.\230\
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    \229\ See proposed Rule 12805(a)(1)(C)(i).
    \230\ Under the proposed rule change, a party that does not file 
an expungement request at least 60 days before the first scheduled 
hearing begins could file a motion seeking an extension. See supra 
note 229. The motion, however, may be opposed by another party and 
denied by the panel.
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ii. Expungement Requests During a Non-Simplified Customer Arbitration 
That Closes Other Than by Award or by Award Without a Hearing
    As described above, during the sample period, associated persons 
named in a non-simplified customer arbitration sought to expunge 1,622 
of the 4,346 disclosures that associated persons sought to expunge in a 
customer arbitration that closed. The 1,622 disclosures include 1,285 
disclosures that were sought to be expunged in a non-simplified 
customer arbitration that closed other than by award or by award 
without a hearing. Associated persons who request expungement during a 
non-simplified customer arbitration (either as a named party or as an 
unnamed party that consents to an on-behalf-of request) that closes 
other than by award or by award without a hearing (and would not have 
their expungement request decided as part of the customer arbitration) 
would incur additional costs to file and resolve a straight-in request 
(e.g., legal fees).\231\ Associated persons would also incur a delay in 
receiving a decision on the request. The member firm with which the 
associated person was associated at the time the customer dispute arose 
would also incur the legal and forum fees corresponding to the 
straight-in request.\232\
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    \231\ Associated persons who would otherwise request expungement 
as a counterclaim during an industry arbitration, which is rare, 
would instead be required to file a straight-in request under 
proposed Rule 13805. These associated persons and member firms with 
which the associated persons were associated would incur similar 
costs.
    \232\ Associated persons would not incur an additional filing 
fee to file the straight-in expungement request. See supra note 95. 
Consistent with the fees associated with non-monetary claims, the 
parties to a straight-in request would incur the minimum hearing 
session fee of $1,150 for each session the panel conducts to decide 
the expungement request. The member firm at which the individuals 
were associated at the time the customer dispute arose would also be 
assessed a minimum surcharge fee of $2,000 and a minimum process fee 
of $3,850. See FINRA Rules 13901, 13902, and 13903 for the fee 
amounts related to non-monetary claims in the DRS arbitration forum.
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    The costs to file and resolve a straight-in request following the 
conclusion of the customer arbitration would be imposed by the proposed 
rule change if the requests would have otherwise been decided as part 
of the non-simplified customer arbitration. The costs would not be 
imposed by the proposed rule change, however, if associated persons 
would have filed a straight-in request after the close of the non-
simplified customer arbitration regardless of the proposed 
restrictions.
    The additional costs for an associated person to file and resolve a 
straight-in request after the close of a non-simplified customer 
arbitration (that closes other than by award or by award without a 
hearing) may reduce the likelihood that parties settle a customer 
arbitration or the amount for which parties settle. For example, 
associated persons may factor the cost to resolve a separate straight-
in request into the decision to settle or arbitrate. In addition, even 
if the parties settle the dispute, associated persons may consider the 
cost to file and resolve a separate straight-in request when 
determining the amount at which they are willing to settle. The 
customers to an arbitration which does not settle may incur additional 
costs to instead arbitrate the claim.\233\
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    \233\ FINRA notes, however, that the determination regarding 
whether to settle a customer arbitration can depend on a number of 
factors, including the parties' respective estimates of the 
additional costs they would incur to continue the customer 
arbitration, the value that the associated person places on 
expungement, the associated person's estimate of the likelihood that 
the associated person could obtain expungement in the customer 
arbitration compared to in a straight-in request, and the estimated 
cost to pursue the straight-in request. Other proposed amendments 
may similarly factor into the decision to settle, such as the 
potential for customer or state securities regulator attendance and 
participation in expungement hearings in straight-in requests.

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[[Page 50193]]

