Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendments Nos. 1 and 2, To Amend the Codes of Arbitration Procedure To Modify the Current Process Relating to the Expungement of Customer Dispute Information, 24282-24320 [2023-08147]
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Federal Register / Vol. 88, No. 75 / Wednesday, April 19, 2023 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97294; File No. SR–FINRA–
2022–024]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendments Nos. 1 and 2, To Amend
the Codes of Arbitration Procedure To
Modify the Current Process Relating to
the Expungement of Customer Dispute
Information
April 12, 2023.
I. Introduction
On July 29, 2022, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend the FINRA Rule 12000 Series
(Code of Arbitration Procedure for
Customer Disputes) (‘‘Customer Code’’)
and the FINRA Rule 13000 Series (Code
of Arbitration Procedure for Industry
Disputes) (‘‘Industry Code’’) (together,
‘‘Codes’’) to modify the current process
relating to the expungement of customer
dispute information.3
The proposed rule change, as
modified by Amendments Nos. 1 and 2,
(hereinafter referred to as the ‘‘proposed
rule change’’ unless otherwise specified)
would amend the Codes to: (1) set forth
requirements on expungement requests
(a) filed during an investment-related,
customer initiated arbitration
(‘‘customer arbitration’’) by an
associated person, or by a party to the
customer arbitration on behalf of an
associated person (an ‘‘on-behalf-of
request’’), or (b) filed by an associated
person separate from a customer
arbitration (‘‘straight-in request’’); (2)
establish a roster of experienced public
arbitrators from which a three-person
panel 4 would be randomly selected to
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The proposed rule change was published for
comment in the Federal Register on August 15,
2022. See Exchange Act Release No. 95455 (Aug. 9,
2022), 87 FR 50170 (Aug. 15, 2022) (File No. SR–
FINRA–2022–024) (‘‘Notice’’).
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).
Under the Codes, a customer’s or claimant’s damage
request determines whether a single arbitrator or a
three-person panel will consider and decide an
arbitration case, though in some cases the parties
may agree to a different number. See FINRA Rules
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decide straight-in requests (the ‘‘Special
Arbitrator Roster’’); 5 (3) establish
procedural requirements for
expungement hearings; and (4) codify
and update FINRA’s Notice to
Arbitrators and Parties on Expanded
Expungement Guidance (‘‘Guidance’’)
that arbitrators and parties would be
required to follow.6 In addition, the
proposed rule change would amend the
Customer Code to specify procedures for
requesting expungement of customer
dispute information arising from
simplified arbitrations.7 The proposed
rule change would also amend the
Codes to establish requirements for
notifying state securities regulators and
customers of expungement requests and
allow participation of state securities
regulators in straight-in requests.8
The proposed rule change was
published for comment in the Federal
Register on August 15, 2022.9 On
September 27, 2022, FINRA consented
to an extension of the time period in
which the Commission must approve
the proposed rule change, disapprove
the proposed rule change, or institute
proceedings to determine whether to
approve or disapprove the proposed
rule change to November 11, 2022.10 On
November 10, 2022, FINRA responded
to the comment letters received in
response to the Notice and filed an
amendment to the proposed rule change
(‘‘Amendment No. 1’’).11 On November
10, 2022, the Commission published a
12401 and 13401; see also Notice at 50171 n.10.
Unless otherwise specified in the Order, the term
‘‘panel’’ will mean either a panel or single
arbitrator.
5 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).
6 See Guidance, available at https://
www.finra.org/arbitration-and-mediation/noticearbitrators-and-parties-expanded-expungementguidance.
7 See Notice at 50170.
8 See id. at 50171.
9 See Notice supra note 3.
10 See letter from Mignon McLemore, Associate
General Counsel, Office of General Counsel, FINRA,
to Lourdes Gonzalez, Assistant Chief Counsel,
Division of Trading and Markets, Commission,
dated September 27, 2022, available at https://
www.finra.org/sites/default/files/2022-09/sr-finra2022-024-extension1.pdf.
11 See letter from Mignon McLemore, Associate
General Counsel, Office of General Counsel, FINRA,
to Vanessa Countryman, Secretary, Commission,
dated November 10, 2022 (‘‘FINRA November 10
Letter’’). The FINRA November 10 Letter is
available at the Commission’s website at https://
www.sec.gov/comments/sr-finra-2022-024/
srfinra2022024-20150592-319706.pdf. Comment
letters received on the proposed rule change are
available at https://www.sec.gov/comments/sr-finra2022-024/srfinra2022024.htm.
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notice of filing of Amendment No. 1 and
an order instituting proceedings to
determine whether to approve or
disapprove the proposed rule change, as
modified by Amendment No. 1.12 On
December 8, 2022, FINRA consented to
an extension of the time period in
which the Commission must approve or
disapprove the proposed rule change to
April 12, 2023.13 On April 3, 2023
FINRA responded to the comment
letters received in response to the Order
Instituting Proceedings and filed a
second amendment to the proposed rule
change (‘‘Amendment No. 2’’).14 The
Commission is publishing this notice to
solicit comments on Amendment No. 2
from interested persons and is
approving the proposed rule change, as
modified by Amendments Nos. 1 and 2,
on an accelerated basis.
II. Description of the Proposed Rule
Change
Background
Information regarding customer
disputes involving associated persons is
maintained in the Central Registration
Depository (‘‘CRD’’). In general, the
information in the CRD system is
reported by registered broker-dealer
firms (‘‘firms’’ or ‘‘member firms’’), 15
associated persons, and regulatory
authorities in response to questions on
the uniform registration forms.16 These
12 See Exchange Act Release No. 96298 (Nov. 10,
2022), 87 FR 68779 (Nov. 16, 2022) (File No. SR–
FINRA–2022–024) (‘‘Order Instituting
Proceedings’’).
13 See letter from Mignon McLemore, Associate
General Counsel, Office of General Counsel, FINRA,
to Lourdes Gonzalez, Assistant Chief Counsel,
Division of Trading and Markets, Commission,
dated December 8, 2022, available at https://
www.finra.org/sites/default/files/2022-12/sr-finra2022-024-extension2.pdf.
14 See letter from Mignon McLemore, Associate
General Counsel, Office of General Counsel, FINRA,
to Vanessa Countryman, Secretary, Commission,
dated April 3, 2023, (‘‘FINRA April 3 Letter’’)
available at https://www.sec.gov/comments/sr-finra2022-024/srfinra2022024-20163319-333785.pdf.
Amendment No. 2 is available at https://
www.finra.org/sites/default/files/2023-04/sr-finra2022-024-partial-amendment-2.pdf.
15 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 Exchange Act
Release No. 88254 (Feb. 20, 2020), 85 FR 11157
(Feb. 26, 2020) (Order Approving File No. SR–
FINRA–2019–027).
16 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). See Notice at 50172 n.20.
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forms are used to collect registration
information, which includes, among
other things, administrative, regulatory,
and criminal history, and financial and
other information about associated
persons, such as investment-related,
customer-initiated arbitrations, civil
litigations, or customer complaints (i.e.,
‘‘customer dispute information’’).17
Among other things, FINRA makes
specific information in the CRD system
publicly available through BrokerCheck,
including customer dispute information
for associated persons who are currently
or were formerly registered with
FINRA.18
FINRA rules allow broker-dealers and
their associated persons to seek
expungement of certain customer
dispute information from the CRD
system and BrokerCheck.19 In general,
an associated person seeks
expungement of customer dispute
information through the FINRA
arbitration process.20 The Customer
Code, which comprises the series of
rules governing customer arbitrations,
governs expungement requests filed by
firms or associated persons during
customer arbitrations.21 In contrast, the
Industry Code comprises the series of
rules governing arbitrations for disputes
between or among industry parties, such
as between a broker-dealer and an
associated person, including straight-in
requests.22 As a result, whether an
expungement request is governed by the
Customer Code or Industry Code will
generally depend on whether the
request is filed during a customer
arbitration or is a straight-in request
filed separately from a customer
arbitration.23
17 See
Notice at 50172.
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. See
‘‘About BrokerCheck,’’ available at https://
www.finra.org/investors/about-brokercheck. Broker
records are available in BrokerCheck for ten years
after an associated person leaves the industry, and
associated persons who are the subject of
disciplinary actions and certain other events remain
on BrokerCheck permanently. See Notice at 50172
at n.24.
19 See Notice at 50172–73.
20 See id. at 50190. An associated person may also
seek expungement by going directly to court
without first going to arbitration. According to
FINRA, from January 2016 through December 2021,
associated persons sought expungement of 194
customer dispute information disclosures in directto-court expungement cases, or less than 2 percent
of the customer dispute information disclosures
that were sought to be expunged in FINRA’s
Dispute Resolution Forum (‘‘DRS arbitration
forum’’). See id. at 50191.
21 See id. at 50175–78; see also FINRA Rule 12000
series.
22 See Notice at 50178–80; see also FINRA Rule
13000 series.
23 See infra notes 69–70 and accompanying text.
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Both the Customer Code and the
Industry Code require arbitrators to hold
a recorded hearing regarding, and
review materials related to, the
appropriateness of expungement of
customer dispute information.24
According to FINRA, its rules and
guidance provide that arbitrators may
recommend expungement for only three
reasons: (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.25 In addition,
arbitrators are required to indicate
which reason is the basis for a
recommendation (i.e., ‘‘factual
impossibility, mistake, or falsity’’) 26
and to provide a brief written
explanation of the reasons for
recommending expungement.27
Regardless of whether expungement
of customer dispute information is
sought directly through a court or in
arbitration, FINRA Rule 2080 requires a
broker-dealer firm or associated person
seeking expungement to obtain an order
of a court of competent jurisdiction
directing such expungement or
confirming an award containing
expungement.28 FINRA will expunge
customer dispute information only
pursuant to a court order.29 If a court
directs expungement or confirms an
arbitration award containing
expungement, the customer dispute
24 See FINRA Rules 12805 and 13805; see also
Notice at 50173.
25 See Notice at 50173.
26 See FINRA Rules 2080, 12805, and 13805.
These requirements are supplemented by the
Guidance, providing arbitrators with ‘‘best
practices’’ and recommendations to follow when
deciding expungement requests. See Notice at
50173 n.35 and accompanying text.
27 See FINRA Rules 12805(c) and 13805(c).
28 See Notice at 50172; see also FINRA Rule 2080.
29 See Notice at 50172. FINRA Rule 2080 also
requires firms and associated persons seeking a
court order or confirmation of the arbitration award
containing expungement to name FINRA as a party
and serve FINRA with all appropriate documents.
FINRA may, however, waive the requirement to be
named as a party if it determines that the award
containing expungement is based on affirmative
judicial or arbitral findings 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. In addition, FINRA has sole
discretion ‘‘under extraordinary circumstances’’ to
waive the requirement that it be named in a court
proceeding if it determines that the request for
expungement and accompanying award are
meritorious and expungement would not have a
material adverse effect on investor protection, the
integrity of the information in the CRD system, or
regulatory requirements. See FINRA Rule 2080(b).
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24283
information is removed from the CRD
system, and is no longer made public
through BrokerCheck.30
Proposed Rule Change
A. Requests for Expungement Under the
Customer Code
FINRA Rule 12805 requires that
arbitrators meet certain conditions in
order to issue an award containing
expungement of customer dispute
information under the Customer Code.31
The rule generally does not, however,
address when and how a request for
expungement can be made by an
associated person or as an on-behalf-of
request during a customer arbitration,
including the types of expungement
requests that can and cannot be made
during a customer arbitration, or when
arbitrators must make expungement
determinations during the customer
arbitration.
The proposed rule change would
amend FINRA Rule 12805 to set forth
requirements addressing the method
and timing for, and required contents of,
expungement requests filed during a
customer arbitration by an associated
person or as an on-behalf-of request,
including the types of expungement
requests that must (or cannot) be
made.32 Among other restrictions,
proposed Rule 12805 would require that
an expungement request made during a
customer arbitration involve the same
customer dispute information that is
associated with the customer’s
statement of claim.33 It would further
require an associated person who is a
named respondent in a customer
arbitration to seek expungement of
customer dispute information associated
with the arbitration claim during the
arbitration proceedings or forfeit the
ability to seek to expunge the customer
dispute information associated with the
customer’s statement of claim in any
30 See
Notice at 50173–74.
Rule 12805 provides that a panel must
comply with the following requirements in order to
grant expungement: (1) hold a recorded hearing
session (by telephone or in person) regarding the
appropriateness of expungement; (2) 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; (3) 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 (4) 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.
32 See Notice at 50174–77 (methods), 50180–81
(limitations), 50181–82 (timing).
33 See id. at 50174–77.
31 FINRA
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subsequent proceeding.34 In addition,
the proposed rule would authorize the
Director of FINRA Dispute Resolution
Services (‘‘Director’’) to deny the forum
to expungement requests that do not
meet, among other things, the proposed
method, timing, or content
requirements.35 In addition, the
proposed rule change would also
provide guidance on when a panel can
rule on an expungement request made
in the course of a customer arbitration.36
Further, the proposed rule change
would prohibit an associated person
from: (1) intervening in an ongoing
customer arbitration to request
expungement 37 or (2) filing an
expungement request as a new claim
against a customer separate from a
customer arbitration.38
1. Expungement Requests During a
Customer Arbitration
a. Expungement Requests by a
Respondent Named in a Customer
Arbitration
Currently, an associated person who
is named as a respondent in a customer
arbitration (‘‘named associated person’’)
is not required to seek expungement of
customer dispute information associated
with the arbitration claim during the
arbitration proceedings. Rather, the
associated person can either request
expungement at any time during the
customer arbitration or separately from
the customer arbitration in a straight-in
request.39 If a named associated person
34 See
proposed Rule 12805(a)(1)(A).
Notice at 50182; see also proposed Rules
12203 and 13203.
36 See Notice at 50177–78.
37 See id. at 50178; see also proposed Rules
12805(a)(2)(E)(iii) and 12800(d)(2)(D).
38 See Notice at 50178; see also proposed Rule
12805(a)(3). As elaborated below, where an
associated person is neither named in a customer
arbitration nor the subject of an on-behalf-of
request, the associated person would be required to
file a request to expunge customer dispute
information as a straight-in request under proposed
Rule 13805 against the member firm with whom
they were associated at the time the subject of the
request arose. Similarly, requests to expunge
customer dispute information that is not associated
with a customer arbitration—and that as a result are
ineligible for expungement under proposed Rule
12805—would need to be filed as straight-in
requests under proposed Rule 13805 against
member firms under the proposed rule change. See
proposed Rule 12805(a)(2)(E)(iii)b.; see also Section
II.A.2. ‘‘No Intervening in Customer Arbitrations to
Request Expungement.’’
39 See Notice at 50175. There are currently 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).
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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 decide the
expungement request and include the
decision as part of the customer’s
award.40 If the customer arbitration does
not close by award after a hearing (e.g.,
the case settles), and the associated
person continues to pursue the
expungement request, the panel from
the customer arbitration will hold an
expungement-only hearing to decide the
expungement request.41
The proposed rule change would
amend FINRA Rule 12805 to modify
existing requirements and set forth new
requirements for when and how a
named associated person would file an
expungement request during a customer
arbitration.42 Under proposed Rule
12805(a)(1)(A), if a named associated
person wants to seek expungement of
customer dispute information associated
with the customer’s statement of claim,
the named associated person would be
required to make the expungement
request during the customer
arbitration.43 As discussed below, these
requests would be subject to limitations
on how and when the requests may be
made.44 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 that
customer dispute information in any
subsequent proceeding.45
Proposed Rule 12203(b) would
authorize the Director to deny the DRS
See FINRA Rule 12100(x). In general, parties must
file initial statements of claim and all pleadings and
other documents with the Director. See FINRA Rule
12300(b). 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 Rule 13503(d)(5).
40 FINRA stated that if an arbitration closes by
award after a hearing, the panel from the customer
arbitration would be best situated to decide the
related issue of expungement. See Notice at 50175.
41 See id.
42 See proposed Rule 12805.
43 See proposed Rule 12805(a)(1)(A). FINRA
stated that ‘‘[r]equiring 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.’’
Notice at 50175.
44 See proposed Rule 12805(a)(1)(B); see also
Section II.C., ‘‘Limitations on Expungement
Requests.’’
45 See proposed Rule 12805(a)(1)(A).
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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. 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.46
i. Method and Timing of Requesting
Expungement in Customer Arbitration
The proposed rule change would limit
how and when expungement requests
may be made by a named associated
person during the customer arbitration.
Under the proposed rule change, if a
named associated person requests
expungement during the customer
arbitration, the request would be
required to be included in the answer to
the statement of claim or in a separate
pleading requesting expungement.47 If
the request is included in the answer, it
must be filed within 45 days of receipt
of the customer’s statement of claim in
accordance with existing requirements
under the Codes.48 If the named
associated person requests expungement
in a separate pleading, rather than the
answer, the request would be required
to be filed no later than 60 days before
the first scheduled hearing begins.49
FINRA believes these proposed
deadlines should provide adequate time
for: (1) the named associated person to
assess the customer’s case, the potential
merits of an expungement request, and
whether to file the request; and (2) the
parties to the customer arbitration to
prepare their expungement-related
arguments, since the expungement
issues will overlap with the issues
raised by the customer’s claim.50 To
request expungement after the filing
deadline, the named associated person
would be required to file a motion
requesting an extension, which would
be decided by the panel.51
46 See
proposed Rule 12203(c).
proposed Rule 12805(a)(1)(C)(i). FINRA
Rules 12100(x) and 13100(v) would be amended to
include a ‘‘separate document requesting
expungement’’ as a pleading under the Codes.
48 See FINRA Rule 12303(a).
49 See proposed Rule 12805(a)(1)(C)(i).
50 See Notice at 50176.
51 See id. 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.
47 See
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ii. Required Contents of an
Expungement Request in Customer
Arbitration
The proposed rule change would also
set forth content requirements for an
expungement request made by a named
associated person during a customer
arbitration. Under the proposed rule
change, a request for expungement by a
named associated person in a customer
arbitration would be required to include
the applicable filing fee under the
Customer Code.52 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.53
Moreover, the proposed rule change
would require the named associated
person requesting expungement to
explain whether expungement of the
same customer dispute information was
previously requested and, if so, how
that request was decided.54 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.55
b. Expungement Requests by a Party
Named in a Customer Arbitration on
Behalf of an Unnamed Person
According to FINRA, the Codes do not
specifically address on-behalf-of
52 See
proposed Rule 12805(a)(1)(C)(ii)a.
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. See Notice at 50176
n.58. For example, Form U4 (Uniform Application
for Broker-Dealer Registration) requires disclosure
of information concerning an associated person that
relates to the occurrence of an event reportable
under Item 14 of Form U4 (e.g., certain customer
complaints, arbitrations, and civil litigations) on the
appropriate Disclosure Reporting Page. FINRA
stated that these content 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.’’ See Notice at 50176; see also
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.’’ See supra
note 6.
54 See proposed Rule 12805(a)(1)(C)(ii)e.
55 See proposed Rules 12307(a)(8) through (11)
and 12805(a)(1)(C)(ii). FINRA stated that ‘‘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.’’ Notice at 50176.
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53 See
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requests.56 Currently, a party to a
customer arbitration may file an onbehalf-of request for expungement
during the customer arbitration. If the
party 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., the case settles), either
the requesting party or the unnamed
person could ask the panel to consider
and decide the expungement request
before it disbands. Under current
practice, in this circumstance the panel
from the customer arbitration will hold
a hearing regarding the appropriateness
of expungement pursuant to FINRA
Rule 12805.57
Proposed Rule 12805(a)(2) would
codify this practice to permit a party to
a customer arbitration to file an onbehalf-of request that seeks to expunge
customer dispute information associated
with the customer’s statement of claim
during the customer arbitration
(provided the request is eligible for
arbitration under proposed Rule
12805).58 As with expungement
requests made by a named associated
person, the proposed rule change would
set forth requirements governing how
and when an on-behalf-of request may
be made, and the contents of such
request.
i. Method and Timing of Requesting
Expungement on Behalf of an Unnamed
Person
To help ensure that an associated
person that is the subject of an onbehalf-of request is aware of the request,
the proposed rule change would require
the unnamed person to consent in
writing 59 to the on-behalf-of request by
signing the Form Requesting
Expungement on Behalf of an Unnamed
Person (‘‘Form’’).60 By signing the Form,
56 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).
57 See Notice at 50176.
58 See proposed Rule 12805(a)(2)(B). As with
expungement requests filed by a named associated
person in a customer arbitration, proposed Rule
12203(b) would authorize the Director 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. See Notice at 50175.
59 See proposed Rule 12805(a)(2)(A).
60 The unnamed person whose CRD record would
be expunged and the party requesting expungement
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the unnamed person would be: (1)
consenting to the on-behalf-of request; 61
(2) agreeing to be bound by the panel’s
decision on the request; 62 and (3)
acknowledging their understanding 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.63
The party making the request would
also be required to file the request
(including the Form) no later than 60
days before the first scheduled
hearing.64 Under the proposed rule
change, filing and serving the on-behalfof request would obligate the requesting
party to represent the unnamed person
and the unnamed person’s interests and
to pursue the request for expungement
on behalf of the unnamed person during
the customer arbitration.65
ii. Required Contents of an On-Behalf-Of
Request and Filing Fee
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.66 Thus, the party requesting
expungement on behalf of an unnamed
person 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
previously requested and, if so, how it
on the unnamed person’s behalf must both sign the
Form. See proposed Rule 12805(a)(2)(C)(ii).
61 See Notice at 50176.
62 See proposed Rule 12805(a)(2)(D)(i). Signing
the Form would also obligate the unnamed person
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).
63 See Notice at 50177.
64 See proposed Rule 12805(a)(2)(C)(iii).
65 See proposed Rule 12805(a)(2)(D)(iii). FINRA
stated that requiring the parties’ consent ‘‘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.’’ See Notice at 50176. This would help
prevent ‘‘associated persons 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.’’ See
Notice at 50177.
66 See proposed Rules 12805(a)(1)(C)(ii) and
12805(a)(2)(C)(i).
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was decided.67 In addition, 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.68
c. Deciding Expungement Requests
during Customer Arbitrations
The proposed rule change would
change when a panel is required to
decide an expungement request
(whether made by a named associated
person or on behalf of an unnamed one)
made during a customer arbitration.
Specifically, when the panel would be
required to decide an expungement
request would depend on whether or
not the customer arbitration closes: (1)
by award after a hearing or (2) other
than by award or by award without a
hearing.
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
pursue the issue of expungement during
the hearing, the panel may not decide
the request and may deem it
withdrawn.69 Under these
circumstances, the associated person
may request expungement again at a
later date.70
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, even if the
requesting party withdraws or fails to
pursue the request (in which case the
panel would deny the expungement
request with prejudice).71
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67 See
proposed Rules 12805(a)(1)(C)(ii) and
12805(a)(2)(C)(i).
68 See proposed Rule 12805(a)(2)(C)(ii).
69 See Notice at 50177; see also FINRA Rules
12702 and 13702.
70 See Notice at 50177.
71 See proposed Rules 12805(a)(1)(D)(i) and
12805(a)(2)(E)(i). FINRA stated that requiring a
panel to deny with prejudice such requests ‘‘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
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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., the case
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.72
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.73
The proposed rule change would
change this process. If 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
request.74 Instead, the associated person
could only seek expungement through a
straight-in-request under proposed Rule
13805 against the member firm at which
the person was associated at the time
the customer dispute arose, and a panel
from the Special Arbitrator Roster
would decide the request.75
2. No Intervening in Customer
Arbitrations To Request Expungement
The proposed rule change would
provide that if an associated person is
not a party to a customer arbitration
(i.e., they are an unnamed person), and
no party to the customer arbitration
requests expungement on their behalf,
the unnamed person would be
prohibited from intervening in the
customer arbitration to request
expungement.76 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 under the
Industry Code, and a panel from the
seeking to re-file the request and receiving a
potentially more favorable decision from a different
set of arbitrators.’’ Notice at 50177.
72 See FINRA Rule 12805; see also Notice at
50177.
73 See Notice at 50177.
74 See proposed Rules 12805(a)(1)(D)(ii)a. and
12805(a)(2)(E)(ii)a.
75 See proposed Rules 12805(a)(1)(D)(ii)b. and
12805(a)(2)(E)(ii)b. See also Section II.B., ‘‘Straightin Requests under the Industry Code and the
Special Arbitrator Roster.’’
76 See proposed Rules 12805(a)(2)(E)(iii) and
12800(d)(2)(D).
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Special Arbitrator Roster would decide
the request.77
3. No Straight-In Requests Against
Customers
Currently, although the practice is
relatively rare, associated persons
sometimes file expungement requests
against customers as new claims,
separate from a customer arbitration.78
FINRA stated that such requests may
unduly delay the resolution of a
customer’s claim and require a customer
to participate in the resolution of the
request.79 The proposed rule change
would prevent an associated person
from requiring a customer to participate
once the customer’s claims have been
resolved, by prohibiting the associated
person from filing a request for
expungement of the customer dispute
information as a new claim against a
customer separate from the investmentrelated, customer-initiated arbitration.80
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.81
B. Straight-In Requests Under the
Industry Code and the Special
Arbitrator Roster
As stated above, the Industry Code
comprises the series of rules governing
arbitrations for disputes between or
among industry parties, such as between
a member firm and an associated
person. 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 against the member
firm with whom the associated person
was associated at the time the subject of
the request arose under proposed Rule
13805.82 In addition, an associated
person could request expungement of
77 See
proposed Rule 12805(a)(2)(E)(iii)b.
Notice at 50178. From January 2016
through December 2021, FINRA identified 6,476
straight-in requests to expunge customer dispute
information, 116 of which were requests filed
against a customer. See id. at 50178 n.89.
79 See id. at 50178.
80 See proposed Rule 12805(a)(3). FINRA stated
that customers should not 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.
See Notice at 50178.
81 See Notice at 50178.
82 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 43 and accompanying text.
78 See
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customer dispute information that was
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 onbehalf-of request and the customer
arbitration closes other than by award or
by award without a hearing; 83 or (2) the
associated person is the subject of a
customer arbitration, but is neither
named in the arbitration nor is the
subject of an on-behalf-of request, and
the customer arbitration closes for any
reason.84 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.85
1. Filing a Straight-In Request Under the
Industry Code
a. Applicability
The process for initiating a straight-inrequest for expungement of customer
dispute information under the Industry
Code would be governed, in part, by
FINRA Rule 13302. This rule 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 through the DR
Party Portal (‘‘Portal’’).86 Under
proposed Rule 13805, an associated
person requesting expungement of
customer dispute information as a
straight-in request under the Industry
Code would be required to file a
statement of claim, in accordance with
the procedures contained in FINRA
Rule 13302, against the member firm at
which the person was associated at the
time the customer dispute arose.87
Under the proposed rule change, the
Director would be authorized to deny
the use of the DRS arbitration forum for
the request if this connection is not
present.88
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b. Required Content of Straight-In
Requests
The required content of a straight-in
request under the Industry Code would
83 See proposed Rules 12805(a)(2)(D)(ii) and
12805(a)(2)(E)(ii).
84 See proposed Rule 13805(a)(1).
85 See Notice at 50178.
86 FINRA’s DR Portal, among other things,
permits arbitration case participants to 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, available at www.finra.org/arbitrationmediation/dr-portal.
87 See proposed Rule 13805(a)(1).
88 See proposed Rule 13203(b).
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be the same as that required for
expungement requests filed under the
Customer Code.89 Thus, the associated
person’s straight-in request would be
required to contain the applicable filing
fee; 90 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.91 In
addition, as discussed below, the
proposed rule change would impose
limitations on when such requests may
be made.92
2. Panel From the Special Arbitrator
Roster Decides Requests Filed Under the
Industry Code
If an associated person files a straightin request in accordance with proposed
Rule 13805, a three-person panel
randomly selected from the Special
89 See proposed Rule 13805(a)(3); see also Section
II.A.1.a.ii, ‘‘Required Contents of an Expungement
Request in Customer Arbitration.’’
90 FINRA stated that it ‘‘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.’’ Notice
at 50179 n.95.
91 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
Rule 13307(a).
92 See Section 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)(a) a panel or court of competent
jurisdiction previously found the associated person
liable in a customer arbitration or civil litigation
associated with the same customer dispute
information, or (b) the customer dispute
information involves the same conduct that is the
basis of a final regulatory action taken by a
securities regulator or SRO; (5) more than two years
have elapsed since the customer arbitration or civil
litigation associated with the customer dispute
information has closed; (6) 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 (7) a named associated person is seeking
expungement even though 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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Arbitrator Roster pursuant to proposed
Rule 13806 would be required to hold
an expungement hearing, decide the
expungement request, and issue an
award.93 The proposed rule change
would 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.94
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, the proposed rule change would
require arbitrators on the Special
Arbitrator Roster to be public arbitrators
who are eligible for the chairperson
roster (‘‘public chairperson’’).95 In
general, public arbitrators are persons
who 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.96 Arbitrators are eligible for
the chairperson roster if they have
completed chairperson training
provided by FINRA and: (1) have a law
degree and are either 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
a self-regulatory organization (‘‘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.97 FINRA stated that these
requirements would help ensure that
the persons conducting the
expungement hearing are impartial and
experienced in managing and
93 See
proposed Rule 13805(a)(4).
id. According to FINRA, ‘‘[t]his
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.’’ Notice at 50179.
95 See proposed Rule 13806(b).
96 See Notice at 50170 n.3; see also FINRA Rules
12100(aa) and 13100(x).
97 See FINRA Rules 12400(c) and 13400(c).
FINRA stated that 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.’’ Notice at 50179
n.102.
94 See
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conducting arbitration hearings in the
DRS arbitration forum.98
Second, the proposed rule change
would require arbitrators on the Special
Arbitrator Roster to have evidenced
successful completion of, and agreement
with, enhanced expungement training
provided by FINRA.99 FINRA currently
provides an Expungement Training
module for arbitrators.100 This training,
however, would be expanded for
arbitrators seeking to qualify for the
Special Arbitrator Roster.101
Third, the proposed rule change
would require arbitrators on the Special
Arbitrator Roster 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.102 FINRA stated that
‘‘if an arbitrator has served on four
arbitrations through to award, it would
indicate that the arbitrator has gained
the knowledge and experience in the
DRS arbitration forum to conduct
hearings.’’ 103
b. Composition of the Panel
The proposed rule change would
require the Neutral List Selection
System (‘‘NLSS’’) 104 to select randomly
the three public chairpersons from the
Special Arbitrator Roster to decide a
straight-in request filed by an associated
person.105 The parties would not be
permitted to agree to fewer than three
arbitrators.106 The parties requesting
expungement also would not be
permitted to strike any arbitrators
selected by NLSS nor stipulate to their
removal,107 but would be permitted to
challenge an arbitrator selected for
cause.108 If an arbitrator is removed,
98 See
Notice at 50179.
proposed Rule 13806(b)(2)(A).
100 See Notice at 50179.
101 See id.
102 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. Id.; see also FINRA Rule 12800(c)(3)(B).
103 Notice at 50179–80.
104 NLSS is a computer algorithm used to generate
lists of arbitrators on a random basis from DRS’s
rosters of arbitrators for the selected hearing
location.
105 See proposed Rule 13806(b)(1). The first
arbitrator selected would be the chair of the panel.
See proposed Rule 13806(b)(3).
106 See proposed Rule 13806(b)(5).
107 See proposed Rule 13806(b)(4), as modified by
Amendment No. 2. 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).
108 See proposed Rule 13806(b)(4). The Director
may remove an arbitrator for conflict of interest or
bias (i.e., ‘‘cause’’) upon request of a party. The
Director will grant a party’s request to remove an
arbitrator if it is reasonable to infer, based on
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99 See
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NLSS would randomly select a
replacement.109 FINRA stated 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.’’ 110
C. Limitations on Expungement
Requests
Currently, the Codes provide minimal
constraints on making expungement
requests. FINRA Rules 12805 and 13805
do not address when a party would not
be permitted to file an expungement
request in the DRS arbitration forum.111
The Guidance, however, describes
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
should deny the expungement
request.112
The proposed rule change would
codify the Guidance by providing that
an associated person may not file a
request for expungement of customer
information known at the time of the request, that
the arbitrator is biased, lacks impartiality, or has a
direct or indirect interest in the outcome of the
arbitration. The interest or bias must be definite and
capable of reasonable demonstration, rather than
remote or speculative. See FINRA Rule 13410.
109 See proposed Rule 13806(b)(4).
110 Notice at 50180. FINRA stated that ‘‘outside of
the expungement context, the parties to an
arbitration 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.’’ Id.
111 But see infra note 127 (describing time limits
that apply to all arbitration claims, including
expungement requests).
112 See supra note 6; see also Notice at 50180.
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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.113 According to FINRA,
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.114
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.115
The proposed rule change would codify
and expand upon this limitation 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.116
According to FINRA, the proposed rule
change would, among other things,
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.117
113 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).
114 FINRA stated 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). See
Notice at 50180 n.117.
115 See Notice at 50180; see also supra note 6.
116 See proposed Rule 13805(a)(2)(A)(iii).
117 See Notice at 50180.
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b. Straight-In Request Prohibited if a
Panel or Court of Competent
Jurisdiction Previously Found the
Associated Person Liable
Under the Codes, arbitration awards
are final and binding unless vacated
based on the limited grounds set forth
in applicable state or federal statutes.118
The only avenue for challenging a prior
adverse arbitration award is to file a
timely motion with an appropriate court
to vacate, modify, or correct the
award.119 Thus, if an associated person
is found liable in a customer arbitration,
FINRA considers the associated person
legally bound by the award and the
Director will decline the use of the DRS
arbitration forum if the associated
person then requests expungement of
customer dispute information that is
associated with the customer arbitration
in which the associated person was
found liable. FINRA stated that it
considers such expungement requests a
collateral attack on the binding
arbitration award, which is contrary to
the Codes.120 Accordingly, the proposed
rule change would provide that an
associated person shall not file a claim
requesting expungement of customer
dispute information from the CRD
system if the customer dispute
information is associated with a
customer arbitration or civil litigation in
which a panel or court of competent
jurisdiction previously found the
associated person liable.121
c. Straight-In Request Prohibited if
Named Associated Person Did Not
Request Expungement in Customer
Arbitration
As discussed above, under proposed
Rule 12805(a)(1)(A) an associated
person who is named in a customer
118 See
id. at 50173.
id. at 50173 n.33.
120 See FINRA November 10 Letter at 28; FINRA
Rules 12904(b) and 13904(b).
121 See proposed Rule 13805(a)(2)(A)(iv).
Amendment No. 2 would modify the proposed rule
change to provide that an associated person shall
not file a claim requesting expungement of
customer dispute information from the CRD system
against a member firm at which the person was
associated at the time the customer dispute arose
if the customer dispute information involves the
same conduct that is the basis of a final regulatory
action taken by a securities regulator or SRO. If an
associated person requests expungement of such
customer dispute information, the Director will
deny the DRS arbitration forum to the expungement
request. See FINRA April 3 Letter at 14; see also
infra note 430 and accompanying text. However, if
an associated person is successful at appealing a
final regulatory action, the associated person may
file a claim requesting expungement of the
customer dispute information involving the same
conduct that is the basis of the final regulatory
action, provided that the request is not otherwise
ineligible for arbitration (e.g., that the request is
time barred). See FINRA April 3 Letter at 14.
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119 See
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arbitration would be required to request
expungement of associated customer
dispute information 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.122 Proposed
Rule 13805(a)(2)(A)(vii) would provide
a mechanism to enforce the forfeiture
established in proposed Rule
12805(a)(1)(A).123 Specifically,
proposed Rule 13805(a)(2)(A)(viii)
would prohibit an associated person
who is named, but failed to request
expungement of the customer dispute
information associated with the
customer’s statement of claim in a
customer arbitration, from subsequently
filing a straight-in request seeking to
expunge this customer dispute
information.124
d. Time Limits Applicable to
Disclosures Arising After the Effective
Date of the Proposed Rule Change
FINRA Rules 12206(a) and 13206(a)
require an associated person to submit
a claim within six years from the
occurrence or event giving rise to the
claim. This six-year eligibility rule
applies to all arbitration claims,
including those requesting
expungement of customer dispute
information.125 As a result, FINRA
stated that many straight-in requests are
filed many years after the customer
arbitration closes or the customer
complaint is reported in the CRD
system.126 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.127 The proposed rule change
would allow an associated person to
request expungement of customer
122 See proposed Rule 12805(a)(1)(A); see also
Section II.A.1.a., ‘‘Expungement Requests by a
Respondent Named in a Customer Arbitration.’’
123 See Notice at 50175.
124 See proposed Rule 13805(a)(2)(A)(viii).
125 See Notice at 50174 n.38.
126 See id. at 50181.
127 See proposed Rules 13805(a)(2)(A)(vi) and
(vii). 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 125. As discussed below,
under the proposed rule change, requests to
expunge customer dispute information that arose
up to six years prior to the effective date of the
proposed rule change would continue to be eligible
for expungement but would need to be filed within
two or three years, as applicable. See proposed Rule
13805(a)(2)(B).
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dispute information associated with a
customer arbitration or civil litigation—
including any associated customer
complaint disclosures—within two
years after the customer arbitration or
civil litigation closes.128 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.129 If a customer arbitration is
filed after a panel has issued an award
on a request to expunge a customer
complaint associated with the newly
filed customer arbitration, the proposed
rule would provide that the prior
expungement award shall not be
admissible in the customer
arbitration.130
The proposed rule change 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.131 Specifically, the proposed
rule change would provide that if an
expungement request is otherwise
eligible under the six-year limitation
128 See proposed Rule 13805(a)(2)(A)(vi). FINRA
stated that 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. See
Notice at 50181 n.126. FINRA stated that 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 sufficient 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. See Notice at 50181.
129 See Notice at 50181. FINRA stated that 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. See id.
130 See proposed Rules 12604(c) and 13604(c).
FINRA stated that the proposed rule change would
avoid unfairly impacting the customer arbitration.
See also Notice at 50181.
131 See Notice at 50182.
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period of FINRA Rule 13206(a),132 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; 133 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, the effective date.134
3. Director’s Authority To Deny the
Forum
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The proposed rule change would
require the Director 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 13805.135 The
proposed rule change would also
provide the Director with 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 13805.136
FINRA stated that the proposed rule
change would help ensure additional
safeguards around the expungement
132 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. See FINRA Rules 12206(a)
and 13206(a).
133 See proposed Rule 13805(a)(2)(B)(i).
134 See proposed Rule 13805(a)(2)(B)(ii).
135 See proposed Rules 12203(b) and 13203(b).
For example, FINRA stated that under the proposed
rule change the Director would decline the use of
the DRS arbitration forum if: (1) an expungement
request is ineligible under the proposed time
limitations; (2) a panel has previously considered
the merits of, or a court has previously decided, an
expungement request associated with the same
customer dispute information; (3) an associated
person was named as a respondent in a customer
arbitration but did not request expungement; (4) an
associated person requested expungement but
withdrew or did not pursue the expungement
request; or (5) 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. See Notice at 50182.
136 See proposed Rules 12203(c) and 13203(c). For
example, FINRA stated that the Director may
decline the use of the DRS arbitration forum if the
Director determines that: (1) 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; or (2) an associated person seeks
expungement of customer dispute information other
than pursuant to proposed Rules 12805, 12800(d)
and (e) or 13805, as applicable. See Notice at 50182.
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process by expanding the circumstances
in which the Director is authorized to
deny the DRS arbitration forum.137
D. Procedural 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.138 In addition, the Guidance
recommends that arbitrators follow
certain practices when deciding
expungement requests. The proposed
rule change would amend the current
expungement hearing requirements by
incorporating relevant provisions from
the Guidance. The proposed amended
requirements would apply to all
expungement hearings.139
1. Recorded Hearing Sessions
The Codes currently require a panel
deciding an expungement request to
hold a recorded hearing session (by
telephone or in person) regarding the
appropriateness of expungement.140 The
proposed rule change would provide
that the panel would be required to 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. The proposed
rule change would also eliminate the
reference to the hearing being held by
telephone or in person since the
participants in the hearing may, under
the proposed rule change, also appear
by video conference; the proposed rule
change would also allow different
participants to attend using different
methods (e.g., one by phone, one by
video conference).141
2. Requesting Party’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 and
eliminate the ability to appear via
137 See
Notice at 50182.
supra note 31.
139 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 Section II.G.,
‘‘Expungement Requests During Simplified
Customer Arbitrations’’) and a straight-in request
under proposed Rule 13805, unless otherwise
specified. See Notice at 50182 n.137.
140 See FINRA Rules 12805(a) and 13805(a).
141 See proposed Rules 12805(c)(1) and
13805(c)(1).
138 See
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telephone.142 The proposed rule change
would also require a party requesting
expungement on behalf of an unnamed
person or the party’s representative to
appear in person or by video conference
at the hearing.143 The panel would
determine the method of appearance.144
FINRA stated that requiring that
attendance be in person or by video
conference would help the panel assess
the associated person’s credibility.145
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.146 Specifically, the Guidance
provides that arbitrators should:
• Allow the customer and their
representative to appear at the
expungement hearing;
• Allow the customer to testify
(telephonically, in person, or by 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.147
Specifically, the proposed rule change
would state that all customers whose
customer dispute information is
associated with the expungement
request are entitled to attend and
participate in all aspects of the
prehearing conferences and the
expungement hearing.148 And the
142 See proposed Rules 12805(c)(2) and
13805(c)(2).
143 See id.
144 See id.
145 See Notice at 50182.
146 The Guidance states that arbitrators should
permit customers and their counsel to participate in
the expungement hearing. See supra note 6.
147 See Notice at 50182–83.
148 See proposed Rules 12805(c)(3)(A) and
13805(c)(3)(A). A prehearing conference is any
hearing session, including an Initial Prehearing
Conference, 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 proposed rule change, all customers
whose customer dispute information is associated
with the straight-in request would be entitled to
representation at prehearing conferences. See
proposed Rule 13805(c)(4).
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proposed rule change would provide
that the customer could choose to attend
and participate by telephone, in person
or by video conference.149
The proposed rule change would also
specify certain parameters of the
customer’s participation.150 First, the
proposed rule change would provide
that a customer or a customer’s
representative could introduce evidence
during the expungement hearing.151 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.152
Second, the customer and the
customer’s witnesses would be allowed
to testify at the expungement hearing
and be questioned by the customer or
customer’s representative.153 If a
customer 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.154
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.155
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.156
FINRA stated that customer
attendance and participation during an
expungement hearing would provide
the panel with important information
and perspective that it might not
otherwise receive. In addition, by
providing customers with options for
how to attend and participate in
hearings FINRA seeks to encourage
customer attendance and
participation.157 However, FINRA also
stated that the proposed rule should
give the associated person or party
requesting expungement on behalf of an
unnamed person the opportunity to
149 See proposed Rules 12805(c)(3)(B) and
13805(c)(3)(B).
150 See Notice at 50183.
151 See proposed Rules 12805(c)(5)(A) and
13805(c)(5)(A).
152 See id.
153 See proposed Rules 12805(c)(5)(B) and
13805(c)(5)(B).
154 See id.
155 See proposed Rules 12805(c)(5)(C) and
13805(c)(5)(C).
156 See proposed Rules 12805(c)(5)(D) and
13805(c)(5)(D).
157 See Notice at 50183.
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substantiate arguments in support of the
expungement request.158
4. Panel Requests for Additional
Documents or Evidence
The proposed rule change would
explicitly authorize a 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.159 FINRA stated
that this proposed rule change would
help ensure that arbitrators have the
information necessary to make an
informed decision on 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.160
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.161 The proposed rule
change would retain this
requirement.162
In addition, the Guidance currently
recommends that arbitrators 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
158 Id.
159 See proposed Rules 12805(c)(6) and
13805(c)(7).
160 See Notice at 50183.
161 FINRA stated that the panel must review
settlement documents that are related to the
customer dispute information associated with the
expungement request, regardless of whether the
associated person was a party to the settlement. Id.
at 50183 n.152.
162 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.
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indicated that the customer will not
oppose the expungement request.163
The proposed rule change would codify
the language in the Guidance,164 in part,
because conditioned settlements violate
FINRA Rule 2081 and may be grounds
to deny an expungement request.165
6. Unanimous Decision To Issue an
Award Containing Expungement Relief
Unlike arbitration cases generally,
which may be decided based on a
majority decision of the panel, the
proposed rule change would require
that the arbitrators agree unanimously to
issue an award containing expungement
relief.166 The proposed amendments
would also provide that in order to issue
an award containing expungement
relief, the panel must unanimously find
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 investmentrelated sales practice violation, forgery,
theft, misappropriation or conversion of
funds; or (3) the claim, allegation or
information is false.167 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.168 FINRA stated that these
proposed rule changes would help
ensure that expungement is awarded
only in limited circumstances in
163 See
Notice at 50184.
proposed Rules 12805(c)(7) and
13805(c)(8).
165 See Notice at 50184.
166 See proposed Rules 12805(c)(8)(A) and
13805(c)(9)(A). FINRA stated that when deciding a
customer’s claims, a majority decision of the
arbitrators would continue to be sufficient. Notice
at 50184 n.156.
167 See proposed Rules 12805(c)(8)(A)(i) and
13805(c)(9)(A)(i). FINRA stated that 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. See Notice
at 50184; see also FINRA Rule 2080 (Obtaining an
Order of Expungement of Customer Dispute
Information from the Central Registration
Depository (CRD) System). FINRA Rule 2080 is not
part of the Codes, and the proposed rule change
would not amend FINRA Rule 2080. FINRA
explained that the proposed rule change would
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 Notice at 50184 at n.162.
168 See proposed Rules 12805(c)(8)(A)(ii) and
13805(c)(9)(A)(ii).
164 See
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accordance with the narrow standards
in its rules.169
panel when making the expungement
determination.175
7. Contents of the Expungement Award
9. Forum Fees
The panel is currently required ‘‘to
provide a ‘brief’ written explanation of
the reasons for its finding that one or
more of the [FINRA Rule 2080] grounds
for expungement applies to the facts of
the case.’’ 170 According to FINRA, the
Guidance suggests that the panel’s
explanation should be complete and not
solely a recitation of one of the FINRA
Rule 2080(b)(1) grounds or language
provided in the expungement
request.171 The proposed rule change
would retain the requirement to provide
the written explanation, but would
remove the word ‘‘brief,’’ and 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.172 Thus, FINRA
stated that under the proposed rule
change, the panel would be required to
provide enough detail in the award to
explain its rationale for awarding
expungement relief.173
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 proposed rule
change would state that 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.176
8. Evidentiary Weight of Decision Not
To Attend or Participate
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The proposed rule change would state
that a panel shall not give any
evidentiary weight to a decision by a
customer or an authorized
representative of state securities
regulators (‘‘authorized representative’’)
not to attend or participate in an
expungement hearing when making a
determination of whether expungement
is appropriate.174 FINRA stated that 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, a customer’s or an
authorized representative’s decision not
to attend or participate should not be
given any evidentiary weight by the
169 See Notice at 50184; see also supra note 25
and accompanying text.
170 See Notice at 50184; see also FINRA Rules
12805(c) and 13805(c).
171 See Notice at 50184.
172 See proposed Rules 12805(c)(8)(B) and
13805(c)(9)(B).
173 See Notice at 50184.
174 See proposed Rules 12805(c)(8)(C) and
13805(c)(9)(C); see also Amendment No. 1; see also
Section 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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E. Notifications to Customers and to
State Securities Regulators Regarding
Expungement Requests
1. Notification to Customers by the
Associated Person
According to FINRA, 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.177 The proposed rule
change would codify this practice in the
Industry Code by requiring the
associated person to 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.178 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.179 The
panel would be authorized to decide
whether extraordinary circumstances
exist that make service on the customers
impracticable.180
The proposed rule change also 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
175 See Notice at 50185; see also FINRA
November 10 Letter at 10–11.
176 See proposed Rules 12805(c)(9) and
13805(c)(10).
177 See Notice at 50185; see also supra note 6.
178 See proposed Rule 13805(b)(1)(A)(i) and (ii).
This proposed requirement would apply to straightin 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 Notice
at 50185 n.168.
179 See proposed Rules 13805(b)(1)(A)(i) and (ii).
180 See id.
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and any responses received from the
customers.181
FINRA stated that providing
notification to customers would help
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 regarding the
associated person’s request. FINRA also
stated that requiring the panel to review
all documents that the associated person
used to inform the customers about the
expungement request as well as any
customer responses received would
help ensure that the associated person
does not attempt to dissuade a customer
from attending or participating in the
expungement hearing.182
2. Notifications to the Customer by the
Director
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.183 The Director
would also provide the notified
customers with access to all documents
on the Portal related to the request for
expungement prior to their attendance
and participation in the expungement
hearing.184
3. Notifications to State Securities
Regulators
The proposed rule change would
require FINRA to notify state securities
181 See
proposed Rule 13805(b)(1)(A)(iv).
Notice at 50185.
183 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 Section
II.G.3., ‘‘Customer Notification of Expungement
Hearings during Simplified Arbitrations’’
(discussing customer notification of expungement
hearings in connection with simplified
arbitrations). FINRA stated that the Director would
be required to include language in the notice
encouraging the customer to attend and participate
in the expungement hearing. See Notice at 50185.
184 See proposed Rule 13805(b)(1)(B)(ii); see also
Notice at 50185. FINRA would provide customers
with access to the documents through the Portal.
The Portal has two parts: the DR Neutral Portal is
for arbitrators and mediators serving on the Dispute
Resolution roster, and the DR Party Portal is for
arbitration and mediation case participants. Once
registered on the 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 supra
note 86. FINRA stated that these proposed rule
changes would help encourage customer attendance
and participation in the expungement hearing,
which would help the panel fully develop a record
on which to decide the expungement request. See
Notice at 50185.
182 See
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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.185 FINRA stated
that the proposed notification
requirement would help ensure that
state securities regulators are timely
notified of expungement requests.186
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F. Attendance and Participation of an
Authorized Representative of State
Securities Regulators in Straight-In
Requests
The proposed rule change would
provide a mechanism for an authorized
representative of a state securities
regulator to provide their position or
positions on an expungement request in
writing or by attending and
participating in the expungement
hearing in person or by video
conference.187 The proposed rule
change would limit attendance and
participation by an authorized
representative to straight-in requests.188
The proposed rule change would also
require the Director to provide state
securities regulators with access to all
documents relevant to: (1) the
expungement request filed in the
arbitration requesting expungement
relief; and (2) 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.189
Such access would be required to be
provided at the same time as providing
notification to state securities regulators
of the straight-in request.190
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 proposed rule
change would require the Director to
notify the authorized representative of
185 See proposed Rules 12800(f)(1), 12805(b) and
13805(b)(2)(A). FINRA stated that it 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. See Notice at
50185 n.176.
186 See Notice at 50185.
187 See proposed Rule 13805(c)(6)(A).
188 See Notice at 50185–86; see also proposed
Rule 1305(c)(6). The proposed rule change would
not allow an authorized representative to attend or
participate in a customer arbitration where
expungement has been requested; FINRA believes
that 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. See id. at 50186.
189 See proposed Rule 13805(b)(2)(B).
190 See id.; see also Notice at 50186. The state
securities regulators’ access to the documents
would be subject to confidentiality restrictions. See
proposed Rule 13805(b)(2)(B).
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the time, date and place of any
prehearing conferences and the
expungement hearing.191 Under
proposed Rule 13805(c)(6), 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.192
Under the proposed rule change, the
other persons appearing at the
expungement hearing could state
objections to the authorized
representative’s evidence and crossexamine the authorized representative’s
witnesses.193
According to FINRA, 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).194 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.195 In addition, the proposed
rule change provides that 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.196
FINRA stated that 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.197
G. Expungement Requests During
Simplified Customer Arbitrations
FINRA Rule 12800, governing
simplified arbitration,198 was designed
to make the DRS arbitration process less
burdensome for customer arbitrations
involving $50,000 or less (exclusive of
interest and expenses) by providing
such customers with expedited
procedures. Simplified arbitrations are
decided on the pleadings and other
materials submitted by the parties,
unless the customer requests a
hearing.199 Further, a single arbitrator
from the public chairperson roster is
appointed to consider and decide
simplified arbitrations, unless the
parties agree in writing otherwise.200
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
Customer 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.201
FINRA Rule 12800 does not expressly
address how an expungement request
should be filed or considered during a
simplified arbitration.202 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.203
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.204 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.205
199 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, this
order uses the term ‘‘arbitrator,’’ unless otherwise
specified, to mean either a panel or single arbitrator.
201 See FINRA Rule 12800(c).
202 See Notice at 50186.
203 See Notice at 50186, proposed Rules 12800(d)
and (e).
204 See proposed Rules 12800(d)(1) and (2).
205 See proposed Rule 12800(e)(2). See Section
II.G.1.c., ‘‘No Expungement Request is Filed.’’
200 See
191 See
proposed Rule 13805(b)(3).
proposed Rule 13805(c)(6)(B).
193 See proposed Rule 13805(c)(6)(C).
194 See Notice at 50186.
195 See id. at 50186 n.182.
196 See proposed Rule 13805(c)(6)(A).
197 See Notice at 50186. FINRA also stated that
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. See id.
198 See supra note 7 and accompanying text.
192 See
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a. Request by a Named Associated
Person During a 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.206
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.207 If the
named associated person requests
expungement in a pleading other than
an answer, the request would be
required to be filed within 30 days after
the date FINRA notifies the parties of
the appointment of the arbitrator.208 The
request would be required to include
the same information as a request filed
in a non-simplified arbitration.209
The arbitrator would be required to
decide an expungement request that is
filed by the associated person.210 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.211
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b. Request by a Party on Behalf of an
Unnamed Person
Under the proposed rule change, the
requirements for a party to file an onbehalf-of request during a simplified
206 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 requests made
in simplified arbitration. See Notice at 50187 n.191.
See Section II.C., ‘‘Limitations on Expungement
Requests.’’
207 See proposed Rule 12800(d)(1)(B)(i). Pursuant
to FINRA Rule 12303(a), a respondent’s answer
must be submitted within 45 days of receipt of the
statement of claim. See Notice at 50187 n.192; see
supra note 48 and accompanying text.
208 See proposed Rule 12800(d)(1)(B)(i). FINRA
stated that when it notifies the parties that an
arbitrator has been appointed, it 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. See Notice at 50187 n.193.
209 See proposed Rules 12800(d)(1)(B)(i) and
12805(a)(1)(C)(ii). More specifically, 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.
210 See proposed Rules 12800(d)(1)(B)(ii) and
12800(e)(1).
211 See proposed Rule 12800(d)(1)(C). FINRA
stated this provision would limit arbitratorshopping. See Notice at 50187.
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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.212 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 would be
required to consent to such filing by
signing the Form.213
The arbitrator would be required to
decide an on-behalf-of request that is
filed by the requesting party.214 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.215
c. No Expungement Request Is Filed
If expungement is not requested
during a 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.216 The
request would be subject to the
limitations on whether and when such
requests may be filed under the Industry
Code.217
2. Deciding Expungement Requests
During Simplified Arbitrations
If expungement is requested during
simplified arbitration, the arbitrator
would be required to decide the
expungement request, regardless of how
the simplified arbitration closes (e.g.,
212 See
proposed Rule 12800(d)(2)(A).
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
Section II.A.1.b., ‘‘Expungement Requests By a
Party Named in a Customer Arbitration on Behalf
of an Unnamed Person.’’
214 See proposed Rules 12800(d)(2)(B)(ii) and
12800(e)(1).
215 See proposed Rule 12800(d)(2)(C).
216 See proposed Rules 12800(e)(2), 13805(a)(1)
and 13806. FINRA stated that 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. 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 Notice
at 50187 n.203 and accompanying text.
217 See proposed Rule 12800(e)(2); see also
Section II.C., ‘‘Limitations on Expungement
Requests.’’
213 See
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even if the arbitration settles).218 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.219
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
issue an award.220 After the customer’s
dispute is decided, the arbitrator would
hold a separate expungement-only
hearing to consider and decide the
expungement request and issue a
separate, subsequent award.221 FINRA
stated that the proposed rule change is
designed to minimize any delays in
resolving the customer arbitration and
any delays in potential recovery that a
customer may be awarded.222
b. ‘‘Option One’’ Full Hearing
If the customer chooses to have an
‘‘Option One’’ full hearing on their
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.223 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.224
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
218 See proposed Rule 12800(e)(1). Simplified
arbitration is a more streamlined arbitration
process. See Notice at 50186. In part, a single
arbitrator from the public chairperson roster is
appointed to consider and decide simplified
arbitrations, unless the parties agree in writing
otherwise. Id.
219 See proposed Rule 12800(e).
220 See proposed Rule 12800(e)(1)(A).
221 See id. 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). See Notice
at 50188 n.206.
222 See Notice at 50188.
223 See proposed Rule 12800(e)(1)(B)(i).
224 See Notice at 50188.
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request.225 The arbitrator would
conduct a separate expungement-only
hearing to develop the factual record
and help the arbitrator make a fully
informed decision on the expungement
request.226
3. Customer Notification of
Expungement Hearings During
Simplified Arbitrations
The proposed rule change would
require the Director to notify all
customers from the simplified
arbitration of a separate expungementonly hearing.227 FINRA stated that the
Director’s notice would provide the
customers with timely notice of the
expungement hearing so that the
customers and their representatives may
participate.228
H. Non-Substantive Changes
The proposed rule change would also
amend the Codes to make nonsubstantive, 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
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).
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III. Discussion and Commission
Findings
After careful review of the proposed
rule change, the comment letters, and
FINRA’s responses to the comments, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
that are applicable to a national
securities association.229 Specifically,
225 See
proposed Rule 12800(e)(1)(B)(ii).
Notice at 50188.
227 See proposed Rule 12800(f)(2).
228 See Notice at 50188.
229 In approving this rule change, the Commission
has considered the rule’s impact on efficiency,
226 See
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later than 60 days before the first
scheduled hearing begins.236
Finally, the proposed rule change
would further prescribe the contents of
an expungement request.237 For
example, the proposed rule change
would require the named associated
person requesting expungement to
explain whether expungement of the
same customer dispute information was:
(1) previously requested and, if so, (2)
how it was decided.238
FINRA stated that 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.239 FINRA further
A. Requests for Expungement Under the
stated that the potential costs that
Customer Code
would be incurred by associated
persons, arbitrators and the DRS
1. Expungement Requests by
arbitration forum if named associated
Respondents Named in Customer
persons file expungement requests are
Arbitration
appropriate given the potential benefit
The proposed rule change to amend
of having customer input and a
FINRA Rule 12805 would, in part,
complete factual record for the panel to
govern how and when named associated decide an expungement request.240
Moreover, FINRA stated that requiring
persons may request expungement
the named associated person requesting
during a customer arbitration. Among
expungement to explain whether
other things, the proposed rule change
expungement of the same customer
would require that a named associated
person file a request for expungement of dispute information was previously
requested and, if so, how it was decided
the customer dispute information
would further link the request to a
associated with the customer’s
specific case and help prevent multiple
statement of claim in the customer
requests for expungement.241
arbitration or forfeit the ability to
Finally, FINRA stated the proposed
request expungement of the same
60-day deadline would provide
customer dispute information in a
adequate time for: (1) the named
subsequent proceeding.232
associated person to assess the
The proposed rule change would also customer’s case, the potential merits of
dictate the method of and deadline for
an expungement request, and whether
filing an expungement request.233 Under to file the request; and (2) the parties to
the proposed rule change, a named
a customer arbitration to prepare their
associated person would need to
expungement-related arguments, since
include their request for expungement
the expungement issues will overlap
in their answer to the customer’s
with the issues raised by the customer’s
statement of claim or in a separate
claim.242
Four commenters supported, and
pleading requesting expungement.234 If
there was no opposition to, these
the associated person includes their
request in the answer, they must file the aspects of the proposed rule change.243
answer within 45 days of receipt of the
236 See proposed Rule 12805(a)(1)(C)(i); see also
statement of claim.235 If the named
supra notes 49–50 and accompanying text. See also
associated person requests expungement Section II.A.1.a.i., ‘‘Method and Timing of
in a separate pleading requesting
Requesting Expungement in Customer Arbitration.’’
237 See proposed Rule 12805(a)(1)(C)(ii).
expungement, rather than the answer,
238 See proposed Rule 12805(a)(1)(C)(ii)e.
they would need to file the pleading no
the Commission finds that the proposed
rule change is consistent with Section
15A(b)(6) of the Exchange Act,230 which
requires, among other things, that
FINRA rules 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 Commission also finds that the
proposed rule change is consistent with
Section 15A(b)(5) of the Exchange
Act,231 which requires, among other
things, that FINRA rules provide for the
equitable allocation of reasonable dues,
fees and other charges among members
and issuers and other persons using any
facility or system that FINRA operates
or controls.
competition, and capital formation. See 15 U.S.C.
78c(f).
230 15 U.S.C. 78o–3(b)(6).
231 15 U.S.C. 78o–3(b)(5).
232 See proposed Rule 12805(a)(1)(A).
233 See proposed Rule 12805(a)(1)(C)(i).
234 See id.
235 See FINRA Rule 12303(a).
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239 See Section II.A.1.a., ‘‘Expungement Requests
by a Respondent Named in a Customer
Arbitration.’’
240 See Notice at 50175.
241 See id. at 50176.
242 Id.
243 See letters from Seth A. Miller, General
Counsel, President, Advocacy & Administration,
Cambridge Investment Research, Inc., to the
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One commenter stated that requiring an
associated person to request
expungement in a customer dispute
matter, if the associated person is a
party to the matter, reduces the need for
additional hearings, filing fees, attorney
fees, and other arbitration costs
concerning the same parties and the
same evidence.244 Three commenters
supported the proposed rule change on
the basis that it would allow the panel
that heard all of the evidence, including
the customer’s evidence, to be best
situated to decide the expungement
request.245 One of these commenters
stated that the requirement would
prevent ‘‘arbitrator-shopping’’ (i.e.,
purposefully not raising, or
withdrawing, an expungement request
in an arbitration in order to file a
request with a panel more likely to
award expungement).246
The Commission believes that the
proposed rule change should improve
the integrity of the expungement
process. Where a customer arbitration
closes by award after a hearing, the
panel’s experience with the parties and
the dispute, as well as the panel’s
review of the documents, testimony,
and other evidence in connection with
the arbitration, should leave the panel
well positioned to make a decision
regarding the related expungement
request. Moreover, requiring the
expungement request to be made within
45 days of receipt of the customer’s
statement of claim (if included in the
answer) or no later than 60 days before
the first scheduled hearing begins (if
included in a pleading) should allow
the requesting party a reasonable
amount of time to make an informed
decision about whether to request
expungement while at the same time
providing the parties with reasonable
case-preparation time, since the
expungement issues will likely overlap
with the issues raised by the customer’s
claim.
Further, the content required for an
expungement request under the
proposed rule change, including the
Commission, dated September 6, 2022
(‘‘Cambridge’’) at 1–2; Melanie Senter Lubin,
NASAA President and Maryland Securities
Commissioner, North American Securities
Administrators Association, Inc., to the
Commission, dated September 6, 2022 (‘‘NASAA
September 6 Letter’’) at 2–3; Scott Eichhorn, et. al.,
Acting Director, University of Miami Investor
Rights Clinic, to the Commission, dated September
6, 2022 (‘‘Miami’’) at 2–3; William A. Jacobson,
Esq., Clinical Professor, Cornell Law School, and
Director, Cornell Securities Law Clinic, et. al., to the
Commission, dated September 6, 2022 (‘‘Cornell’’)
at 2.
244 See Cambridge at 2.
245 See NASAA September 6 Letter at 2–3; Miami
at 2–3; Cornell at 2.
246 See Cornell at 2.
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CRD occurrence number that is the
subject of the request, the case name
and docket number associated with the
customer dispute information, and
whether expungement of such
information had previously been
requested and any resolution thereof,
should improve the expungement
process by clearly documenting both the
request and whether it repeats a
previous request. The required content
would provide the panel with
information sufficient to understand
who is requesting expungement and in
connection with which customer
dispute.247 In addition, requiring the
party requesting expungement to
explain whether expungement of the
same customer dispute information was
previously requested and, if so, how it
was decided will help prevent parties
from pursuing second requests for
expungement, consistent with the
proposed rule change prohibiting repeat
requests, which is discussed in more
detail below.248
2. Content and Timing of on-Behalf-of
Requests in Customer Arbitration
As with expungement requests made
by a named associated person, the
proposed rule change would, in part,
govern how and when an on-behalf-of
request may be made during a customer
arbitration. For example, proposed Rule
12805(a)(2)(C)(iii) would require the
party making the request to file it no
later than 60 days before the first
scheduled hearing.
In addition, proposed Rule
12805(a)(2)(C)(ii) would require the
party filing an on-behalf-of request to
submit to the Director the Form signed
by the unnamed person and a statement
requesting expungement. As discussed
above, by signing the Form the
unnamed person would be: (1)
consenting to the on-behalf-of request,
(2) agreeing to be bound by the panel’s
decision on the on-behalf-of request,
and (3) acknowledging their
understanding 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.249
Finally, proposed Rules
12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i)
would require the party requesting
247 See
Notice at 50176.
Section III.A.5., ‘‘Limitations Applicable
to Straight-in Requests and Expungement Requests
during a Customer Arbitration.’’
249 See Notice at 50177; see also Section II.A.1.b.,
‘‘Expungement Requests by a Party Named in a
Customer Arbitration on Behalf of an Unnamed
Person.’’
248 See
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expungement on behalf of an unnamed
person 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
previously requested and, if so, how it
was decided.250
FINRA believes that requiring
associated persons to sign and submit
the Form would help address its
concern 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 onbehalf-of request.251 Specifically,
requiring submission of the signed Form
would help ensure that an unnamed
person is aware of an on-behalf-of
request.252 In addition, by signing the
Form, the associated persons would be
acknowledging that, if the customer
arbitration closes by award after a
hearing and an expungement decision is
made, the unnamed person would be
barred from filing a request for
expungement for the same customer
dispute information in a subsequent
proceeding.253
In addition, under the proposed rule
change, on-behalf-of requests would
resemble named associated person
requests in timing (the proposed rule
would require service on all parties no
later than 60 days before the first
scheduled hearing), and in content (an
on-behalf-of request would be required
to include the same elements as a
named associated person request).254
The Commission received no
comment letters supporting or opposing
this proposed rule change.
For reasons similar to those discussed
above for expungement requests made
by a named associated person in a
customer arbitration, the Commission
believes that these timing and content
requirements should improve the
integrity of the expungement process.255
In addition, the panel’s decision would
preclude the unnamed party from
250 See
Notice at 50177.
id.
252 See id.
253 See id.
254 See id. at 50176–77; see also Section III.A.1.,
‘‘Expungement Requests by Respondents Named in
Customer Arbitration.’’ The proposed rule change
would not require that an on-behalf-of request be
included in an answer or pleading requesting
expungement (although it could be) as such
requests are made on behalf of non-parties. See
Notice at 50176.
255 See Section III.A.1., ‘‘Expungement Requests
by Respondents Named in Customer Arbitration.’’
251 See
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seeking expungement of the same
customer dispute information in another
forum by claiming their interests were
inadequately represented in the hearing
under the terms of the Form. Moreover,
requiring the expungement request to be
made no later than 60 days before the
first scheduled hearing begins should
allow the requesting party a reasonable
amount of time to make an informed
decision about whether to request
expungement while at the same time
providing the parties with reasonable
case-preparation time, as the
expungement issues will overlap with
the issues raised by the customer’s
claim.
Further, the notice provided to the
associated person pursuant to the
requirement to submit the Form with
the associated person’s written consent
should help ensure that the associated
person is made aware of the on-behalfof request and will likely help prevent
inadvertent duplicative filings. The
requirement that the associated person
agree to be bound by the panel’s
decision on the request, and be barred
from filing a request for expungement
for the same customer dispute
information, will help prevent the
associated person from requesting
expungement from a different panel if
they are unsatisfied with the decision
issued by the first panel. Such
safeguards also help conserve resources
and prevent inconsistent
determinations.
3. Deciding Expungement Requests
During Customer Arbitrations
As stated above, the proposed rule
change would treat customer claims that
close by award after a hearing
differently from customer claims that
close other than by award (e.g., the case
settles) or that close by award without
a hearing. Where the customer’s claim
closes by award after a hearing, the
proposed rule change would require the
panel in a customer arbitration to
consider and decide a request for
expungement made during the
proceeding. In addition, if the party
requesting expungement withdraws or
does not pursue the expungement
request, the panel will be required to
deny the expungement request with
prejudice. FINRA stated that this change
should make efficient use of the panel’s
familiarity with the case-in-chief, and
help protect investors by precluding
arbitrator-shopping by associated
persons or those requesting
expungement on their behalf.256
256 See Notice at 50177. FINRA expressed concern
that, absent this change, associated persons (or
other requesters) might seek to withdraw and refile
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Conversely, where the customer’s
claim closes other than by award or
closes by award without a hearing, the
proposed rule change would preclude
the panel that heard the customer claim
from considering the ongoing
expungement request.257 In such cases,
the efficiency rationale becomes less
compelling, and FINRA believes that
such expungement requests are best
considered as straight-in requests by a
panel from the Special Arbitrator Roster,
discussed in more detail below.258
These proposed rule changes are
intended to protect investors by
reducing opportunities for arbitratorshopping and by providing arbitrators
with special training and factualdevelopment tools specific to the
expungement context.259
Two commenters supported the
proposed requirement that the panel in
a customer arbitration decide an
expungement request where the
customer arbitration closes by award
after a hearing.260 These commenters
reasoned that because the panel would
have presided over the case-in-chief,
assessing input from all involved
parties, it is best situated to decide the
expungement request.261 Three
commenters further supported the
proposed requirement that, in the event
an expungement request is withdrawn
or not pursued, the panel would be
required to deny the request with
prejudice, reasoning that the proposed
rule change would prevent arbitratorshopping by discouraging requesting
parties from withdrawing an
expungement request in order to seek a
potentially more favorable panel.262
Three commenters, however,
suggested that associated persons
should be able to voluntarily withdraw
expungement requests without
prejudice.263 One of these commenters
their expungement requests to avoid having the
requests decided by the panel who heard evidence
on the customer’s arbitration claim (receiving a new
list of arbitrators and a potentially more favorable
decision). See id.
257 See id. at 50177–78.
258 See Section III.B., ‘‘Straight-in Requests under
the Industry Code and the Special Arbitrator
Roster.’’
259 See Notice at 50178 and 50194.
260 See letter from Christine Lazaro, Director of
the Securities Arbitration Clinic and Professor of
Clinical Legal Education, et. al., Securities
Arbitration Clinic at St. John’s University School of
Law, to the Commission, dated September 6, 2022
(‘‘St. John’s) at 2; Cornell at 2.
261 See id.
262 See Cornell at 2; Miami at 4; St. John’s at 3.
263 See letters from Dochtor D. Kennedy,
President & Founder, AdvisorLaw, LLC, to the
Commission, dated August 9, 2022 (‘‘AdvisorLaw’’)
at 2–3; Jennifer W. Burke, Esq., Hennion & Walsh,
Inc., to the Commission, dated September 6, 2022
(‘‘Hennion’’) at 6; Russell Del Toro, Esq., TCM,
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stated that customers are free to
withdraw claims without prejudice,264
while another argued that there is no
evidence to support the claim that a
person that withdraws an expungement
request is doing so in the hopes of
finding a more favorable panel.265 A
third commenter stated that there are a
number of valid and practical reasons
for why a non-party associated person’s
request for expungement may be
withdrawn prior to final hearing (e.g.,
time and costs), and thus that it is
inappropriate to penalize an associated
person for withdrawing their
expungement request.266
FINRA declined to amend the
proposed rule change in response to
comments. FINRA expressed concern
that arbitrator-shopping and repeated
attempts to seek expungement of the
same customer dispute information are
inconsistent with the arbitration process
and threaten the integrity of the
information in the CRD system because
they permit parties to request
expungement until they get a favorable
response.267 FINRA highlighted the
extent of its concern by pointing out
that among the requests to expunge
customer dispute information in
arbitration from January 2016 through
December 2021, FINRA identified 282
disclosures that were the subject of a
previously withdrawn or denied
requests to expunge.268 FINRA further
stated, in response to a commenter’s
statement that an associated person may
have valid and practical reasons for
withdrawing an expungement request,
that it is not in a position to determine
or assess, on a case-by-case basis, the
legitimacy of an associated person’s
reason for withdrawing an expungement
request during a customer arbitration.269
Two commenters also supported the
proposed requirement that
expungement requests made during
customer arbitrations that close other
than by award or close by award
without a hearing, be heard by a panel
from the Special Arbitrator Roster.270
One of these commenters reasoned that
the original arbitration panels do not get
to hear the full presentation of the
evidence on the merits of the underlying
P.S.C., to the Commission, dated December 21, 2022
(‘‘Del Toro’’).
264 See Hennion at 6.
265 See Advisorlaw at 2–3.
266 See Del Toro.
267 See FINRA November 10 Letter at 28–29.
268 See FINRA November 10 Letter at 29; see also
FINRA April 3 Letter at 5.
269 See FINRA April 3 Letter at 5.
270 See letter from Michael S. Edmiston, PIABA
President, Public Investors Advocate Bar
Association, to the Commission, dated September 6,
2022 (‘‘PIABA September 6 Letter’’ at 3 and St.
John’s at 2.
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customer case and that customers or
their representatives have little
incentive to attend and participate in an
expungement hearing once their case
has settled.271
One commenter, however, contended
that a named associated person who
requests expungement during a
customer arbitration that closes other
than by award or that closes by award
without a hearing should continue to be
allowed to request an expungementonly hearing before the same panel from
the customer arbitration.272 Specifically,
this commenter stated that, even in
cases that are settled or dismissed, the
panel has often had an opportunity to
review the pleadings, participate in the
disposition of discovery and other
prehearing motions, and otherwise
familiarize itself with the facts of the
case.273 Furthermore, according to the
commenter, permitting the same panel
to decide an expungement hearing may
be more efficient because, in many
cases, the parties will have already
researched and ranked the panel
members and the expungement hearing
will have been scheduled for the same
day as the hearing on the merits.274
According to the commenter, alreadyscheduled expungement hearings would
reduce scheduling issues and increase
the likelihood of customer participation,
as customers will have already set aside
the time.275
FINRA considered these comments
but declined to amend the proposed
rule change.276 FINRA stated that, when
a customer arbitration closes other than
by award or by award without a hearing,
the panel may not have heard the
presentation of the evidence on the
merits of the case. In addition, FINRA
stated that customers or their
representatives have little incentive to
attend and provide their interpretation
of the facts in a subsequent
expungement hearing once their case
has settled.277 Because a customer
271 See
PIABA September 6 Letter at 3.
letter from Kevin M. Carroll, Managing
Director and Associate General Counsel, Securities
Industry and Financial Markets Association, to the
Commission, dated September 2, 2022 (‘‘SIFMA
September 2 Letter’’) at 8.
273 See id.
274 See id.
275 See id.
276 See FINRA November 10 Letter at 24.
277 See id. FINRA formed its 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, to consider possible
enhancements to the DRS arbitration and mediation
forum. In 2015, the Task Force stated 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
arbitration that closes other than by
award, or by award without a hearing,
has the potential for an inadequately
developed, or nonexistent, record,
FINRA contended that the integrity of
information in the CRD system would
be better maintained by requiring a
panel randomly selected from the
Special Arbitrator Roster to hear and
decide such expungement requests.278
Furthermore, FINRA stated that
requiring an associated person to file
such an expungement request as a
straight-in request under the Industry
Code would strengthen the
expungement process because the
Special Arbitrator Roster panel deciding
the request would have the experience,
qualifications, and training necessary to
help ensure the development of a more
complete factual record; 279 in addition,
FINRA stated that the proposed rule
change would make it easier for
customers to participate in the
expungement proceeding, further
helping the panel establish a more
complete factual record.280
The Commission believes the
proposed rule changes are aimed at
enhancing FINRA’s expungement
framework. On the one hand, they
require a panel of arbitrators that has
decided the merits of a case to leverage
their understanding of the case to
decide any related expungement
requests; the panel would be required to
decide the request even if the requesting
party withdraws or fails to present a
case in support of the request—in which
case the panel would deny the
expungement request with prejudice.
This is both efficient and helps protect
investors by preventing those requesting
expungement from withdrawing and
refiling their request to obtain new
arbitrators when unsatisfied with the
original panel. On the other hand, when
a case closes other than by award or
closes by award without a hearing, the
efficiency benefits of having the same
panel decide the request (while not
eliminated) are diminished. Moreover,
the risk that the expungement hearing
will not benefit from either a fully
developed record or the adversarial
process increases. For example, a case
may settle before the record has had a
chance to develop and a customer who
has settled their claims may have little
incentive to commit more time and
resources in a subsequent expungement
hearing. Rather than leave it to
arbitrators in individual cases to decide
whether they have enough information
to proceed to hear an expungement
request, FINRA has established uniform,
separate procedures to help ensure the
development of an adequate factual
record in connection with every
expungement request. The proposed
rule changes also aim to help ensure
that arbitrators deciding straight-in
expungement requests have the training
and tools to develop an adequate factual
record, particularly in the absence of
customer participation. Finally, the
proposed rule change allows for the
effective administration of the
expungement process and provides
certainty to the parties about when
requests for expungement may be made.
The Commission recognizes that in
some cases the arbitrators from a
customer arbitration could bring to a
related standalone expungement hearing
insights gleaned from their engagement
with a well-developed factual record.
Nevertheless, the proposed rule changes
help ensure that every expungement
request benefits from an adequate
factual record. Moreover, it arms
arbitrators on the Special Arbitrator
Roster with the expungement-specific
training and procedural tools necessary
to develop and understand the factual
record, regardless of both the state of the
record prior to their involvement and
the presence or absence of customers at
the expungement hearing. Finally, it
makes procedural improvements to
facilitate customer participation in
expungement hearings.