iii. Expungement Requests by Unnamed Persons in Non-Simplified Customer 
Arbitrations and by Named and Unnamed Persons in Simplified Customer 
Arbitrations
    The proposed rule change would not require an unnamed person in a 
non-simplified customer arbitration, an associated person named in a 
simplified customer arbitration, or an unnamed person in a simplified 
customer arbitration to request expungement of the customer dispute 
information during the arbitration.\234\ Instead, like today, these 
associated persons may wait until after the conclusion of the 
arbitration to request expungement as a straight-in request.\235\ 
During the sample period, unnamed persons in non-simplified customer 
arbitrations, associated persons named in simplified customer 
arbitrations, and unnamed persons in simplified customer arbitrations 
sought to expunge 2,724 of the 4,346 disclosures that associated 
persons sought to expunge in a customer arbitration that closed.
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    \234\ See proposed Rules 12805(a)(2)(A), 12800(d)(1)(A), and 
12800(d)(2)(A). Unnamed persons would also be prohibited from 
intervening in a non-simplified or simplified customer arbitration 
and requesting expungement. See proposed Rules 
12805(a)(2)(E)(iii)(a) and 12800(d)(2)(D).
    \235\ The requirement to wait until after the close of the 
customer arbitration would help ensure that the panel from the 
Special Arbitrator Roster is aware of the outcome of the customer 
arbitration when deciding the request.
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    The option to wait until after the customer arbitration has 
concluded to request expungement is not a new benefit created by the 
proposed rule change, but is instead currently permitted under the 
Codes. FINRA believes that an unnamed person in a non-simplified 
customer arbitration, an associated person named to a simplified 
customer arbitration, or an unnamed person in a simplified customer 
arbitration should have the option to seek expungement as a straight-in 
request and have their request decided by a panel from the Special 
Arbitrator Roster.
    Associated persons (or parties on behalf of unnamed persons) who 
are not required and choose not to request expungement during a 
customer arbitration may incur additional costs to file and resolve a 
straight-in request. The member firms with which the associated persons 
were associated at the time the customer dispute arose would also incur 
additional costs. Any incremental costs from not filing an expungement 
request during a customer arbitration, however, are not imposed by the 
proposed rule change. Instead, they are borne at the discretion of the 
parties who make the determination of when to request expungement, and 
are similar to the costs they incur under the Codes today.
    The proposed time limits to request expungement during a customer 
arbitration may impose costs on associated persons (or parties on 
behalf of unnamed persons) who are not required but choose to request 
expungement.\236\ Associated persons who are not able to have their 
expungement request decided during a customer arbitration (e.g., 
because the case settles) and instead file a straight-in request as a 
result of the proposed time limits would incur a delay in receiving a 
decision on the expungement request. Similar to today, associated 
persons would incur the legal and forum fees associated with the 
request, and the member firms with which the associated persons were 
associated at the time the customer dispute arose would also incur 
legal and forum fees associated with the straight-in request.
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    \236\ Under the proposed rule change, a party on-behalf-of an 
unnamed person would be required to request expungement during a 
non-simplified arbitration no later than 60 days before the first 
scheduled hearing, and a named associated person or a party on-
behalf-of an unnamed person would be required to request expungement 
during a simplified arbitration within 30 days of the date that 
FINRA provides notice of arbitrator appointment. See proposed Rules 
12805(a)(2)(C)(iii) and 12800(d)(1)(B)(i).
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C. Time Limits for Filing Straight-In Requests
    For customer dispute information reported to the CRD system after 
the effective date of the proposed rule change, the proposed rule 
change would require an associated person to file a straight-in request 
within two years of a customer arbitration or civil litigation closing, 
or, if there is no customer arbitration or civil litigation, within 
three years from the initial reporting of the customer complaint to the 
CRD system.\237\
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    \237\ See proposed Rules 13805(a)(2)(A)(iv) and 
13805(a)(2)(A)(v). The proposed rule change would also impose a two-
year time limit for requests to expunge customer dispute information 
that arose from a customer arbitration or civil litigation that 
closed on or prior to the effective date of the proposed rule 
change, or, if no customer arbitration or civil litigation, a three-
year time limit to request expungement of customer dispute 
information arising from a customer complaint initially reported to 
the CRD system on or prior to the effective date of the proposed 
rule change. See proposed Rules 13805(a)(2)(B)(i) and 
13805(a)(2)(B)(ii). These time limits would run from the effective 
date of the proposed rule change.
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    The proposed time limits may better facilitate customer attendance 
and participation in the proceedings and the likelihood that the panel 
from the Special Arbitrator Roster receives testimony and other 
evidence relevant to deciding an expungement request. In addition, the 
time limits would help ensure that the expungement hearing is held 
close in time to the customer arbitration or civil litigation, or the 
events that led to the customer dispute information disclosure, and 
foreclose the option of an associated person to choose the timing of a 
straight-in request to potentially reduce the likelihood of customer 
attendance and participation. Similar to the other amendments proposed 
herein, an increase in customer attendance and participation may 
provide a panel from the Special Arbitrator Roster with additional 
information to decide an expungement request and help ensure the 
accuracy of the customer dispute information contained in the CRD 
system and displayed through BrokerCheck.
    The proposed time limits, however, may constrain an associated 
person from filing a straight-in request. Associated persons who would 
otherwise delay the filing of a straight-in request may incur 
additional costs to file a straight-in request within the required time 
limits. Similar to the costs which may result from the proposed time 
limits to request expungement during a customer arbitration, associated 
persons who become constrained to file a straight-in request within the 
proposed time limits may incur indirect costs (as described above).
    The proposed time limits to file a straight-in request may also 
constrain an associated person from seeking expungement of multiple 
customer dispute information disclosures in the same straight-in 
request (i.e., in the same arbitration). Associated persons who may 
become constrained include those waiting for additional customers to 
make complaints or for a customer arbitration or civil litigation to 
close. The disclosures associated persons may want to include in the 
same straight-in request may relate to the provision of similar 
investment advice or services or market events resulting in multiple 
customer losses.
    Associated persons who become constrained from seeking to expunge 
multiple customer dispute information disclosures in the same straight-
in request because of the proposed time limits and who still seek 
expungement of all customer dispute information disclosures would be 
required to file the requests in more than one arbitration. These 
associated persons would incur additional legal and forum fees for each 
additional arbitration. The member firm

[[Page 50194]]