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.’’ See Notice at
50174 n.37; see also Final Report and
Recommendations of the FINRA Dispute Resolution
Task Force (Dec. 16, 2015), available at https://
www.finra.org/sites/default/files/Final-DR-taskforce-report.pdf.
278 See FINRA November 10 Letter at 24.
279 See Notice at 50178, 80; see also Section
III.B.3., ‘‘Straight-in Requests under the Industry
Code and the Special Arbitrator Roster, The Special
Arbitrator Roster.’’
280 See Notice at 50183; see also Section III.D.3.,
‘‘Customer’s Attendance and Participation During
the Expungement Hearing.’’
4. No Straight-In Requests Against
Customers or Intervening in Customer
Arbitrations To Request Expungement
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The proposed rule changes would
prohibit an associated person from filing
a straight-in request against a customer,
and would prohibit unnamed persons
from intervening in a customer
arbitration and requesting expungement.
FINRA stated that the proposed rule
would help protect investors by
preventing associated persons from
interrupting, and thus delaying,
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customer cases, thereby safeguarding
customer time and resources.281
One commenter opposed the
proposed prohibition against an
associated person filing a straight-in
request against a customer.282 This
commenter argued that permitting
straight-in requests against customers
would solve many of the issues
addressed in the proposed rule change,
including customer notice and
participation.283
Two commenters objected to the
proposed prohibition against
expungement interventions by unnamed
persons in customer arbitrations.284 One
of these commenters stated that
prohibiting an unnamed person from
intervening to clear their name results
in potentially false allegations
remaining in the CRD for upwards of a
year (i.e., until expungement can be
awarded in the straight-in request and
confirmed by a court).285 The other
commenter stated that the rules should
allow for the most fair, speedy, and
inexpensive resolution of the matters
and recommended that the proposed
rule change allow for a sub-proceeding
between the intervening affected
associated person and the parties where
a separate award on the matter of
expungement is issued by the same
panel without affecting the resolution of
the main award.286
FINRA declined to amend the
proposed rule change in response to
comments. In the Notice and in
response to comments, FINRA stated
that in circumstances where an
associated person is neither a named
party nor the subject of an on-behalf-of
request, the associated person’s conduct
is unlikely to be fully addressed by the
parties during the customer arbitration,
and permitting the unnamed person’s
intervention could unnecessarily
interrupt or delay resolution of the
case.287 FINRA further stated that it
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.288 FINRA also stated that
the requirement that an associated
person file a straight-in request against
the member firm at which the person
281 See Notice at 50178; see also Section II.A.2.,
‘‘No Intervening in Customer Arbitrations to
Request Expungement.’’
282 See Del Toro.
283 See id.
284 See AdvisorLaw at 4 and Del Toro.
285 See AdvisorLaw at 4.
286 See Del Toro.
287 See FINRA November 10 Letter at 29; see also
FINRA April 3 Letter at 5; see also Notice at 50178.
288 See FINRA April 3 Letter at 6.
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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.289
The Commission believes that
prohibiting straight-in requests against
customers, and prohibiting
expungement interventions by unnamed
persons in customer arbitrations, as
proposed, will protect investors by
conserving their time, resources, and
ability to make their case efficiently and
without interruption. The Commission
appreciates that this will require the
associated person to wait until the
customer claim has been resolved to
initiate a straight-in expungement
proceeding, but believes such a delay is
reasonable to help ensure that the
related customer arbitration can be
resolved as expeditiously as possible.
Moreover, the panel selected from the
Special Arbitrator Roster deciding the
expungement request would have the
benefit of any final factual record from
the related customer dispute.
5. Limitations Applicable to Straight-in
Requests and Expungement Requests
During a Customer Arbitration
The proposed rule change would
provide 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.290
FINRA stated that the proposed rule
changes would prevent an associated
person from forum shopping, or seeking
to return to the DRS arbitration forum to
garner a favorable outcome on their
expungement request.291 The
Commission received no comment
letters supporting or opposing this
proposed rule change.
The proposed rule changes should
help prevent an associated person, or
firm seeking expungement on their
behalf, from forum-shopping to garner a
more favorable outcome on an
expungement request. As such, the
proposed rule change should help
protect the integrity of the information
in the CRD system.292 In addition, the
289 See
id. at 7.
proposed Rule 12805(a)(1)(B).
291 See Notice at 50180.
292 The proposed rule change would give
unnamed persons the authority to reject the onbehalf-of request to preserve their ability to request
expungement on their own if they believe their
interests would be insufficiently represented by the
290 See
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proposed rule change should promote
more efficient use of resources by
precluding duplicative claims.
B. Straight-In Requests Under the
Industry Code and the Special
Arbitrator Roster
1. Filing a Straight-In Request
a. Form of a Straight-In Request
Proposed Rule 13805 would require
an associated person to make any
request to expunge disclosures of
customer dispute information (other
than requests made in a customer
arbitration itself) as a straight-in request,
and would limit the circumstances in
which an associated person could
request expungement.293 Specifically,
proposed Rule 13805(a)(1) would
require an associated person to make
such an expungement request against
the member firm with which they were
associated at the time the customer
dispute arose.294 FINRA stated that this
requirement would help ensure that
there is a connection between the
respondent firm and the subject matter
of the expungement request and that the
panel selected from the Special
Arbitrator Roster would be able to
request evidence from the member firm
with information that is relevant to the
expungement request.295
Two commenters recommended that
FINRA adopt an alternative for
unnamed parties to request
expungement other than by straight-in
requests.296 For example, one of these
commenters recommended that FINRA
establish a method for unnamed parties
who ‘‘had no say in whether the
[underlying] case should be settled.’’ 297
Similarly, the other commenter
expressed concern that an unnamed
named firm requesting expungement on their
behalf. See proposed Rule 12805(a)(2)(C) and (D).
293 See Section II.B.1., ‘‘Filing a Straight-in
Request Under the Industry Code.’’
294 Proposed Rule 13805(a)(2) would bar an
associated person from filing a straight-in request
against a member firm where the request has
previously been heard or denied, the relevant
customer dispute has not been resolved, specified
temporal limitations have passed, the associated
person is prohibited from seeking expungement
under Rule 12805(a)(1)(A) (for example, by failing
to seek expungement in the customer arbitration),
or a panel or court of competent jurisdiction
previously found the associated person liable or the
customer dispute information involves the same
conduct that is the basis of a final regulatory action
taken by a securities regulator or self-regulatory
organization. See Section III.B.6., ‘‘Limitations
Applicable to Straight-in Requests Only.’’
295 See Notice at 50179.
296 See letter from Robin M. Traxler, Senior Vice
President, Policy & Deputy General Counsel,
Financial Services Institute, to the Commission,
dated September 6, 2022 (‘‘FSI’’) at 5–6; letter from
Josh Barber to the Commission, dated August 24,
2022 (‘‘Barber’’).
297 See Barber.
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person may not be aware of a customer
arbitration (or have input in the
resolution of customer’s case) and thus
may not be aware they need to make a
straight-in request.298
FINRA responded that its existing
rules help ensure that associated
persons are aware of arbitration
disclosures on their Forms U4 and
U5.299 In addition, if a party to a
customer arbitration is unwilling to file
an on-behalf-of request or if a party files
an on-behalf-of request and the
arbitration settles, the proposed rule
change would allow the associated
person to seek expungement by filing a
request to expunge the same customer
dispute information as a straight-in
request.300
Two commenters supported the
proposed rule change regarding straightin requests, but recommended that
FINRA prohibit associated persons from
filing a straight-in request to expunge
multiple, unrelated requests in one
arbitration claim.301 According to one of
these commenters, the practice of
bundling expungement requests permits
‘‘gaming the system’’ by having such
claims heard by ‘‘expungement-friendly
arbitrators.’’ 302 One of these
commenters further suggested that
FINRA require a nexus between the
hearing location and the conduct at
issue so that customers and state
regulators would have more of an
incentive to participate.303 These
commenters reasoned that these changes
would prevent unnecessary
complications for the panel considering
the expungement request and provide a
common set of facts for the panel to
consider.304
FINRA responded that the proposed
time limits for filing a request 305 may
curtail the common practice of bundling
unrelated and aged expungement
requests in one straight-in request; and
the requirement under the proposed
rule change that an associated person
would be required to file a 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
298 See
FSI at 5–6.
FINRA November 10 Letter at 30; see, e.g.,
FINRA Rule 1010(c)(2)(A)–(B) and FINRA By-Laws,
Article V, Sections 3(a) and 3(b).
300 See FINRA November 10 Letter at 30.
301 See PIABA September 6 Letter at 4–5; Miami
at 4–5.
302 See Miami at 4–5.
303 See id. at 6.
304 See PIABA September 6 Letter at 5; Miami at
5–6.
305 See Section III.B.6., ‘‘Limitations Applicable to
Straight-in Requests Only.’’
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299 See
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subject matter of the straight-in request.
With respect to requiring a locational
nexus, FINRA stated that the ability for
a customer to attend and participate in
an expungement hearing by telephone
or by video conference should help
address concerns about there being a
connection between the hearing location
and the allegation at issue.306 FINRA
further stated that concerns about
expungement requests being brought
before expungement-friendly arbitrators
should be mitigated by several proposed
requirements to minimize the potential
for associated person or broker-dealer
influence in the arbitrator selection
process for straight-in requests. For
example, the proposed change would
require FINRA’s list selection algorithm
to randomly select a three-person panel
from the Special Arbitrator Roster and
the parties would not be able to agree
to fewer than three arbitrators, strike
any arbitrators selected by the list
selection algorithm or stipulate to their
removal, or be permitted to stipulate to
the use of pre-selected arbitrators.307
According to FINRA, ‘‘these
requirements would help ensure that
arbitrators on the Special Arbitrator
Roster have the qualifications and
training to decide straight-in requests
and that the arbitrators conducting the
expungement hearings are impartial and
experienced in managing and
conducting arbitration hearings in the
DRS arbitration forum.’’ 308
The Commission believes the
requirements set forth in the proposed
rule change are designed to promote
investor protection because it should
enhance the integrity of the CRD system.
The firm with which the person
requesting expungement was associated
at the time the dispute arose should
have knowledge of the dispute and
access to relevant documentary or other
evidence.309 Thus, requiring that a
straight-in request be filed against the
member firm with which the person was
associated at the time of the conduct
would increase the likelihood that the
firm would be in a position to
contribute to the development of any
record, including at the request of the
panel.310
306 See
FINRA November 10 Letter at 20.
id. at 20–21.
308 See id. at 21.
309 See Notice at 50179.
310 Proposed Rule 13203(b) would provide the
Director authority to deny the use of the forum to
decide the request if the requisite connection
between the associated person and the firm is not
present. See Notice at 50179. In addition, proposed
Rule 13805(a)(2) would impose limitations on when
such requests may be made. See Section III.B.6.,
‘‘Limitations Applicable to Straight-in Requests
Only.’’
Also, the practice of bundling
multiple, unrelated claims should be
largely curtailed by the proposed time
limits and requirement that claims be
filed against the member firm at which
the person was associated at the time
the customer dispute arose; and that the
constraints on parties’ ability to
influence the composition of the panel
should minimize the use of pre-selected,
expungement-friendly arbitrators.
Finally, associated persons should be
aware of arbitration disclosures on their
Forms U4 and U5.311 To the extent they
are not, the proposed time limits
(discussed below) provide associated
persons a reasonable amount of time to
become aware and seek expungement by
filing a request to expunge the same
customer dispute information as a
straight-in request.312 Thus, seeking
expungement via a straight-in request,
with the procedural safeguards
discussed herein, should not unduly
burden an associated person seeking
expungement.
b. Content of a Straight-In Request
In addition, as with named associated
person requests, the proposed rule
change also would establish content
requirements for straight-in
expungement requests.313 The required
content of a straight-in request would be
the same as those required for
expungement requests filed under
proposed Rule 12805.314 Specifically, an
associated person would be required to
include the following in a straight-in
request: 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, if applicable; and an
explanation of whether expungement of
the same customer dispute information
was previously requested and, if so,
how it was decided.315
The Commission received no
comment letters supporting or opposing
this proposed rule change.
The proposed form and content
requirements are reasonable for straightin requests. In particular, requiring an
associated person to file their
expungement request against the
307 See
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311 See
supra note 299.
supra note 300; see also Section III.B.6.b.,
‘‘Limitations Applicable to Straight-in Requests
Only, Time Limits for Expungement Requests.’’
313 See Notice at 50179.
314 See proposed Rule 13805(a)(3); see also Notice
at 50179; see also Section III.A.1., ‘‘Expungement
Requests by Respondents Named in Customer
Arbitration.’’
315 See proposed Rule 13805(a)(3); see also Notice
at 50179.
312 See
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member firm with which they were
associated at the time the customer
dispute arose should provide the panel
deciding the expungement request with
another source of documents potentially
pertinent to its consideration of the
request. As such, it could help a panel
establish a more complete factual record
upon which to base an award. In
addition, as discussed in more detail
above, the content required for an
expungement request under the
proposed rule change, including the
CRD occurrence number that is the
subject of the request, the case name
and docket number associated with the
customer dispute information, and
whether expungement of such
information had previously been
requested and any resolution thereof,
should improve the expungement
process by clearly documenting both the
request and whether it repeats a
previous request. The required content
would provide the panel with
information sufficient to know who is
requesting expungement and the
customer dispute with which it is
connected. In addition, requiring the
party requesting expungement to
explain whether expungement of the
same customer dispute information was
previously requested and, if so, how it
was decided will help prevent parties
from pursuing second requests for
expungement, consistent with the
proposed prohibition against repeat
requests.316
2. Deciding Straight-In Expungement
Requests
The proposed rule change would
establish a new framework for
arbitrators hearing straight-in
expungement requests. The proposed
rule change would require a threeperson panel 317 to hold an
expungement hearing, decide the
expungement request, and issue an
award in response to a straight-in
request filed in accordance with
proposed Rule 13805.318 As with
expungement requests decided in
customer arbitration, the panel would
be required to deny an expungement
request with prejudice in cases in which
an associated person withdraws or does
not pursue the request. FINRA stated
that requiring a panel to deny a request
that is withdrawn or not pursued would
protect investors by preventing
associated persons from withdrawing
and refiling expungement requests until
they obtain a panel whose composition
they believe is more likely to deliver a
favorable recommendation.319
The Commission received no
comment letters supporting or opposing
this proposed rule change. However, as
discussed above, the Commission
received, and FINRA responded to,
comments supporting and opposing
similar procedures for deciding
expungement requests during customer
arbitration.320
The Commission believes that
requiring a panel selected from the
Special Arbitrator Roster to decide a
straight-in expungement request and
deny a claim that is withdrawn or not
pursued, would help to prevent an
associated person from undermining the
enhanced expungement framework with
this form of arbitrator-shopping.321
3. The Special Arbitrator Roster
The proposed rule change would
establish a Special Arbitrator Roster
from which a three-person panel would
be drawn to decide all straight-in
expungement requests.322 Proposed
Rule 13806(b) would limit the Special
Arbitrator Roster to arbitrators with
specified experience and training.
Specifically, the proposed rule change
would limit the roster to public
arbitrators who are eligible for the
chairperson roster, have completed
FINRA’s enhanced expungement
training, and have served as an
arbitrator through award on at least four
customer-initiated arbitrations
administered by FINRA or by another
SRO in which a hearing was held.323 In
proposing the rule, FINRA stated that
these requirements would help ensure
that arbitrators on the Special Arbitrator
Roster: have the experience,
qualifications, and training to conduct a
fair and impartial expungement hearing;
appreciate the unique, distinct role they
play as expungement hearing
arbitrators; and understand the limited
circumstances in which expungement
should be awarded.324
Once the Special Arbitrator Roster has
been established, the proposed rule
change would require that three
319 See
Notice at 50179.
Section III.A.3., ‘‘Deciding Expungement
Requests during Customer Arbitrations.’’
321 See Section III.A.3., ‘‘Deciding Expungement
Requests during Customer Arbitrations’’ (discussing
comments received regarding the proposed rule
change’s treatment of expungement claims that are
withdrawn or not pursued).
322 See proposed Rule 13806.
323 See id.; see also Notice at 50179–80.
324 See Notice at 50179–80.
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320 See
316 See Section III.A.2., ‘‘Content and Timing of
On-Behalf-of Requests in Customer Arbitration.’’
317 As discussed in more detail below, the threeperson panel would be selected from the Special
Arbitrator Roster pursuant to proposed Rule 13806.
See Section III.B.3., ‘‘Straight-in Requests under the
Industry Code and the Special Arbitrator Roster,
The Special Arbitrator Roster.’’
318 See proposed Rule 13805(a)(4).
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24301
members of that roster be selected at
random to decide each expungement
request filed under proposed Rule
13805.325 In addition, the first arbitrator
selected would be the chair of the
panel,326 the parties would not be
permitted to agree to fewer than three
arbitrators,327 and the parties would not
be permitted to strike any arbitrators or
to stipulate to their removal, but would
be permitted to challenge an arbitrator
selected for cause.328 In proposing the
rule, FINRA stated that this process
would minimize the potential for
influence in the arbitrator selection
process by the associated person and
member firm, whose interests may be
aligned.329
Four commenters supported the
proposed rule change’s establishment of
a Special Arbitrator Roster, the selection
of a panel from this roster for
expungement requests under the
Industry Code, and the restrictions on
parties’ ability to influence the panel’s
composition.330 Three of these four
commenters supported the proposed
rule change on the basis that the threeperson panel would minimize the
impact of unopposed expungement
requests, facilitate expanded factfinding during the expungement
request, and that the prohibition on
ranking and striking, or agreeing to
arbitrators would reduce both the
prevalence of arbitrator-shopping and
repeat-player incentives for arbitrators
(i.e., from choosing arbitrators who are
historically more likely to award
expungements).331 The fourth
commenter further stated that the
proposed rule change would increase
efficiency and decrease costs for all
parties to the expungement matter, since
the parties will no longer need to spend
hours researching and ranking
arbitrators to find the individuals most
experienced at handling these issues.332
In addition, one commenter also stated
that the enhanced training to be
received by the Special Arbitrator Roster
would give associated persons fewer
causes for removal of an arbitrator for
cause.333
Five commenters, however, objected
to the proposed rule change’s
limitations on ranking and striking
325 See
proposed Rule 13806(b).
proposed Rule 13806(b)(3).
327 See proposed Rule 13806(b)(5).
328 See proposed Rule 13806(b)(4).
329 See Notice at 50180.
330 See Cambridge at 2; Cornell at 1–2; PIABA
September 6 Letter at 3; St. John’s at 2–3.
331 See Cornell at 1–2; PIABA September 6 Letter
at 3; St. John’s at 2–3.
332 See Cambridge at 2.
333 See Cornell at 2.
326 See
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arbitrators.334 One of these commenters
stated that ranking and striking is
‘‘enjoyed by all other participants in
FINRA arbitration proceedings’’ 335
while another commenter similarly
stated that customers have the ability to
rank and strike arbitrators.336 A third
commenter argued that because
different arbitrators approach issues
differently, there is a benefit to starting
with a large pool of potential panelists
and then letting the parties ‘‘winnow
the pool.’’ 337
FINRA stated that currently, based on
its experience with straight-in requests
filed in the DRS arbitration forum,
associated persons typically file
straight-in request for expungement
against the broker-dealer firm at which
the associated person is currently
employed.338 In such instances, the
proceeding is less likely to be
adversarial in nature than if the
associated person files an expungement
request against a customer.339 For
example, FINRA stated that a
respondent firm may support the
request for expungement because it has
an interest in removing negative
information from the associated
person’s CRD record.340 Accordingly,
FINRA stated that it would not be
appropriate to continue to use the
current process for selecting
arbitrators—striking and combining
ranked lists—to select arbitrators to
decide straight-in requests.341 FINRA
reasoned that in arbitrations that occur
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.342 Therefore, the
adversarial nature of the proceedings
serves to minimize the impact of each
party’s influence in arbitrator
selection.343 An adversarial proceeding
is less likely to occur in straight-in
requests.344 Thus, the proposed rule
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334 See
letter from Tosh Grebenik to the
Commission, dated November 21, 2022
(‘‘Grebenik’’); letter from Ronald Beckner to the
Commission, dated October 12, 2022 (‘‘Beckner’’);
Del Toro; Advisorlaw at 2; Hennion at 6.
335 See AdvisorLaw at 2–3.
336 See Hennion at 6.
337 See Grebenik.
338 See Notice at 50174 n.41; FINRA April 3 Letter
at 6.
339 See FINRA November 10 Letter at 26–27;
FINRA April 3 Letter at 5; Notice at 50180.
340 See id. at 50174.
341 See FINRA November 10 Letter at 26; FINRA
April 3 Letter at 5; Notice at 50180.
342 See FINRA November 10 Letter at 26; FINRA
April 3 Letter at 5; Notice at 50180.
343 See FINRA November 10 Letter at 26; FINRA
April 3 Letter at 5; Notice at 50180.
344 See FINRA November 10 Letter at 26–27;
FINRA April 3 Letter at 5; Notice at 50180.
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change would prevent associated
persons and member firms from
collaboratively seeking to influence the
outcome of the expungement request
through arbitrator selection.345
FINRA also recognized the potential
for the proposed rule change to limit the
associated person’s 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.346
However, FINRA stated that the higher
standards that the arbitrators would be
required to meet to serve on the Special
Arbitrator Roster should mitigate the
impact of the absence of party input on
the selection of arbitrators.347 In
addition, associated persons and
member firms would still be permitted
to challenge any arbitrator for cause.348
Given the potential lack of adverse
parties in straight-in expungement
requests, FINRA reasonably determined
that the random selection of a set
number of arbitrators is appropriate.
Random arbitrator selection, along with
other aspects of the proposed rule
change (e.g., the requirement that a
panel decide an expungement request
that is filed by an associated person, and
the prohibition on an associated person
withdrawing and re-filing their
expungement request), should help
eliminate arbitrator-shopping and serve
to protect investors and the integrity of
information in the CRD system. In
addition, parties would continue to be
able to challenge and remove arbitrators
for cause.
Several commenters also
recommended that FINRA expand the
pool of arbitrators eligible to serve on
the Special Arbitrator Roster, in
particular to allow for non-public
arbitrators, stating that such a change
would bring securities industry
expertise to deciding expungement
requests.349 One commenter suggested
that industry participants who have
worked as a general securities principal
for a least five consecutive years, in the
prior seven-year period, be eligible for
inclusion on the Special Arbitrator
Roster.350 This commenter also
suggested that at least one person on
each three-person panel be required to
345 See FINRA November 10 Letter at 27; FINRA
April 3 Letter at 5; Notice at 50180.
346 See FINRA November 10 Letter at 27; FINRA
April 3 Letter at 5; Notice at 50180.
347 See FINRA November 10 Letter at 27; FINRA
April 3 Letter at 5.
348 See FINRA November 10 Letter at 27; FINRA
April 3 Letter at 5.
349 See FSI at 4; Hennion at 6; Grebenik.
350 See FSI at 4.
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have securities industry experience
either as a general securities principal or
as an attorney who has the requisite five
years’ experience in state or federal
securities regulation or as a securities
regulator.351 Another commenter
likewise recommended including the
ability to have an industry arbitrator on
any expungement panel where more
than one arbitrator was required.352 A
third commenter argued that requiring
one public arbitrator, one non-public
arbitrator, and a chairperson that can
either be public or non-public, would
help create a diverse knowledge base
and would help the panel make better,
more informed decisions.353
Another commenter suggested not
limiting the Special Arbitrator Roster to
chair-qualified public arbitrators.354
This commenter stated that experience
in understanding and appreciating the
regulatory value of a customer
complaint should be the most important
qualification, thus concluding that the
Special Arbitrator Roster should be
expanded to include current and former
state, federal and SRO securities
regulators. This commenter further
suggested that the most experienced
arbitrators should not be on the Special
Arbitrator Roster as they have exhibited
bias in favor of granting expungements
in the past.355
FINRA declined to amend the
proposed rule change in response to
these comments. FINRA stated that it
‘‘believes that having experienced
public arbitrators, without significant
ties to the financial industry, deciding
straight-in requests would help achieve
the goal of balancing the competing
interests in the expungement process of
providing a fair process and ensuring
that information about associated
persons that is available to investors is
accurate.’’ 356 Such arbitrators would be
provided training that is neutral and
351 Id.
352 See Hennion at 6. Hennion further suggested
that arbitrators should be required to pay for the
training. See id. at 5. FINRA responded that it does
not now, and will not in the future, charge
arbitrators for any arbitrator training. See FINRA
November 10 Letter at 25.
353 See Grebenik. This commenter further
suggested that the enhanced expungement training
should be made public and be neutral rather than
‘‘persuasive’’ in an attempt to prevent panels from
granting expungement. Id. FINRA responded that
like other arbitrator training provided by DRS, the
proposed training will be neutral and informative
and it will be publicly available on FINRA’s
website. See FINRA April 3 Letter at 4 n.10. The
Commission believes that FINRA has addressed the
commenter’s suggestion.
354 See letter from Celiza Braganca, President, et.
al., The PIABA Foundation, to the Commission,
dated September 6, 2022 (‘‘PIABA Foundation
September 6 Letter’’) at 2–3.
355 See id.
356 FINRA November 10 Letter at 25.
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informative and the training would be
made publicly available on FINRA’s
website. Moreover, FINRA stated that
the enhanced training that arbitrators on
the Special Arbitrator Roster would be
required to take (as well as the other
eligibility requirements) would help
ensure that arbitrators on the Special
Arbitrator Roster have the qualifications
and training to appropriately decide
straight-in requests and that the persons
conducting the expungement hearings
are impartial and experienced in
managing and conducting arbitration
hearings in the DRS arbitration
forum.357
The Commission believes that FINRA
reasonably determined which arbitrators
would be eligible to serve on the Special
Arbitrator Roster. Specifically, limiting
eligibility to public arbitrators
reasonably balances the competing
interests in the expungement process of
providing a fair process and ensuring
the integrity of the information in the
CRD system. This approach should also
enhance the public’s perception that the
expungement process and rules are fair,
which, in turn, should enhance the
perception of the integrity of the
information on the CRD system. In
addition, the proposed eligibility
requirements should help ensure that
experienced arbitrators are deciding
expungement requests in light of the
public interest in the integrity of the
information in the CRD system.
4. State Attendance and Participation in
Straight-In Expungement Requests
The proposed rule change would
provide a mechanism for an authorized
representative of a state securities
regulator to present the state securities
regulator’s position on an expungement
request in writing or by attending and
participating in the expungement
hearing in person or by video
conference.358 The proposed rule
change would limit the authorized
representative’s ability to attend and
participate to only straight-in requests,
where the panel may otherwise only
hear evidence from the party requesting
expungement.359 To facilitate
attendance and participation, the
Director would notify the applicable
state securities regulator (in a manner
determined by the Director in
collaboration with state securities
regulators) and provide applicable
information and documents related to
the associated customer arbitration.360
357 See FINRA November 10 Letter at 25–26; see
also FINRA April 3 Letter at 4–5.
358 See proposed Rule 13805(c)(6)(A).
359 See Notice at 50185–86.
360 See proposed Rules 13805(b)(2)(A) and (B).
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In addition, under the proposed rule
change, the panel would not be
permitted to allow the attendance or
participation of the authorized
representative to materially delay the
scheduling of an expungement
hearing.361
While an authorized representative of
a state securities regulator would not be
a party to 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.362 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.363
In the Notice, FINRA stated that
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.364
Moreover, FINRA believes that state
participation in straight-in requests is
important in light of the importance of
the CRD to state registration and
oversight responsibilities.365
Seven commenters supported the
proposed rule change’s inclusion of
state securities regulators in the
expungement process.366 These
commenters supported including a
representative of a state securities
regulator in straight-in expungement
requests on the basis that such
participation would serve to
counterbalance a potentially unopposed
expungement request since customers
are less likely to participate in straightin requests,367 and would therefore help
protect the integrity of the information
in the CRD system needed for the
performance of state regulatory
proposed Rule 13805(c)(6)(A).
proposed Rule 13805(c)(6)(B).
363 See proposed Rule 13805(c)(6)(C).
364 See Notice at 50186.
365 See id.; see also NASAA September 6 Letter
at 1 (stating that securities regulators depend on
accurate information to make regulatory decisions).
366 See letter from Benjamin P. Edwards,
Associate Professor of Law, University of Nevada,
Las Vegas William S. Boyd School of Law, to the
Commission, dated September 6, 2022 (‘‘Edwards’’)
at 1–2; Miami at 6–7; PIABA September 6 Letter at
2; Cornell at 3; NASAA September 6 Letter at 3–
4; PIABA Foundation September 6 Letter at 2; St.
John’s at 3–4.
367 See PIABA Foundation September 6 Letter at
2; Miami at 6–7; Cornell at 3; Edwards at 1–2.
24303
obligations.368 One commenter stated
that while it appreciates the opportunity
to appear for arbitration proceedings
hearing expungement requests, state
participation in such proceedings would
be limited by resources and statespecific procedural hurdles that could
inhibit the ability to appear.369
Five commenters expressed concern
about permitting state securities
regulator participation in straight-in
expungement hearings.370 One of these
commenters suggested that notification
to state securities regulators should
instead occur at the point FINRA seeks
to obtain an order from a court of
competent jurisdiction confirming an
award containing expungement.371
Another commenter objected to a nonparty participating in an expungement
proceeding without being subject to the
forum’s jurisdiction because: (1) a panel
could not sanction a non-party for
perjury, and (2) ‘‘increasing the
barriers’’ to expungement would
decrease the proceeding’s efficiency.372
A third commenter argued that
participation of state securities
regulators would increase costs.373
FINRA responded that state securities
regulators are already notified about,
and can participate in, proceedings at
the state court confirmation level.
FINRA Rule 2080 requires that FINRA
be named as a party in such
proceedings, unless this requirement is
waived by FINRA. Upon receipt of a
complaint naming FINRA or a request
for a waiver from the requirement to
name FINRA as an additional party,
FINRA will notify NASAA of the
complaint or waiver request. NASAA, in
turn, will notify the appropriate state
securities regulator.374 FINRA stated
that under the proposed rule change
FINRA would notify state securities
regulators within 15 days of receiving a
request for expungement, giving them
time to review and decide whether to
participate in a straight-in request,
including in any prehearing
conference.375
FINRA also responded that the
arbitrators who would decide straight-in
361 See
362 See
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368 See PIABA September 6 Letter at 3; NASAA
September 6 Letter at 3–4; Cornell at 3; St. John’s
at 3–4.
369 See NASAA September 6 Letter at 3.
370 See letter from Michael Neal, Financial
Advisor, M. A. NEAL Financial Services, to the
Commission, dated August 31, 2022 (‘‘Neal’’);
Hennion at 6; AdvisorLaw at 3; Beckner; Grebenik
(supporting notification and attendance of state
regulators, but opposing participation).
371 See Hennion at 6; see also supra notes 28–30.
372 See AdvisorLaw at 3.
373 See Neal.
374 See FINRA November 10 Letter at 8 n.33.
375 See Notice at 50196 n.251 and accompanying
text.
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requests would have the experience,
qualifications and training necessary to
conduct a fair and impartial
expungement hearing in accordance
with the proposed rules and that the
proposed rule change would provide an
associated person requesting
expungement the opportunity to crossexamine any witness called by a state
securities regulator’s authorized
representative. FINRA stated that these
mechanisms should be sufficient to help
ensure that a non-party’s testimony or
documentary information presented is
appropriately scrutinized.376 FINRA
responded further by stating that
concerns about state participation
increasing costs to file an expungement
request may be overstated, as under the
proposed rule change the authorized
representative would not be a party to
the request, and thus, would not be
permitted to take actions that could
delay the proceeding or add to the
parties’ costs.377
FINRA acknowledged that in person
attendance and participation by an
authorized state representative may be
limited given state resource constraints.
FINRA pointed out that the proposed
rule change provides low-cost options to
help facilitate state participation;
specifically, that it would permit the
authorized representative to attend and
participate via video conference or
submit a state’s position in writing.378
The Commission believes that
permitting attendance and participation
by state securities regulators in straightin expungement proceedings, which
have a higher likelihood of proceeding
unopposed, and providing state
regulators low-cost options to do so,
will enhance the straight-in
expungement process. Specifically,
including state securities regulators and
providing them with access to
documents relevant to the expungement
request provides them the opportunity
to fulfill their own regulatory
obligations, while at the same time
increasing the likelihood that the panel
in an expungement proceeding will hear
evidence from multiple viewpoints,
thus allowing the panel to make more
informed decisions. At the same time,
the conditions applicable to state
securities regulator participation are
designed so that they do not delay the
resolution of an expungement request
and allow the claimants the opportunity
to challenge any information presented
in the forum by the state’s
376 See
377 See
FINRA November 10 Letter at 9–10.
id. at 9; see also FINRA April 3 Letter at
8.
378 See FINRA November 10 Letter at 8; see also
proposed Rule 13805(c)(6)(A).
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representative. As such, the proposed
rule change appropriately balances the
interests of state regulators in the
expungement process, as well as their
need to allocate and preserve resources,
with the importance of maintaining an
efficient and cost effective process for
associated persons requesting
expungement.
Two commenters recommended that
FINRA extend the option for a state
regulator’s representative to participate
in other expungement requests,
including those in customer
arbitration,379 and simplified
arbitration.380 These commenters
considered state participation in other
contexts as providing a similar
counterbalance as in a straight-in
request because expungement requests
in both customer arbitrations, whether
standard or simplified, are similarly
often unopposed because customers do
not participate in that aspect of the
proceeding.381
FINRA declined to amend the
proposed rule change in response to
these comments. FINRA stated that
attendance or participation in a
customer arbitration could substantially
disrupt the customer’s case and would
likely be less impactful, as the panel
from the customer arbitration hears the
customer’s evidence on the merits.382
Furthermore, in simplified arbitration
the expungement-only hearing would
likely be scheduled shortly after the
customer’s dispute is decided or closes,
increasing the likelihood of customer
attendance and participation. Thus,
FINRA does not believe that it is
necessary for state securities regulators
to also attend and participate in
expungement-only hearings in
simplified arbitrations.383
The Commission believes that it is
reasonable for FINRA to limit state
securities regulator participation to
straight-in requests where there is a
higher likelihood of proceeding without
meaningful opposition and state
participation may provide the greatest
benefit. In customer arbitration, the
panel will have the benefit of a balanced
presentation of the merits of the case
that should allow it to make an
informed decision on the expungement
request. Moreover, in simplified
arbitration it is more likely that a
customer will participate, providing
their version of events, in an
expungement hearing when it occurs
soon after the panel makes an award
379 See
Edwards at 1–2.
Miami at 6–7.
381 See Edwards 1–2; see also Miami at 6–7.
382 See FINRA November 10 Letter at 8.
383 See id. at 22.
380 See
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based on the merits of the claim.
Finally, FINRA stated it will continue to
evaluate whether there are other ways to
further strengthen the current
expungement process, including
whether to allow state securities
regulators to attend and participate in
separate expungement-only hearings in
simplified arbitrations.384
5. Alternatives to Deciding
Expungement Requests Through
Arbitration
While expressing support for the
proposed rule change, three commenters
contended that expungement
determinations are more appropriately a
regulatory decision not properly
adjudicated by FINRA’s arbitration
process.385 One of these commenters
argued that the degree to which such
records are preserved in CRD and
BrokerCheck for all stakeholders should
not turn on the varying abilities of any
party—state securities regulator,
authorized representative or customer—
to appear to make an argument.
According to the commenter, doing so
would continue to lead to inconsistent
results that have no relationship to the
importance of this information.386
FINRA did not amend the proposed
rule change in response to these
comments. FINRA stated that it believes
it is important to pursue a two-track
approach to improving the
expungement process. In the near term,
FINRA stated the integrity of the
information in the CRD system should
be better protected by adopting the
‘‘substantial improvements’’ to the
current expungement process that can
be achieved with the proposed rule
change.387 Concurrently, FINRA stated
that it would continue working with
NASAA and other interested parties to
consider a redesign of the current
expungement process.388
The proposed rule change is designed
to strengthen the current expungement
framework and to protect investors and
the public interest. The proposed rule
change’s establishment of a special
roster of specially qualified and trained
arbitrators to decide certain
expungement requests should help
mitigate the potentially non-adversarial
nature of straight-in expungement
requests. In particular, the Commission
believes that having three specially
qualified and trained arbitrators
available to ask questions and
384 See
FINRA April 3 Letter at 18–19.
PIABA September 6 Letter at 3–4; PIABA
Foundation September 6 Letter at 2; NASAA
September 6 Letter at 3–4.
386 See NASAA September 6 Letter at 3.
387 See FINRA November 10 Letter at 6.
388 See id. at 6–7.
385 See
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empowered to request evidence, along
with the proposed rule change’s
inclusion of state securities regulators in
straight-in requests where there may
otherwise be no opposing viewpoint,
should help ensure that a complete
factual record is created upon which the
arbitrators can base a decision in such
expungement hearings. The proposed
rule change also updates the Codes to
incorporate provisions from FINRA
Guidance that, among other things,
facilitate customer attendance and
participation in expungement hearings,
permit panels to request additional
documents or evidence relevant to an
expungement request, and codify the
grounds for awarding expungement.389
In addition, the Commission believes
that continuing dialogue among FINRA,
state regulators, industry participants,
consumer advocates, and other
stakeholders in the expungement
process will lead to future
improvements as the expungement
process continues to evolve.
6. Limitations Applicable to Straight-In
Requests Only
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The proposed rule change also would
codify and expand upon other aspects of
the Guidance applicable to straight-in
requests, in particular those related to
eligibility to file the request. For
example, the proposed rule change
would: prohibit an associated person
from filing a straight-in request if the
customer arbitration, civil litigation, or
customer complaint that gave rise to the
customer dispute information has not
closed; establish time limits for
expungement requests that are
specifically tied to the close of customer
arbitrations and civil litigations, or the
reporting of customer complaints in the
CRD system; and, prevent an associated
person from filing an expungement
request if (1) a panel or court of
competent jurisdiction previously found
the associated person liable in a
customer arbitration or civil litigation
associated with the same customer
dispute information or (2) the customer
dispute information involves the same
conduct that is the basis of a final
389 See Section III.D., ‘‘Procedural Requirements
Relating to All Expungement Hearings.’’
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regulatory action 390 taken by a
securities regulator or SRO.391
b. Time Limits for Expungement
Requests
a. No Expungement Request Until
Underlying Case Closes
Currently, FINRA Rules 12206(a) and
13206(a) require an associated person to
submit an arbitration claim, including
requests for expungement of customer
dispute information, within six years
from the occurrence or event giving rise
to the claim.394 The proposed rule
change would eliminate this six-year
eligibility rule and instead establish
shorter time limits for expungement
requests that are specifically tied to the
close of customer arbitrations and civil
litigations, or the reporting of customer
complaints in the CRD system, as
applicable.395 FINRA stated that the
time periods provided for in the
proposed rule changes for each situation
would provide a sufficient amount of
time for associated persons and their
firms to, among other things, gather the
documents, information, and other
resources required to file the
expungement request.396
With respect to customer arbitrations
and civil litigations, FINRA stated that
it believes the two-year period would
help ensure that expungement hearings
are held close enough in time to the
customer arbitration or civil litigation
such that information regarding the
dispute is available and in a timeframe
that could increase the likelihood of
customer participation where a
customer so chooses. The shorter
timeframe, FINRA believes, should help
encourage customer attendance and
participation in expungement
proceedings and help ensure that
straight-in requests are brought before
relevant evidence and testimony
The proposed rule change would
codify and expand upon the Guidance
by providing that an associated person
may not file a straight-in request if the
customer arbitration, civil litigation, or
customer complaint that gave rise to the
customer dispute information has not
closed, a limitation that is designed to
prevent an associated person from
obtaining a decision on an expungement
request while the related customer
dispute is ongoing.392 FINRA stated this
change would prevent potentially
inconsistent expungement decisions on
related customer dispute information
and help ensure that the panel that
would decide the straight-in request is
able to consider the final factual record
from the customer arbitration or civil
litigation.393 The Commission received
no comment letters supporting or
opposing this proposed rule change.
The proposed rule change would help
maintain the integrity of the information
in the CRD system by helping to prevent
inconsistent expungement decisions on
related customer dispute information.
The proposed rule change would also
help ensure that the panel deciding the
straight-in request is able to consider the
final factual record from the customer
arbitration or civil litigation.
390 FINRA stated that a ‘‘final regulatory action’’
includes any final action, including any action that
is on appeal, by a securities regulator or SRO. See
FINRA Rule 8312(c); see also Regulatory Notice 09–
66 (November 2009) (stating that ‘‘actions that are
delineated in current Form U4 Questions 14C, 14D
or 14E will be considered ‘final regulatory actions.’
Similarly, actions that are detailed in current Form
U5 Question 7D, and have a status of ‘final’ or ‘on
appeal,’ will be considered ‘final regulatory actions’
as such actions are also addressed in Form U4.’’).
For example, a Letter of Acceptance, Waiver, and
Consent and an accepted Offer of Settlement are
two examples, among others, of final regulatory
actions taken by FINRA. See FINRA Rule 9216(a)(4)
and Rule 9270(g). A ‘‘final regulatory action’’ may
also include a final action reported by a regulator
on Form U6. See Regulatory Notice 09–66
(November 2009). See FINRA April 3 Letter at 14
n.49. For purposes of this proposed rule, a ‘‘final
regulatory action’’ would not include a final action
by a securities regulator or SRO that is dismissed,
vacated or withdrawn. If, after dismissal, vacatur,
or withdrawal of the final regulatory action, the
associated person’s expungement request in the
DRS arbitration forum would be ineligible pursuant
to Rule 13805(a)(2) (e.g., because the request is time
barred), the associated person could seek a court
order directing expungement of the customer
dispute information. See FINRA April 3 Letter at 14
n.52.
391 See Amendment No. 2; see also infra note 430
and accompanying text.
392 See proposed Rule 13805(a)(2)(A)(iii); see also
Notice at 50180.
393 See Notice at 50180.
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394 See supra note 125 and 127 and
accompanying text.
395 See Notice at 50181. As described above, the
proposed rule change would prescribe different
time limits in connection with customer
arbitrations or civil litigations and customer
complaints. In the case of a customer arbitration or
civil litigation that gave rise to the customer dispute
information in question, proposed Rule
13805(a)(2)(A)(iv) would require an associated
person to file a straight-in request within two years
of such matters closing. In the case of customer
complaints, proposed Rule 13805(a)(2)(A)(v) would
prohibit an associated person from filing a straightin request where more than three years has elapsed
from the time the complaint was first reported to
the CRD system and there was no customer
arbitration or civil litigation that gave rise to the
customer dispute information. The proposed rule
change would also establish similar 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. See Notice at 50181–82; see also Section
II.C.2.d., ‘‘Time Limits Applicable to Disclosures
Arising After the Effective Date of the Proposed
Rule Change.’’
396 See Notice at 50181.
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becomes stale or unavailable.397
Accordingly, FINRA believes the
proposed time limit would help provide
panels with more complete factual
records on which to base their
expungement decisions, while at the
same time allowing the associated
person adequate time to determine
whether to seek expungement.398
With respect to customer complaints
where there was no customer arbitration
or civil litigation associated with the
customer dispute information, FINRA
stated that it believes that the three-year
period 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. The three-year time
limitation 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. FINRA
also believes that the three-year time
limitation may 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.399
Six commenters supported the
proposed time limitations.400 Two of
these commenters stated that the time
limitations will make it more likely that
customers will participate 401 and one of
these commenters stated that the
timeframes provide enough time for
associated persons to determine
whether to file an expungement request
and gather the relevant information to
support their request.402 Another
commenter stated that the time
limitations would increase the
efficiency of the expungement process
and decrease the cost to member firms
because when expungement requests are
filed ‘‘four or five or even ten years’’
after the event giving rise to the request,
a party’s ability to respond to discovery
requests and produce relevant
information becomes much more
difficult and time consuming.403
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397 See
id.
id.
399 See id.
400 See Miami at 5; Cambridge at 2; Cornell at 3–
4; NASAA at 2; St. John’s at 3; PIABA September
6 Letter at 4.
401 See Cornell at 4; St. John’s at 3.
402 See Cornell at 3–4.
403 See Cambridge at 2.
398 See
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Seven commenters objected to the
time period limitations.404 One
commenter stated that time limits for
filing an expungement request should
mirror those provided to customers (a
six-year period of eligibility with
expansion for good cause).405 This
commenter argued that providing the
associated person the opportunity to file
for expungement within a six-year time
frame—regardless of whether there was
a customer-filed arbitration—recognizes
that representatives may not have been
meaningfully involved in the
underlying arbitration for a variety of
reasons (e.g., separation from the
firm).406 Two other commenters stated
that the amount of time that passes has
no bearing on the merits of the
expungement request.407 Another
commenter stated that time limits may
preclude expungement requests because
associated persons are not aware of the
expungement process and suggested
grandfathering in associated persons
with existing disclosures or sending
notifications to such persons.408 Two
other commenters stated that associated
persons may lack the resources to seek
expungement within the proposed twoyear time limit.409 One of these
commenters added that associated
persons may not consider expungement
important at the time only to change
their minds later on in their careers;
however, the commenter recommended
that if FINRA moved forward with the
two-year time limit, it should ensure all
404 See letter from James P. Galvin, Esq., Galvin
Legal PLLC, to the Commission, dated April 7, 2023
(Galvin) at 2; Hennion at 6; AdvisorLaw at 3;
Grebenik; Beckner; Del Toro; Barber.
405 See Hennion at 6. See also FINRA Rule 12206
(Time Limits) (stating that no claim shall be eligible
for submission to arbitration under the Customer
Code where six years have elapsed from the
occurrence or event giving rise to the claim).
406 See Hennion at 6.
407 See AdvisorLaw at 3; Barber; see also letter
from John O’Bannon, Financial Advisor, Diversified
Financial Group, to the Commission, dated October
11, 2022 (stating that ‘‘[i]f a customer complaint is
truly meritless, then the advisor should not
continue to be potentially harmed by having there
[sic] meritless disclosures continue to be on
record.’’ And recommending: (1) that ‘‘[d]isclosures
that were dropped by clients should be dropped by
FINRA no later than 3 years after filing’’; (2)
allowing ‘‘[e]diting of [Form] U4 listings [to]
correctly describe the issue and resolution [in a
manner that does not] immediately give the
negative connotation that the advisor is a cheat/liar
if it’s not accurate’’; and (3) establish ‘‘an
expungement process for those convictions that [are
more than 15 years old]’’); see also Grebenik (stating
that ‘‘FINRA should evaluate the complaint first to
determine a basic level of legitimacy. Otherwise,
the meritless and frivolous complaints will
continue to be filed and will continue to be
expunged at a high rate of success.’’). These
comments from O’Bannon and Grebnik are outside
the scope of the proposed rule change.
408 See Grebenik.
409 See Galvin at 2; Del Toro.
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associated persons affected by a given
arbitration claim are given proper notice
of the case’s closure, as well as a
description of any applicable time limits
for making an expungement request.410
Finally, one commenter that otherwise
supported the proposed rule change
argued that less time was necessary and
urged FINRA to adopt a shorter, oneyear time period for all straight-in
expungement requests.411
FINRA considered these comments
but declined to amend the proposed
rule change. FINRA responded that it
believes that the proposed time
limitations appropriately address its
concern that a number of expungement
requests are currently filed many years
after a customer arbitration closes or the
reporting of a customer complaint in the
CRD system.412 FINRA stated that
requiring associated persons to file
straight-in requests within three years of
the filing of the customer complaint,
rather than six, would help ensure that
expungement hearings are held close in
time to the events that led to the
customer dispute information
disclosure.413 FINRA stated that, in
turn, this may: (1) increase the
likelihood of customer participation; (2)
ensure that straight-in requests are filed
before relevant evidence and testimony
becomes stale or unavailable; and (3)
generally help to develop a more
complete factual record on which to
decide an expungement request.414
FINRA also stated that allowing two
years from the close of the customer
arbitration or civil litigation to bring an
410 See
Del Toro.
PIABA September 6 Letter at 4.
412 See FINRA November 10 Letter at 19. In
response to a commenter’s request that associated
persons with existing disclosure be ‘‘grandfathered
in’’ or provide notice, FINRA stated such
‘‘grandfathering’’ would be contrary to the purpose
of the proposed rule change to address concerns
about expungement requests made many years after
the fact, and further stated that if the proposed rule
change is approved, it would issue a Regulatory
Notice that will provide notice to associated
persons of when the time period will commence for
seeking expungement of customer dispute
information already on their records. See Grebenik;
FINRA April 3 Letter at 11–12.
413 See FINRA April 3 Letter at 10–11.
414 See id. FINRA recognized that as a result of
the three-year time limitation, an associated person
may be prevented from filing a request for
expungement of customer dispute information
because the member firm’s investigation of the
customer complaint has not concluded and,
therefore, the customer complaint associated with
the customer dispute information has not closed.
However, FINRA stated that it believes that such
instances would occur rarely. Furthermore, in the
event that an associated person is prevented from
filing a request for expungement of customer
dispute information in the DRS arbitration forum
because of the three-year time limitation, the
associated person could seek a court order directing
expungement of the customer dispute information.
See id.
411 See
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expungement request would provide a
reasonable amount of time for
associated persons and firms to gather
the necessary documents, information
and other necessary resources required
to file the expungement request and
help ensure that the expungement
hearing is held close enough in time to
the customer arbitration. In addition,
the two-year time limitation would
reduce the potential for such
information to become stale and
increase the likelihood of customer
participation.415 Moreover, FINRA
stated that it believes the three-year time
period for expungement requests in
connection with customer complaints
would: (1) allow firms to complete their
investigation of the customer complaint
and close it in the CRD system; (2) allow
associated persons to develop a sense of
whether the complaint may evolve into
an arbitration or civil litigation; and (3)
allow associated persons to determine
whether to proceed with a request to
expunge the complaint.416
FINRA acknowledged that there could
be instances when associated persons
may not be aware that a customer
arbitration has closed, and that the twoyear time limit for requesting
expungement of customer dispute
information has begun to run.417 To
facilitate an associated person’s
awareness of the proposed time limits,
FINRA stated that if the proposed rule
change is approved, it would issue a
Regulatory Notice providing notice to
associated persons of when the time
period will commence for seeking
expungement of customer dispute
information already on their records.
FINRA also stated it would update the
cover letter that is provided by DRS to
respondents once a statement of claim
has been filed to explain that: (1) an
associated person is prohibited 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; (2) an
associated person is 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, unless
such request is barred under the
Industry Code; and (3) associated
persons may remain apprised of the
status of the customer arbitration,
including case closure, by contacting
the parties to the arbitration or DRS.418
415 See FINRA November 10 Letter at 19; FINRA
April 3 Letter at 11–12 and n.39.
416 See FINRA November 10 Letter at 19.
417 See FINRA April 3 Letter at 9.
418 Id.
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FINRA further stated that the updated
cover letter would also encourage
member firms to provide updates about
the status of the customer arbitration to
associated persons who are not named
parties to the customer arbitration,
including case closure.419 Finally,
FINRA stated it would publish guidance
on its website about the changes to the
Codes that would include information
about how associated persons can
remain apprised of the status of a
customer arbitration, including through
contacting DRS.420
FINRA’s time limitations seek to
balance two competing interests: (1)
promoting customer participation and
the availability of evidence and (2)
providing sufficient time for an
associated person to determine whether
to seek expungement and, in the case of
customer complaints, for firms to
investigate and close a complaint and
for the complaint to evolve, or not, into
arbitration or civil litigation. The
Commission believes that the proposed
rule change strikes a reasonable balance
between these competing interests.
Holding expungement hearings closer in
time to the event that gave rise to the
customer dispute information should
promote the availability of evidence and
customer participation, which would
help contribute to more informed
expungement determinations and
therefore to investor protection and the
integrity of information in the CRD
system.421
c. Preclusion of Certain Expungement
Requests
The proposed rule change, as
modified by Amendments No. 1 and No.
2, would also preclude an associated
person from filing an expungement
request if: (1) a panel or court of
competent jurisdiction previously found
the associated person liable in a
customer arbitration or civil litigation
associated with the same customer
dispute information or (2) the customer
dispute information involves the same
conduct that is the basis of a final
regulatory action 422 taken by a
securities regulator or SRO.423
FINRA included the proposed
preclusion of expungement requests
419 Id.
at 9–10.
at 10.
421 As stated above, the proposed rule changes
would give the Director the express authority to
deny the use of the DRS arbitration forum to decide
expungement requests, including where the request
is ineligible under the proposed time limitations.
The Commission believes that these powers are a
reasonable method to help ensure adherence to the
limitations contained in proposed Rules 12805 and
13805.
422 See supra note 390.
423 See proposed Rule 13805(a)(2)(A)(v).
420 Id.
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where the associated person was
previously found liable in a customer
arbitration or civil litigation associated
with the same customer dispute
information as an amendment to its
proposed rule change in response, in
part, to a commenter’s
recommendation.424 FINRA reasoned
that these expungement requests are in
effect a collateral attack on the binding
arbitration award and that a collateral
attack is not contemplated under FINRA
rules and is contrary to the Codes.425
FINRA stated that the only avenue for
challenging a prior adverse arbitration
award is to file a timely motion with an
appropriate court to vacate, modify, or
correct the award.426
Two commenters supported the
amendment.427 These commenters
agreed that an arbitral or judicial finding
that a claim is valid should preclude the
ability to have such information
expunged.428 A third commenter
supported the amendment, but
suggested the reason for the amendment
would apply equally in other contexts,
and recommended that associated
persons should be prevented from
seeking expungement of customer
dispute information that forms the basis
for a finding of liability in all of the
contexts in which such information
forms part of a regulatory record, such
as state regulatory proceedings,
proceedings brought by the
Commission, or self-regulatory
proceedings.429
After further consideration of the
issue, FINRA proposed a modification
to the proposed rule change in
Amendment No. 2 to provide that an
associated person shall not file a claim
requesting expungement of customer
dispute information from the CRD
system against a member firm at which
the person was associated at the time
the customer dispute arose if the
customer dispute information involves
424 See St. John’s at 2 (suggesting that associated
persons be prohibited from seeking expungement if
there has been a finding of liability in the
underlying customer arbitration). See Amendment
No. 1; see also FINRA November 10 Letter at 28.
425 See FINRA November 10 Letter at 28; see also
FINRA Rules 12904(b) and 13904(b).
426 See FINRA November 10 Letter at 28.
427 See letters from Celiza P. Braganc
¸a, PastPresident & Director, et. al., The PIABA Foundation,
to the Commission, dated December 7, 2022
(‘‘PIABA Foundation December 7 Letter’’) at 2; see
also Hugh D. Berkson, President, Public Investors
Arbitration Bar Association, to the Commission,
dated December 7, 2022 (‘‘PIABA December 7
Letter’’) at 2–3.
428 See id.
429 See letter from Andrew Hartnett, President,
North American Securities Administrators
Association, Inc., to the Commission, dated
December 7, 2022 (‘‘NASAA December 7 Letter’’) at
3.
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the same conduct that is the basis of a
final regulatory action taken by a
securities regulator or SRO. If an
associated person requests expungement
of such customer dispute information,
the Director would deny the forum to
the expungement request.430 FINRA
stated that prohibiting an associated
person from filing such expungement
requests would promote greater
efficiency in the DRS arbitration forum
because it would preclude requests that
otherwise would be unsuccessful.431
Permitting expungement following a
finding of liability in an arbitration or
civil litigation associated with the same
customer dispute information or a final
regulatory action based on the same
conduct sought to be expunged would
be inconsistent with the specified
grounds that can form the basis for an
expungement award under the proposed
rule change (i.e., factual impossibility,
mistake, or falsity). Permitting an
expungement claim in these
circumstances would, in addition to
constituting a collateral attack on the
results of the underlying dispute,
contribute to inefficiencies in the
expungement process by allowing for
claims to proceed that could not
succeed.
C. Expungement Requests During
Simplified Arbitrations
1. Filing and Considering Requests
During Simplified Arbitration
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,432 and would
establish procedures for requesting and
considering expungement requests in
simplified arbitrations that are
consistent with the expedited nature of
these proceedings.433
The proposed rule change would
require an arbitrator in a simplified
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430 See
FINRA April 3 Letter at 14; Amendment
No. 2; see also proposed Rule 13203(b).
431 See FINRA April 3 Letter at 13–14.
432 See proposed Rule 12800(d)(1)(A). If the
requesting party requests expungement in a
pleading other than an answer, the request must be
filed within 30 days from the date that FINRA
notifies the associated person of arbitrator
appointment. See proposed Rule 12800(d)(1)(B).
When FINRA notifies the parties that 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. See
Notice at 50187 n.193 and accompanying text. The
request would be required to include the same
information as a request filed in a non-simplified
arbitration. See proposed Rules 12800(d)(1)(B)(i)
and 12805(a)(1)(C)(ii); see also Notice at 50187.
433 See proposed Rules 12800(d) and (e); see also
Notice at 50186. See Section II.A., ‘‘Requests for
Expungement under the Customer Code.’’
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arbitration to decide an expungement
request that is filed by an associated
person or as an on-behalf-of request.434
In addition, as in the proposed rule
change governing regular customer
arbitration, under the proposed rule
change if the requesting party
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 refiled.435 FINRA stated that these
proposed rule changes would help
eliminate arbitrator-shopping by
requiring the panel in which the request
is made to decide the request.436 FINRA
also stated that, unlike the proposed
amendments to a regular customer
arbitration, FINRA was not proposing
that a panel from the Special Arbitrator
Roster decide an expungement request
made during a simplified customer
arbitration where the arbitration closes
other than by award or closes by award
without a hearing, because the public
chairpersons who decide simplified
arbitrations would be fully capable of
making appropriate expungement
decisions on the basis of their
experience and would have the same
enhanced expungement training as the
arbitrators on the Special Arbitrator
Roster.437
In addition, unlike in a regular
customer arbitration, if expungement is
not requested during a simplified
arbitration, the proposed rule change
would permit the associated person to
file a straight-in expungement request
for the same customer dispute
information under the Industry Code
and have the request decided by a threeperson panel randomly selected from
the Special Arbitrator Roster.438
One commenter requested that a
named associated person should be
required to request expungement during
the arbitration of the customer’s claim,
as proposed for non-simplified cases.439
The commenter stated that arbitrators in
simplified arbitrations are experienced
public arbitrators who have the same
enhanced expungement training as the
arbitrators on the Special Arbitrator
Roster and would therefore be able to
make an informed decision on the
434 See proposed Rules 12800(d)(1)(B)(ii) and
12800(e)(1); see also Notice at 50187.
435 See proposed Rule 12800(d)(1)(C); see also
Notice at 50187.
436 See Notice at 50187.
437 See Notice at 50188. Under the proposed rule
change, 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. See also
proposed Rule 12800(b).
438 See proposed Rule 12800(e)(2).
439 See Miami at 2–3.
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merits of an expungement request.440
The commenter also stated that
requiring a named party to request
expungement during the arbitration of
the customer’s claim in simplified
arbitration would encourage customer
participation because the expungement
request would be closer in time to the
complained-about conduct and
therefore easier for the customer to
recall the facts.441
FINRA declined to amend the
proposed rule change, referencing the
expedited nature of simplified
arbitrations.442 FINRA stated that
because there may be less discovery in
simplified arbitration and the customer
can dictate the extent of the evidence
presented to the arbitrator, there may be
less information available for the
arbitrator to evaluate an expungement
request.443 Accordingly, FINRA stated
that it is appropriate that an associated
person should retain the ability to
choose to file the request as a straightin request under the Industry Code.444
FINRA also stated, however, that it will
continue to monitor expungement
requests and decisions in simplified
arbitrations to determine if additional
changes are warranted, including
whether a panel from the Special
Arbitrator Roster should be required to
decide an expungement request in
simplified arbitrations.445
Requiring an arbitrator to decide an
expungement request that is filed in a
simplified arbitration, regardless of the
outcome of that arbitration, along with
requiring an arbitrator to a reject such a
request with prejudice if it is
withdrawn, will help protect the
integrity of the information in the CRD
system by limiting an associated
person’s ability to request expungement
for the same claim (even if it has been
denied in the past) until they find a
panel willing to award it. By allowing
an associated person to determine
440 See Miami at 3–4. Similarly, Cornell requested
that FINRA add to the proposed rule change that
if an expungement is requested during a simplified
arbitration and if the parties agree to have a specific
arbitrator, this arbitrator must be required to
undergo the enhanced expungement training
provided to the arbitrators on the Special Arbitrator
Roster prior to considering the expungement
request. See Cornell at 4–5. In response, FINRA
stated that the proposed rule change would require
that arbitrators deciding expungement requests in
simplified arbitrations be experienced public
arbitrators who have taken the same expungement
training as arbitrators on the Special Arbitrator
Roster, including where the parties agree to a
specific arbitrator. See FINRA November 10 Letter
at 22.
441 See Miami at 3–4.
442 See FINRA November 10 Letter at 23.
443 See id.; see also Notice at 50187.
444 See Notice at 50187.
445 See id.; see also FINRA April 3 Letter at 18–
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whether to request expungement in a
simplified arbitration or to instead file
the request as a straight-in request under
the Industry Code, the proposed rule
change appropriately puts the decision
to seek expungement in the hands of the
party most impacted by the outcome.
Because claims in simplified arbitration
generally are decided by one arbitrator
based on the documents that are
submitted by the parties, with limited
discovery, and without a hearing, there
may be less information available for the
arbitrator to evaluate an expungement
request during a simplified arbitration.
Therefore, the Commission believes that
associated persons should be given the
choice of how they want to proceed
with their request for expungement,
while at the same time balancing
customer and regulator interests in the
process. The Commission notes,
however, that FINRA has stated it will
monitor this issue and propose changes
as warranted.
2. Deciding Requests in Simplified
Arbitration
As stated above, if expungement is
requested during a simplified
arbitration, the proposed rule change
would require the arbitrator to decide
the expungement request regardless of
how the simplified arbitration case
closes, including by settlement, in one
of two ways, depending on the how the
customer chooses to have their claim
decided.446
If the customer chooses to have their
claim decided either (1) ‘‘on the papers’’
(i.e., without a hearing) or (2) in an
‘‘Option Two’’ special proceeding, the
arbitrator would decide the customer’s
dispute first and then issue an award
before deciding the expungement
request.447 After the customer’s dispute
is decided, the arbitrator would hold a
separate expungement-only hearing to
consider and decide the expungement
request and issue a separate award.448
FINRA reasoned that this requirement
would minimize any delays in resolving
the customer arbitration and in
determining any potential recovery that
a customer may be awarded.449 FINRA
further stated that the separate
expungement-only hearing would be
necessary to enable the arbitrator to
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446 See
Notice at 50187–88; see also proposed
Rules 12800(d)(1)(B)(ii) and 12800(e)(1).
447 See proposed Rule 12800(e)(1)(A).
448 See proposed Rule 12800(e)(1)(A). The
arbitrator would have to conduct the expungement
hearing pursuant to proposed Rule 12805(c); the
expungement award would have to meet the
requirements of proposed Rule 12805(c)(8); and
forum fees would be assessed pursuant to proposed
Rule 12805(c)(9). See id.; see also Notice at 50188
n.206.
449 See Notice at 50188.
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request any documentary, testimonial,
or other evidence it deems relevant to
the expungement request to make a fully
informed decision.450
Alternatively, if the customer chooses
to have their claim decided by an
‘‘Option One’’ full hearing and it closes
by award, the proposed rule change
would require the arbitrator to consider
and decide the expungement request
during the customer arbitration and
include the decision in the award.451
This process would be the same as
deciding an expungement request
during a regular customer arbitration
that closes by award after a hearing,
where the customer’s claim and
expungement request are addressed
during the customer arbitration.452
If a simplified arbitration closes other
than by award or closes by award
without a hearing, however, the
proposed rule change would require the
arbitrator 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.453 Under the proposed rule
change, the Director would notify all
customers from the simplified
arbitration of the separate expungementonly hearing, if applicable.454 FINRA
believes that a separate expungement
hearing would be necessary in these
circumstances for the arbitrator to
develop a complete factual record in
order to make a fully informed decision
on the expungement request.455 FINRA
also believes that the Director’s notice
would further this objective by
providing a timely reminder to
customers of the expungement hearing
so that they may plan and prepare to
attend and participate if they choose.456
Moreover, FINRA stated that it would
continue to monitor expungement
requests and decisions in simplified
arbitrations to determine if additional
changes are warranted.457
Three commenters voiced support for
the proposed rule change, specifically
identifying the bifurcation of the
expungement hearing and simplified
arbitration where the customer’s claim
is decided ‘‘on the papers’’ or in an
450 See id. FINRA stated that the customer
arbitration may not be as fully developed when a
customer has requested an ‘‘on the papers’’ or
special proceeding. See id.
451 See proposed Rule 12800(e)(1)(B)(i); see also
Section III.A.3., ‘‘Deciding Expungement Requests
during Customer Arbitrations.’’
452 See Notice at 50188.
453 See proposed Rule 12800(e)(1)(B)(ii).
454 See proposed Rule 12800(f)(2).
455 See Notice at 50188.
456 See id.
457 See id.
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‘‘Option Two’’ hearing.458 One of these
commenters reasoned that by requiring
a separate hearing on the expungement
request following a final decision on the
customer’s claim, the proposed rule
change would allow for a just resolution
of the request because the arbitrator
would have all of the facts and special
insights necessary to decide whether to
award expungement, while ensuring the
resolution of the investor’s claim is not
delayed.459 Another commenter
similarly stated that deciding the
customer dispute before the request for
expungement would minimize delays in
customer recovery but allow the
arbitrator to make a more fully
developed record before deciding the
expungement request.460
Another commenter suggested that
FINRA create a simplified process for
expungement with similar fees and an
‘‘on the papers’’ option before a single
arbitrator for requests for expungement
associated with customer complaints
and customer arbitrations under
$50,000.461 In response, FINRA
declined to amend the proposed rule
change, stating that an important part of
ensuring the expungement process
works as intended is for arbitrators to
hold recorded expungement hearings
during which they can hear testimony
and assess the credibility of the
associated person requesting
expungement and any witnesses.462
The proposed rule change’s procedure
for determining the order in which a
panel would decide an expungement
request in a simplified arbitration based
on the type of proceeding chosen by the
customer is reasonable. For example,
where a customer opts to have their
claim decided without a hearing (i.e.,
‘‘on the papers’’) or chooses an ‘‘Option
Two’’ special proceeding, the arbitrator
would hold a separate expungementonly hearing to consider and decide the
expungement request after it decides the
customer’s dispute. The Commission
believes that this process benefits both
customers and associated persons. The
customer would avoid any delay in
resolving their claim that consideration
of an expungement request would
cause; and the associated person would
have a separate hearing to help ensure
that the arbitrator has sufficient
evidence upon which to rule on their
expungement request. Alternatively,
where the customer chooses to have
their claim decided after a full hearing
458 See
Miami at 2–3; St. John’s at 2; Cornell at
4.
459 See
St. John’s at 2.
Cornell at 4.
461 See Hennion at 6.
462 See FINRA November 10 Letter at 23.
460 See
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(i.e., an ‘‘Option One’’ proceeding), it is
reasonable to allow the panel to rule on
an expungement request because the
request would not unduly burden the
customer or an associated person
requesting expungement in the hearing.
By choosing ‘‘Option One’’, a customer
has agreed to participate in a more
involved and time-consuming process
than having their claim decided ‘‘on the
papers.’’ Likewise, the customer has
assumed the risk that the resolution of
their claim could be delayed by an
associated person’s expungement
request. In addition, the associated
person gets an opportunity during the
hearing to help the panel fully develop
a record on which to decide the
expungement request.
D. Procedural Requirements Relating to
All Expungement Hearings
The proposed rule changes would
include certain procedural provisions
that would apply to all expungement
hearings. As described above, these
would include procedural requirements
relating to: (1) hearing format; (2)
associated person’s appearance; (3)
customer attendance and participation;
(4) panel requests for additional
documents or evidence; (5) review of
settlement documents; (6) requirement
for a unanimous decision to issue an
award containing expungement relief;
(7) contents of an expungement award;
(8) grounds for awarding expungement;
(9) evidentiary weight of a decision by
customers or authorized representatives
not to attend or participate; and, (10)
forum fees.463 In addition, the proposed
rule change would expand the authority
of the Director to deny the use of the
DRS arbitration forum.464
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1. Hearing Format
Current FINRA rules 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.465 The
proposed rule change would also permit
the panel to hold a recorded hearing
session by video conference. The
proposed rule change would also clarify
that a panel would not be limited in the
number of hearing sessions it could
hold to decide an expungement
request.466 No commenter supported or
objected to these proposed changes.
This is an appropriate approach.
Permitting parties to hold a recorded
463 See Section II.D., ‘‘Procedural Requirements
Relating to All Expungement Hearings.’’
464 See Section II.C.3, ‘‘Director’s Authority to
Deny the Forum.’’
465 See FINRA Rules 12805(a) and 13805(a).
466 See proposed Rules 12805(c)(1) and
13805(c)(1).
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hearing session by video conference
enhances party participation by making
it more convenient and allowing others
to read facial expressions of those
testifying. In addition, by not limiting
the number of hearing sessions a panel
could schedule to hear an expungement
request, the proposed rule change
would help ensure that parties would
not be limited in presenting their
arguments.467
2. Appearance by Associated Person or
Party Requesting Expungement
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.468
Likewise, 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.469 The panel would determine
the method of appearance.470 FINRA
stated that it 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 the
associated person’s appearance to 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.471
No commenter supported or objected
to these proposed changes. One
commenter stated that ‘‘FINRA should
be mindful that not all persons have the
same kind of access to technology and
bandwidth. As such, the panel should
also have discretion to decide the
appropriateness of the manner and form
of the requesting . . . [associated
person’s] participation given the
circumstances.’’ 472 FINRA responded
that the proposed rule change provides
the panel with that discretion. However,
FINRA stated that the method of
appearance would be required to be in
person or by video conference because
FINRA believes the panel may be better
able to assess the associated person’s
467 Arbitrators would remain in control of the
number of hearings needed to decide an
expungement request. See FINRA Rule 12500
(Initial Prehearing Conference) (requiring the
Director to schedule an Initial Prehearing
Conference during which the panel will, among
other things, schedule any subsequent hearing
sessions during which a request would be heard).
468 See proposed Rules 12805(c)(2) and
13805(c)(2).
469 See id.; see also FINRA April 3 Letter at 7.
470 See id.
471 See Notice at 50182.
472 Del Toro.
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credibility through these methods of
appearance.473
Given the importance of protecting
the integrity of the information in the
CRD system, FINRA reasonably
determined to require that a party
requesting expungement appear at the
expungement hearing either in person
or by video conference. Such a
requirement will allow the panel to
better assess the testimony of such
persons, but also provides flexibility to
accommodate instances in which it may
not be reasonable or necessary to require
an in-person hearing. Leaving the
manner of appearance within the
panel’s discretion is appropriate, as the
panel will be free to require an inperson appearance where, from the
panel’s perspective, the record requires
or will be improved by such an
appearance.
3. Customer’s Attendance and
Participation During the Expungement
Hearing
The proposed rule change would
codify certain provisions of the
Guidance to: (1) allow the customer and
their representative to appear at the
expungement hearing; 474 (2) allow the
customer to testify (telephonically, in
person, or by other method) at the
expungement hearing; 475 (3) allow the
representative for the customer or a pro
se customer to introduce documents and
evidence at the expungement
hearing; 476 (4) 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; 477 and (5) 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.478
FINRA stated that it believes that
customer participation during an
expungement hearing provides the
panel with important information and
perspective that it might not otherwise
receive. Through the proposed rule
change, FINRA seeks to make it easier
for customers to participate and,
thereby, to encourage them to do so.479
FINRA further stated that the proposed
rule change strikes the right balance
473 See
FINRA April 3 Letter at 7.
proposed Rules 12805(c)(3)–(4) and
13805(c)(3)–(4).
475 See proposed Rules 12805(c)(3)(B) and
13805(c)(3)(B).
476 See proposed Rules 12805(c)(5)(A) and
13805(c)(5)(A).
477 See proposed Rules 12805(c)(5)(C) and
13805(c)(5)(C).
478 See proposed Rules 12805(c)(5)(D) and
13805(c)(5)(D).
479 See Notice at 50183.
474 See
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between allowing the customer to
participate fully in the hearing and, on
the other hand, giving the requesting
party the opportunity to substantiate
arguments in support of the
expungement request.480 This
opportunity includes the ability of the
requesting party to cross-examine a
customer who chooses to testify and to
object to evidence introduced by a
customer.481
Commenters both supporting and
opposing the proposed rule change
recommended modifications to these
provisions.482 One commenter who
opposed the proposed rule change
objected to the participation of nonparties (such as customers in a straightin proceeding) without such parties
submitting to FINRA jurisdiction
because non-parties who commit
perjury cannot be sanctioned or
reprimanded.483 Another commenter
supported the proposed rule change but
recommended that the proposed rule
change be amended to make clear that
customers would have the opportunity
and ability to participate ‘‘in all
aspects’’ of the hearing, such that
customers could attend the entire
hearing, introduce arguments, and make
their points at any time they deem
appropriate.484
In response to the first commenter,
FINRA stated that arbitrators on the
Special Arbitrator Roster would have
the experience necessary to assess the
credibility of those attending and
participating in the hearing, as well as
any documentary information. In
addition, FINRA pointed out that the
proposed rule change would give an
associated person requesting
expungement the opportunity to crossexamine a non-party customer if the
person chooses to testify or any witness
called by the customer or authorized
representative.485 FINRA believes these
mechanisms should be sufficient to
ensure that a non-party’s testimony or
documentary information presented is
appropriately scrutinized.486
480 See
id.
id.
482 See AdvisorLaw at 3; NASAA September 6
Letter at 4.
483 See AdvisorLaw at 3. The Commission notes
that, with respect to customer participation for
purposes of FINRA Rules 13512 (Subpoenas), 13513
(Authority of Panel to Direct Appearances of
Associated Person Witnesses and Production of
Documents Without Subpoenas), 13602
(Attendance at Hearings), and 13903 (Hearing
Session Fees, and Other Costs and Expenses), the
customer would be a non-party only to the extent
that an expungement request was made as a
straight-in request under the Industry Code.
484 See NASAA September 6 Letter at 4.
485 See FINRA November 10 Letter at 9.
486 See id. at 10.
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481 See
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FINRA responded to the other
comment by making one of the
proposed modifications in Amendment
No. 1 to provide that customers would
have the opportunity and ability to
participate in all aspects of the
hearing.487 Three commenters
supported this amendment, stating that
the amendment would enable
arbitration panels to have a more
detailed and balanced view of the
relevant facts and events underlying the
expungement request.488 Another
commenter recommended limiting a
customer’s ability to participate in a
hearing, stating that while allowing
customer participation ‘‘can provide
value,’’ for logistics reasons, the
customer should not be able to request
discovery.489
In response, FINRA stated that
customer attendance and participation
in expungement hearings helps the
panel fully develop a record on which
to decide the expungement request.490
FINRA further responded that as a nonparty to the straight-in request, the
customer would not be permitted under
the proposed rule change to seek
discovery from the parties through the
DRS arbitration forum, so the proposed
rule change is consistent with the
commenter’s view in this regard.491
Customer participation during an
expungement hearing should provide a
panel with important information and
perspective that it might not otherwise
receive. The Commission also
understands that customers may have
little personal interest in participating
in a hearing once their claim has been
resolved. The proposed rule changes
would implement enhancements to
facilitate customer participation in those
cases where customers wish to
participate. The Commission further
believes that the procedural safeguards
will appropriately balance the ability of
a customer to participate in a hearing
and provide relevant information with
the interest of an associated person in
testing any such information through
objection or cross-examination. This
ability to object or cross-examine should
also help address concerns that nonparties are not themselves subject to
FINRA’s jurisdiction.
4. Panel Requests for Additional
Documents or Evidence
The proposed rule change would
codify the ability of the panel to request
487 See
Amendment No. 1; see also supra note 11.
PIABA Foundation December 7 Letter at
2; PIABA December 7 Letter at 2; NASAA December
7 Letter at 2.
489 See Grebenik.
490 See FINRA April 3 Letter at 12.
491 See id. 11–12; see also Notice at 50186 n.182.
488 See
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24311
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.492 FINRA stated
that 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.493 FINRA further stated that,
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.494
One commenter expressed support for
the proposed rule change and suggested
that FINRA amend the proposed rule
change to consider the failure to
produce requested documents to be
grounds for denial of the expungement
request with prejudice.495 FINRA
declined to amend the proposed rule
change in response to this comment.496
FINRA stated that its rules already
provide arbitrators with authority to
determine whether sanctions should be
imposed for failure to comply with any
provision of the Code, or any order of
a panel or single arbitrator authorized to
act on behalf of the panel.497 FINRA
specifically pointed out that: (1) a panel
may assess monetary penalties payable
to one or more parties; preclude a party
from presenting evidence; make an
adverse inference against a party; assess
postponement and forum fees; and
assess attorneys’ fees, costs and
expenses; 498 (2) a panel may dismiss a
claim, defense, or arbitration with
prejudice as a sanction for material and
intentional failure to comply with an
order of the panel if prior warnings or
sanctions have proven ineffective; 499 (3)
a member or an associated person could
be subject to disciplinary action for
failure to produce requested
documents; 500 and (4) such failure may
492 See proposed Rules 12805(c)(6) and
13805(c)(7).
493 See Notice at 50183.
494 See id.
495 See NASAA September 6 Letter at 5.
496 See FINRA November 10 Letter at 30–31.
497 See id.
498 See id. at 30 (citing FINRA Rules 12212(a) and
13212(a)).