at which the individual was associated at the time the customer 
disputes arose would also incur additional legal and forum fees for 
each additional arbitration. Associated persons who seek to expunge 
customer dispute information disclosures from a longer time period may 
be more likely to become constrained and incur these additional costs 
than associated persons who seek to expunge customer dispute 
information disclosures from a shorter time period.
    Associated persons who are waiting until the close of a customer 
arbitration or civil litigation to seek to expunge multiple customer 
dispute information disclosures in the same arbitration may consider 
the anticipated costs to file an additional straight-in request when 
offering a settlement amount to customers. Associated persons could 
offer a higher settlement amount reflective of these anticipated costs, 
and customers may similarly seek to negotiate a higher settlement 
amount.\238\
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    \238\ Other factors may influence the decision of parties to 
settle or arbitrate the dispute. See supra note 233.
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    Finally, the three-year time limit may increase the likelihood that 
an associated person seeks expungement of a customer complaint only for 
the customer then to file a related claim in arbitration. If the 
associated person were to seek expungement of a customer dispute 
information disclosure associated with the subsequent customer 
arbitration, either during the customer arbitration or as a straight-in 
request, then the associated person would incur the additional costs of 
the second request. If the associated person seeks expungement as a 
straight-in request, then the member firm with which the associated 
person was associated at the time the customer dispute arose would also 
incur costs associated with the request.
D. Time Limits for Filing Straight-In Requests--Quantitative 
Description
    As discussed as part of the Economic Baseline, 6,476 customer 
dispute information disclosures were sought to be expunged in straight-
in requests during the sample period. The following estimates 
demonstrate that for the majority of these straight-in requests, the 
request would not have been permitted under the proposed time limits 
and associated persons would not have been able to include more than 
one customer dispute information disclosure in the same straight-in 
request. The estimates, however, do not account for the potential 
change in the behavior of associated persons--associated persons would 
have incentive under the proposed amendments to file the straight-in 
requests within the proposed time limits or otherwise lose the ability 
to file a request in the forum.\239\
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    \239\ The following estimates also do not account for the number 
of straight-in requests of customer dispute information arising from 
a previous (non-simplified or simplified) customer arbitration 
which, under the proposed rule change, would have been decided as 
part of the customer arbitration.
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    Among the 6,476 customer dispute information disclosures that 
associated persons sought to expunge in straight-in requests, 2,135 of 
the disclosures related to a previous (non-simplified or simplified) 
customer arbitration (of the same underlying dispute). Six-hundred ten 
of the disclosures (29 percent) were sought to be expunged in straight-
in requests filed within the two-year time limit and would have been 
permitted under the proposed rule change. The remaining 4,341 of the 
6,476 disclosures did not relate to a previous (non-simplified or 
simplified) customer arbitration (of the same underlying dispute). 
Seven-hundred ninety-eight of the disclosures (18 percent) were sought 
to be expunged in straight-in requests within three years from the 
initial reporting of the disclosure to the CRD system and would have 
been permitted under the proposed rule change.
    As discussed above, the expungement of more than one customer 
dispute information disclosure can be sought in a single arbitration, 
and the proposed time limits may limit the ability of an associated 
person to seek expungement of multiple customer dispute information 
disclosures in the same straight-in request. The 6,476 customer dispute 
information disclosures sought to be expunged in straight-in requests 
were made in 3,177 arbitrations. Associated persons included more than 
one customer dispute information disclosure in 1,384 of the 3,177 
straight-in requests (44 percent). In total, associated persons sought 
the expungement of 4,683 customer dispute information disclosures (72 
percent of the 6,476 customer dispute disclosures) in the 1,384 
straight-in requests.
    Under the proposed time limits, associated persons would not have 
been able to include all of the customer dispute information 
disclosures in at least 614 of the 1,384 straight-in requests (44 
percent). In 556 of the 614 straight-in requests (91 percent), the 
associated person included at least one customer dispute information 
disclosure that was six years or longer from its respective time limit 
start date. Also, in 374 of the 614 straight-in requests (61 percent), 
the associated person would not have been able to include in the same 
straight-in request one or more customer dispute information 
disclosures that related to a customer arbitration.
E. Arbitrators or Panels Deciding Expungement Requests
    The proposed rule change would require that the panel from a non-
simplified customer arbitration decide expungement requests during the 
arbitration if the arbitration closes by award after a hearing.\240\ In 
addition, the proposed rule change would require the arbitrator from a 
simplified customer arbitration to decide an expungement request if it 
is requested--at a full hearing, in a separate expungement-only hearing 
after the simplified arbitration closes if the arbitration is decided 
``on the papers,'' or in a special proceeding.\241\ The proposed rule 
change would also require that a randomly selected three-person 
arbitration panel from the Special Arbitrator Roster decide straight-in 
requests.\242\ Finally, the proposed rule change would require that a 
three-person arbitration panel unanimously agree to issue an award 
containing expungement relief.\243\
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    \240\ See proposed Rules 12805(a)(1)(D)(i) and 
12805(a)(2)(E)(i).
    \241\ See proposed Rules 12800(e)(1)(A) and 12800(e)(1)(B)(ii).
    \242\ See proposed Rule 13806(b)(1).
    \243\ See proposed Rules 12805(c)(8)(A)(i) and 
13805(c)(9)(A)(i).
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    The proposed rule change may place a panel in a better position to 
determine whether to award expungement of customer dispute information, 
and thereby help ensure the accuracy of the customer dispute 
information contained in the CRD system. In general, the panel that 
decides a request would either hear the full merits of the customer 
arbitration or have additional training and qualifications when they 
may receive information only from the party requesting expungement. 
Panels from the Special Arbitrator Roster would also be able to request 
any evidence that they deem relevant from the associated person and 
member firm at which the associated person was associated at the time 
the customer dispute arose.
    As discussed above, straight-in requests where customers typically 
do not attend or participate in the expungement hearing often lack 
appreciable opposition. A panel from the Special Arbitrator Roster, 
with three arbitrators to ask questions, request evidence, and serve 
generally as fact finders in the absence of customer input, may help 
ensure that a complete factual record is created to support a

[[Page 50195]]