499 See id. at 30–31 (citing FINRA IM–12000(c),
FINRA Rule 12212(c), FINRA IM–13000(c), and
FINRA Rule 13212(c)).
500 See id. at 31 (citing FINRA Rules 12212(b) and
13212(b)).
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be deemed conduct inconsistent with
just and equitable principles of trade
and a violation of FINRA Rule 2010.501
The proposed rule change should
help ensure that a panel receives the
documents or information that it
requests, and further that a panel is
already empowered to dismiss a claim
with prejudice for failure to comply
with an order of the panel. Further, the
arbitrator’s critical role as fact-finder in
deciding expungement requests requires
that arbitrators have the ability to
request evidence relevant to their
decisions. By providing arbitrators with
this power, the proposed rule change
will help panels establish more fully
developed records upon which to base
awards.
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5. Review of Settlement Documents
The proposed rule change would
retain current FINRA Rules 12805(b)’s
and 13805(b)’s requirement for a panel
considering an expungement request to
review any related settlement
documents and consider the amount of
payments made to any party, and any
other terms and conditions of the
settlement.502 In addition, in cases in
which a customer does not participate
in the expungement hearing, or a
requesting party states that a customer
has indicated that they will not oppose
the expungement request, the proposed
rule change would codify the
suggestion, currently in the Guidance,
that the panel should inquire and fully
consider whether a party impermissibly
conditioned a settlement of the
arbitration upon the customer’s
agreement not to oppose the request for
expungement.503 No commenter
supported or objected to these proposed
changes. The proposed rule change
should provide arbitrator oversight of
past settlement agreements which
should help ensure (through deterrence)
that future settlements are not
impermissibly conditioned on a
customer’s agreement not to oppose the
request for expungement.
6. Unanimous Decision To Issue an
Award Containing Expungement Relief
Under current FINRA rules,
consistent with arbitration cases
generally, a panel may award
expungement based on a majority
decision of the arbitrators.504 The
proposed rule change would require
that the arbitrators agree unanimously to
issue an award containing expungement
501 See id. (citing FINRA IM–12000(c) and FINRA
IM–13000(c)).
502 See proposed Rules 12805(c)(7) and
13805(c)(8); see also Notice at 50183–84.
503 See id.
504 See FINRA Rules 12410 and 13414.
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relief.505 FINRA stated that, although
the vast majority of expungement
decisions are already unanimous,506 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.507
Five commenters supported the
proposed unanimity requirement.508
Two of these commenters reasoned that
the unanimity requirement would
further safeguard the integrity of the
information in the CRD system.509 Three
commenters also supported the
unanimity requirement as ensuring that
expungement is an ‘‘extraordinary’’ 510
or ‘‘exceptional’’ 511 remedy.
Six commenters, on the other hand,
opposed the unanimity requirement.512
One of these commenters argued that
the requirement of the written rationale
would encourage unanimity of the
decision without mandating it and
would further ensure the remedy is
extraordinary, thus maintaining the
necessary balance between investor
protection and regulatory value with
fairness to advisors.513 Two of these
commenters argued that no single
arbitrator should hold veto power over
an expungement decision because it
would lead to more inaccurate and
misleading data in the CRD system,514
while a fourth argued that requiring
unanimous agreement does not value
the opinions of all arbitrators.515
FINRA declined to amend the
proposed rule change and responded
that requiring a unanimous decision of
the arbitrators would help protect the
integrity of the information in the CRD
system and help ensure that the
505 See proposed Rules 12805(c)(8)(A) and
13805(c)(9)(A).
506 In the Notice, FINRA stated that during the
sample period of January 2016 to December 2021,
in arbitrations decided by a three-person arbitration
panel and involving an expungement request, the
panel decision was unanimous in 98 percent and
not unanimous in 2 percent of arbitrations. See
Notice at 50184 n.157; see also id. at 50173 n.28
(defining the length of the sample period).
507 See id. at 50184.
508 See Cornell at 4; NASAA September 6 Letter
at 3; Edwards at 1; St. John’s at 3; PIABA September
6 Letter at 2.
509 See Cornell at 4 and St. John’s at 3.
510 See St. John’s at 3; PIABA September 6 Letter
at 2.
511 See Cornell at 4.
512 See letter from Victoria Staudinger, to the
Commission, dated August 16, 2022; SIFMA
September 2 Letter at 7; FSI at 5; Grebenik; Beckner;
Del Toro.
513 See FSI at 5.
514 See SIFMA September 2 Letter at 7; see also
Del Toro.
515 See Grebenik.
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expungement process operates as
intended.516
Requiring a unanimous decision will
help enhance the integrity of the
information in the CRD system by
helping ensure expungement will only
be awarded when there is no
disagreement among the arbitrators that
the factual record supports it. The
importance of the CRD system extends
to all aspects of regulation of brokerdealers and registered representatives.
Among other things, the information
about firms and registered
representatives available on CRD
facilitates regulators, such as FINRA and
the other SROs, state regulators, as well
as the Commission, in meeting their
regulatory obligations. In addition,
certain information in the CRD system
is available to the public through
BrokerCheck; this information helps
investors make better-informed choices
about the registered representatives and
broker-dealer firms with whom they
may conduct business. For these
reasons, the importance of the integrity
of information in the CRD system
militates against awarding expungement
in circumstances where there may be
disagreement about the merits of a
claim.
One commenter recommended that
the panel’s unanimous decisions to
expunge records should only be reached
when the evidence presented in support
of expungement meets a clear and
convincing standard of proof.517 This
commenter reasoned that such an
evidentiary standard would be
consistent with the extraordinary nature
of expungement.518
FINRA declined to amend the
proposed rule change in response to this
recommendation. FINRA stated that to
further clarify the limited circumstances
under which arbitrators must decide
expungement requests, the proposed
rule change would expressly list in the
Codes the narrow grounds in FINRA
Rule 2080(b)(1) for deciding these
requests.519 FINRA stated that it
believes that the explicit incorporation
of these grounds into the Codes and the
requirement for a unanimous decision
by arbitrators from the Special
Arbitrator Roster would achieve the goal
of balancing the competing interests in
the expungement process of providing a
fair process and protecting the integrity
of the information in the CRD system.520
516 See FINRA November 10 Letter at 11; see also
FINRA April 3 Letter at 4–5.
517 See NASAA September 6 Letter at 3.
518 See id.
519 See FINRA November 10 Letter at 17; see also
proposed Rules 12805(c)(8)(A)(i) and
13805(c)(9)(A)(i).
520 See FINRA November 10 Letter at 17.
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Finally, FINRA stated it will continue to
evaluate whether there are other ways to
further strengthen the expungement
process, including whether to require
that a panel find that the evidence
presented in support of an expungement
request meets a clear and convincing
standard of proof in order to issue an
award containing expungement
relief.521
The importance of the integrity of
information in the CRD system militates
against awarding expungement in
circumstances where there may be
disagreement about the merits of a
claim. Thus, as stated above, requiring
a unanimous decision will enhance the
integrity of the information in the CRD
system by helping ensure expungement
will only be awarded when there is no
disagreement among the arbitrators that
the factual record supports it.
Furthermore, by requiring a threeperson panel of specially trained,
specially qualified arbitrators to
unanimously decide an expungement
request based on three specified
grounds 522 (in addition to the proposed
reforms to the process for selecting
arbitrators and the enhanced training
and qualification), the proposed rule
change is reasonably designed to help
ensure that arbitrators only award
expungement when there is evidentiary
support of their decisions. Therefore,
FINRA’s decision regarding the
evidentiary standard is reasonable in
light of the implementation of a
unanimous decision requirement, and
other proposed safeguards.
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7. Awards
Current FINRA Rules 12805(c) and
13805(c) require that the panel 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. The proposed
rule change would retain the
requirements of current Rules 12805(c)
and 13805(c) but would remove the
word ‘‘brief.’’ As a result, the panel
would be required to provide enough
detail in the award to explain its
rationale for awarding expungement
relief.523 In addition, the proposed rule
change would incorporate language
from the Guidance by requiring that the
panel’s explanation identify any specific
documentary, testimonial or other
evidence on which the panel relied in
awarding expungement relief.524
521 See
FINRA April 3 Letter at 18–19.
Section III.D.8., ‘‘Grounds for
Recommending Expungement.’’
523 See proposed Rules 12805(c)(8)(B) and
13805(c)(9)(B); see also Notice at 50184.
524 See proposed Rules 12805(c)(8)(B) and
13805(c)(9)(B).
522 See
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One commenter suggested that FINRA
‘‘strengthen’’ this aspect of the proposed
rule change by requiring arbitrators to
provide a thorough explanation of how
a request meets expungement’s
extraordinary standard, including an
explanation of how the arbitrators
determined that the requesting party’s
uncontested assertions accurately
reflected the truth of the matter.525
FINRA declined to amend the
proposed rule change and responded
that the panel’s explanation would be
required to not be solely a recitation of
one of the grounds for awarding
expungement relief or language
provided in the expungement request
and that the proposed rule change
would require the panel to identify any
specific documentary, testimonial, or
other evidence on which the panel
relied in awarding expungement
relief.526 In addition, FINRA stated that
it would specify in its enhanced
expungement training for arbitrators the
importance of explaining their rationale
for awarding expungement relief.527
Requiring a written rationale that
specifically identifies the basis for an
expungement award and the documents
or other evidence that supports such an
award should be sufficient both to help
ensure that a panel has considered the
available evidence and its bearing on
the available bases for an expungement
award and should help ensure that a
panel has correctly identified a
permissible ground for expungement.
Further, the written rationale
requirement should provide interested
parties with enough information to
understand the reasons for an
expungement award.
8. Grounds for Recommending
Expungement
As stated above, both currently and
under the proposed rule change, an
associated person may seek
expungement of customer dispute
information by obtaining a court
expungement order by either: (1) going
through the arbitration process and
obtaining an award recommending
expungement (and then obtaining a
court order confirming the arbitration
award); or (2) going directly to court
(without first going through arbitration).
Regardless of whether expungement of
customer dispute information is sought
directly through a court or by first going
through arbitration, FINRA Rule 2080
requires an associated person seeking
expungement to obtain a court order
directing such expungement or
525 See
NASAA September 6 Letter at 5.
FINRA November 10 Letter at 18.
527 See id.
526 See
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24313
confirming an award containing such
expungement.528 Moreover, under
FINRA Rule 2080(b) members or
associated persons petitioning a court
for expungement relief, or seeking
judicial confirmation of an arbitration
award containing expungement relief,
must name FINRA as an additional
party and serve FINRA with all
appropriate documents unless this
requirement is waived by FINRA
pursuant to either Rule 2080(b)(1) or
2080(b)(2). Specifically, FINRA Rule
2080(b)(1) provides that FINRA may
waive the requirement to name FINRA
as a party in situations where
‘‘expungement relief is based on
affirmative judicial or arbitral findings’’
of factual impossibility, mistake, or
falsity.529
In addition to FINRA’s ability to
waive the obligation to name FINRA as
a party under FINRA Rule 2080(b)(1),
FINRA may also waive the requirement
to name FINRA as a party to a court
proceeding seeking confirmation of an
arbitration award pursuant to FINRA
Rule 2080(b)(2).530 FINRA Rule
2080(b)(2) provides that FINRA may
waive this requirement in situations in
which ‘‘the expungement relief is based
on judicial or arbitral findings other
than those described above’’—that is,
situations in which an arbitrator has not
found factual impossibility, mistake, or
falsity but, nevertheless, has
recommended expungement based on
findings not named in Rule 2080. In
such situations, ‘‘FINRA, in its sole
discretion and under extraordinary
circumstances, also may waive the
obligation to name FINRA as a party 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.’’ 531 In other words, if an
arbitrator recommends expungement on
grounds other than factual
impossibility, mistake, or falsity, FINRA
may, in ‘‘extraordinary circumstances’’
nevertheless decide to waive the
obligation to name FINRA as a party if
FINRA finds: (1) that the alternative
grounds supplied by the arbitrator and
the arbitrator’s recommendation are
528 See
supra notes 25–30 and accompanying text.
FINRA Rule 2080(b)(1). FINRA Rule 2080
is not part of the Codes. FINRA stated that it is not
proposing amendments to FINRA Rule 2080 at this
time but is considering whether enhancements to
the current expungement process through changes
to FINRA Rule 2080 may be warranted. See Notice
at 50184 n.162.
530 See supra note 29 and accompanying text.
531 See FINRA Rule 2080(b)(2).
529 See
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meritorious and (2) that the
expungement would have no material
adverse effect on investor protection,
the integrity of the information in the
CRD system, or regulatory
requirements.532
It is FINRA’s view that, currently, in
order to issue an award containing
expungement relief, a panel must
affirmatively find that one of the three
grounds contained in FINRA Rule
2080(b)(1) has been met.533 More
specifically, current FINRA Rules 12805
and 13805 require that, in order to issue
an award containing expungement of
customer dispute information, a panel
must indicate in the arbitration award
which of the FINRA Rule 2080 grounds
for expungement serves as the basis for
its expungement order. In other words,
according to FINRA, to include
expungement relief in an award, FINRA
Rules 12805 and 13805 currently
require a panel to find that: (1) the
claim, allegation, or information is
factually impossible or clearly
erroneous; (2) the associated person was
not involved in the alleged investmentrelated sales practice violation, forgery,
theft, misappropriation, or conversion of
funds; or (3) the claim, allegation, or
information is false.534
The proposed rule change would
replace FINRA Rules 12805’s and
13805’s reference to FINRA Rule 2080
with an enumeration of the specific
grounds identified in FINRA Rule
2080(b)(1) (i.e., factual impossibility,
mistake, or falsity). FINRA stated that
the proposed rule change thus would
codify, in the Codes, 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.535
In FINRA’s view, both FINRA and the
Commission historically have treated
the grounds in Rule 2080(b)(1) as the
exclusive grounds upon which
expungement may be awarded.536
532 See Notice at 50184 n.162; see also FINRA
November 10 Letter at 12 n.54.
533 See Notice at 50173.
534 See id. at 50173 n.31 and accompanying text;
see also id. at 50184 n.162.
535 See id. at 50184 n.162 and accompanying text.
536 See id. at 50173 n.31 (citing, among other
things, Exchange Act Release No. 58886 (Oct. 30,
2008), 73 FR 66086, 66087 (Nov. 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’’) and 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’’)). Id. See also FINRA
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Consistent with this view, the proposed
rule change, in addition to codifying the
FINRA Rule 2080(b)(1) grounds as the
exclusive grounds upon which a panel
may base an expungement award,
would also state that a panel shall not
issue, and the Director shall not serve,
an award containing expungement relief
based on grounds other than those in
proposed Rules 12805(c)(8)(A)(i) and
13805(c)(9)(A)(i).537 Three commenters
supported these proposed changes to
FINRA Rules 12805 and 13805.538 Two
of these commenters stated that the
required grounds for issuing an
expungement award would help ensure
that expungement is an extraordinary
remedy.539 The third commenter
reasoned that the proposed rule change
should drive outcomes that are more
consistent with the limited
circumstances under which
expungement can be granted and favors
consistency in the expungement
process.540
One commenter objected to this
provision of the proposed rule change,
positing that FINRA should not limit the
grounds for when arbitrators can
recommend expungement to those
contained in current Rule 2080(b)(1),
incorporated into proposed Rule 12805
and 13805, but should also allow
arbitrators to recommend expungement
on the grounds contained in Rule
2080(b)(2) by also incorporating those
grounds into the proposed rule
change.541 The commenter stated that
the current grounds for granting
expungement under FINRA rules are not
limited to the three grounds listed in
Rule 2080(b)(1) (i.e., factual
impossibility, mistake, or falsity), but
also include the grounds listed in Rule
2080(b)(2) (i.e., (1) the expungement and
accompanying findings on which it is
based are meritorious and (2)
expungement would have no material
adverse effect on investor protection,
November 10 Letter at 13–14 and 14 n.62; see also
FINRA April 3 Letter at 16.
537 See proposed Rules 12805(c)(8)(A)(ii) and
13805(c)(9)(A)(ii).
538 See Cambridge at 2–3; Cornell at 4; St. John’s
at 3.
539 See Cornell at 4; St. John’s at 3.
540 See Cambridge at 2.
541 See SIFMA September 2 Letter at 4–6; see also
letter from Kevin M. Carroll, Managing Director and
Associate General Counsel, Securities Industry and
Financial Markets Association, to the Commission,
dated December 7, 2022 (‘‘SIFMA December 7
Letter’’) (expanding on its argument that the
proposed rule change should permit arbitrators to
recommend expungement if they find the grounds
contained in Rule 2080(b)(2), in addition to Rule
2080(b)(1), in response to FINRA November 10
Letter); Del Toro (arguing that ‘‘[e]xpungement
awards based solely on Rule 2080(b)(2) are rare, but
they are nevertheless allowed under the current
rules’’).
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the integrity of the information in the
CRD system, or regulatory
requirements).542 Accordingly, and
notwithstanding prior FINRA guidance
purporting to limit the grounds upon
which a panel may grant expungement
to those contained Rule 2080(b)(1), in
the commenter’s view arbitrators may
also award expungement based on Rule
2080(b)(2).543 The commenter disagreed
with FINRA’s position that subsection
(b)(2) only provides factors for FINRA to
consider in deciding whether to waive
the obligation to name FINRA as a party
in a court petition for expungement
relief. Instead, the commenter stated
that Rules 2080(b)(1) and 2080(b)(2)
operate in the same manner and that
Rule 2080(b)(2) provides additional
grounds on which a panel may base an
expungement award.544 In support of its
recommendation, the commenter argued
that failing to permit expungement on
the grounds contained in Rule
2080(b)(2) would result in meritorious
expungement requests being rejected,
leading to inaccurate and misleading
information remaining in the CRD
system.545 The commenter further stated
that FINRA has not justified limiting the
grounds upon which expungement may
be awarded to those contained in the
proposed rule change (i.e., the grounds
in Rule 2080(b)(1)).546 The commenter
added that the proposed rule change is
inconsistent with the Exchange Act
because FINRA: (1) circumvented the
proper rulemaking process by failing to
provide adequate notice that it was
proposing a significant rule change to
limit the expungement grounds to Rule
2080(b)(1) or an opportunity for
comment; 547 and (2) failed to provide
any cost-benefit analysis, or other
justification, to support limiting the
grounds for expungement to those under
Rule 2080(b)(1).548
542 See SIFMA September 2 Letter at 3–4 (quoting
FINRA Rules 12805 and 13805); SIFMA December
7 Letter at 2.
543 See SIFMA September 2 Letter at 2–4; SIFMA
December 7 Letter at 2.
544 See SIFMA September 2 Letter at 4; SIFMA
December 7 Letter at 2.
545 See SIFMA September 2 Letter at 5–6; SIFMA
December 7 Letter at 3.
546 See SIFMA September 2 Letter at 4–6; SIFMA
December 7 Letter at 3; Del Toro (stating that
‘‘FINRA Rule 2080 is a substantive rule and its
modification requires a comprehensive rulemaking
process through which FINRA must provide
justification for making said change. FINRA has
provided no such justification here,’’ and ‘‘[FINRA]
provides no evidence or data suggesting that
arbitrators are applying an incorrect standard in
arbitration cases’’).
547 See SIFMA December 7 Letter at 2; see also
SIFMA September 2 Letter at 4, 10; Del Toro
(stating that ‘‘some of the Proposal[’]s changes
result in the indirect abrogation of FINRA Rule
2080(b)(2) through a procedural rule change’’).
548 See SIFMA December 7 Letter at 3.
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FINRA disagreed with the commenter,
stating that Rules 12805 and 13805 and
their rulemaking history and related
guidance establish that arbitrators in the
forum are currently limited to the
grounds enumerated in FINRA Rule
2080(b)(1)(A)–(C) when awarding
expungement.549 According to FINRA,
the plain language of current FINRA
Rules 12805 and 13805 is consistent
with FINRA’s position that, currently,
FINRA Rule 2080(b)(1) lists the
exclusive grounds upon which a panel
may award expungement.550
Specifically, FINRA stated that current
FINRA Rules 12805 and 13805 describe
what ‘‘the panel must’’ do in order to
grant expungement of customer dispute
information, and only FINRA Rule
2080(b)(1) describes grounds upon
which arbitrators may grant
expungement in the forum.551 By
contrast, Rule 2080(b)(2) provides a
general standard for FINRA to consider
in making its own regulatory
determination in extraordinary
circumstances when the court or
arbitrator makes findings ‘‘other than
those described in [2080](b)(1)].’’ 552
According to FINRA, as a result, the
language in current FINRA Rules 12805
and 13805 requiring the panel to
‘‘[i]ndicate in the arbitration award
which of the Rule 2080 grounds for
expungement serve(s) as the basis for its
expungement order’’ is properly
understood as referring only to the
grounds listed in paragraph (b)(1), as
those are the only specific grounds
listed in FINRA Rule 2080 that a panel
could affirmatively find in making an
expungement determination.553
FINRA further stated that by
approving FINRA Rule 2080 and FINRA
Rules 12805 and 13805, the Commission
demonstrated its expectation that a
panel should indicate in the arbitration
award which of the grounds for
expungement in Rule 2080(b)(1)(A)–(C)
serves as the basis for the expungement
order.554 According to FINRA, the
Commission thus ‘‘explicitly approved
the FINRA Rule 2080(b)(1)
limitation.’’ 555
FINRA also disagreed with the
commenter that not permitting
549 See FINRA November 10 Letter at 12–15; see
also FINRA April 3 Letter at 15–16.
550 See FINRA November 10 Letter at 14.
551 See id. at 14–15.
552 See id. at 14.
553 See id. at 15.
554 Id. at 13–14 (citing Exchange Act Release No.
58886 (October 30, 2008), 73 FR 66086, 66087
(November 6, 2008) (Order Approving File No. SR–
FINRA–2008–010)).
555 Id. at 14 (citing Exchange Act Release No.
58886 (October 30, 2008), 73 FR 66086, 66087
(November 6, 2008) (Order Approving File No. SR–
FINRA–2008–010)).
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expungement on Rule 2080(b)(2)
grounds would lead to inaccurate and
misleading information in the CRD
system.556 On the contrary, FINRA
stated that it believes that allowing
arbitrators in the forum to issue awards
containing expungement relief by
applying an ‘‘equitable’’ standard would
not sufficiently protect the integrity of
the information in the CRD system, as,
in FINRA’s view, any removal of
information from the CRD system
should be based on specific, enumerated
standards, such as those provided in
FINRA Rule 2080(b)(1).557 If FINRA
were to change course and expand the
grounds for expungement to allow for
(b)(2) grounds, as advocated by the
commenter, FINRA believes it would
inappropriately broaden the grounds for
expungement to allow for removal of
dispute information beyond the
extraordinary circumstances in which
expungement is appropriate.558 In
particular, whereas (b)(1) identifies
specific grounds for expungement, the
(b)(2) grounds are entirely open ended,
as they refer only to grounds ‘‘other than
those described’’ in (b)(1).559
In response to the commenter’s
assertion that FINRA has not justified
the proposed rule changes, FINRA
reiterated its view, stated in the Notice,
that the proposed rule changes would
further protect the integrity of the
information in the CRD system.560
FINRA stated the proposed rule changes
would reinforce that expungement is
appropriate only in extraordinary
circumstances by specifying in the
Codes the narrow grounds that
arbitrators must find in issuing an
award containing expungement
relief.561 FINRA stated that amending
Rules 12805 and 13805 to codify the
three narrow grounds in Rule 2080(b)(1)
as the only grounds on which arbitrators
may determine to award expungement
relief best aligns with FINRA’s position
that its expungement framework should
allow for the removal of customer
dispute information from the CRD
system only in extraordinary
circumstances in accordance with
FINRA’s rules.562 These three narrow
grounds, in FINRA’s view, fairly address
the circumstances in which an
556 See
id. at 12–13.
id.
558 See FINRA November 10 Letter at 12–17; see
also FINRA April 3 Letter at 16–17.
559 See FINRA November 10 Letter at 12–17; see
also FINRA April 3 Letter at 16–17.
560 See FINRA November 10 Letter at 12, 16; see
also FINRA April 3 Letter at 17; see also Notice at
50186.
561 See FINRA November 10 Letter at 12, 16; see
also FINRA April 3 Letter at 16.
562 See FINRA April 3 Letter at 16.
557 See
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associated person would appropriately
seek expungement of customer dispute
information in the DRS arbitration
forum.563 In addition, FINRA stated that
allowing expungement only in these
extraordinary circumstances would
continue to balance the competing
interests of providing regulators with
broad access to information about
customer disputes to fulfill their
regulatory obligations, providing a fair
process that recognizes an associated
person’s interest in protecting their
reputation, and ensuring investors have
access to accurate information about
associated persons with whom they may
decide to do business.564 Furthermore,
FINRA stated that is 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.565
Finally, FINRA also disagreed with
the commenter’s assertion that FINRA
has not provided adequate notice or
opportunity for public comment of its
intent to amend FINRA Rules 12805 and
13805 to codify the exclusive grounds
upon which an arbitration panel may
issue an award containing expungement
of customer dispute information from
the CRD system.566 FINRA stated that by
proposing the proposed rules it has
solicited comment on the proposed rule
change, which FINRA stated clearly
articulates the amendment and the basis
for it.567 In addition, FINRA stated that
it had also previously solicited
comment in Regulatory Notice 17–42.568
According to FINRA, adequate notice
and opportunity for comment in this
instance is demonstrated by publication
of the proposed rules explaining the
reasons for the proposed rule change,
the commenter’s comment letters in
response to the proposed rules, and
FINRA’s consideration of and responses
to comments.569
The Commission’s order approving
Rules 12805 and 13805 stated that ‘‘in
order to grant expungement of customer
dispute information under Rule [2080],
the panel must . . . indicate in the
arbitration award which of the grounds
563 See
id. at 16–17.
id. at 17.
565 See id. (citing Notice at 50189–50198).
566 See FINRA November 10 Letter at 16; see also
FINRA April 3 Letter at 17.
567 See FINRA November 10 Letter at 16; see also
FINRA April 3 Letter at 17.
568 See FINRA November 10 Letter at 16.
569 See FINRA April 3 Letter at 17.
564 See
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for expungement in Rule
[2080](b)(1)(A)–(C) serves as the basis
for the expungement order.’’ 570 The
proposed rule change would codify
FINRA’s intended exclusive grounds for
expungement. Codifying in FINRA
Rules 12805 and 13805 the grounds
enumerated in Rule 2080(b)(1) as the
only grounds on which an arbitrator
may recommend expungement would
give arbitrators a clear mandate. It
would resolve any potential uncertainty
regarding the applicability of FINRA
Rule 2080(b)(2) as an appropriate
ground upon which arbitrators may
issue awards containing expungement
relief. Moreover, consistent with FINRA
guidance, it would help ensure that
arbitrators recommend expungement
only as an extraordinary remedy in the
extraordinary circumstances of factual
impossibility, mistake, or falsity.
The proposed rule change would also
help protect the integrity of information
in the CRD system by helping ensure
that expungement remains an
extraordinary remedy limited to narrow,
enumerated circumstances. The
Commission also believes that FINRA’s
decision to limit the grounds for
expungement to those enumerated in
Rule 2080(b)(1) is appropriate. Because
Rule 2080(b)(2) describes a general
standard for FINRA to consider in
determining whether or not to waive an
associated person’s obligation to name
FINRA as a party when seeking judicial
confirmation of an expungement award,
including Rule 2080(b)(2)’s standard
would make the type of information that
could be expunged broader and less
foreseeable and thus risk undermining
the integrity of the information in the
CRD system.571
Further, in contrast to the
commenter’s statement, FINRA
provided justification to support
limiting the grounds for awarding
570 Id. The Commission’s approval order also
similarly describes FINRA’s response to comments
as stating ‘‘that the proposal requires arbitrators to
evaluate fully whether the party requesting
expungement either in arbitration or in connection
with a settlement agreement has met the criteria
promulgated under Rule [2080](b)(1)(A)–(C).’’ Id.
571 Although FINRA Rule 2080(b)(2) states that
FINRA ‘‘in its sole discretion and in extraordinary
circumstances’’ may waive an associated person’s
obligation to name FINRA as a party when seeking
judicial confirmation of an expungement award
where FINRA ‘‘determines that . . . the
expungement relief and accompanying findings on
which it is based are meritorious’’ and ‘‘would have
no material adverse effect on investor protection,
the integrity of the CRD system or regulatory
requirements,’’ these ‘‘extraordinary circumstances’’
are not further delineated by the rule and are at
FINRA’s discretion. By contrast, proposed Rules
12805 and 13805 would specifically identify the
extraordinary circumstances in which a panel may
award expungement—factual impossibility,
mistake, or falsity.
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expungement to those under Rule
2080(b)(1). In its filing, FINRA details
the economic impact analyzing ‘‘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 [its]
regulatory objectives.’’ 572 FINRA’s
analysis covers the potential economic
impact of the entire proposed rule
change, including proposed Rules
12805(c)(8)(A) and 13805(c)(9)(A).573
Thus, FINRA’s economic analysis
addressed its codification, in the Codes,
of 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.
Furthermore, as stated above,
BrokerCheck helps investors make more
informed choices about the associated
persons and broker-dealer firms with
whom they may conduct business.
Since the information on BrokerCheck is
populated by information from CRD, the
integrity of the information investors
use to make their investment decisions
is dependent on the integrity of the
information in the CRD system. An
expungement process limited to clear,
enumerated standards helps ensure that
factually impossible, mistaken, or false
information can be removed from the
CRD system, while also decreasing the
likelihood that arbitrators award
expungement on unforeseen or unsound
grounds to the detriment of the quality
of information in the CRD system. In
light of this, the Commission believes
that FINRA has appropriately balanced
the investor protection benefits of the
proposed rule change against the
potential harm to associated persons,
and that FINRA has reasonably
considered the impacts of the proposed
rule change as outlined in its economic
impact analysis and its response to
comments.
Finally, Section 19(b) of the Act,574
and Rule 19b–4 thereunder,575 set forth
the requirements for notice and
comment for an SRO proposed rule
change. That process was followed for
this proposed rule change. The Notice
articulated FINRA’s proposed rule
change, as well as its bases for it. In
response, the Commission received
forty-five comment letters including
from commenters expressing concern
572 Notice
at 50189–98.
id.
574 15 U.S.C. 78s(b)(1).
575 17 CFR 240.19b–4.
573 See
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about the proposed codification of Rule
2080(b)(1)’s grounds for expungement.
On November 10, 2022, FINRA
responded to those commenters and
filed Amendment No. 1, modifying the
original proposed rule change. In the
Order Instituting Proceedings, the
Commission noticed Amendment No. 1
and requested comment on the
proposed rule change, as modified. In
response, the Commission received
seven comment letters including from
commenters expressing concern about
the proposed codification of Rule
2080(b)(1)’s grounds for expungement.
9. Evidentiary Weight of Decision of
Customer or Authorized Representative
Not To Attend or Participate
Originally, the proposed rule change
would have included an instruction for
arbitration panels that the decision of a
customer or an authorized
representative of state securities
regulators not to attend or participate in
the expungement hearing would not be
material to the determination of whether
expungement is appropriate.576 One
commenter suggested that FINRA
amend the proposed rule change to state
clearly that arbitrators must give no
weight to such decisions.577 FINRA
agreed 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, and accordingly
amended the proposed rule change to
clarify this position.578
As amended, the proposed rule
change states that a panel shall not give
any evidentiary weight to a decision by
a customer or an authorized
representative not to attend or
participate in an expungement hearing
when making a determination of
whether expungement is appropriate.579
FINRA stated that it is aware that some
panels have indicated in expungement
awards that a customer did not appear
at the expungement hearing.580 But,
FINRA stated that it believes that 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 and
thus it should not be considered by the
panel when deciding a request for
576 See
Notice at 50184.
NASAA September 6 Letter at 5.
578 See FINRA November 10 Letter at 11 and
Amendment No. 1.
579 See proposed Rules 12805(c)(8)(C) and
13805(c)(9)(C).
580 See Notice at 50184–85.
577 See
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expungement.581 Three commenters
supported the amendment.582 The
Commission received no comment
letters opposing the amendment.
The Commission agrees that
customers or authorized representatives
of a state securities regulator may decide
not to appear for a variety of reasons
unrelated to the merits of an
expungement request and that FINRA
reasonably determined that such a
decision by a customer or an authorized
representative should not be given
weight by the panel assessing the
request.
10. Forum Fees
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The proposed rule change would
retain the current requirement that the
panel must assess against the parties
requesting expungement all forum fees
for each hearing in which the sole topic
is the determination of the
appropriateness of expungement.583
One commenter characterized the
existing minimum member surcharge
and process fees that would be assessed
to firms if an associated person files a
straight-in request, following an
arbitration that closes other than by
award or closes by award without a
hearing, as ‘‘duplicative’’ and suggested
that these fees be eliminated.584
According to this commenter, in a
customer arbitration that closes other
than by award or by award without a
hearing, the member firm would have
already paid the member surcharge and
processing fee for using the forum.585
The member would then have to pay
again if named in a subsequent straightin request.586 Another commenter stated
similarly that where firms have already
paid the fee in the original matter,
associated persons should not then be
required to pay another full fee for
expungement requests.587
In response, FINRA stated that the
member surcharge and process fees that
a member firm would be assessed if an
associated person files a straight-in
request are not duplicate fees.588 FINRA
stated it is appropriate to assess these
fees for straight-in requests because
such requests initiate separate
arbitrations seeking different relief—
581 See id.; see also FINRA November 10 Letter at
10–11.
582 See PIABA Foundation December 7 Letter at
2; PIABA December 7 Letter at 2; NASAA December
7 Letter at 2.
583 See proposed Rules 12805(c)(9) and
13805(c)(10); see also FINRA Rules 12805(d) and
13805(d).
584 See SIFMA September 2 Letter at 9.
585 See id.
586 See id.
587 See FSI at 6.
588 See FINRA November 10 Letter at 31.
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namely, expungement.589 FINRA also
stated that if the associated person, or
the requesting party in the case of an onbehalf-of request, files a straight-in
request after having previously paid the
filing fee to request expungement of the
same customer dispute information
during a customer arbitration that settles
or is dismissed, FINRA would not assess
a second filing fee when the associated
person files the straight-in request.590
Moreover, FINRA explained that, in
instances in which DRS’s fees may be
challenging to pay due to financial
hardship, the Director has the authority
to defer payment of all or part of an
associated person’s filing fee on a
showing of financial hardship.591
FINRA may reasonably assess member
surcharge and process fees for straightin requests. Straight-in requests are
separate arbitrations before a separate
panel of specially trained arbitrators.
Proceedings have costs and it is
appropriate that FINRA would require
the parties generating those costs to pay
them.592
11. Director’s Authority To Deny the
Forum
The proposed rule change would
require the Director 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 13805.593 The
proposed rule change would also
provide the Director with 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 13805.594
589 See
id.
id. at 32; see also Notice at 50179 n.95.
591 See FINRA November 10 Letter at 6.
592 Any such fee filings must be filed pursuant to
Section 19(b) and Rule 19b–4, and must be
consistent with all the relevant statutory and rule
requirements.
593 See proposed Rules 12203(b) and 13203(b).
For example, FINRA stated that under the proposed
rule change the Director would decline the use of
the DRS arbitration forum if: (1) an expungement
request is ineligible under the proposed time
limitations; (2) a panel has previously considered
the merits of, or a court has previously decided, an
expungement request associated with the same
customer dispute information; (3) an associated
person was named as a respondent in a customer
arbitration but did not request expungement; (4) an
associated person requested expungement but
withdrew or did not pursue the expungement
request; or (5) 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. See Notice at 50182.
594 See proposed Rules 12203(c) and 13203(c). For
example, FINRA stated that the Director may
decline the use of the DRS arbitration forum if the
590 See
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24317
FINRA stated that the proposed rule
change would help ensure additional
safeguards around the expungement
process by expanding the circumstances
in which the Director is authorized to
deny the DRS arbitration forum.595
No commenter supported or objected
to these proposed changes. The
Commission believes that providing the
Director with the authority to deny the
use of the DRS arbitration forum should
enhance the integrity of the
expungement process and the CRD
system.
E. Notifications to Customers and States
Regarding Expungement Requests
1. Associated Persons Notify Customers
The proposed rule change would
codify a practice from the Guidance to
require the associated person who files
a straight-in request to serve all
customers whose customer arbitrations,
civil litigations, and customer
complaints are a subject of the
expungement request with a copy of the
statement of claim requesting
expungement and any answer.596 The
panel would be authorized to decide
whether extraordinary circumstances
exist that make service on the customers
impracticable.597 The proposed rule
change would further 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.598 FINRA stated that these
proposed rule changes would help
ensure that a customer knows about the
expungement request and has an
opportunity to attend and participate in
the expungement hearing.599
Three commenters supported this
aspect of the proposed rule change.600
Two commenters reasoned that the
notification requirement would
Director determines that: (1) 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; or (2) an associated person seeks
expungement of customer dispute information other
than pursuant to proposed Rules 12805, 12800(d)
and (e) or 13805, as applicable. See Notice at 50182.
595 See Notice at 50182.
596 See proposed Rule 13805(b)(1)(A)(i) and (ii).
Proposed Rule 13805(b)(1)(A)(ii) would require the
associated person to serve a copy of the statement
of claim and a copy of any answer within 10 days
of filing.
597 See proposed Rule 13805(b)(1)(A)(i).
598 See proposed Rule 13805(b)(1)(A)(iv).
599 See Notice at 50185.
600 See Cornell at 3; NASAA September 6 Letter
at 4; St. John’s at 3.
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encourage customer participation and
reduce unopposed expungement
hearings.601 For the same reasons, one
of these commenters further supported
the requirement that the associated
person file proof of service and copies
of all communications with the
panel.602
The proposed customer notification
provision will help ensure that
customers are aware of expungement
requests and have an opportunity to
participate. Further, requiring filing of
proof of service and any
communications will help ensure that
customers are notified in accordance
with the proposed rule change and that
customers are not inappropriately
dissuaded from participating in an
expungement proceeding. Under these
proposed rule changes, customers
should be more likely to participate in
a hearing to decide an expungement
request, which helps ensure that the
panel has a more fully formed set of
evidence upon which to base its
decision. With this additional
information, the panel should be more
likely to award expungement only when
appropriate, thereby helping protect the
integrity of the information in the CRD
system.
2. Director Notifies Customers
To facilitate customer notification of
an expungement request, proposed Rule
13805(b)(1)(B)(i) would require an
associated person to include in any
request to expunge customer dispute
information a current address for the
relevant customer.603 To help ensure an
associated person complies with this
proposed obligation, proposed Rule
13307(a)(7) would provide that an
expungement request that does not
include such address is ‘‘deficient,’’ and
the Director may not serve any
expungement request that does not
include such address, the effect being
that such request would not move
forward.604
Proposed Rule 13805(b)(1)(B)(i)
would require the Director to notify all
customers whose customer arbitrations,
civil litigations, or customer complaints
are the subject of an expungement
request of the time, date, and place of
any prehearing conferences and the
expungement hearing. FINRA stated
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601 See
Cornell at 3; St. John’s at 3.
602 See Cornell at 3.
603 See proposed Rule 13805(b)(1)(B)(i).
604 Specifically, under proposed Rule 13307(a)(7),
a request for expungement that does not include a
current address for the customer would be
considered deficient. Pursuant to FINRA Rule
13307(a), the Director will not serve a deficient
claim, effectively halting the expungement request
until the deficiency is corrected. See also FINRA
Rule 13302.
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that this proposed notification
requirement would facilitate customer
participation in the expungement
process by providing the customer the
time to plan and prepare for the
hearing.605 The proposed rule change
would also require the Director to: (1)
include language in the notice
encouraging the customer to attend and
participate; and (2) provide the notified
customers with access to all documents
on the Portal relevant to the
expungement request that are filed in:
(a) the arbitration requesting
expungement relief and (b) a customerinitiated arbitration brought by the
customer under the Customer Code that
is a subject of the expungement
request.606
Three commenters recommended
amendments to these provisions.607 One
of these commenters argued that for
logistics reasons, customers should only
be notified once for the pre-hearing
conference and should not be notified
again for the expungement hearing.608
Another commenter recommended that
the proposed rule change be amended to
provide that FINRA ‘‘will ‘deliver’ the
relevant documents to customers upon
request,’’ rather than providing
customers with ‘‘access.’’ 609 The third
commenter recommended that FINRA
amend the rule to allow firms to provide
the customer’s last known address
instead of the current address, stating
that an error in the listed current
address in the petition for expungement,
after the appropriate diligence and
attempts to correct the error, should not
preclude the filing and granting of the
expungement request.610
With respect to the notification
requirements, FINRA stated that
customer attendance and participation
in expungement hearings helps the
panel fully develop a record on which
to decide the expungement request.611
FINRA further stated that the associated
person seeking expungement should
provide the customer’s current address,
so that the Director will have the most
recent contact information to timely
notify the customer of the expungement
request, prehearing conferences, and
expungement hearings.612 FINRA
accordingly declined to amend the
Notice at 50185.
proposed Rule 13805(b)(1)(B)(ii); see also
Notice at 50185; see also supra notes 86 and 184
and accompanying text (discussing the Portal).
607 See Grebenik; NASAA September 6 Letter at
4; Del Toro.
608 See Grebenik.
609 See NASAA September 6 Letter at 4.
610 See Del Toro.
611 See FINRA April 3 Letter at 12.
612 See id. at 7.
proposed rule change in response to
these comments.613
FINRA likewise declined to amend
the proposed rule change in response to
one commenter’s suggestion that FINRA
‘‘will deliver’’ materials on request,
rather than providing access.614 FINRA
responded that these changes were
unnecessary because the Portal
currently helps ensure that customers
receive necessary notifications regarding
their arbitration and mediation cases.615
FINRA stated that it provides case
participants with access to documents
through the Portal. FINRA explained
that once registered on the Portal, a
customer may, among other things, view
documents and submit documents to
FINRA and, for those customers who are
unable to access the Portal, DRS would
provide paper documents upon
request.616
The proposed rule change related to
customer notification would help
ensure that customers are notified of
expungement requests and able to
access related necessary documents.
The requirement that an associated
person include a current address for the
relevant customer would help ensure
that customers are notified of
expungement requests in a timely
manner. Moreover, DRS will provide
paper documents to customers that may
not have the ability to access the Portal
upon request. Notified customers would
be more likely to participate in a hearing
to decide an expungement request,
which would help ensure that the panel
has a more fully formed set of evidence
upon which to base its decision. With
this additional information, the panel is
more likely to appropriately decide
whether to award expungement, thereby
helping protect the integrity of the
information in the CRD system.
3. FINRA Notifies State Securities
Regulators
The proposed rule change would
require FINRA to notify state securities
regulators, in the manner to be
determined by the Director in
collaboration with state securities
regulators, of an expungement request
within 15 days of receiving an
expungement request.617 FINRA stated
that the proposed notification
requirement would help ensure that
605 See
606 See
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613 See
id. at 8, 12–13.
id. at 12–13; see also supra notes 86 and
184 and accompanying text (discussing the Portal).
615 See FINRA November 10 Letter at 10.
616 See id.
617 See proposed Rules 12800(f)(1), 12805(b) and
13805(b)(2)(A). FINRA stated that it would make
this notification in connection with expungement
requests under the Customer and Industry Codes.
See Notice at 50185 n.176.
614 See
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state securities regulators are timely
notified of expungement requests.618
No commenter supported or objected
to these proposed changes. Two
commenters, however, recommended
that FINRA take further action.619 One
commenter suggested that FINRA
consider notifying state securities
regulators about separate, expungementonly hearings following a simplified
arbitration.620 The other commenter
suggested that FINRA provide
notification to state securities regulators
regarding expungement requests ‘‘at the
time when they have the ability to
become involved—at the state court
confirmation level.’’ 621
In response, FINRA stated that FINRA
Rule 2080 requires an associated person
seeking to confirm an arbitration award
containing expungement relief to name
FINRA as an additional party unless this
requirement is waived by FINRA.622 In
addition, it is FINRA’s practice to notify
state regulators when it receives a
complaint naming FINRA, or a request
for a waiver.623 Furthermore, FINRA
stated that it is not necessary for state
securities regulators to participate in
separate expungement-only hearings in
simplified arbitrations because the
panel already would have sufficient
information upon which to develop a
complete factual record in order to make
a fully-informed decision on the
expungement request.624 For example,
expungement-only hearings in
simplified arbitrations would occur after
the arbitrator has heard the merits of the
customer’s case in an adversarial
process.625 Similarly, FINRA stated that
it expects an expungement-only hearing
to be scheduled shortly after the
customer’s dispute is decided or closes,
increasing the likelihood of customer
attendance and participation.626
Accordingly, FINRA did not amend the
proposed rule change in response to
these comments.627
The Commission believes that
notification to state securities regulators
within 15 days of receiving an
expungement request should provide
adequate notice and, for straight-in
requests, allow the state securities
regulator to determine whether to
participate in the expungement
proceeding. As stated above, permitting
attendance and participation by state
618 See
Notice at 50185.
Miami at 7; Hennion at 6.
620 See Miami at 7.
621 Hennion at 6.
622 See FINRA November 10 Letter at 8 n.33.
623 See id.; see also FINRA Rule 2080.
624 See FINRA November 10 Letter at 22.
625 See id.
626 See id.
627 See id. at 22 and 8 n.33.
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securities regulators in straight-in
expungement proceedings should
enhance the straight-in expungement
process. Specifically, inclusion of state
securities regulators provides them the
opportunity to fulfill their own
regulatory obligations, while at the same
time increasing the likelihood that the
panel in an expungement proceeding
that may not involve a customer will
hear evidence from multiple
viewpoints. With this additional
information, the panel is more likely to
award expungement only when
appropriate, thereby helping protect the
integrity of the information in the CRD
system. The Commission also believes
that panels deciding separate
expungement-only hearings in
simplified arbitrations should have
sufficient information from the
underlying claim to develop a complete
factual record in order to make a fullyinformed decision on the expungement
request. In this way, the rule as
proposed would help protect the
integrity of the information in the CRD
system. Finally, FINRA has stated that
it will continue to monitor the
expungement process to evaluate
whether additional rule changes may be
necessary to further strengthen the
expungement process, including
whether to allow state securities
regulators to attend and participate in
separate expungement-only hearings in
simplified arbitrations.628
IV. Solicitation of Comments on
Amendment No. 2
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 2 is consistent with the
Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. 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
628 See
PO 00000
FINRA April 3 Letter at 18–19.
Frm 00039
Fmt 4701
Sfmt 4703
24319
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
10:00 a.m. and 3:00 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 May 10, 2023.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendments Nos. 1 and 2
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendments Nos. 1 and 2,
prior to the thirtieth day after the date
of publication of notice of the filing of
Amendment No. 2 in the Federal
Register.629 In Amendment No. 2,
FINRA modified the proposed rule
change to provide that an associated
person would be precluded from filing
a straight-in request if the customer
dispute information involves the same
conduct that was the basis of a final
regulatory action taken by a securities
regulator or SRO. The basis for
extending this prohibition is the same as
the basis for the original proposed rule
change prohibiting an associated person
from filing a straight-in request if the
customer dispute information is
associated with a finding of liability in
an arbitration or civil litigation—
permitting an expungement claim in
these circumstances would constitute a
collateral attack on the results of the
underlying resolved dispute.
After consideration of the comments
FINRA received on the proposed rule
change, the Commission believes that
Amendment No. 2 represents a
629 See
E:\FR\FM\19APN2.SGM
15 U.S.C. 78s(b)(2)(C)(iii).
19APN2
24320
Federal Register / Vol. 88, No. 75 / Wednesday, April 19, 2023 / Notices
reasonable extension of, and is
substantially similar to, the original
prohibition of an associated person
filing a straight-in request where the
customer dispute information formed
the basis for a past finding of liability
and is appropriate and responsive to
commenter’s concerns. Accordingly, the
Commission finds good cause, pursuant
to Section 19(b)(2) of the Act,630 to
approve the proposed rule change, as
modified by Amendments Nos. 1 and 2,
on an accelerated basis.
VI. Conclusion
For the reasons set forth above, the
Commission finds that the proposed
rule change, as modified by
Amendments Nos. 1 and 2, is consistent
with the provisions of Exchange Act
Section 15A(b)(6),631 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
Commission also finds that the
proposed rule change is consistent with
Section 15A(b)(5) of the Exchange
Act,632 which requires, among other
things, that FINRA rules provide for the
equitable allocation of reasonable dues,
fees and other charges among members
and issuers and other persons using any
631 15
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630 15
U.S.C. 78s(b)(2).
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632 15
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PO 00000
Fmt 4701
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.634
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–08147 Filed 4–18–23; 8:45 am]
BILLING CODE 8011–01–P
633 15
U.S.C. 78o–3(b)(6).
U.S.C. 78o–3(b)(5).
Frm 00040
facility or system that FINRA operates
or controls.
It is therefore ordered pursuant to
Section 19(b)(2) of the Exchange Act 633
that the proposed rule change (SR–
FINRA–2022–024), as modified by
Amendments Nos. 1 and 2, be, and
hereby is, approved on an accelerated
basis.
634 17
Sfmt 9990
E:\FR\FM\19APN2.SGM
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
19APN2
]]>Agencies
[Federal Register Volume 88, Number 75 (Wednesday, April 19, 2023)]
[Notices]
[Pages 24282-24320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-08147]
[[Page 24281]]
Vol. 88
Wednesday,
No. 75
April 19, 2023
Part II
Securities and Exchange Commission
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Self-Regulatory Organizations; Financial Industry Regulatory Authority,
Inc.; Notice of Filing of Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendments Nos. 1 and 2, To Amend the Codes of Arbitration Procedure To
Modify the Current Process Relating to the Expungement of Customer
Dispute Information; Notice
Federal Register / Vol. 88, No. 75 / Wednesday, April 19, 2023 /
Notices
[[Page 24282]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97294; File No. SR-FINRA-2022-024]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendments Nos. 1 and 2, To Amend the Codes of Arbitration Procedure To
Modify the Current Process Relating to the Expungement of Customer
Dispute Information
April 12, 2023.
I. Introduction
On July 29, 2022, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the FINRA Rule 12000
Series (Code of Arbitration Procedure for Customer Disputes)
(``Customer Code'') and the FINRA Rule 13000 Series (Code of
Arbitration Procedure for Industry Disputes) (``Industry Code'')
(together, ``Codes'') to modify the current process relating to the
expungement of customer dispute information.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The proposed rule change was published for comment in the
Federal Register on August 15, 2022. See Exchange Act Release No.
95455 (Aug. 9, 2022), 87 FR 50170 (Aug. 15, 2022) (File No. SR-
FINRA-2022-024) (``Notice'').
---------------------------------------------------------------------------
The proposed rule change, as modified by Amendments Nos. 1 and 2,
(hereinafter referred to as the ``proposed rule change'' unless
otherwise specified) would amend the Codes to: (1) set forth
requirements on expungement requests (a) filed during an investment-
related, customer initiated arbitration (``customer arbitration'') by
an associated person, or by a party to the customer arbitration on
behalf of an associated person (an ``on-behalf-of request''), or (b)
filed by an associated person separate from a customer arbitration
(``straight-in request''); (2) establish a roster of experienced public
arbitrators from which a three-person panel \4\ would be randomly
selected to decide straight-in requests (the ``Special Arbitrator
Roster''); \5\ (3) establish procedural requirements for expungement
hearings; and (4) codify and update FINRA's Notice to Arbitrators and
Parties on Expanded Expungement Guidance (``Guidance'') that
arbitrators and parties would be required to follow.\6\ In addition,
the proposed rule change would amend the Customer Code to specify
procedures for requesting expungement of customer dispute information
arising from simplified arbitrations.\7\ The proposed rule change would
also amend the Codes to establish requirements for notifying state
securities regulators and customers of expungement requests and allow
participation of state securities regulators in straight-in
requests.\8\
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\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). Under the Codes, a customer's or
claimant's damage request determines whether a single arbitrator or
a three-person panel will consider and decide an arbitration case,
though in some cases the parties may agree to a different number.
See FINRA Rules 12401 and 13401; see also Notice at 50171 n.10.
Unless otherwise specified in the Order, the term ``panel'' will
mean either a panel or single arbitrator.
\5\ 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).
\6\ See Guidance, available at https://www.finra.org/arbitration-and-mediation/notice-arbitrators-and-parties-expanded-expungement-guidance.
\7\ See Notice at 50170.
\8\ See id. at 50171.
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on August 15, 2022.\9\ On September 27, 2022, FINRA consented
to an extension of the time period in which the Commission must approve
the proposed rule change, disapprove the proposed rule change, or
institute proceedings to determine whether to approve or disapprove the
proposed rule change to November 11, 2022.\10\ On November 10, 2022,
FINRA responded to the comment letters received in response to the
Notice and filed an amendment to the proposed rule change (``Amendment
No. 1'').\11\ On November 10, 2022, the Commission published a notice
of filing of Amendment No. 1 and an order instituting proceedings to
determine whether to approve or disapprove the proposed rule change, as
modified by Amendment No. 1.\12\ On December 8, 2022, FINRA consented
to an extension of the time period in which the Commission must approve
or disapprove the proposed rule change to April 12, 2023.\13\ On April
3, 2023 FINRA responded to the comment letters received in response to
the Order Instituting Proceedings and filed a second amendment to the
proposed rule change (``Amendment No. 2'').\14\ The Commission is
publishing this notice to solicit comments on Amendment No. 2 from
interested persons and is approving the proposed rule change, as
modified by Amendments Nos. 1 and 2, on an accelerated basis.
---------------------------------------------------------------------------
\9\ See Notice supra note 3.
\10\ See letter from Mignon McLemore, Associate General Counsel,
Office of General Counsel, FINRA, to Lourdes Gonzalez, Assistant
Chief Counsel, Division of Trading and Markets, Commission, dated
September 27, 2022, available at https://www.finra.org/sites/default/files/2022-09/sr-finra-2022-024-extension1.pdf.
\11\ See letter from Mignon McLemore, Associate General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
Commission, dated November 10, 2022 (``FINRA November 10 Letter'').
The FINRA November 10 Letter is available at the Commission's
website at https://www.sec.gov/comments/sr-finra-2022-024/srfinra2022024-20150592-319706.pdf. Comment letters received on the
proposed rule change are available at https://www.sec.gov/comments/sr-finra-2022-024/srfinra2022024.htm.
\12\ See Exchange Act Release No. 96298 (Nov. 10, 2022), 87 FR
68779 (Nov. 16, 2022) (File No. SR-FINRA-2022-024) (``Order
Instituting Proceedings'').
\13\ See letter from Mignon McLemore, Associate General Counsel,
Office of General Counsel, FINRA, to Lourdes Gonzalez, Assistant
Chief Counsel, Division of Trading and Markets, Commission, dated
December 8, 2022, available at https://www.finra.org/sites/default/files/2022-12/sr-finra-2022-024-extension2.pdf.
\14\ See letter from Mignon McLemore, Associate General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
Commission, dated April 3, 2023, (``FINRA April 3 Letter'')
available at https://www.sec.gov/comments/sr-finra-2022-024/srfinra2022024-20163319-333785.pdf. Amendment No. 2 is available at
https://www.finra.org/sites/default/files/2023-04/sr-finra-2022-024-partial-amendment-2.pdf.
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II. Description of the Proposed Rule Change
Background
Information regarding customer disputes involving associated
persons is maintained in the Central Registration Depository (``CRD'').
In general, the information in the CRD system is reported by registered
broker-dealer firms (``firms'' or ``member firms''),\15\ associated
persons, and regulatory authorities in response to questions on the
uniform registration forms.\16\ These
[[Page 24283]]
forms are used to collect registration information, which includes,
among other things, administrative, regulatory, and criminal history,
and financial and other information about associated persons, such as
investment-related, customer-initiated arbitrations, civil litigations,
or customer complaints (i.e., ``customer dispute information'').\17\
Among other things, FINRA makes specific information in the CRD system
publicly available through BrokerCheck, including customer dispute
information for associated persons who are currently or were formerly
registered with FINRA.\18\
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\15\ 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 Exchange Act Release
No. 88254 (Feb. 20, 2020), 85 FR 11157 (Feb. 26, 2020) (Order
Approving File No. SR-FINRA-2019-027).
\16\ 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). See Notice at 50172
n.20.
\17\ See Notice at 50172.
\18\ 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. See
``About BrokerCheck,'' available at https://www.finra.org/investors/about-brokercheck. Broker records are available in BrokerCheck for
ten years after an associated person leaves the industry, and
associated persons who are the subject of disciplinary actions and
certain other events remain on BrokerCheck permanently. See Notice
at 50172 at n.24.
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FINRA rules allow broker-dealers and their associated persons to
seek expungement of certain customer dispute information from the CRD
system and BrokerCheck.\19\ In general, an associated person seeks
expungement of customer dispute information through the FINRA
arbitration process.\20\ The Customer Code, which comprises the series
of rules governing customer arbitrations, governs expungement requests
filed by firms or associated persons during customer arbitrations.\21\
In contrast, the Industry Code comprises the series of rules governing
arbitrations for disputes between or among industry parties, such as
between a broker-dealer and an associated person, including straight-in
requests.\22\ As a result, whether an expungement request is governed
by the Customer Code or Industry Code will generally depend on whether
the request is filed during a customer arbitration or is a straight-in
request filed separately from a customer arbitration.\23\
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\19\ See Notice at 50172-73.
\20\ See id. at 50190. An associated person may also seek
expungement by going directly to court without first going to
arbitration. According to FINRA, from January 2016 through December
2021, 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 FINRA's Dispute Resolution Forum
(``DRS arbitration forum''). See id. at 50191.
\21\ See id. at 50175-78; see also FINRA Rule 12000 series.
\22\ See Notice at 50178-80; see also FINRA Rule 13000 series.
\23\ See infra notes 69-70 and accompanying text.
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Both the Customer Code and the Industry Code require arbitrators to
hold a recorded hearing regarding, and review materials related to, the
appropriateness of expungement of customer dispute information.\24\
According to FINRA, its rules and guidance provide that arbitrators may
recommend expungement for only three reasons: (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.\25\ In addition, arbitrators are required to
indicate which reason is the basis for a recommendation (i.e.,
``factual impossibility, mistake, or falsity'') \26\ and to provide a
brief written explanation of the reasons for recommending
expungement.\27\
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\24\ See FINRA Rules 12805 and 13805; see also Notice at 50173.
\25\ See Notice at 50173.
\26\ See FINRA Rules 2080, 12805, and 13805. These requirements
are supplemented by the Guidance, providing arbitrators with ``best
practices'' and recommendations to follow when deciding expungement
requests. See Notice at 50173 n.35 and accompanying text.
\27\ See FINRA Rules 12805(c) and 13805(c).
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Regardless of whether expungement of customer dispute information
is sought directly through a court or in arbitration, FINRA Rule 2080
requires a broker-dealer firm or associated person seeking expungement
to obtain an order of a court of competent jurisdiction directing such
expungement or confirming an award containing expungement.\28\ FINRA
will expunge customer dispute information only pursuant to a court
order.\29\ If a court directs 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.\30\
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\28\ See Notice at 50172; see also FINRA Rule 2080.
\29\ See Notice at 50172. FINRA Rule 2080 also requires firms
and associated persons seeking a court order or confirmation of the
arbitration award containing expungement to name FINRA as a party
and serve FINRA with all appropriate documents. FINRA may, however,
waive the requirement to be named as a party if it determines that
the award containing expungement is based on affirmative judicial or
arbitral findings 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. In addition,
FINRA has sole discretion ``under extraordinary circumstances'' to
waive the requirement that it be named in a court proceeding if it
determines that the request for expungement and accompanying award
are meritorious and expungement would not have a material adverse
effect on investor protection, the integrity of the information in
the CRD system, or regulatory requirements. See FINRA Rule 2080(b).
\30\ See Notice at 50173-74.
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Proposed Rule Change
A. Requests for Expungement Under the Customer Code
FINRA Rule 12805 requires that arbitrators meet certain conditions
in order to issue an award containing expungement of customer dispute
information under the Customer Code.\31\ The rule generally does not,
however, address when and how a request for expungement can be made by
an associated person or as an on-behalf-of request during a customer
arbitration, including the types of expungement requests that can and
cannot be made during a customer arbitration, or when arbitrators must
make expungement determinations during the customer arbitration.
---------------------------------------------------------------------------
\31\ FINRA Rule 12805 provides that a panel must comply with the
following requirements in order to grant expungement: (1) hold a
recorded hearing session (by telephone or in person) regarding the
appropriateness of expungement; (2) 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; (3)
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 (4) 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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The proposed rule change would amend FINRA Rule 12805 to set forth
requirements addressing the method and timing for, and required
contents of, expungement requests filed during a customer arbitration
by an associated person or as an on-behalf-of request, including the
types of expungement requests that must (or cannot) be made.\32\ Among
other restrictions, proposed Rule 12805 would require that an
expungement request made during a customer arbitration involve the same
customer dispute information that is associated with the customer's
statement of claim.\33\ It would further require an associated person
who is a named respondent in a customer arbitration to seek expungement
of customer dispute information associated with the arbitration claim
during the arbitration proceedings or forfeit the ability to seek to
expunge the customer dispute information associated with the customer's
statement of claim in any
[[Page 24284]]
subsequent proceeding.\34\ In addition, the proposed rule would
authorize the Director of FINRA Dispute Resolution Services
(``Director'') to deny the forum to expungement requests that do not
meet, among other things, the proposed method, timing, or content
requirements.\35\ In addition, the proposed rule change would also
provide guidance on when a panel can rule on an expungement request
made in the course of a customer arbitration.\36\ Further, the proposed
rule change would prohibit an associated person from: (1) intervening
in an ongoing customer arbitration to request expungement \37\ or (2)
filing an expungement request as a new claim against a customer
separate from a customer arbitration.\38\
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\32\ See Notice at 50174-77 (methods), 50180-81 (limitations),
50181-82 (timing).
\33\ See id. at 50174-77.
\34\ See proposed Rule 12805(a)(1)(A).
\35\ See Notice at 50182; see also proposed Rules 12203 and
13203.
\36\ See Notice at 50177-78.
\37\ See id. at 50178; see also proposed Rules
12805(a)(2)(E)(iii) and 12800(d)(2)(D).
\38\ See Notice at 50178; see also proposed Rule 12805(a)(3). As
elaborated below, where an associated person is neither named in a
customer arbitration nor the subject of an on-behalf-of request, the
associated person would be required to file a request to expunge
customer dispute information as a straight-in request under proposed
Rule 13805 against the member firm with whom they were associated at
the time the subject of the request arose. Similarly, requests to
expunge customer dispute information that is not associated with a
customer arbitration--and that as a result are ineligible for
expungement under proposed Rule 12805--would need to be filed as
straight-in requests under proposed Rule 13805 against member firms
under the proposed rule change. See proposed Rule
12805(a)(2)(E)(iii)b.; see also Section II.A.2. ``No Intervening in
Customer Arbitrations to Request Expungement.''
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1. Expungement Requests During a Customer Arbitration
a. Expungement Requests by a Respondent Named in a Customer Arbitration
Currently, an associated person who is named as a respondent in a
customer arbitration (``named associated person'') is not required to
seek expungement of customer dispute information associated with the
arbitration claim during the arbitration proceedings. Rather, the
associated person can either request expungement at any time during the
customer arbitration or separately from the customer arbitration in a
straight-in request.\39\ 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 decide the expungement request and
include the decision as part of the customer's award.\40\ If the
customer arbitration does not close by award after a hearing (e.g., the
case settles), and the associated person continues to pursue the
expungement request, the panel from the customer arbitration will hold
an expungement-only hearing to decide the expungement request.\41\
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\39\ See Notice at 50175. There are currently 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). See FINRA Rule 12100(x). In general, parties must file
initial statements of claim and all pleadings and other documents
with the Director. See FINRA Rule 12300(b). 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 Rule
13503(d)(5).
\40\ FINRA stated that if an arbitration closes by award after a
hearing, the panel from the customer arbitration would be best
situated to decide the related issue of expungement. See Notice at
50175.
\41\ See id.
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The proposed rule change would amend FINRA Rule 12805 to modify
existing requirements and set forth new requirements for when and how a
named associated person would file an expungement request during a
customer arbitration.\42\ Under proposed Rule 12805(a)(1)(A), if a
named associated person wants to seek expungement of customer dispute
information associated with the customer's statement of claim, the
named associated person would be required to make the expungement
request during the customer arbitration.\43\ As discussed below, these
requests would be subject to limitations on how and when the requests
may be made.\44\ 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 that
customer dispute information in any subsequent proceeding.\45\
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\42\ See proposed Rule 12805.
\43\ See proposed Rule 12805(a)(1)(A). FINRA stated that
``[r]equiring 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.'' Notice at 50175.
\44\ See proposed Rule 12805(a)(1)(B); see also Section II.C.,
``Limitations on Expungement Requests.''
\45\ See proposed Rule 12805(a)(1)(A).
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Proposed Rule 12203(b) would authorize the Director 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. 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.\46\
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\46\ See proposed Rule 12203(c).
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i. Method and Timing of Requesting Expungement in Customer Arbitration
The proposed rule change would limit how and when expungement
requests may be made by a named associated person during the customer
arbitration. Under the proposed rule change, if a named associated
person requests expungement during the customer arbitration, the
request would be required to be included in the answer to the statement
of claim or in a separate pleading requesting expungement.\47\ If the
request is included in the answer, it must be filed within 45 days of
receipt of the customer's statement of claim in accordance with
existing requirements under the Codes.\48\ If the named associated
person requests expungement in a separate pleading, rather than the
answer, the request would be required to be filed no later than 60 days
before the first scheduled hearing begins.\49\ FINRA believes these
proposed deadlines should provide adequate time for: (1) the named
associated person to assess the customer's case, the potential merits
of an expungement request, and whether to file the request; and (2) the
parties to the customer arbitration to prepare their expungement-
related arguments, since the expungement issues will overlap with the
issues raised by the customer's claim.\50\ To request expungement after
the filing deadline, the named associated person would be required to
file a motion requesting an extension, which would be decided by the
panel.\51\
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\47\ See proposed Rule 12805(a)(1)(C)(i). FINRA Rules 12100(x)
and 13100(v) would be amended to include a ``separate document
requesting expungement'' as a pleading under the Codes.
\48\ See FINRA Rule 12303(a).
\49\ See proposed Rule 12805(a)(1)(C)(i).
\50\ See Notice at 50176.
\51\ See id. 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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[[Page 24285]]
ii. Required Contents of an Expungement Request in Customer Arbitration
The proposed rule change would also set forth content requirements
for an expungement request made by a named associated person during a
customer arbitration. Under the proposed rule change, a request for
expungement by a named associated person in a customer arbitration
would be required to include the applicable filing fee under the
Customer Code.\52\ 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.\53\ Moreover, the proposed rule change would require the
named associated person requesting expungement to explain whether
expungement of the same customer dispute information was previously
requested and, if so, how that request was decided.\54\ 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.\55\
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\52\ See proposed Rule 12805(a)(1)(C)(ii)a.
\53\ 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. See Notice at 50176
n.58. For example, Form U4 (Uniform Application for Broker-Dealer
Registration) requires disclosure of information concerning an
associated person that relates to the occurrence of an event
reportable under Item 14 of Form U4 (e.g., certain customer
complaints, arbitrations, and civil litigations) on the appropriate
Disclosure Reporting Page. FINRA stated that these content
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.'' See Notice at
50176; see also 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.'' See supra note 6.
\54\ See proposed Rule 12805(a)(1)(C)(ii)e.
\55\ See proposed Rules 12307(a)(8) through (11) and
12805(a)(1)(C)(ii). FINRA stated that ``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.'' Notice at 50176.
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b. Expungement Requests by a Party Named in a Customer Arbitration on
Behalf of an Unnamed Person
According to FINRA, the Codes do not specifically address on-
behalf-of requests.\56\ Currently, a party to a customer arbitration
may file an on-behalf-of request for expungement during the customer
arbitration. If the party 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., the
case settles), either the requesting party or the unnamed person could
ask the panel to consider and decide the expungement request before it
disbands. Under current practice, in this circumstance the panel from
the customer arbitration will hold a hearing regarding the
appropriateness of expungement pursuant to FINRA Rule 12805.\57\
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\56\ 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).
\57\ See Notice at 50176.
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Proposed Rule 12805(a)(2) would codify this practice to permit a
party to a customer arbitration to file an on-behalf-of request that
seeks to expunge customer dispute information associated with the
customer's statement of claim during the customer arbitration (provided
the request is eligible for arbitration under proposed Rule 12805).\58\
As with expungement requests made by a named associated person, the
proposed rule change would set forth requirements governing how and
when an on-behalf-of request may be made, and the contents of such
request.
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\58\ See proposed Rule 12805(a)(2)(B). As with expungement
requests filed by a named associated person in a customer
arbitration, proposed Rule 12203(b) would authorize the Director 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. See Notice at
50175.
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i. Method and Timing of Requesting Expungement on Behalf of an Unnamed
Person
To help ensure that an associated person that is the subject of an
on-behalf-of request is aware of the request, the proposed rule change
would require the unnamed person to consent in writing \59\ to the on-
behalf-of request by signing the Form Requesting Expungement on Behalf
of an Unnamed Person (``Form'').\60\ By signing the Form, the unnamed
person would be: (1) consenting to the on-behalf-of request; \61\ (2)
agreeing to be bound by the panel's decision on the request; \62\ and
(3) acknowledging their understanding 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.\63\
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\59\ See proposed Rule 12805(a)(2)(A).
\60\ The unnamed person whose CRD record would be expunged and
the party requesting expungement on the unnamed person's behalf must
both sign the Form. See proposed Rule 12805(a)(2)(C)(ii).
\61\ See Notice at 50176.
\62\ See proposed Rule 12805(a)(2)(D)(i). Signing the Form would
also obligate the unnamed person 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).
\63\ See Notice at 50177.
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The party making the request would also be required to file the
request (including the Form) no later than 60 days before the first
scheduled hearing.\64\ Under the proposed rule change, filing and
serving the on-behalf-of request would obligate the requesting party to
represent the unnamed person and the unnamed person's interests and to
pursue the request for expungement on behalf of the unnamed person
during the customer arbitration.\65\
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\64\ See proposed Rule 12805(a)(2)(C)(iii).
\65\ See proposed Rule 12805(a)(2)(D)(iii). FINRA stated that
requiring the parties' consent ``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.'' See Notice at 50176.
This would help prevent ``associated persons 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.'' See Notice at 50177.
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ii. Required Contents of an On-Behalf-Of Request and Filing Fee
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.\66\ Thus, the
party requesting expungement on behalf of an unnamed person 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 previously requested and, if so,
how it
[[Page 24286]]
was decided.\67\ In addition, 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.\68\
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\66\ See proposed Rules 12805(a)(1)(C)(ii) and
12805(a)(2)(C)(i).
\67\ See proposed Rules 12805(a)(1)(C)(ii) and
12805(a)(2)(C)(i).
\68\ See proposed Rule 12805(a)(2)(C)(ii).
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c. Deciding Expungement Requests during Customer Arbitrations
The proposed rule change would change when a panel is required to
decide an expungement request (whether made by a named associated
person or on behalf of an unnamed one) made during a customer
arbitration. Specifically, when the panel would be required to decide
an expungement request would depend on whether or not the customer
arbitration closes: (1) by award after a hearing or (2) other than by
award or by award without a hearing.
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 pursue the issue of expungement during the hearing, the panel
may not decide the request and may deem it withdrawn.\69\ Under these
circumstances, the associated person may request expungement again at a
later date.\70\
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\69\ See Notice at 50177; see also FINRA Rules 12702 and 13702.
\70\ See Notice at 50177.
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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, even if the requesting party withdraws or fails to
pursue the request (in which case the panel would deny the expungement
request with prejudice).\71\
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\71\ See proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i).
FINRA stated that requiring a panel to deny with prejudice such
requests ``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.'' Notice at
50177.
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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., the case 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.\72\ 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.\73\
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\72\ See FINRA Rule 12805; see also Notice at 50177.
\73\ See Notice at 50177.
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The proposed rule change would change this process. If 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 request.\74\ Instead, the associated person
could only seek expungement through a straight-in-request under
proposed Rule 13805 against the member firm at which the person was
associated at the time the customer dispute arose, and a panel from the
Special Arbitrator Roster would decide the request.\75\
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\74\ See proposed Rules 12805(a)(1)(D)(ii)a. and
12805(a)(2)(E)(ii)a.
\75\ See proposed Rules 12805(a)(1)(D)(ii)b. and
12805(a)(2)(E)(ii)b. See also Section II.B., ``Straight-in Requests
under the Industry Code and the Special Arbitrator Roster.''
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2. No Intervening in Customer Arbitrations To Request Expungement
The proposed rule change would provide that if an associated person
is not a party to a customer arbitration (i.e., they are an unnamed
person), and no party to the customer arbitration requests expungement
on their behalf, the unnamed person would be prohibited from
intervening in the customer arbitration to request expungement.\76\
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 under the
Industry Code, and a panel from the Special Arbitrator Roster would
decide the request.\77\
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\76\ See proposed Rules 12805(a)(2)(E)(iii) and 12800(d)(2)(D).
\77\ See proposed Rule 12805(a)(2)(E)(iii)b.
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3. No Straight-In Requests Against Customers
Currently, although the practice is relatively rare, associated
persons sometimes file expungement requests against customers as new
claims, separate from a customer arbitration.\78\ FINRA stated that
such requests may unduly delay the resolution of a customer's claim and
require a customer to participate in the resolution of the request.\79\
The proposed rule change would prevent an associated person from
requiring a customer to participate once the customer's claims have
been resolved, by prohibiting the associated person from filing a
request for expungement of the customer dispute information as a new
claim against a customer separate from the investment-related,
customer-initiated arbitration.\80\ 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.\81\
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\78\ See Notice at 50178. From January 2016 through December
2021, FINRA identified 6,476 straight-in requests to expunge
customer dispute information, 116 of which were requests filed
against a customer. See id. at 50178 n.89.
\79\ See id. at 50178.
\80\ See proposed Rule 12805(a)(3). FINRA stated that customers
should not 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. See Notice at
50178.
\81\ See Notice at 50178.
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B. Straight-In Requests Under the Industry Code and the Special
Arbitrator Roster
As stated above, the Industry Code comprises the series of rules
governing arbitrations for disputes between or among industry parties,
such as between a member firm and an associated person. 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 against the member firm
with whom the associated person was associated at the time the subject
of the request arose under proposed Rule 13805.\82\ In addition, an
associated person could request expungement of
[[Page 24287]]
customer dispute information that was 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; \83\ or (2) the associated person is the subject of
a customer arbitration, but is neither named in the arbitration nor is
the subject of an on-behalf-of request, and the customer arbitration
closes for any reason.\84\ 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.\85\
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\82\ 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 43 and accompanying text.
\83\ See proposed Rules 12805(a)(2)(D)(ii) and
12805(a)(2)(E)(ii).
\84\ See proposed Rule 13805(a)(1).
\85\ See Notice at 50178.
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1. Filing a Straight-In Request Under the Industry Code
a. Applicability
The process for initiating a straight-in-request for expungement of
customer dispute information under the Industry Code would be governed,
in part, by FINRA Rule 13302. This rule 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 through the DR
Party Portal (``Portal'').\86\ Under proposed Rule 13805, an associated
person requesting expungement of customer dispute information as a
straight-in request under the Industry Code would be required to file a
statement of claim, in accordance with the procedures contained in
FINRA Rule 13302, against the member firm at which the person was
associated at the time the customer dispute arose.\87\ Under the
proposed rule change, the Director would be authorized to deny the use
of the DRS arbitration forum for the request if this connection is not
present.\88\
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\86\ FINRA's DR Portal, among other things, permits arbitration
case participants to 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, available at www.finra.org/arbitration-mediation/dr-portal.
\87\ See proposed Rule 13805(a)(1).
\88\ See proposed Rule 13203(b).
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b. Required Content of Straight-In Requests
The required content of a straight-in request under the Industry
Code would be the same as that required for expungement requests filed
under the Customer Code.\89\ Thus, the associated person's straight-in
request would be required to contain the applicable filing fee; \90\
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.\91\ In addition, as discussed below, the proposed rule change
would impose limitations on when such requests may be made.\92\
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\89\ See proposed Rule 13805(a)(3); see also Section
II.A.1.a.ii, ``Required Contents of an Expungement Request in
Customer Arbitration.''
\90\ FINRA stated that it ``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.'' Notice at 50179 n.95.
\91\ 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 Rule 13307(a).
\92\ See Section 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)(a) a panel or court of competent jurisdiction
previously found the associated person liable in a customer
arbitration or civil litigation associated with the same customer
dispute information, or (b) the customer dispute information
involves the same conduct that is the basis of a final regulatory
action taken by a securities regulator or SRO; (5) more than two
years have elapsed since the customer arbitration or civil
litigation associated with the customer dispute information has
closed; (6) 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 (7) a named associated
person is seeking expungement even though 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 an associated person files a straight-in request 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.\93\ The proposed rule change would 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.\94\
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\93\ See proposed Rule 13805(a)(4).
\94\ See id. According to FINRA, ``[t]his 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.'' Notice at 50179.
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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, the proposed rule change would require arbitrators on the
Special Arbitrator Roster to be public arbitrators who are eligible for
the chairperson roster (``public chairperson'').\95\ In general, public
arbitrators are persons who 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.\96\ Arbitrators are eligible for the chairperson
roster if they have completed chairperson training provided by FINRA
and: (1) have a law degree and are either 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 a self-regulatory organization
(``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.\97\ FINRA stated that these
requirements would help ensure that the persons conducting the
expungement hearing are impartial and experienced in managing and
[[Page 24288]]
conducting arbitration hearings in the DRS arbitration forum.\98\
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\95\ See proposed Rule 13806(b).
\96\ See Notice at 50170 n.3; see also FINRA Rules 12100(aa) and
13100(x).