decision and the decision reflects the merits of the request.
    The proposed rule change would also reduce the potential influence 
of associated persons and member firms on the selection of the panel 
that decides a straight-in request. First, parties to the straight-in 
request would not be permitted to strike or rank any arbitrators 
randomly selected to create a panel from the Special Arbitrator Roster, 
thereby limiting the ability of an associated person and member firm 
with which the associated person was associated at the time the 
customer dispute arose to together select arbitrators who are more 
likely to award expungement. To the extent that the associated person 
and the member firm's interests are aligned and both seek to increase 
the likelihood that an award containing expungement relief is issued, 
they would together be expected to select arbitrators who may be more 
likely to award expungement.\244\
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    \244\ Honigsberg and Jacob also find evidence that suggests 
parties can use previous expungement decisions to determine the 
potential likelihood that an arbitrator will award expungement. See 
supra note 223.
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    Second, an associated person would not be permitted to withdraw a 
request and seek expungement of the same customer dispute information 
in a subsequent arbitration.\245\ Associated persons may exercise this 
option if they believe that they have a higher probability of obtaining 
an expungement award with a different arbitrator or panel in another 
arbitration, and in particular if the associated person files a 
straight-in request against the member firm with which the individual 
was associated at the time the customer dispute arose.
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    \245\ See proposed Rules 12805(a)(2)(A), Rules 12805(a)(1)(D)(i) 
and 12805(a)(2)(E)(i). The inability to withdraw a request also 
includes the requirement that a case be closed with prejudice if an 
associated person withdraws a straight-in request after a panel from 
the Special Arbitrator Roster is appointed. See proposed Rule 
13805(a)(4). In the sample period, an associated person withdrew 292 
of the 5,810 straight-in requests (five percent) filed in cases that 
closed. The 292 straight-in requests include 240 requests where a 
panel was appointed.
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    Among the expungement requests during the sample period, FINRA has 
identified 282 attempts to expunge a previously withdrawn or denied 
request to expunge.\246\ Both the initial request and the subsequent 
request were made during the sample period. Additional subsequent 
expungement requests may have been filed during the sample period if 
the initial expungement request was made prior to the sample period 
(i.e., before January 2016). These 282 attempts can therefore be 
considered a lower bound for the number of these requests during the 
sample period.
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    \246\ The 282 subsequent requests include 261 previous requests 
that were withdrawn or otherwise not pursued by the associated 
person or party that filed the request, 17 previous requests by a 
named person that were denied, one previous request on behalf of an 
unnamed person that was denied, and three previous requests 
determined by the panel to be ineligible for arbitration. A panel 
issued an award containing expungement relief in 167 of the 282 
subsequent expungement requests (59 percent) and denied 20 requests 
(seven percent). One of the awards containing expungement relief 
relates to the previous request on behalf of the unnamed person that 
was denied. Another of the awards containing expungement relief 
relates to the previous request that was deficient and therefore not 
decided. Forty-three subsequent expungement requests were withdrawn 
or deficient and, therefore, not decided. Finally, 52 subsequent 
expungement requests were still pending as of the end of the sample 
period. In 115 of the 282 subsequent expungement requests, the 
associated person was an unnamed party in the first arbitration. A 
similar measure in the Discussion Paper describes 193 attempts to 
expunge the same customer dispute information in more than one 
arbitration. See supra note 13. The measure described herein 
reflects an updated methodology.
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    Under the proposed rule change, the grounds under which a panel may 
award expungement would not change.\247\ The proposed rule change, 
however, would likely increase the number of expungement requests 
decided by a three-person panel and would require that the panel decide 
unanimously whether to issue an award containing expungement relief. 
FINRA expects that the unanimity requirement would tend to reduce the 
number of awards containing expungement relief with less or less 
certain merit.
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    \247\ See supra note 31 and accompanying text; see also proposed 
Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i). The proposed rule 
change would also instruct the panel not to consider the decision of 
the customer or authorized representative not to attend or 
participate in an expungement hearing as material to the 
determination of whether expungement is appropriate. This may help 
ensure expungement decisions are based on the merits of the request. 
See proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C).
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F. Arbitrators or Panels Deciding Expungement Requests--Quantitative 
Description
    As discussed as part of the Economic Baseline, 10,156 of the 11,619 
customer dispute information disclosures sought to be expunged during 
the sample period were filed in an arbitration that closed. Among the 
10,156 disclosures, 9,030 (89 percent) would have required a panel from 
the Special Arbitrator Roster. The 9,030 disclosures include 5,088 
disclosures sought to be expunged during a non-simplified customer 
arbitration that closed by award without a hearing or other than by 
award, and 3,942 sought to be expunged in a straight-in request that 
did not relate to a previous (non-simplified or simplified) customer 
arbitration.
    A panel from a (non-simplified or simplified) customer arbitration 
would have been required to make a decision on the requests to expunge 
1,025 of the 10,156 customer dispute information disclosures (10 
percent). The 1,025 disclosures include 499 disclosures that were 
requested to be expunged during a non-simplified customer arbitration 
that closed by award after a hearing, 400 requested to be expunged 
during a simplified customer arbitration, and 126 requested to be 
expunged in a straight-in request to expunge customer dispute 
information arising from a previous non-simplified customer arbitration 
that closed by award after a hearing.
    Finally, a panel from the Special Arbitrator Roster, or an 
arbitrator from a simplified customer arbitration, would have been 
required to make the decision with respect to the remaining 101 
disclosures that associated persons sought to expunge in a straight-in 
request and that related to customer dispute information arising from a 
previous simplified customer arbitration. The panel that would have 
decided the request is dependent on whether an associated person, or a 
party on-behalf-of an associated person, would have requested 
expungement during the simplified arbitration.
    A three-person panel made expungement decisions in 1,051 customer 
or industry arbitrations. The panel decision was unanimous in 1,030 of 
the 1,051 arbitrations (98 percent), but not unanimous in 21 
arbitrations (2 percent). In 11 of the 21 arbitrations, or one percent 
of the 1,051 arbitrations, one of the three arbitrators opposed an 
expungement decision awarding expungement. These 11 awards would not 
have been permitted under the proposed rule change. Since unanimous 
agreement is not currently required, however, current data on unanimous 
agreement may not reflect the extent to which unanimity would occur 
once it is required. The extent to which decisions may differ under the 
proposed rule change is therefore not known.
G. Attendance and Participation in Expungement Hearings
    As discussed above, the proposed rule change may facilitate 
customer attendance and participation by restricting when a named 
associated person, or a party on-behalf-of an unnamed person, may 
request expungement. Other proposed amendments may facilitate the 
attendance and participation of customers or authorized representatives 
of states securities regulators in expungement hearings. Attendance and 
participation by customers or

[[Page 50196]]