\97\ See FINRA Rules 12400(c) and 13400(c). FINRA stated that
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.'' Notice at 50179
n.102.
\98\ See Notice at 50179.
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Second, the proposed rule change would require arbitrators on the
Special Arbitrator Roster to have evidenced successful completion of,
and agreement with, enhanced expungement training provided by
FINRA.\99\ FINRA currently provides an Expungement Training module for
arbitrators.\100\ This training, however, would be expanded for
arbitrators seeking to qualify for the Special Arbitrator Roster.\101\
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\99\ See proposed Rule 13806(b)(2)(A).
\100\ See Notice at 50179.
\101\ See id.
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Third, the proposed rule change would require arbitrators on the
Special Arbitrator Roster 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.\102\ FINRA stated that ``if an
arbitrator has served on four arbitrations through to award, it would
indicate that the arbitrator has gained the knowledge and experience in
the DRS arbitration forum to conduct hearings.'' \103\
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\102\ 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. Id.;
see also FINRA Rule 12800(c)(3)(B).
\103\ Notice at 50179-80.
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b. Composition of the Panel
The proposed rule change would require the Neutral List Selection
System (``NLSS'') \104\ to select randomly the three public
chairpersons from the Special Arbitrator Roster to decide a straight-in
request filed by an associated person.\105\ The parties would not be
permitted to agree to fewer than three arbitrators.\106\ The parties
requesting expungement also would not be permitted to strike any
arbitrators selected by NLSS nor stipulate to their removal,\107\ but
would be permitted to challenge an arbitrator selected for cause.\108\
If an arbitrator is removed, NLSS would randomly select a
replacement.\109\ FINRA stated 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.'' \110\
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\104\ NLSS is a computer algorithm used to generate lists of
arbitrators on a random basis from DRS's rosters of arbitrators for
the selected hearing location.
\105\ See proposed Rule 13806(b)(1). The first arbitrator
selected would be the chair of the panel. See proposed Rule
13806(b)(3).
\106\ See proposed Rule 13806(b)(5).
\107\ See proposed Rule 13806(b)(4), as modified by Amendment
No. 2. 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).
\108\ See proposed Rule 13806(b)(4). The Director may remove an
arbitrator for conflict of interest or bias (i.e., ``cause'') upon
request of a party. The Director will grant a party's request to
remove an arbitrator if it is reasonable to infer, based on
information known at the time of the request, that the arbitrator is
biased, lacks impartiality, or has a direct or indirect interest in
the outcome of the arbitration. The interest or bias must be
definite and capable of reasonable demonstration, rather than remote
or speculative. See FINRA Rule 13410.
\109\ See proposed Rule 13806(b)(4).
\110\ Notice at 50180. FINRA stated that ``outside of the
expungement context, the parties to an arbitration 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.''
Id.
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C. Limitations on Expungement Requests
Currently, the Codes provide minimal constraints on making
expungement requests. FINRA Rules 12805 and 13805 do not address when a
party would not be permitted to file an expungement request in the DRS
arbitration forum.\111\ The Guidance, however, describes 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.
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\111\ But see infra note 127 (describing time limits that apply
to all arbitration claims, including expungement requests).
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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 should deny the
expungement request.\112\
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\112\ See supra note 6; see also Notice at 50180.
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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.\113\ According to FINRA, 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.\114\
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\113\ 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).
\114\ FINRA stated 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). See Notice at 50180 n.117.
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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.\115\ The proposed rule change would codify and expand upon
this limitation 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.\116\ According to FINRA,
the proposed rule change would, among other things, 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.\117\
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\115\ See Notice at 50180; see also supra note 6.
\116\ See proposed Rule 13805(a)(2)(A)(iii).
\117\ See Notice at 50180.
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[[Page 24289]]
b. Straight-In Request Prohibited if a Panel or Court of Competent
Jurisdiction Previously Found the Associated Person Liable
Under the Codes, arbitration awards are final and binding unless
vacated based on the limited grounds set forth in applicable state or
federal statutes.\118\ The only avenue for challenging a prior adverse
arbitration award is to file a timely motion with an appropriate court
to vacate, modify, or correct the award.\119\ Thus, if an associated
person is found liable in a customer arbitration, FINRA considers the
associated person legally bound by the award and the Director will
decline the use of the DRS arbitration forum if the associated person
then requests expungement of customer dispute information that is
associated with the customer arbitration in which the associated person
was found liable. FINRA stated that it considers such expungement
requests a collateral attack on the binding arbitration award, which is
contrary to the Codes.\120\ Accordingly, the proposed rule change would
provide that an associated person shall not file a claim requesting
expungement of customer dispute information from the CRD system if the
customer dispute information is associated with a customer arbitration
or civil litigation in which a panel or court of competent jurisdiction
previously found the associated person liable.\121\
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\118\ See id. at 50173.
\119\ See id. at 50173 n.33.
\120\ See FINRA November 10 Letter at 28; FINRA Rules 12904(b)
and 13904(b).
\121\ See proposed Rule 13805(a)(2)(A)(iv). Amendment No. 2
would modify the proposed rule change to provide that an associated
person shall not file a claim requesting expungement of customer
dispute information from the CRD system against a member firm at
which the person was associated at the time the customer dispute
arose if the customer dispute information involves the same conduct
that is the basis of a final regulatory action taken by a securities
regulator or SRO. If an associated person requests expungement of
such customer dispute information, the Director will deny the DRS
arbitration forum to the expungement request. See FINRA April 3
Letter at 14; see also infra note 430 and accompanying text.
However, if an associated person is successful at appealing a final
regulatory action, the associated person may file a claim requesting
expungement of the customer dispute information involving the same
conduct that is the basis of the final regulatory action, provided
that the request is not otherwise ineligible for arbitration (e.g.,
that the request is time barred). See FINRA April 3 Letter at 14.
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c. Straight-In Request Prohibited if Named Associated Person Did Not
Request Expungement in Customer Arbitration
As discussed above, under proposed Rule 12805(a)(1)(A) an
associated person who is named in a customer arbitration would be
required to request expungement of associated customer dispute
information 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.\122\ Proposed Rule
13805(a)(2)(A)(vii) would provide a mechanism to enforce the forfeiture
established in proposed Rule 12805(a)(1)(A).\123\ Specifically,
proposed Rule 13805(a)(2)(A)(viii) would prohibit an associated person
who is named, but failed to request expungement of the customer dispute
information associated with the customer's statement of claim in a
customer arbitration, from subsequently filing a straight-in request
seeking to expunge this customer dispute information.\124\
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\122\ See proposed Rule 12805(a)(1)(A); see also Section
II.A.1.a., ``Expungement Requests by a Respondent Named in a
Customer Arbitration.''
\123\ See Notice at 50175.
\124\ See proposed Rule 13805(a)(2)(A)(viii).
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d. Time Limits Applicable to Disclosures Arising After the Effective
Date of the Proposed Rule Change
FINRA Rules 12206(a) and 13206(a) require an associated person to
submit a claim within six years from the occurrence or event giving
rise to the claim. This six-year eligibility rule applies to all
arbitration claims, including those requesting expungement of customer
dispute information.\125\ As a result, FINRA stated that many straight-
in requests are filed many years after the customer arbitration closes
or the customer complaint is reported in the CRD system.\126\ 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.\127\ The proposed rule change would allow an associated
person to request expungement of customer dispute information
associated with a customer arbitration or civil litigation--including
any associated customer complaint disclosures--within two years after
the customer arbitration or civil litigation closes.\128\ 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.\129\ If a customer arbitration
is filed after a panel has issued an award on a request to expunge a
customer complaint associated with the newly filed customer
arbitration, the proposed rule would provide that the prior expungement
award shall not be admissible in the customer arbitration.\130\
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\125\ See Notice at 50174 n.38.
\126\ See id. at 50181.
\127\ See proposed Rules 13805(a)(2)(A)(vi) and (vii). 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
125. As discussed below, under the proposed rule change, requests to
expunge customer dispute information that arose up to six years
prior to the effective date of the proposed rule change would
continue to be eligible for expungement but would need to be filed
within two or three years, as applicable. See proposed Rule
13805(a)(2)(B).
\128\ See proposed Rule 13805(a)(2)(A)(vi). FINRA stated that
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. See
Notice at 50181 n.126. FINRA stated that 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 sufficient 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. See Notice at 50181.
\129\ See Notice at 50181. FINRA stated that 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. See id.
\130\ See proposed Rules 12604(c) and 13604(c). FINRA stated
that the proposed rule change would avoid unfairly impacting the
customer arbitration. See also Notice at 50181.
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The proposed rule change 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.\131\ Specifically,
the proposed rule change would provide that if an expungement request
is otherwise eligible under the six-year limitation
[[Page 24290]]
period of FINRA Rule 13206(a),\132\ 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; \133\ 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, the effective date.\134\
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\131\ See Notice at 50182.
\132\ 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. See FINRA Rules
12206(a) and 13206(a).
\133\ See proposed Rule 13805(a)(2)(B)(i).
\134\ See proposed Rule 13805(a)(2)(B)(ii).
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3. Director's Authority To Deny the Forum
The proposed rule change would require the Director 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.\135\ The proposed
rule change would also provide the Director with 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.\136\ FINRA stated that the proposed rule change would help
ensure additional safeguards around the expungement process by
expanding the circumstances in which the Director is authorized to deny
the DRS arbitration forum.\137\
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\135\ See proposed Rules 12203(b) and 13203(b). For example,
FINRA stated that under the proposed rule change the Director would
decline the use of the DRS arbitration forum if: (1) an expungement
request is ineligible under the proposed time limitations; (2) a
panel has previously considered the merits of, or a court has
previously decided, an expungement request associated with the same
customer dispute information; (3) an associated person was named as
a respondent in a customer arbitration but did not request
expungement; (4) an associated person requested expungement but
withdrew or did not pursue the expungement request; or (5) 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. See Notice at
50182.
\136\ See proposed Rules 12203(c) and 13203(c). For example,
FINRA stated that the Director may decline the use of the DRS
arbitration forum if the Director determines that: (1) 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; or (2) an associated
person seeks expungement of customer dispute information other than
pursuant to proposed Rules 12805, 12800(d) and (e) or 13805, as
applicable. See Notice at 50182.
\137\ See Notice at 50182.
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D. Procedural 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.\138\ In addition, the Guidance recommends that
arbitrators follow certain practices when deciding expungement
requests. The proposed rule change would amend the current expungement
hearing requirements by incorporating relevant provisions from the
Guidance. The proposed amended requirements would apply to all
expungement hearings.\139\
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\138\ See supra note 31.
\139\ 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 Section II.G., ``Expungement Requests During Simplified
Customer Arbitrations'') and a straight-in request under proposed
Rule 13805, unless otherwise specified. See Notice at 50182 n.137.
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1. Recorded Hearing Sessions
The Codes currently require a panel deciding an expungement request
to hold a recorded hearing session (by telephone or in person)
regarding the appropriateness of expungement.\140\ The proposed rule
change would provide that the panel would be required to 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.
The proposed rule change would also eliminate the reference to the
hearing being held by telephone or in person since the participants in
the hearing may, under the proposed rule change, also appear by video
conference; the proposed rule change would also allow different
participants to attend using different methods (e.g., one by phone, one
by video conference).\141\
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\140\ See FINRA Rules 12805(a) and 13805(a).
\141\ See proposed Rules 12805(c)(1) and 13805(c)(1).
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2. Requesting Party'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
and eliminate the ability to appear via telephone.\142\ The proposed
rule change would also require a party requesting expungement on behalf
of an unnamed person or the party's representative to appear in person
or by video conference at the hearing.\143\ The panel would determine
the method of appearance.\144\ FINRA stated that requiring that
attendance be in person or by video conference would help the panel
assess the associated person's credibility.\145\
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\142\ See proposed Rules 12805(c)(2) and 13805(c)(2).
\143\ See id.
\144\ See id.
\145\ See Notice at 50182.
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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.\146\ Specifically, the Guidance provides that
arbitrators should:
---------------------------------------------------------------------------
\146\ The Guidance states that arbitrators should permit
customers and their counsel to participate in the expungement
hearing. See supra note 6.
---------------------------------------------------------------------------
Allow the customer and their representative to appear at
the expungement hearing;
Allow the customer to testify (telephonically, in person,
or by 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.\147\
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\147\ See Notice at 50182-83.
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Specifically, the proposed rule change would state that all
customers whose customer dispute information is associated with the
expungement request are entitled to attend and participate in all
aspects of the prehearing conferences and the expungement hearing.\148\
And the
[[Page 24291]]
proposed rule change would provide that the customer could choose to
attend and participate by telephone, in person or by video
conference.\149\
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\148\ See proposed Rules 12805(c)(3)(A) and 13805(c)(3)(A). A
prehearing conference is any hearing session, including an Initial
Prehearing Conference, 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 proposed rule change, all customers
whose customer dispute information is associated with the straight-
in request would be entitled to representation at prehearing
conferences. See proposed Rule 13805(c)(4).
\149\ See proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B).
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The proposed rule change would also specify certain parameters of
the customer's participation.\150\ First, the proposed rule change
would provide that a customer or a customer's representative could
introduce evidence during the expungement hearing.\151\ 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.\152\
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\150\ See Notice at 50183.
\151\ See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).
\152\ See id.
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Second, the customer and the customer's witnesses would be allowed
to testify at the expungement hearing and be questioned by the customer
or customer's representative.\153\ If a customer 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.\154\
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\153\ See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B).
\154\ See id.
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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.\155\
---------------------------------------------------------------------------
\155\ 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.\156\
---------------------------------------------------------------------------
\156\ See proposed Rules 12805(c)(5)(D) and 13805(c)(5)(D).
---------------------------------------------------------------------------
FINRA stated that customer attendance and participation during an
expungement hearing would provide the panel with important information
and perspective that it might not otherwise receive. In addition, by
providing customers with options for how to attend and participate in
hearings FINRA seeks to encourage customer attendance and
participation.\157\ However, FINRA also stated that the proposed rule
should give the associated person or party requesting expungement on
behalf of an unnamed person the opportunity to substantiate arguments
in support of the expungement request.\158\
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\157\ See Notice at 50183.
\158\ Id.
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4. Panel Requests for Additional Documents or Evidence
The proposed rule change would explicitly authorize a 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.\159\ FINRA stated that this
proposed rule change would help ensure that arbitrators have the
information necessary to make an informed decision on 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.\160\
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\159\ See proposed Rules 12805(c)(6) and 13805(c)(7).
\160\ See Notice at 50183.
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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.\161\ The proposed rule
change would retain this requirement.\162\
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\161\ FINRA stated that the panel must review settlement
documents that are related to the customer dispute information
associated with the expungement request, regardless of whether the
associated person was a party to the settlement. Id. at 50183 n.152.
\162\ 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 currently recommends that arbitrators
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.\163\ The proposed rule change would codify the
language in the Guidance,\164\ in part, because conditioned settlements
violate FINRA Rule 2081 and may be grounds to deny an expungement
request.\165\
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\163\ See Notice at 50184.
\164\ See proposed Rules 12805(c)(7) and 13805(c)(8).
\165\ See Notice at 50184.
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6. Unanimous Decision To Issue an Award Containing Expungement Relief
Unlike arbitration cases generally, which may be decided based on a
majority decision of the panel, the proposed rule change would require
that the arbitrators agree unanimously to issue an award containing
expungement relief.\166\ The proposed amendments would also provide
that in order to issue an award containing expungement relief, the
panel must unanimously find 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.\167\ 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.\168\
FINRA stated that these proposed rule changes would help ensure that
expungement is awarded only in limited circumstances in
[[Page 24292]]
accordance with the narrow standards in its rules.\169\
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\166\ See proposed Rules 12805(c)(8)(A) and 13805(c)(9)(A).
FINRA stated that when deciding a customer's claims, a majority
decision of the arbitrators would continue to be sufficient. Notice
at 50184 n.156.
\167\ See proposed Rules 12805(c)(8)(A)(i) and
13805(c)(9)(A)(i). FINRA stated that 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. See
Notice at 50184; see also FINRA Rule 2080 (Obtaining an Order of
Expungement of Customer Dispute Information from the Central
Registration Depository (CRD) System). FINRA Rule 2080 is not part
of the Codes, and the proposed rule change would not amend FINRA
Rule 2080. FINRA explained that the proposed rule change would
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 Notice at 50184 at n.162.
\168\ See proposed Rules 12805(c)(8)(A)(ii) and
13805(c)(9)(A)(ii).
\169\ See Notice at 50184; see also supra note 25 and
accompanying text.
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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
[FINRA Rule 2080] grounds for expungement applies to the facts of the
case.'' \170\ According to FINRA, the Guidance suggests that the
panel's explanation should be complete and not solely a recitation of
one of the FINRA Rule 2080(b)(1) grounds or language provided in the
expungement request.\171\ The proposed rule change would retain the
requirement to provide the written explanation, but would remove the
word ``brief,'' and 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.\172\ Thus, FINRA stated that under the proposed
rule change, the panel would be required to provide enough detail in
the award to explain its rationale for awarding expungement
relief.\173\
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\170\ See Notice at 50184; see also FINRA Rules 12805(c) and
13805(c).
\171\ See Notice at 50184.
\172\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B).
\173\ See Notice at 50184.
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8. Evidentiary Weight of Decision Not To Attend or Participate
The proposed rule change would state that a panel shall not give
any evidentiary weight to a decision by a customer or an authorized
representative of state securities regulators (``authorized
representative'') not to attend or participate in an expungement
hearing when making a determination of whether expungement is
appropriate.\174\ FINRA stated that 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, 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.\175\
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\174\ See proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C); see
also Amendment No. 1; see also Section 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).
\175\ See Notice at 50185; see also FINRA November 10 Letter at
10-11.
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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
proposed rule change would state that 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.\176\
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\176\ See proposed Rules 12805(c)(9) and 13805(c)(10).
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E. Notifications to Customers and to State Securities Regulators
Regarding Expungement Requests
1. Notification to Customers by the Associated Person
According to FINRA, 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.\177\ The proposed rule change
would codify this practice in the Industry Code by requiring the
associated person to 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.\178\ 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.\179\ The panel would be authorized to
decide whether extraordinary circumstances exist that make service on
the customers impracticable.\180\
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\177\ See Notice at 50185; see also supra note 6.
\178\ See proposed Rule 13805(b)(1)(A)(i) and (ii). This
proposed 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 Notice at 50185 n.168.
\179\ See proposed Rules 13805(b)(1)(A)(i) and (ii).
\180\ See id.
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The proposed rule change also 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.\181\
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\181\ See proposed Rule 13805(b)(1)(A)(iv).
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FINRA stated that providing notification to customers would help
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 regarding the associated person's
request. FINRA also stated that requiring the panel to review all
documents that the associated person used to inform the customers about
the expungement request as well as any customer responses received
would help ensure that the associated person does not attempt to
dissuade a customer from attending or participating in the expungement
hearing.\182\
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\182\ See Notice at 50185.
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2. Notifications to the Customer by the Director
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.\183\ The Director would also provide the notified customers
with access to all documents on the Portal related to the request for
expungement prior to their attendance and participation in the
expungement hearing.\184\
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\183\ 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 Section II.G.3., ``Customer Notification of
Expungement Hearings during Simplified Arbitrations'' (discussing
customer notification of expungement hearings in connection with
simplified arbitrations). FINRA stated that the Director would be
required to include language in the notice encouraging the customer
to attend and participate in the expungement hearing. See Notice at
50185.
\184\ See proposed Rule 13805(b)(1)(B)(ii); see also Notice at
50185. FINRA would provide customers with access to the documents
through the Portal. The Portal has two parts: the DR Neutral Portal
is for arbitrators and mediators serving on the Dispute Resolution
roster, and the DR Party Portal is for arbitration and mediation
case participants. Once registered on the 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
supra note 86. FINRA stated that these proposed rule changes would
help encourage customer attendance and participation in the
expungement hearing, which would help the panel fully develop a
record on which to decide the expungement request. See Notice at
50185.
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3. Notifications to State Securities Regulators
The proposed rule change would require FINRA to notify state
securities
[[Page 24293]]
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.\185\ FINRA stated that the
proposed notification requirement would help ensure that state
securities regulators are timely notified of expungement requests.\186\
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\185\ See proposed Rules 12800(f)(1), 12805(b) and
13805(b)(2)(A). FINRA stated that it 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. See Notice at 50185 n.176.
\186\ See Notice at 50185.
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F. Attendance and Participation of an Authorized Representative of
State Securities Regulators in Straight-In Requests
The proposed rule change would provide a mechanism for an
authorized representative of a state securities regulator to provide
their position or positions on an expungement request in writing or by
attending and participating in the expungement hearing in person or by
video conference.\187\ The proposed rule change would limit attendance
and participation by an authorized representative to straight-in
requests.\188\
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\187\ See proposed Rule 13805(c)(6)(A).
\188\ See Notice at 50185-86; see also proposed Rule 1305(c)(6).
The proposed rule change would not allow an authorized
representative to attend or participate in a customer arbitration
where expungement has been requested; FINRA believes that 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. See id. at 50186.
---------------------------------------------------------------------------
The proposed rule change would also require the Director to provide
state securities regulators with access to all documents relevant to:
(1) the expungement request filed in the arbitration requesting
expungement relief; and (2) 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.\189\ Such
access would be required to be provided at the same time as providing
notification to state securities regulators of the straight-in
request.\190\
---------------------------------------------------------------------------
\189\ See proposed Rule 13805(b)(2)(B).
\190\ See id.; see also Notice at 50186. The state securities
regulators' access to the documents would be subject to
confidentiality restrictions. See proposed Rule 13805(b)(2)(B).
---------------------------------------------------------------------------
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 proposed rule change would require the
Director to notify the authorized representative of the time, date and
place of any prehearing conferences and the expungement hearing.\191\
Under proposed Rule 13805(c)(6), 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.\192\ Under the proposed
rule change, 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.\193\
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\191\ See proposed Rule 13805(b)(3).
\192\ See proposed Rule 13805(c)(6)(B).
\193\ See proposed Rule 13805(c)(6)(C).
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According to FINRA, 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).\194\ 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.\195\ In addition,
the proposed rule change provides that 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.\196\
---------------------------------------------------------------------------
\194\ See Notice at 50186.
\195\ See id. at 50186 n.182.
\196\ See proposed Rule 13805(c)(6)(A).
---------------------------------------------------------------------------
FINRA stated that 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.\197\
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\197\ See Notice at 50186. FINRA also stated that 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. See id.
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G. Expungement Requests During Simplified Customer Arbitrations
FINRA Rule 12800, governing simplified arbitration,\198\ was
designed to make the DRS arbitration process less burdensome for
customer arbitrations involving $50,000 or less (exclusive of interest
and expenses) by providing such customers with expedited procedures.
Simplified arbitrations are decided on the pleadings and other
materials submitted by the parties, unless the customer requests a
hearing.\199\ Further, a single arbitrator from the public chairperson
roster is appointed to consider and decide simplified arbitrations,
unless the parties agree in writing otherwise.\200\
---------------------------------------------------------------------------
\198\ See supra note 7 and accompanying text.
\199\ See FINRA Rule 12800(a).
\200\ 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, this order uses the
term ``arbitrator,'' unless otherwise specified, to mean either a
panel or single arbitrator.
---------------------------------------------------------------------------
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 Customer 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.\201\
---------------------------------------------------------------------------
\201\ See FINRA Rule 12800(c).
---------------------------------------------------------------------------
FINRA Rule 12800 does not expressly address how an expungement
request should be filed or considered during a simplified
arbitration.\202\ 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.\203\
---------------------------------------------------------------------------
\202\ See Notice at 50186.
\203\ See Notice at 50186, proposed Rules 12800(d) and (e).
---------------------------------------------------------------------------
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.\204\ 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.\205\
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\204\ See proposed Rules 12800(d)(1) and (2).
\205\ See proposed Rule 12800(e)(2). See Section II.G.1.c., ``No
Expungement Request is Filed.''
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[[Page 24294]]
a. Request by a Named Associated Person During a 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.\206\ 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.\207\ If the named associated person requests expungement
in a pleading other than an answer, the request would be required to be
filed within 30 days after the date FINRA notifies the parties of the
appointment of the arbitrator.\208\ The request would be required to
include the same information as a request filed in a non-simplified
arbitration.\209\
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\206\ 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 requests made in
simplified arbitration. See Notice at 50187 n.191. See Section
II.C., ``Limitations on Expungement Requests.''
\207\ See proposed Rule 12800(d)(1)(B)(i). Pursuant to FINRA
Rule 12303(a), a respondent's answer must be submitted within 45
days of receipt of the statement of claim. See Notice at 50187
n.192; see supra note 48 and accompanying text.
\208\ See proposed Rule 12800(d)(1)(B)(i). FINRA stated that
when it notifies the parties that an arbitrator has been appointed,
it 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. See Notice at 50187
n.193.
\209\ See proposed Rules 12800(d)(1)(B)(i) and
12805(a)(1)(C)(ii). More specifically, 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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The arbitrator would be required to decide an expungement request
that is filed by the associated person.\210\ 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.\211\
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\210\ See proposed Rules 12800(d)(1)(B)(ii) and 12800(e)(1).
\211\ See proposed Rule 12800(d)(1)(C). FINRA stated this
provision would limit arbitrator-shopping. See Notice at 50187.
---------------------------------------------------------------------------
b. Request by a Party on Behalf of an Unnamed Person
Under the proposed rule change, 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.\212\ 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 would be required to consent to such filing by signing the
Form.\213\
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\212\ See proposed Rule 12800(d)(2)(A).
\213\ 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 Section II.A.1.b.,
``Expungement Requests By a Party Named in a Customer Arbitration on
Behalf of an Unnamed Person.''
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The arbitrator would be required to decide an on-behalf-of request
that is filed by the requesting party.\214\ 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.\215\
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\214\ See proposed Rules 12800(d)(2)(B)(ii) and 12800(e)(1).
\215\ See proposed Rule 12800(d)(2)(C).
---------------------------------------------------------------------------
c. No Expungement Request Is Filed
If expungement is not requested during a 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.\216\ The request would be subject to the
limitations on whether and when such requests may be filed under the
Industry Code.\217\
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\216\ See proposed Rules 12800(e)(2), 13805(a)(1) and 13806.
FINRA stated that 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. 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 Notice at 50187 n.203
and accompanying text.
\217\ See proposed Rule 12800(e)(2); see also Section II.C.,
``Limitations on Expungement Requests.''
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2. Deciding Expungement Requests During Simplified Arbitrations
If expungement is requested during 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).\218\ 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.\219\
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\218\ See proposed Rule 12800(e)(1). Simplified arbitration is a
more streamlined arbitration process. See Notice at 50186. In part,
a single arbitrator from the public chairperson roster is appointed
to consider and decide simplified arbitrations, unless the parties
agree in writing otherwise. Id.
\219\ See proposed Rule 12800(e).
---------------------------------------------------------------------------
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 issue an award.\220\ After the customer's dispute is
decided, the arbitrator would hold a separate expungement-only hearing
to consider and decide the expungement request and issue a separate,
subsequent award.\221\ FINRA stated that the proposed rule change is
designed to minimize any delays in resolving the customer arbitration
and any delays in potential recovery that a customer may be
awarded.\222\
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\220\ See proposed Rule 12800(e)(1)(A).
\221\ See id. 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). See Notice at 50188 n.206.
\222\ See Notice at 50188.
---------------------------------------------------------------------------
b. ``Option One'' Full Hearing
If the customer chooses to have an ``Option One'' full hearing on
their 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.\223\ 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.\224\
---------------------------------------------------------------------------
\223\ See proposed Rule 12800(e)(1)(B)(i).
\224\ See Notice at 50188.
---------------------------------------------------------------------------
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
[[Page 24295]]
request.\225\ The arbitrator would conduct a separate expungement-only
hearing to develop the factual record and help the arbitrator make a
fully informed decision on the expungement request.\226\
---------------------------------------------------------------------------
\225\ See proposed Rule 12800(e)(1)(B)(ii).
\226\ See Notice at 50188.
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3. Customer Notification of Expungement Hearings During Simplified
Arbitrations
The proposed rule change would require the Director to notify all
customers from the simplified arbitration of a separate expungement-
only hearing.\227\ FINRA stated that the Director's notice would
provide the customers with timely notice of the expungement hearing so
that the customers and their representatives may participate.\228\
---------------------------------------------------------------------------
\227\ See proposed Rule 12800(f)(2).
\228\ See Notice at 50188.
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H. Non-Substantive Changes
The proposed rule change would also 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 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).
III. Discussion and Commission Findings
After careful review of the proposed rule change, the comment
letters, and FINRA's responses to the comments, the Commission finds
that the proposed rule change is consistent with the requirements of
the Exchange Act and the rules and regulations thereunder that are
applicable to a national securities association.\229\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 15A(b)(6) of the Exchange Act,\230\ which requires, among other
things, that FINRA rules 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 Commission also finds that the proposed rule
change is consistent with Section 15A(b)(5) of the Exchange Act,\231\
which requires, among other things, that FINRA rules provide for the
equitable allocation of reasonable dues, fees and other charges among
members and issuers and other persons using any facility or system that
FINRA operates or controls.
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\229\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\230\ 15 U.S.C. 78o-3(b)(6).
\231\ 15 U.S.C. 78o-3(b)(5).
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A. Requests for Expungement Under the Customer Code
1. Expungement Requests by Respondents Named in Customer Arbitration
The proposed rule change to amend FINRA Rule 12805 would, in part,
govern how and when named associated persons may request expungement
during a customer arbitration. Among other things, the proposed rule
change would require that a named associated person file a request for
expungement of the customer dispute information associated with the
customer's statement of claim in the customer arbitration or forfeit
the ability to request expungement of the same customer dispute
information in a subsequent proceeding.\232\
---------------------------------------------------------------------------
\232\ See proposed Rule 12805(a)(1)(A).
---------------------------------------------------------------------------
The proposed rule change would also dictate the method of and
deadline for filing an expungement request.\233\ Under the proposed
rule change, a named associated person would need to include their
request for expungement in their answer to the customer's statement of
claim or in a separate pleading requesting expungement.\234\ If the
associated person includes their request in the answer, they must file
the answer within 45 days of receipt of the statement of claim.\235\ If
the named associated person requests expungement in a separate pleading
requesting expungement, rather than the answer, they would need to file
the pleading no later than 60 days before the first scheduled hearing
begins.\236\
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\233\ See proposed Rule 12805(a)(1)(C)(i).
\234\ See id.
\235\ See FINRA Rule 12303(a).
\236\ See proposed Rule 12805(a)(1)(C)(i); see also supra notes
49-50 and accompanying text. See also Section II.A.1.a.i., ``Method
and Timing of Requesting Expungement in Customer Arbitration.''
---------------------------------------------------------------------------
Finally, the proposed rule change would further prescribe the
contents of an expungement request.\237\ For example, the proposed rule
change would require the named associated person requesting expungement
to explain whether expungement of the same customer dispute information
was: (1) previously requested and, if so, (2) how it was decided.\238\
---------------------------------------------------------------------------
\237\ See proposed Rule 12805(a)(1)(C)(ii).
\238\ See proposed Rule 12805(a)(1)(C)(ii)e.
---------------------------------------------------------------------------
FINRA stated that 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.\239\ FINRA further stated that the potential
costs that would be incurred by associated persons, arbitrators and the
DRS arbitration forum if named associated persons file expungement
requests are appropriate given the potential benefit of having customer
input and a complete factual record for the panel to decide an
expungement request.\240\ Moreover, FINRA stated that requiring the
named associated person requesting expungement to explain whether
expungement of the same customer dispute information was previously
requested and, if so, how it was decided would further link the request
to a specific case and help prevent multiple requests for
expungement.\241\
---------------------------------------------------------------------------
\239\ See Section II.A.1.a., ``Expungement Requests by a
Respondent Named in a Customer Arbitration.''
\240\ See Notice at 50175.
\241\ See id. at 50176.
---------------------------------------------------------------------------
Finally, FINRA stated the proposed 60-day deadline would provide
adequate time for: (1) the named associated person to assess the
customer's case, the potential merits of an expungement request, and
whether to file the request; and (2) the parties to a customer
arbitration to prepare their expungement-related arguments, since the
expungement issues will overlap with the issues raised by the
customer's claim.\242\
---------------------------------------------------------------------------
\242\ Id.
---------------------------------------------------------------------------
Four commenters supported, and there was no opposition to, these
aspects of the proposed rule change.\243\
[[Page 24296]]
One commenter stated that requiring an associated person to request
expungement in a customer dispute matter, if the associated person is a
party to the matter, reduces the need for additional hearings, filing
fees, attorney fees, and other arbitration costs concerning the same
parties and the same evidence.\244\ Three commenters supported the
proposed rule change on the basis that it would allow the panel that
heard all of the evidence, including the customer's evidence, to be
best situated to decide the expungement request.\245\ One of these
commenters stated that the requirement would prevent ``arbitrator-
shopping'' (i.e., purposefully not raising, or withdrawing, an
expungement request in an arbitration in order to file a request with a
panel more likely to award expungement).\246\
---------------------------------------------------------------------------
\243\ See letters from Seth A. Miller, General Counsel,
President, Advocacy & Administration, Cambridge Investment Research,
Inc., to the Commission, dated September 6, 2022 (``Cambridge'') at
1-2; Melanie Senter Lubin, NASAA President and Maryland Securities
Commissioner, North American Securities Administrators Association,
Inc., to the Commission, dated September 6, 2022 (``NASAA September
6 Letter'') at 2-3; Scott Eichhorn, et. al., Acting Director,
University of Miami Investor Rights Clinic, to the Commission, dated
September 6, 2022 (``Miami'') at 2-3; William A. Jacobson, Esq.,
Clinical Professor, Cornell Law School, and Director, Cornell
Securities Law Clinic, et. al., to the Commission, dated September
6, 2022 (``Cornell'') at 2.
\244\ See Cambridge at 2.
\245\ See NASAA September 6 Letter at 2-3; Miami at 2-3; Cornell
at 2.
\246\ See Cornell at 2.
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The Commission believes that the proposed rule change should
improve the integrity of the expungement process. Where a customer
arbitration closes by award after a hearing, the panel's experience
with the parties and the dispute, as well as the panel's review of the
documents, testimony, and other evidence in connection with the
arbitration, should leave the panel well positioned to make a decision
regarding the related expungement request. Moreover, requiring the
expungement request to be made within 45 days of receipt of the
customer's statement of claim (if included in the answer) or no later
than 60 days before the first scheduled hearing begins (if included in
a pleading) should allow the requesting party a reasonable amount of
time to make an informed decision about whether to request expungement
while at the same time providing the parties with reasonable case-
preparation time, since the expungement issues will likely overlap with
the issues raised by the customer's claim.
Further, the content required for an expungement request under the
proposed rule change, including the CRD occurrence number that is the
subject of the request, the case name and docket number associated with
the customer dispute information, and whether expungement of such
information had previously been requested and any resolution thereof,
should improve the expungement process by clearly documenting both the
request and whether it repeats a previous request. The required content
would provide the panel with information sufficient to understand who
is requesting expungement and in connection with which customer
dispute.\247\ In addition, requiring the party requesting expungement
to explain whether expungement of the same customer dispute information
was previously requested and, if so, how it was decided will help
prevent parties from pursuing second requests for expungement,
consistent with the proposed rule change prohibiting repeat requests,
which is discussed in more detail below.\248\
---------------------------------------------------------------------------
\247\ See Notice at 50176.
\248\ See Section III.A.5., ``Limitations Applicable to
Straight-in Requests and Expungement Requests during a Customer
Arbitration.''
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2. Content and Timing of on-Behalf-of Requests in Customer Arbitration
As with expungement requests made by a named associated person, the
proposed rule change would, in part, govern how and when an on-behalf-
of request may be made during a customer arbitration. For example,
proposed Rule 12805(a)(2)(C)(iii) would require the party making the
request to file it no later than 60 days before the first scheduled
hearing.
In addition, proposed Rule 12805(a)(2)(C)(ii) would require the
party filing an on-behalf-of request to submit to the Director the Form
signed by the unnamed person and a statement requesting expungement. As
discussed above, by signing the Form the unnamed person would be: (1)
consenting to the on-behalf-of request, (2) agreeing to be bound by the
panel's decision on the on-behalf-of request, and (3) acknowledging
their understanding 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.\249\
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\249\ See Notice at 50177; see also Section II.A.1.b.,
``Expungement Requests by a Party Named in a Customer Arbitration on
Behalf of an Unnamed Person.''
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Finally, proposed Rules 12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i)
would require the party requesting expungement on behalf of an unnamed
person 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 previously requested and, if so,
how it was decided.\250\
---------------------------------------------------------------------------
\250\ See Notice at 50177.
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FINRA believes that requiring associated persons to sign and submit
the Form would help address its concern 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.\251\ Specifically, requiring
submission of the signed Form would help ensure that an unnamed person
is aware of an on-behalf-of request.\252\ In addition, by signing the
Form, the associated persons would be acknowledging that, if the
customer arbitration closes by award after a hearing and an expungement
decision is made, the unnamed person would be barred from filing a
request for expungement for the same customer dispute information in a
subsequent proceeding.\253\
---------------------------------------------------------------------------
\251\ See id.
\252\ See id.
\253\ See id.
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In addition, under the proposed rule change, on-behalf-of requests
would resemble named associated person requests in timing (the proposed
rule would require service on all parties no later than 60 days before
the first scheduled hearing), and in content (an on-behalf-of request
would be required to include the same elements as a named associated
person request).\254\
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\254\ See id. at 50176-77; see also Section III.A.1.,
``Expungement Requests by Respondents Named in Customer
Arbitration.'' The proposed rule change would not require that an
on-behalf-of request be included in an answer or pleading requesting
expungement (although it could be) as such requests are made on
behalf of non-parties. See Notice at 50176.
---------------------------------------------------------------------------
The Commission received no comment letters supporting or opposing
this proposed rule change.
For reasons similar to those discussed above for expungement
requests made by a named associated person in a customer arbitration,
the Commission believes that these timing and content requirements
should improve the integrity of the expungement process.\255\ In
addition, the panel's decision would preclude the unnamed party from
[[Page 24297]]
seeking expungement of the same customer dispute information in another
forum by claiming their interests were inadequately represented in the
hearing under the terms of the Form. Moreover, requiring the
expungement request to be made no later than 60 days before the first
scheduled hearing begins should allow the requesting party a reasonable
amount of time to make an informed decision about whether to request
expungement while at the same time providing the parties with
reasonable case-preparation time, as the expungement issues will
overlap with the issues raised by the customer's claim.
---------------------------------------------------------------------------
\255\ See Section III.A.1., ``Expungement Requests by
Respondents Named in Customer Arbitration.''
---------------------------------------------------------------------------
Further, the notice provided to the associated person pursuant to
the requirement to submit the Form with the associated person's written
consent should help ensure that the associated person is made aware of
the on-behalf-of request and will likely help prevent inadvertent
duplicative filings. The requirement that the associated person agree
to be bound by the panel's decision on the request, and be barred from
filing a request for expungement for the same customer dispute
information, will help prevent the associated person from requesting
expungement from a different panel if they are unsatisfied with the
decision issued by the first panel. Such safeguards also help conserve
resources and prevent inconsistent determinations.