authorized representatives may increase the likelihood that a panel 
reviews a more complete factual record when deciding a request, and 
ultimately help ensure the accuracy of the customer dispute information 
contained in the CRD system.
    The proposed rule change would provide customers the option to 
attend and participate in an expungement hearing using whichever method 
is convenient for them (i.e., by telephone, by video conference or in 
person).\248\ The proposed rule change would also codify elements of 
the Guidance that require associated persons to notify a customer of a 
straight-in request,\249\ and for the panel to permit the customer to 
testify, cross-examine the associated person and other witnesses, 
present evidence at the hearing and make opening and closing 
arguments.\250\
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    \248\ See proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B).
    \249\ See proposed Rule 13805(b)(1)(A)(i) through (iii). The 
proposed rule change would also require the associated person to 
file with the panel all documents provided to the customers. This 
would help ensure that customers have knowledge of the straight-in 
request, and are not dissuaded from attending or participating in 
the expungement hearing as a result of the notification from the 
associated person. See proposed Rule 13805(b)(1)(A)(iv). The 
Director would also provide the notified customers with access to 
documents relevant to the expungement request filed in the 
arbitration, which may help in their preparation for the expungement 
hearing. See proposed Rule 13805(b)(1)(B)(ii).
    \250\ Other amendments to the proposed rule change would also 
help encourage customer attendance and participation in simplified 
customer arbitrations and straight-in requests. For example, the 
proposed rule change would allow customers to be represented at an 
expungement hearing and thereby mitigate any potential concern they 
may have regarding a direct confrontation with the associated 
person. See proposed Rules 12805(c)(4) and 13805(c)(4). In addition, 
the proposed rule change provides that the Director would notify the 
customer of the time and place of any prehearing conferences and the 
expungement hearing of a straight-in request. See proposed Rule 
13805(b)(1)(B)(i).
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    An authorized representative of state securities regulators would 
similarly be permitted to attend and participate in prehearing 
conferences and expungement hearings in straight-in requests.\251\ If 
an authorized representative presents additional information at the 
expungement hearing, including information that may not otherwise be 
available, the panel may receive a more complete factual record on 
which to base their decision. The magnitude of these effects would 
increase with the likelihood the authorized representative attends, 
participates and presents new evidence, such as when concerns arise 
regarding the merits of an expungement request.
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    \251\ See proposed Rule 13805(c)(6). The proposed rule change 
also provides that FINRA would notify state securities regulators 
within 15 days of receiving a request for expungement. See proposed 
Rules 12805(b) and 13805(b)(2). State securities regulators would 
therefore have the time to review and decide whether to oppose a 
straight-in request, or review and decide whether to oppose 
confirmation in court of an award from a customer arbitration 
containing expungement relief.
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    Customers and authorized representatives of state securities 
regulators may incur costs to attend and participate in the expungement 
hearings. These costs, however, would be optional and at their own 
discretion. Associated persons may factor in the potential for customer 
and state securities regulator attendance and participation in a 
straight-in request when deciding whether to settle a non-simplified 
customer arbitration.\252\
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    \252\ See supra Item II.A.1.II.F., ``Attendance and 
Participation of an Authorized Representative of State Securities 
Regulators in Straight-in Requests,'' and accompanying text.
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    The proposed rule change would require an associated person (or the 
party requesting expungement on behalf of an unnamed person) to appear 
by video conference or in-person at an expungement hearing.\253\ This 
requirement would help the panel assess the associated person's 
credibility and allow them to ask questions of an associated person and 
observe their responses. An associated person would also be permitted 
to cross-examine and seek information from customers who testify.\254\ 
This may provide associated persons with the opportunity to 
substantiate their arguments in support of their expungement request.
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    \253\ See proposed Rules 12805(c)(2) and 13805(c)(2).
    \254\ See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B).
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    Associated persons may incur costs to appear at an expungement 
hearing. The costs include the time and expense to appear, and other 
direct and indirect costs (e.g., opportunity costs) associated with the 
associated person's appearance. The costs would depend on the method of 
appearance (i.e., by video conference or in-person), which, under the 
proposed rule change, would be determined by the panel. Associated 
persons who appear in-person would incur the time and expense to travel 
to and from the hearing location. Associated persons who live further 
away from the hearing location, or are less able to travel, would incur 
greater costs to appear in-person. Associated persons who instead 
appear by video conference would not incur travel costs. These 
associated persons, however, may perceive that they are less able to 
provide effective testimony. These perceived costs may be mitigated by 
the ability of parties to file a motion seeking to appear in-person.
H. Impact on Business and Professional Opportunities
    As a result of the proposed rule change, associated persons may 
determine that the additional costs to seek expungement relief are 
higher than the anticipated benefits. In addition, although the 
proposed rule change is intended to help ensure arbitrators award 
expungement when appropriate as it relates to the merits of the 
request, the likelihood that an associated person receives an award 
containing expungement relief may decrease because of the likely 
increase in the number of three-person panels deciding expungement 
requests and the requirement that such decisions be unanimous. This may 
lead associated persons not to seek expungement, including in some 
instances when expungement is likely to be awarded.
    Associated persons who are not able to seek expungement of customer 
dispute information from the CRD system, or are delayed in doing so, 
may experience a loss of business and professional opportunities. The 
loss of business and professional opportunities by one associated 
person, however, may be the gain of another. Associated persons who may 
benefit in this regard include those who still determine that the 
additional costs to seek expungement relief under the proposed rule 
change is less than the anticipated benefits and continue to seek 
expungement of customer dispute information, and other associated 
persons who do not have similar disclosures.
    An associated person may seek expungement of customer dispute 
information in a direct-to-court expungement case. The proposed rule 
change may result in associated persons seeking expungement in more 
direct-to-court expungement cases. For some associated persons, the 
anticipated costs to first go through arbitration under the proposed 
rule change may be greater than the similar costs to seek expungement 
in a direct-to-court expungement case. Associated persons who would 
otherwise first go through arbitration because of the proposed rule 
change may incur additional costs relative to today to seek expungement 
relief.
    The number of associated persons who would instead seek expungement 
in a direct-to-court expungement case is dependent not only on the 
additional costs under the proposed rule change, but the costs an 
associated person would expect to incur in court to initiate an 
expungement proceeding. This information is generally not

[[Page 50197]]

publicly available, and accordingly the potential effect of the 
proposed rule change on direct-to-court expungement cases is not 
measured and is uncertain.
I. Other Economic Effects
    Finally, the proposed rule change may have other marginal economic 
effects. First, the prohibition of a subsequent expungement request 
would decrease the potential inefficient allocation of resources 
resulting from a subsequent request that would have resulted in the 
same decision (i.e., denial) as the first. The resources of the forum 
allocated to the additional expungement request could instead be used 
for other claims or requests that were not previously adjudicated or 
for other purposes.\255\
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    \255\ The resources relate to the specific costs to administer 
the claim, as well as the overall attendant costs to administer the 
forum.
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    Second, the proposed rule change may increase the efficiency of the 
forum by requiring that a party provide certain information when filing 
an expungement request. The information includes identification of the 
customer dispute information that is the subject of the request, and 
whether expungement of the same customer dispute information was 
previously requested and, if so, how it was decided. This would 
increase the efficiency of the forum by enabling FINRA to identify and 
track a request through the expungement process, and by alerting 
arbitrators and FINRA to another expungement request of the same 
customer dispute information. The efficiency of the forum would also 
increase by requiring an unnamed person to consent to an on-behalf-of 
expungement request in writing. This would help ensure that an unnamed 
person is aware of the request and prevent another expungement request 
by the unnamed person of the same customer dispute information.
    In addition, the proposed rule change may affect the value of the 
customer dispute information to describe the conduct of associated 
persons. The change in the value of the information depends on the 
merit of the disclosures that would have otherwise been expunged. The 
merit of these disclosures also depends on many factors which are 
difficult to predict. These factors include the incentive of parties to 
file an expungement request under the proposed rule change, the 
decisions by the panel to issue an award containing expungement relief 
dependent on the information that becomes available, and the merit of 
the customer dispute information that would have otherwise been sought 
to be expunged. The effect of the proposed rule change on the extent to 
which the customer dispute information available in the CRD system 
accurately describes the conduct of associated persons is, therefore, 
uncertain.
4. Alternatives Considered
    Alternatives to the proposed rule change include amendments that 
were proposed in Regulatory Notice 17-42 and the 2020 Rule Filing.\256\ 
For example, an alternative to the proposed rule change, which was 
proposed in the 2020 Rule Filing, could be to limit when a party can 
file an expungement request during a non-simplified customer 
arbitration to 30 days before the first scheduled hearing session. 
Thirty days may reduce the likelihood that an associated person files 
an expungement request based on more limited information about whether 
the request would be successful. Thirty days, however, may not provide 
associated persons adequate time to address any filing deficiencies 
before the request is served on the other parties. In addition, 
customers would have less time to consider the request before the first 
scheduled hearing session.
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    \256\ See supra notes 9 and 11.
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    Another alternative to the proposed rule change could be to include 
different time limits for an associated person to file a straight-in 
request. In the Notice, FINRA proposed a one-year time limit for 
associated persons to file a straight-in request after the close of a 
customer arbitration or, if no arbitration or civil litigation, after 
the initial reporting of the customer complaint to the CRD system.\257\ 
In the 2020 Rule Filing, FINRA proposed a two-year time limit for 
associated persons to file a straight-in request after the close of a 
customer case, or, if no arbitration or civil litigation, a six-year 
time limit for associated persons to file a straight-in request after 
the initial reporting of the customer complaint.\258\
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    \257\ See supra note 9.
    \258\ See supra note 11.
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    In general, shorter (longer) time limits may further facilitate 
(impede) customer attendance and participation in the proceedings and 
the likelihood that the panel from the Special Arbitrator Roster 
receives evidence and testimony from the customer to consider when 
deciding an expungement request. Shorter (longer) time limits, however, 
may further (less) constrain an associated person from filing a 
straight-in request or including more than one expungement request in 
the same straight-in request.
    For example, the percentage of associated persons who would not 
have been able to include all customer dispute information disclosures 
in the same straight-in request would be lower if the proposed rule 
change imposed a six-year rather than three-year time limit on 
requesting expungement of customer complaints.\259\ As discussed above, 
FINRA believes that the proposed time limits would facilitate customer 
attendance and participation while providing associated persons 
sufficient opportunity to file a straight-in request.
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    \259\ Under these alternative time limits, associated persons 
would not have been able to include all expungement requests in at 
least 426 of the 1,384 arbitrations (31 percent). This estimate is 
13 percent less than the similar calculation but with the time 
limits proposed herein (44 percent). See supra Item II.B.3.D., 
``Time Limits for Filing Straight-in Requests--Quantitative 
Description.'' As mentioned above, these estimates do not account 
for the potential change in the behavior of associated persons as a 
result of the proposed rule change. The estimates also do not 
account for the number of straight-in requests of customer dispute 
information arising from a previous customer arbitration which, 
under the proposed rule change, may have been decided as part of the 
customer arbitration.
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    Other alternatives relate to the panel's decision to issue an award 
containing expungement relief. In the 2020 Rule Filing, FINRA proposed 
allowing a majority decision by a three-person panel, not a unanimous 
decision (as proposed herein), to issue an award containing expungement 
relief.\260\ A majority decision would be consistent with what is 
required for other three-person panel decisions in customer and 
industry arbitrations. FINRA determined, however, that a unanimous 
decision by a three-person panel would better help protect the 
integrity of the information in the CRD system.
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    \260\ See supra note 11.
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    In the Notice, FINRA proposed that a panel find that the customer 
dispute information has ``no investor protection or regulatory value'' 
in order to issue an award containing expungement relief.\261\ This 
alternative may increase the difficulty for an associated person to 
receive an expungement award, and may cause associated persons not to 
seek expungement where expungement is likely (or unlikely) to be 
awarded. In addition, some commenters to the Notice raised concerns 
that the standard

[[Page 50198]]

may, if codified, create confusion among arbitrators and the potential 
for inconsistent application among different arbitrators and panels. 
After considering the concerns, FINRA determined not to propose that 
the panel must find ``no investor protection or regulatory value'' to 
issue an award containing expungement relief.
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    \261\ See supra note 9. In its Order approving NASD Rule 2130 
(now FINRA Rule 2080), which describes the current findings that 
arbitrators must make to issue an award containing expungement 
relief, the SEC stated that ``it believes the proposal strikes the 
appropriate balance between permitting members and associated 
persons to remove information from the CRD system that holds no 
regulatory value, while at the same time preserving information on 
the CRD system that is valuable to investors and regulators.'' See 
Securities Exchange Act Release No. 48933 (December 16, 2003) 68 FR 
74667, 74672 (December 24, 2003) (Order Approving File No. SR-NASD-
2002-168).
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    Finally, other alternatives relate to the appearance of parties at 
expungement hearings. The proposed rule change could have allowed an 
associated person to appear at an expungement hearing by telephone, as 
an alternative to appearance in person or by video conference. Although 
associated persons may incur fewer costs to appear by telephone, FINRA 
believes appearance by telephone may reduce the ability of arbitrators 
to assess the credibility of associated persons when deciding an 
expungement request.
    The proposed rule change could have provided a mechanism for an 
authorized representative of state securities regulators to attend and 
participate in expungement hearings when expungement is requested 
during a customer arbitration (simplified or non-simplified). FINRA 
determined not to propose allowing an authorized representative to 
attend or participate in a customer arbitration in which expungement is 
requested because such attendance and participation could delay or 
disrupt the customer's case and would be less impactful. Unlike many 
straight-in requests, customer cases are opposed and the panel would 
have the benefit of hearing the customer's evidence on the merits.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In December 2017, FINRA published Regulatory Notice 17-42, 
requesting comment on proposed amendments to the current expungement 
process.\262\ FINRA received 70 comments in response to the Notice. 
FINRA responded to these comments in the 2020 Rule Filing, which it 
filed with the Commission on September 22, 2020.\263\
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    \262\ See supra note 9.
    \263\ See Securities Exchange Act Release No. 90000 (September 
25, 2020), 85 FR 62142 (October 1, 2020) (Notice of Filing of File 
No. SR-FINRA-2020-030).
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    The 2020 Rule Filing proposed several significant enhancements to 
the current expungement process, including:
     establishing time limits within which associated persons 
may file straight-in requests;
     providing state securities regulators with notification of 
expungement requests at the time of filing of the requests;
     requiring that all straight-in requests be decided by a 
three-person panel, randomly selected from a roster of experienced 
public arbitrators with enhanced expungement training;
     prohibiting parties to straight-in requests from (1) 
agreeing to fewer than three arbitrators to review their expungement 
requests, (2) striking any of the selected arbitrators, (3) stipulating 
to an arbitrator's removal or (4) stipulating to the use of pre-
selected arbitrators;
     requiring an associated person named in a customer 
arbitration to request expungement during the customer arbitration;
     preventing an associated person from getting ``two bites 
at the apple'' by conditioning and limiting the ability of a party to a 
customer arbitration to file an on-behalf-of request and precluding an 
associated person from requesting expungement of customer dispute 
information if a panel or a court previously denied a request to 
expunge the same customer dispute information;
     prohibiting an associated person who withdraws an 
expungement request from refiling the same request at a later date;
     facilitating customer attendance and participation in 
straight-in requests by notifying customers of the time, date and place 
of any prehearing conferences and the expungement hearing, and making 
clear that customers are entitled to appear with representation at 
prehearing conferences and the expungement hearing;
     providing customers who seek to attend and participate in 
straight-in requests with access to all relevant documents filed in the 
arbitration;
     specifically authorizing the panel to request any 
documentary, testimonial or other evidence that it deems relevant from 
the broker-dealer firm or associated person seeking expungement;
     requiring that the associated person requesting 
expungement appear personally at the expungement hearing; and
     requiring that the panel deciding the expungement request 
provide enough detail in the award to explain its rationale for 
including expungement relief in the award.
    The Commission ultimately received 19 comments from 13 commenters 
in connection with the 2020 Rule Filing. The SEC received eight comment 
letters in response to the initial 2020 Rule Filing.\264\ On December 
18, 2020, FINRA responded to the comments and filed Partial Amendment 
No. 1.\265\ On December 28, 2020, the SEC published a notice and order 
in the Federal Register to solicit comments on the 2020 Rule Filing and 
to institute proceedings to determine whether to approve or disapprove 
the proposed rule change as modified by Partial Amendment No. 1.\266\ 
The SEC received nine comment letters in response to the Order.\267\ On 
April 9, 2021 FINRA filed

[[Page 50199]]

its response to the comments on the Order and Partial Amendment No. 
2.\268\ On May 18, 2021, FINRA filed a third response to comments.\269\
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    \264\ Letter from Steven B. Caruso, Maddox Hargett & Caruso, 
P.C., to Vanessa Countryman, Secretary, SEC, dated September 28, 
2020; letter from Benjamin P. Edwards, Associate Professor of Law, 
University of Nevada, Las Vegas, William S. Boyd School of Law, to 
J. Matthew DeLesDernier, Assistant Secretary, SEC, dated October 12, 
2020 (``Edwards 1''); letter from Dochtor D. Kennedy, President & 
Founder, AdvisorLaw, LLC, to J. Matthew DeLesDernier, Assistant 
Secretary, SEC, dated October 22, 2020 (``AdvisorLaw''); letter from 
Lisa Hopkins, President, NASAA, to Vanessa Countryman, Secretary, 
SEC, dated October 22, 2020 (``NASAA 1''); letter from Amanda 
Skrelja, Paige Guarino, William Lapadula, and Zachary Dukoff, Legal 
Interns & Elissa Germaine, Supervising Attorney, John Jay Legal 
Services, Inc., Elizabeth Haub School of Law, PACE University, to J. 
Matthew DeLesDernier, Assistant Secretary, SEC, dated October 22, 
2020; letter from Kevin M. Carroll, Managing Director and Associate 
General Counsel, SIFMA, to Vanessa A. Countryman, Secretary, SEC, 
dated October 22, 2020; letter from Ruben Huertero, Legal Intern & 
Christine Lazaro, Director of the Securities Arbitration Clinic and 
Professor of Clinical Legal Education, St. John's University School 
of Law, to Vanessa Countryman, Secretary, SEC, dated October 22, 
2020; and letter from David P. Meyer, President, Public Investors 
Advocate Bar Association, to Brent J. Fields, Secretary, SEC, dated 
October 23, 2020 (``PIABA 1''). The comment letters are available at 
https://www.sec.gov/comments/sr-finra-2020-030/srfinra2020030.htm.
    \265\ Letter from Mignon McLemore, Assistant General Counsel, 
FINRA to Vanessa Countryman, Secretary, SEC, dated December 18, 
2020, https://www.sec.gov/comments/sr-finra-2020-030/srfinra2020030-8163215-226938.pdf.
    \266\ See Securities Exchange Act Release No. 90734 (December 
18, 2020), 85 FR 84396 (December 28, 2020) (Order Instituting 
Proceedings to Determine Whether to Approve or Disapprove File No. 
SR-FINRA-2020-030) (``Order'').
    \267\ Letter from Julius Z. Frager, to SEC, dated January 7, 
2021; letter from Professor Lisa Miller, CEO, Lex Law Corporation, 
to Vanessa Countryman, Secretary, SEC, dated January 7, 2021; letter 
from Lisa Hopkins, President, NASAA, to Vanessa Countryman, 
Secretary, SEC, dated January 18, 2021 (``NASAA 2''); letter from 
Benjamin P. Edwards, Associate Professor of Law, University of 
Nevada, Las Vegas, William S. Boyd School of Law, to J. Matthew 
DeLesDernier, Assistant Secretary, SEC, dated January 19, 2021; 
letter from Jason R. Doss, President & Celiza Brangan[ccedil]a, 
Vice-President, the PIABA Foundation, Inc., to J. Matthew 
DeLesDernier, Assistant Secretary, SEC, dated January 19, 2021 
(``PIABA Foundation'') (PIABA Foundation is a separate entity from 
PIABA); letter from Kevin M. Carroll, Managing Director and 
Associate General Counsel, SIFMA, to Vanessa A. Countryman, 
Secretary, SEC, dated January 19, 2021; letter from Lisa Hopkins, 
President, NASAA, to Vanessa Countryman, Secretary, SEC, dated 
January 28, 2021; letter from Barbara Roper, Director of Investor 
Protection, Consumer Federation of America, to Vanessa A. 
Countryman, Secretary, SEC, dated February 1, 2021; and letter from 
David P. Meyer, President, PIABA, to J. Matthew DeLesDernier, 
Assistant Secretary, SEC, dated February 2, 2021 (``PIABA 2). The 
comment letters are available at https://www.sec.gov/comments/sr-finra-2020-030/srfinra2020030.htm.
    \268\ Letter from Mignon McLemore, Associate General Counsel, 
FINRA to Vanessa Countryman, Secretary, SEC, dated April 9, 2021, 
https://www.sec.gov/comments/sr-finra-2020-030/srfinra2020030-8658196-235191.pdf.
    \269\ Letter from Mignon McLemore, Associate General Counsel, 
FINRA to Vanessa Countryman, Secretary, SEC, dated May 18, 2021 
(``Response''), https://www.sec.gov/comments/sr-finra-2020-030/srfinra2020030-8811356-238001.pdf. Following the Response and prior 
to the deadline for Commission action on the 2020 Rule Filing, the 
SEC received one additional comment letter. See letter from David P. 
Meyer, President, PIABA, Jason R. Doss, President, PIABA Foundation 
& Lisa Brangan[ccedil]a, Vice-President, PIABA Foundation, to J. 
Matthew DeLesDernier, Assistant Secretary, SEC, dated May 19, 2021 
(``PIABA 3'').
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    In general, the commenters on the 2020 Rule Filing suggested that 
the proposed changes to the expungement process would be beneficial. 
However, most of the commenters recommended alternative approaches or 
modifications to further protect the information in the CRD system and 
address the fact that many straight-in requests are unopposed. The 
commenters' recommendations generally focused on replacing the current 
expungement process with an administrative process; allowing state 
securities regulators to participate in expungement hearings in the DRS 
arbitration forum; embedding an independent advocate into the 
expungement process in the DRS arbitration forum; requiring that 
associated persons meet a higher standard to obtain an expungement 
award; requiring a unanimous decision of the arbitrators to award 
expungement; providing financial incentives to encourage customer 
participation in expungement proceedings; shortening the time limits 
within which associated persons may request expungement; and requiring 
that the associated person appear at the expungement hearing in person. 
Some commenters, in contrast, suggested that the proposed time limits 
were arbitrarily short; that the arbitrators should be required to 
provide an explanation when denying expungement; or that the 
arbitrators should not be limited to awarding expungement on the 
grounds set forth in FINRA Rule 2080(b)(1).
    On May 28, 2021, following discussions with SEC staff, FINRA 
withdrew the 2020 Rule Filing and Partial Amendments Nos. 1 and 2 in 
order to consider whether modifications to the proposal would be 
appropriate in response to concerns raised by the commenters and SEC 
staff.\270\
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    \270\ Withdrawal of Proposed Rule Change (May 28, 2021), https://www.finra.org/sites/default/files/2021-05/SR-FINRA-2020-030-Withdrawal.pdf. Following FINRA's withdrawal of the 2020 Rule 
Filing, the SEC received two additional comment letters. See letter 
from Kevin M. Carroll, Managing Director and Associate General 
Counsel, SIFMA, to Vanessa A. Countryman, Secretary, SEC, dated May 
6, 2022 and letter from Anonymous, to J. Matthew DeLesDernier, 
Assistant Secretary, SEC, dated July 19, 2021.
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    While the proposed rule change retains many of the significant 
enhancements proposed in the 2020 Rule Filing, the proposed rule change 
makes several key additional changes that would materially mitigate a 
number of the concerns with the current expungement process identified 
above and by commenters on the 2020 Rule Filing. These additional 
enhancements include: (1) providing a mechanism for state securities 
regulators to attend and participate in expungement hearings in 
straight-in requests; \271\ (2) requiring that arbitrators unanimously 
agree to issue an award containing expungement relief based on one or 
more grounds specified in the rule; \272\ (3) shortening the time 
period for requesting expungement of a customer complaint from six 
years to three years after the date a customer complaint is initially 
reported in the CRD system; \273\ and (4) requiring an associated 
person who is seeking expungement to appear at the expungement hearing 
in person or by video conference to further enhance the ability of the 
arbitrator or panel to assess the credibility of the associated 
person.\274\ Each of the proposed changes is discussed in detail above 
under Item II.A.1.II.
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    \271\ In the 2020 Rule Filing, FINRA did not provide a mechanism 
for state securities regulators to attend and participate in 
expungement hearings. NASAA 1 stated that the 2020 Rule Filing 
``fail[ed] to provide a pathway to contest the expungement relief 
during the arbitration should a state determine it is appropriate to 
do so.'' NASAA 2 also stated that notification would ``allow NASAA 
members additional time to evaluate the request and determine the 
appropriate regulatory response, including but not limited to 
investigations, enforcement actions, or intervention in subsequent 
court proceedings seeking to confirm an award.'' In addition, PIABA 
2 and the PIABA Foundation stated that the 2020 Rule Filing ``should 
provide state securities regulators with notice of the expungement 
request at the time that the petition for expungement is filed and 
give them a meaningful opportunity to participate in the arbitration 
proceeding--either by permitting them to intervene in the 
arbitrations directly or permitting them to participate indirectly 
through'' an independent advocate. See also PIABA 3 (stating that 
``state securities regulators and customers [should] have a 
meaningful opportunity to participate in these expungement 
proceedings directly or through an advocate so that, when 
appropriate, evidence opposing expungement can be presented to 
arbitrators.'').
    \272\ Consistent with arbitration cases generally, the 2020 Rule 
Filing would have required a majority decision of the arbitrators to 
award expungement. See FINRA Rules 12904(a) and 13904(a). PIABA 1 
and NASAA 1 suggested that a majority decision was inconsistent with 
expungement being an extraordinary remedy, that it undercut the goal 
of helping to preserve valuable information in the CRD system, and 
that a divided panel decision would indicate that there is doubt 
that the associated person has met this high burden. Similarly, 
Edwards 1 stated that allowing majority decisions ``insufficiently 
protects the public's vital interest in information'' and ``fails to 
communicate that expungement should only be recommended in truly 
extraordinary cases.''
    \273\ In the 2020 Rule Filing, FINRA proposed time limits to 
request expungement in straight-in requests: (1) within two years of 
the close of a customer arbitration or civil litigation that gave 
rise to the customer dispute information and (2) within six years of 
the date a customer complaint was initially reported in the CRD 
system. PIABA 1 and NASAA 1 supported a shorter one-year time limit 
for all expungement requests. PIABA 1 stated that the longer time 
provided in the 2020 Rule Filing would ``degrade the quality of 
evidence for a panel to consider in making an expungement 
determination and decrease the likelihood that the customer will 
participate in the hearing.'' PIABA 1 also stated that firms do not 
``need six years to complete investigations of customer complaints 
and close them in the CRD system (emphasis in original).'' Contra 
AdvisorLaw (stating that the proposed limitations in the 2020 Rule 
Filing were ``arbitrary'' and that ``the accuracy of the information 
contained within the CRD system has no relationship to the age of 
that information'').
    \274\ The 2020 Rule Filing would have allowed the arbitrators to 
determine whether the associated person would appear at the 
expungement hearing by telephone, in person or by video conference. 
NASAA 1 commented that the associated person should appear in person 
and that they should not be able to appear ``by telephone or, as a 
matter of course, videoconference.''
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 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 or disapprove 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:

[[Page 50200]]

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2022-024 on the subject line.

Paper Comments

     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-FINRA-2022-024. This 
file number should be included on the subject line if email 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 website (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 website viewing and printing 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 such filing also will be available for inspection and 
copying at the principal office of FINRA. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2022-024 and should be submitted on or before September 6, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\275\
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    \275\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-17430 Filed 8-12-22; 8:45 am]
BILLING CODE 8011-01-P

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