3. Deciding Expungement Requests During Customer Arbitrations
As stated above, the proposed rule change would treat customer
claims that close by award after a hearing differently from customer
claims that close other than by award (e.g., the case settles) or that
close by award without a hearing. Where the customer's claim closes by
award after a hearing, the proposed rule change would require the panel
in a customer arbitration to consider and decide a request for
expungement made during the proceeding. In addition, if the party
requesting expungement withdraws or does not pursue the expungement
request, the panel will be required to deny the expungement request
with prejudice. FINRA stated that this change should make efficient use
of the panel's familiarity with the case-in-chief, and help protect
investors by precluding arbitrator-shopping by associated persons or
those requesting expungement on their behalf.\256\
---------------------------------------------------------------------------
\256\ See Notice at 50177. FINRA expressed concern that, absent
this change, associated persons (or other requesters) might seek to
withdraw and refile their expungement requests to avoid having the
requests decided by the panel who heard evidence on the customer's
arbitration claim (receiving a new list of arbitrators and a
potentially more favorable decision). See id.
---------------------------------------------------------------------------
Conversely, where the customer's claim closes other than by award
or closes by award without a hearing, the proposed rule change would
preclude the panel that heard the customer claim from considering the
ongoing expungement request.\257\ In such cases, the efficiency
rationale becomes less compelling, and FINRA believes that such
expungement requests are best considered as straight-in requests by a
panel from the Special Arbitrator Roster, discussed in more detail
below.\258\ These proposed rule changes are intended to protect
investors by reducing opportunities for arbitrator-shopping and by
providing arbitrators with special training and factual-development
tools specific to the expungement context.\259\
---------------------------------------------------------------------------
\257\ See id. at 50177-78.
\258\ See Section III.B., ``Straight-in Requests under the
Industry Code and the Special Arbitrator Roster.''
\259\ See Notice at 50178 and 50194.
---------------------------------------------------------------------------
Two commenters supported the proposed requirement that the panel in
a customer arbitration decide an expungement request where the customer
arbitration closes by award after a hearing.\260\ These commenters
reasoned that because the panel would have presided over the case-in-
chief, assessing input from all involved parties, it is best situated
to decide the expungement request.\261\ Three commenters further
supported the proposed requirement that, in the event an expungement
request is withdrawn or not pursued, the panel would be required to
deny the request with prejudice, reasoning that the proposed rule
change would prevent arbitrator-shopping by discouraging requesting
parties from withdrawing an expungement request in order to seek a
potentially more favorable panel.\262\
---------------------------------------------------------------------------
\260\ See letter from Christine Lazaro, Director of the
Securities Arbitration Clinic and Professor of Clinical Legal
Education, et. al., Securities Arbitration Clinic at St. John's
University School of Law, to the Commission, dated September 6, 2022
(``St. John's) at 2; Cornell at 2.
\261\ See id.
\262\ See Cornell at 2; Miami at 4; St. John's at 3.
---------------------------------------------------------------------------
Three commenters, however, suggested that associated persons should
be able to voluntarily withdraw expungement requests without
prejudice.\263\ One of these commenters stated that customers are free
to withdraw claims without prejudice,\264\ while another argued that
there is no evidence to support the claim that a person that withdraws
an expungement request is doing so in the hopes of finding a more
favorable panel.\265\ A third commenter stated that there are a number
of valid and practical reasons for why a non-party associated person's
request for expungement may be withdrawn prior to final hearing (e.g.,
time and costs), and thus that it is inappropriate to penalize an
associated person for withdrawing their expungement request.\266\
---------------------------------------------------------------------------
\263\ See letters from Dochtor D. Kennedy, President & Founder,
AdvisorLaw, LLC, to the Commission, dated August 9, 2022
(``AdvisorLaw'') at 2-3; Jennifer W. Burke, Esq., Hennion & Walsh,
Inc., to the Commission, dated September 6, 2022 (``Hennion'') at 6;
Russell Del Toro, Esq., TCM, P.S.C., to the Commission, dated
December 21, 2022 (``Del Toro'').
\264\ See Hennion at 6.
\265\ See Advisorlaw at 2-3.
\266\ See Del Toro.
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FINRA declined to amend the proposed rule change in response to
comments. FINRA expressed concern that arbitrator-shopping and repeated
attempts to seek expungement of the same customer dispute information
are inconsistent with the arbitration process and threaten the
integrity of the information in the CRD system because they permit
parties to request expungement until they get a favorable
response.\267\ FINRA highlighted the extent of its concern by pointing
out that among the requests to expunge customer dispute information in
arbitration from January 2016 through December 2021, FINRA identified
282 disclosures that were the subject of a previously withdrawn or
denied requests to expunge.\268\ FINRA further stated, in response to a
commenter's statement that an associated person may have valid and
practical reasons for withdrawing an expungement request, that it is
not in a position to determine or assess, on a case-by-case basis, the
legitimacy of an associated person's reason for withdrawing an
expungement request during a customer arbitration.\269\
---------------------------------------------------------------------------
\267\ See FINRA November 10 Letter at 28-29.
\268\ See FINRA November 10 Letter at 29; see also FINRA April 3
Letter at 5.
\269\ See FINRA April 3 Letter at 5.
---------------------------------------------------------------------------
Two commenters also supported the proposed requirement that
expungement requests made during customer arbitrations that close other
than by award or close by award without a hearing, be heard by a panel
from the Special Arbitrator Roster.\270\ One of these commenters
reasoned that the original arbitration panels do not get to hear the
full presentation of the evidence on the merits of the underlying
[[Page 24298]]
customer case and that customers or their representatives have little
incentive to attend and participate in an expungement hearing once
their case has settled.\271\
---------------------------------------------------------------------------
\270\ See letter from Michael S. Edmiston, PIABA President,
Public Investors Advocate Bar Association, to the Commission, dated
September 6, 2022 (``PIABA September 6 Letter'' at 3 and St. John's
at 2.
\271\ See PIABA September 6 Letter at 3.
---------------------------------------------------------------------------
One commenter, however, contended that a named associated person
who requests expungement during a customer arbitration that closes
other than by award or that closes by award without a hearing should
continue to be allowed to request an expungement-only hearing before
the same panel from the customer arbitration.\272\ Specifically, this
commenter stated that, even in cases that are settled or dismissed, the
panel has often had an opportunity to review the pleadings, participate
in the disposition of discovery and other prehearing motions, and
otherwise familiarize itself with the facts of the case.\273\
Furthermore, according to the commenter, permitting the same panel to
decide an expungement hearing may be more efficient because, in many
cases, the parties will have already researched and ranked the panel
members and the expungement hearing will have been scheduled for the
same day as the hearing on the merits.\274\ According to the commenter,
already-scheduled expungement hearings would reduce scheduling issues
and increase the likelihood of customer participation, as customers
will have already set aside the time.\275\
---------------------------------------------------------------------------
\272\ See letter from Kevin M. Carroll, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, to the Commission, dated September 2, 2022 (``SIFMA
September 2 Letter'') at 8.
\273\ See id.
\274\ See id.
\275\ See id.
---------------------------------------------------------------------------
FINRA considered these comments but declined to amend the proposed
rule change.\276\ FINRA stated that, when a customer arbitration closes
other than by award or by award without a hearing, the panel may not
have heard the presentation of the evidence on the merits of the case.
In addition, FINRA stated that customers or their representatives have
little incentive to attend and provide their interpretation of the
facts in a subsequent expungement hearing once their case has
settled.\277\ Because a customer arbitration that closes other than by
award, or by award without a hearing, has the potential for an
inadequately developed, or nonexistent, record, FINRA contended that
the integrity of information in the CRD system would be better
maintained by requiring a panel randomly selected from the Special
Arbitrator Roster to hear and decide such expungement requests.\278\
Furthermore, FINRA stated that requiring an associated person to file
such an expungement request as a straight-in request under the Industry
Code would strengthen the expungement process because the Special
Arbitrator Roster panel deciding the request would have the experience,
qualifications, and training necessary to help ensure the development
of a more complete factual record; \279\ in addition, FINRA stated that
the proposed rule change would make it easier for customers to
participate in the expungement proceeding, further helping the panel
establish a more complete factual record.\280\
---------------------------------------------------------------------------
\276\ See FINRA November 10 Letter at 24.
\277\ See id. FINRA formed its 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, to consider possible enhancements to
the DRS arbitration and mediation forum. In 2015, the Task Force
stated 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.'' See
Notice at 50174 n.37; see also Final Report and Recommendations of
the FINRA Dispute Resolution Task Force (Dec. 16, 2015), available
at https://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf.
\278\ See FINRA November 10 Letter at 24.
\279\ See Notice at 50178, 80; see also Section III.B.3.,
``Straight-in Requests under the Industry Code and the Special
Arbitrator Roster, The Special Arbitrator Roster.''
\280\ See Notice at 50183; see also Section III.D.3.,
``Customer's Attendance and Participation During the Expungement
Hearing.''
---------------------------------------------------------------------------
The Commission believes the proposed rule changes are aimed at
enhancing FINRA's expungement framework. On the one hand, they require
a panel of arbitrators that has decided the merits of a case to
leverage their understanding of the case to decide any related
expungement requests; the panel would be required to decide the request
even if the requesting party withdraws or fails to present a case in
support of the request--in which case the panel would deny the
expungement request with prejudice. This is both efficient and helps
protect investors by preventing those requesting expungement from
withdrawing and refiling their request to obtain new arbitrators when
unsatisfied with the original panel. On the other hand, when a case
closes other than by award or closes by award without a hearing, the
efficiency benefits of having the same panel decide the request (while
not eliminated) are diminished. Moreover, the risk that the expungement
hearing will not benefit from either a fully developed record or the
adversarial process increases. For example, a case may settle before
the record has had a chance to develop and a customer who has settled
their claims may have little incentive to commit more time and
resources in a subsequent expungement hearing. Rather than leave it to
arbitrators in individual cases to decide whether they have enough
information to proceed to hear an expungement request, FINRA has
established uniform, separate procedures to help ensure the development
of an adequate factual record in connection with every expungement
request. The proposed rule changes also aim to help ensure that
arbitrators deciding straight-in expungement requests have the training
and tools to develop an adequate factual record, particularly in the
absence of customer participation. Finally, the proposed rule change
allows for the effective administration of the expungement process and
provides certainty to the parties about when requests for expungement
may be made.
The Commission recognizes that in some cases the arbitrators from a
customer arbitration could bring to a related standalone expungement
hearing insights gleaned from their engagement with a well-developed
factual record. Nevertheless, the proposed rule changes help ensure
that every expungement request benefits from an adequate factual
record. Moreover, it arms arbitrators on the Special Arbitrator Roster
with the expungement-specific training and procedural tools necessary
to develop and understand the factual record, regardless of both the
state of the record prior to their involvement and the presence or
absence of customers at the expungement hearing. Finally, it makes
procedural improvements to facilitate customer participation in
expungement hearings.
4. No Straight-In Requests Against Customers or Intervening in Customer
Arbitrations To Request Expungement
The proposed rule changes would prohibit an associated person from
filing a straight-in request against a customer, and would prohibit
unnamed persons from intervening in a customer arbitration and
requesting expungement. FINRA stated that the proposed rule would help
protect investors by preventing associated persons from interrupting,
and thus delaying,
[[Page 24299]]
customer cases, thereby safeguarding customer time and resources.\281\
---------------------------------------------------------------------------
\281\ See Notice at 50178; see also Section II.A.2., ``No
Intervening in Customer Arbitrations to Request Expungement.''
---------------------------------------------------------------------------
One commenter opposed the proposed prohibition against an
associated person filing a straight-in request against a customer.\282\
This commenter argued that permitting straight-in requests against
customers would solve many of the issues addressed in the proposed rule
change, including customer notice and participation.\283\
---------------------------------------------------------------------------
\282\ See Del Toro.
\283\ See id.
---------------------------------------------------------------------------
Two commenters objected to the proposed prohibition against
expungement interventions by unnamed persons in customer
arbitrations.\284\ One of these commenters stated that prohibiting an
unnamed person from intervening to clear their name results in
potentially false allegations remaining in the CRD for upwards of a
year (i.e., until expungement can be awarded in the straight-in request
and confirmed by a court).\285\ The other commenter stated that the
rules should allow for the most fair, speedy, and inexpensive
resolution of the matters and recommended that the proposed rule change
allow for a sub-proceeding between the intervening affected associated
person and the parties where a separate award on the matter of
expungement is issued by the same panel without affecting the
resolution of the main award.\286\
---------------------------------------------------------------------------
\284\ See AdvisorLaw at 4 and Del Toro.
\285\ See AdvisorLaw at 4.
\286\ See Del Toro.
---------------------------------------------------------------------------
FINRA declined to amend the proposed rule change in response to
comments. In the Notice and in response to comments, FINRA stated that
in circumstances where an associated person is neither a named party
nor the subject of an on-behalf-of request, the associated person's
conduct is unlikely to be fully addressed by the parties during the
customer arbitration, and permitting the unnamed person's intervention
could unnecessarily interrupt or delay resolution of the case.\287\
FINRA further stated that it 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.\288\ FINRA also stated that the
requirement that an associated person file a 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.\289\
---------------------------------------------------------------------------
\287\ See FINRA November 10 Letter at 29; see also FINRA April 3
Letter at 5; see also Notice at 50178.
\288\ See FINRA April 3 Letter at 6.
\289\ See id. at 7.
---------------------------------------------------------------------------
The Commission believes that prohibiting straight-in requests
against customers, and prohibiting expungement interventions by unnamed
persons in customer arbitrations, as proposed, will protect investors
by conserving their time, resources, and ability to make their case
efficiently and without interruption. The Commission appreciates that
this will require the associated person to wait until the customer
claim has been resolved to initiate a straight-in expungement
proceeding, but believes such a delay is reasonable to help ensure that
the related customer arbitration can be resolved as expeditiously as
possible. Moreover, the panel selected from the Special Arbitrator
Roster deciding the expungement request would have the benefit of any
final factual record from the related customer dispute.
5. Limitations Applicable to Straight-in Requests and Expungement
Requests During a Customer Arbitration
The proposed rule change would provide 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.\290\
---------------------------------------------------------------------------
\290\ See proposed Rule 12805(a)(1)(B).
---------------------------------------------------------------------------
FINRA stated that the proposed rule changes would prevent an
associated person from forum shopping, or seeking to return to the DRS
arbitration forum to garner a favorable outcome on their expungement
request.\291\ The Commission received no comment letters supporting or
opposing this proposed rule change.
---------------------------------------------------------------------------
\291\ See Notice at 50180.
---------------------------------------------------------------------------
The proposed rule changes should help prevent an associated person,
or firm seeking expungement on their behalf, from forum-shopping to
garner a more favorable outcome on an expungement request. As such, the
proposed rule change should help protect the integrity of the
information in the CRD system.\292\ In addition, the proposed rule
change should promote more efficient use of resources by precluding
duplicative claims.
---------------------------------------------------------------------------
\292\ The proposed rule change would give unnamed persons the
authority to reject the on-behalf-of request to preserve their
ability to request expungement on their own if they believe their
interests would be insufficiently represented by the named firm
requesting expungement on their behalf. See proposed Rule
12805(a)(2)(C) and (D).
---------------------------------------------------------------------------
B. Straight-In Requests Under the Industry Code and the Special
Arbitrator Roster
1. Filing a Straight-In Request
a. Form of a Straight-In Request
Proposed Rule 13805 would require an associated person to make any
request to expunge disclosures of customer dispute information (other
than requests made in a customer arbitration itself) as a straight-in
request, and would limit the circumstances in which an associated
person could request expungement.\293\ Specifically, proposed Rule
13805(a)(1) would require an associated person to make such an
expungement request against the member firm with which they were
associated at the time the customer dispute arose.\294\ FINRA stated
that this requirement would help ensure that there is a connection
between the respondent firm and the subject matter of the expungement
request and that the panel selected from the Special Arbitrator Roster
would be able to request evidence from the member firm with information
that is relevant to the expungement request.\295\
---------------------------------------------------------------------------
\293\ See Section II.B.1., ``Filing a Straight-in Request Under
the Industry Code.''
\294\ Proposed Rule 13805(a)(2) would bar an associated person
from filing a straight-in request against a member firm where the
request has previously been heard or denied, the relevant customer
dispute has not been resolved, specified temporal limitations have
passed, the associated person is prohibited from seeking expungement
under Rule 12805(a)(1)(A) (for example, by failing to seek
expungement in the customer arbitration), or a panel or court of
competent jurisdiction previously found the associated person liable
or the customer dispute information involves the same conduct that
is the basis of a final regulatory action taken by a securities
regulator or self-regulatory organization. See Section III.B.6.,
``Limitations Applicable to Straight-in Requests Only.''
\295\ See Notice at 50179.
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Two commenters recommended that FINRA adopt an alternative for
unnamed parties to request expungement other than by straight-in
requests.\296\ For example, one of these commenters recommended that
FINRA establish a method for unnamed parties who ``had no say in
whether the [underlying] case should be settled.'' \297\ Similarly, the
other commenter expressed concern that an unnamed
[[Page 24300]]
person may not be aware of a customer arbitration (or have input in the
resolution of customer's case) and thus may not be aware they need to
make a straight-in request.\298\
---------------------------------------------------------------------------
\296\ See letter from Robin M. Traxler, Senior Vice President,
Policy & Deputy General Counsel, Financial Services Institute, to
the Commission, dated September 6, 2022 (``FSI'') at 5-6; letter
from Josh Barber to the Commission, dated August 24, 2022
(``Barber'').
\297\ See Barber.
\298\ See FSI at 5-6.
---------------------------------------------------------------------------
FINRA responded that its existing rules help ensure that associated
persons are aware of arbitration disclosures on their Forms U4 and
U5.\299\ In addition, if a party to a customer arbitration is unwilling
to file an on-behalf-of request or if a party files an on-behalf-of
request and the arbitration settles, the proposed rule change would
allow the associated person to seek expungement by filing a request to
expunge the same customer dispute information as a straight-in
request.\300\
---------------------------------------------------------------------------
\299\ See FINRA November 10 Letter at 30; see, e.g., FINRA Rule
1010(c)(2)(A)-(B) and FINRA By-Laws, Article V, Sections 3(a) and
3(b).
\300\ See FINRA November 10 Letter at 30.
---------------------------------------------------------------------------
Two commenters supported the proposed rule change regarding
straight-in requests, but recommended that FINRA prohibit associated
persons from filing a straight-in request to expunge multiple,
unrelated requests in one arbitration claim.\301\ According to one of
these commenters, the practice of bundling expungement requests permits
``gaming the system'' by having such claims heard by ``expungement-
friendly arbitrators.'' \302\ One of these commenters further suggested
that FINRA require a nexus between the hearing location and the conduct
at issue so that customers and state regulators would have more of an
incentive to participate.\303\ These commenters reasoned that these
changes would prevent unnecessary complications for the panel
considering the expungement request and provide a common set of facts
for the panel to consider.\304\
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\301\ See PIABA September 6 Letter at 4-5; Miami at 4-5.
\302\ See Miami at 4-5.
\303\ See id. at 6.
\304\ See PIABA September 6 Letter at 5; Miami at 5-6.
---------------------------------------------------------------------------
FINRA responded that the proposed time limits for filing a request
\305\ may curtail the common practice of bundling unrelated and aged
expungement requests in one straight-in request; and the requirement
under the proposed rule change that an associated person would be
required to file a 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 straight-in request. With respect to
requiring a locational nexus, FINRA stated that the ability for a
customer to attend and participate in an expungement hearing by
telephone or by video conference should help address concerns about
there being a connection between the hearing location and the
allegation at issue.\306\ FINRA further stated that concerns about
expungement requests being brought before expungement-friendly
arbitrators should be mitigated by several proposed requirements to
minimize the potential for associated person or broker-dealer influence
in the arbitrator selection process for straight-in requests. For
example, the proposed change would require FINRA's list selection
algorithm to randomly select a three-person panel from the Special
Arbitrator Roster and the parties would not be able to agree to fewer
than three arbitrators, strike any arbitrators selected by the list
selection algorithm or stipulate to their removal, or be permitted to
stipulate to the use of pre-selected arbitrators.\307\ According to
FINRA, ``these requirements would help ensure that arbitrators on the
Special Arbitrator Roster have the qualifications and training to
decide straight-in requests and that the arbitrators conducting the
expungement hearings are impartial and experienced in managing and
conducting arbitration hearings in the DRS arbitration forum.'' \308\
---------------------------------------------------------------------------
\305\ See Section III.B.6., ``Limitations Applicable to
Straight-in Requests Only.''
\306\ See FINRA November 10 Letter at 20.
\307\ See id. at 20-21.
\308\ See id. at 21.
---------------------------------------------------------------------------
The Commission believes the requirements set forth in the proposed
rule change are designed to promote investor protection because it
should enhance the integrity of the CRD system. The firm with which the
person requesting expungement was associated at the time the dispute
arose should have knowledge of the dispute and access to relevant
documentary or other evidence.\309\ Thus, requiring that a straight-in
request be filed against the member firm with which the person was
associated at the time of the conduct would increase the likelihood
that the firm would be in a position to contribute to the development
of any record, including at the request of the panel.\310\
---------------------------------------------------------------------------
\309\ See Notice at 50179.
\310\ Proposed Rule 13203(b) would provide the Director
authority to deny the use of the forum to decide the request if the
requisite connection between the associated person and the firm is
not present. See Notice at 50179. In addition, proposed Rule
13805(a)(2) would impose limitations on when such requests may be
made. See Section III.B.6., ``Limitations Applicable to Straight-in
Requests Only.''
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Also, the practice of bundling multiple, unrelated claims should be
largely curtailed by the proposed time limits and requirement that
claims be filed against the member firm at which the person was
associated at the time the customer dispute arose; and that the
constraints on parties' ability to influence the composition of the
panel should minimize the use of pre-selected, expungement-friendly
arbitrators.
Finally, associated persons should be aware of arbitration
disclosures on their Forms U4 and U5.\311\ To the extent they are not,
the proposed time limits (discussed below) provide associated persons a
reasonable amount of time to become aware and seek expungement by
filing a request to expunge the same customer dispute information as a
straight-in request.\312\ Thus, seeking expungement via a straight-in
request, with the procedural safeguards discussed herein, should not
unduly burden an associated person seeking expungement.
---------------------------------------------------------------------------
\311\ See supra note 299.
\312\ See supra note 300; see also Section III.B.6.b.,
``Limitations Applicable to Straight-in Requests Only, Time Limits
for Expungement Requests.''
---------------------------------------------------------------------------
b. Content of a Straight-In Request
In addition, as with named associated person requests, the proposed
rule change also would establish content requirements for straight-in
expungement requests.\313\ The required content of a straight-in
request would be the same as those required for expungement requests
filed under proposed Rule 12805.\314\ Specifically, an associated
person would be required to include the following in a straight-in
request: 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, if applicable; and an explanation of
whether expungement of the same customer dispute information was
previously requested and, if so, how it was decided.\315\
---------------------------------------------------------------------------
\313\ See Notice at 50179.
\314\ See proposed Rule 13805(a)(3); see also Notice at 50179;
see also Section III.A.1., ``Expungement Requests by Respondents
Named in Customer Arbitration.''
\315\ See proposed Rule 13805(a)(3); see also Notice at 50179.
---------------------------------------------------------------------------
The Commission received no comment letters supporting or opposing
this proposed rule change.
The proposed form and content requirements are reasonable for
straight-in requests. In particular, requiring an associated person to
file their expungement request against the
[[Page 24301]]
member firm with which they were associated at the time the customer
dispute arose should provide the panel deciding the expungement request
with another source of documents potentially pertinent to its
consideration of the request. As such, it could help a panel establish
a more complete factual record upon which to base an award. In
addition, as discussed in more detail above, the content required for
an expungement request under the proposed rule change, including the
CRD occurrence number that is the subject of the request, the case name
and docket number associated with the customer dispute information, and
whether expungement of such information had previously been requested
and any resolution thereof, should improve the expungement process by
clearly documenting both the request and whether it repeats a previous
request. The required content would provide the panel with information
sufficient to know who is requesting expungement and the customer
dispute with which it is connected. In addition, requiring the party
requesting expungement to explain whether expungement of the same
customer dispute information was previously requested and, if so, how
it was decided will help prevent parties from pursuing second requests
for expungement, consistent with the proposed prohibition against
repeat requests.\316\
---------------------------------------------------------------------------
\316\ See Section III.A.2., ``Content and Timing of On-Behalf-of
Requests in Customer Arbitration.''
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2. Deciding Straight-In Expungement Requests
The proposed rule change would establish a new framework for
arbitrators hearing straight-in expungement requests. The proposed rule
change would require a three-person panel \317\ to hold an expungement
hearing, decide the expungement request, and issue an award in response
to a straight-in request filed in accordance with proposed Rule
13805.\318\ As with expungement requests decided in customer
arbitration, the panel would be required to deny an expungement request
with prejudice in cases in which an associated person withdraws or does
not pursue the request. FINRA stated that requiring a panel to deny a
request that is withdrawn or not pursued would protect investors by
preventing associated persons from withdrawing and refiling expungement
requests until they obtain a panel whose composition they believe is
more likely to deliver a favorable recommendation.\319\
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\317\ As discussed in more detail below, the three-person panel
would be selected from the Special Arbitrator Roster pursuant to
proposed Rule 13806. See Section III.B.3., ``Straight-in Requests
under the Industry Code and the Special Arbitrator Roster, The
Special Arbitrator Roster.''
\318\ See proposed Rule 13805(a)(4).
\319\ See Notice at 50179.
---------------------------------------------------------------------------
The Commission received no comment letters supporting or opposing
this proposed rule change. However, as discussed above, the Commission
received, and FINRA responded to, comments supporting and opposing
similar procedures for deciding expungement requests during customer
arbitration.\320\
---------------------------------------------------------------------------
\320\ See Section III.A.3., ``Deciding Expungement Requests
during Customer Arbitrations.''
---------------------------------------------------------------------------
The Commission believes that requiring a panel selected from the
Special Arbitrator Roster to decide a straight-in expungement request
and deny a claim that is withdrawn or not pursued, would help to
prevent an associated person from undermining the enhanced expungement
framework with this form of arbitrator-shopping.\321\
---------------------------------------------------------------------------
\321\ See Section III.A.3., ``Deciding Expungement Requests
during Customer Arbitrations'' (discussing comments received
regarding the proposed rule change's treatment of expungement claims
that are withdrawn or not pursued).
---------------------------------------------------------------------------
3. The Special Arbitrator Roster
The proposed rule change would establish a Special Arbitrator
Roster from which a three-person panel would be drawn to decide all
straight-in expungement requests.\322\ Proposed Rule 13806(b) would
limit the Special Arbitrator Roster to arbitrators with specified
experience and training. Specifically, the proposed rule change would
limit the roster to public arbitrators who are eligible for the
chairperson roster, have completed FINRA's enhanced expungement
training, and have served as an arbitrator through award on at least
four customer-initiated arbitrations administered by FINRA or by
another SRO in which a hearing was held.\323\ In proposing the rule,
FINRA stated that these requirements would help ensure that arbitrators
on the Special Arbitrator Roster: have the experience, qualifications,
and training to conduct a fair and impartial expungement hearing;
appreciate the unique, distinct role they play as expungement hearing
arbitrators; and understand the limited circumstances in which
expungement should be awarded.\324\
---------------------------------------------------------------------------
\322\ See proposed Rule 13806.
\323\ See id.; see also Notice at 50179-80.
\324\ See Notice at 50179-80.
---------------------------------------------------------------------------
Once the Special Arbitrator Roster has been established, the
proposed rule change would require that three members of that roster be
selected at random to decide each expungement request filed under
proposed Rule 13805.\325\ In addition, the first arbitrator selected
would be the chair of the panel,\326\ the parties would not be
permitted to agree to fewer than three arbitrators,\327\ and the
parties would not be permitted to strike any arbitrators or to
stipulate to their removal, but would be permitted to challenge an
arbitrator selected for cause.\328\ In proposing the rule, FINRA stated
that this process would minimize the potential for influence in the
arbitrator selection process by the associated person and member firm,
whose interests may be aligned.\329\
---------------------------------------------------------------------------
\325\ See proposed Rule 13806(b).
\326\ See proposed Rule 13806(b)(3).
\327\ See proposed Rule 13806(b)(5).
\328\ See proposed Rule 13806(b)(4).
\329\ See Notice at 50180.
---------------------------------------------------------------------------
Four commenters supported the proposed rule change's establishment
of a Special Arbitrator Roster, the selection of a panel from this
roster for expungement requests under the Industry Code, and the
restrictions on parties' ability to influence the panel's
composition.\330\ Three of these four commenters supported the proposed
rule change on the basis that the three-person panel would minimize the
impact of unopposed expungement requests, facilitate expanded fact-
finding during the expungement request, and that the prohibition on
ranking and striking, or agreeing to arbitrators would reduce both the
prevalence of arbitrator-shopping and repeat-player incentives for
arbitrators (i.e., from choosing arbitrators who are historically more
likely to award expungements).\331\ The fourth commenter further stated
that the proposed rule change would increase efficiency and decrease
costs for all parties to the expungement matter, since the parties will
no longer need to spend hours researching and ranking arbitrators to
find the individuals most experienced at handling these issues.\332\ In
addition, one commenter also stated that the enhanced training to be
received by the Special Arbitrator Roster would give associated persons
fewer causes for removal of an arbitrator for cause.\333\
---------------------------------------------------------------------------
\330\ See Cambridge at 2; Cornell at 1-2; PIABA September 6
Letter at 3; St. John's at 2-3.
\331\ See Cornell at 1-2; PIABA September 6 Letter at 3; St.
John's at 2-3.
\332\ See Cambridge at 2.
\333\ See Cornell at 2.
---------------------------------------------------------------------------
Five commenters, however, objected to the proposed rule change's
limitations on ranking and striking
[[Page 24302]]
arbitrators.\334\ One of these commenters stated that ranking and
striking is ``enjoyed by all other participants in FINRA arbitration
proceedings'' \335\ while another commenter similarly stated that
customers have the ability to rank and strike arbitrators.\336\ A third
commenter argued that because different arbitrators approach issues
differently, there is a benefit to starting with a large pool of
potential panelists and then letting the parties ``winnow the pool.''
\337\
---------------------------------------------------------------------------
\334\ See letter from Tosh Grebenik to the Commission, dated
November 21, 2022 (``Grebenik''); letter from Ronald Beckner to the
Commission, dated October 12, 2022 (``Beckner''); Del Toro;
Advisorlaw at 2; Hennion at 6.
\335\ See AdvisorLaw at 2-3.
\336\ See Hennion at 6.
\337\ See Grebenik.
---------------------------------------------------------------------------
FINRA stated that currently, based on its experience with straight-
in requests filed in the DRS arbitration forum, associated persons
typically file straight-in request for expungement against the broker-
dealer firm at which the associated person is currently employed.\338\
In such instances, the proceeding is less likely to be adversarial in
nature than if the associated person files an expungement request
against a customer.\339\ For example, FINRA stated that a respondent
firm may support the request for expungement because it has an interest
in removing negative information from the associated person's CRD
record.\340\ Accordingly, FINRA stated that it would not be appropriate
to continue to use the current process for selecting arbitrators--
striking and combining ranked lists--to select arbitrators to decide
straight-in requests.\341\ FINRA reasoned that in arbitrations that
occur 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.\342\ Therefore, the adversarial nature of the proceedings
serves to minimize the impact of each party's influence in arbitrator
selection.\343\ An adversarial proceeding is less likely to occur in
straight-in requests.\344\ Thus, the proposed rule change would prevent
associated persons and member firms from collaboratively seeking to
influence the outcome of the expungement request through arbitrator
selection.\345\
---------------------------------------------------------------------------
\338\ See Notice at 50174 n.41; FINRA April 3 Letter at 6.
\339\ See FINRA November 10 Letter at 26-27; FINRA April 3
Letter at 5; Notice at 50180.
\340\ See id. at 50174.
\341\ See FINRA November 10 Letter at 26; FINRA April 3 Letter
at 5; Notice at 50180.
\342\ See FINRA November 10 Letter at 26; FINRA April 3 Letter
at 5; Notice at 50180.
\343\ See FINRA November 10 Letter at 26; FINRA April 3 Letter
at 5; Notice at 50180.
\344\ See FINRA November 10 Letter at 26-27; FINRA April 3
Letter at 5; Notice at 50180.
\345\ See FINRA November 10 Letter at 27; FINRA April 3 Letter
at 5; Notice at 50180.
---------------------------------------------------------------------------
FINRA also recognized the potential for the proposed rule change to
limit the associated person's 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.\346\
However, FINRA stated that the higher standards that the arbitrators
would be required to meet to serve on the Special Arbitrator Roster
should mitigate the impact of the absence of party input on the
selection of arbitrators.\347\ In addition, associated persons and
member firms would still be permitted to challenge any arbitrator for
cause.\348\
---------------------------------------------------------------------------
\346\ See FINRA November 10 Letter at 27; FINRA April 3 Letter
at 5; Notice at 50180.
\347\ See FINRA November 10 Letter at 27; FINRA April 3 Letter
at 5.
\348\ See FINRA November 10 Letter at 27; FINRA April 3 Letter
at 5.
---------------------------------------------------------------------------
Given the potential lack of adverse parties in straight-in
expungement requests, FINRA reasonably determined that the random
selection of a set number of arbitrators is appropriate. Random
arbitrator selection, along with other aspects of the proposed rule
change (e.g., the requirement that a panel decide an expungement
request that is filed by an associated person, and the prohibition on
an associated person withdrawing and re-filing their expungement
request), should help eliminate arbitrator-shopping and serve to
protect investors and the integrity of information in the CRD system.
In addition, parties would continue to be able to challenge and remove
arbitrators for cause.
Several commenters also recommended that FINRA expand the pool of
arbitrators eligible to serve on the Special Arbitrator Roster, in
particular to allow for non-public arbitrators, stating that such a
change would bring securities industry expertise to deciding
expungement requests.\349\ One commenter suggested that industry
participants who have worked as a general securities principal for a
least five consecutive years, in the prior seven-year period, be
eligible for inclusion on the Special Arbitrator Roster.\350\ This
commenter also suggested that at least one person on each three-person
panel be required to have securities industry experience either as a
general securities principal or as an attorney who has the requisite
five years' experience in state or federal securities regulation or as
a securities regulator.\351\ Another commenter likewise recommended
including the ability to have an industry arbitrator on any expungement
panel where more than one arbitrator was required.\352\ A third
commenter argued that requiring one public arbitrator, one non-public
arbitrator, and a chairperson that can either be public or non-public,
would help create a diverse knowledge base and would help the panel
make better, more informed decisions.\353\
---------------------------------------------------------------------------
\349\ See FSI at 4; Hennion at 6; Grebenik.
\350\ See FSI at 4.
\351\ Id.
\352\ See Hennion at 6. Hennion further suggested that
arbitrators should be required to pay for the training. See id. at
5. FINRA responded that it does not now, and will not in the future,
charge arbitrators for any arbitrator training. See FINRA November
10 Letter at 25.
\353\ See Grebenik. This commenter further suggested that the
enhanced expungement training should be made public and be neutral
rather than ``persuasive'' in an attempt to prevent panels from
granting expungement. Id. FINRA responded that like other arbitrator
training provided by DRS, the proposed training will be neutral and
informative and it will be publicly available on FINRA's website.
See FINRA April 3 Letter at 4 n.10. The Commission believes that
FINRA has addressed the commenter's suggestion.
---------------------------------------------------------------------------
Another commenter suggested not limiting the Special Arbitrator
Roster to chair-qualified public arbitrators.\354\ This commenter
stated that experience in understanding and appreciating the regulatory
value of a customer complaint should be the most important
qualification, thus concluding that the Special Arbitrator Roster
should be expanded to include current and former state, federal and SRO
securities regulators. This commenter further suggested that the most
experienced arbitrators should not be on the Special Arbitrator Roster
as they have exhibited bias in favor of granting expungements in the
past.\355\
---------------------------------------------------------------------------
\354\ See letter from Celiza Braganca, President, et. al., The
PIABA Foundation, to the Commission, dated September 6, 2022
(``PIABA Foundation September 6 Letter'') at 2-3.
\355\ See id.
---------------------------------------------------------------------------
FINRA declined to amend the proposed rule change in response to
these comments. FINRA stated that it ``believes that having experienced
public arbitrators, without significant ties to the financial industry,
deciding straight-in requests would help achieve the goal of balancing
the competing interests in the expungement process of providing a fair
process and ensuring that information about associated persons that is
available to investors is accurate.'' \356\ Such arbitrators would be
provided training that is neutral and
[[Page 24303]]
informative and the training would be made publicly available on
FINRA's website. Moreover, FINRA stated that the enhanced training that
arbitrators on the Special Arbitrator Roster would be required to take
(as well as the other eligibility requirements) would help ensure that
arbitrators on the Special Arbitrator Roster have the qualifications
and training to appropriately decide straight-in requests and that the
persons conducting the expungement hearings are impartial and
experienced in managing and conducting arbitration hearings in the DRS
arbitration forum.\357\
---------------------------------------------------------------------------
\356\ FINRA November 10 Letter at 25.
\357\ See FINRA November 10 Letter at 25-26; see also FINRA
April 3 Letter at 4-5.
---------------------------------------------------------------------------
The Commission believes that FINRA reasonably determined which
arbitrators would be eligible to serve on the Special Arbitrator
Roster. Specifically, limiting eligibility to public arbitrators
reasonably balances the competing interests in the expungement process
of providing a fair process and ensuring the integrity of the
information in the CRD system. This approach should also enhance the
public's perception that the expungement process and rules are fair,
which, in turn, should enhance the perception of the integrity of the
information on the CRD system. In addition, the proposed eligibility
requirements should help ensure that experienced arbitrators are
deciding expungement requests in light of the public interest in the
integrity of the information in the CRD system.
4. State Attendance and Participation in Straight-In Expungement
Requests
The proposed rule change would provide a mechanism for an
authorized representative of a state securities regulator to present
the state securities regulator's position on an expungement request in
writing or by attending and participating in the expungement hearing in
person or by video conference.\358\ The proposed rule change would
limit the authorized representative's ability to attend and participate
to only straight-in requests, where the panel may otherwise only hear
evidence from the party requesting expungement.\359\ To facilitate
attendance and participation, the Director would notify the applicable
state securities regulator (in a manner determined by the Director in
collaboration with state securities regulators) and provide applicable
information and documents related to the associated customer
arbitration.\360\ In addition, under the proposed rule change, the
panel would not be permitted to allow the attendance or participation
of the authorized representative to materially delay the scheduling of
an expungement hearing.\361\
---------------------------------------------------------------------------
\358\ See proposed Rule 13805(c)(6)(A).
\359\ See Notice at 50185-86.
\360\ See proposed Rules 13805(b)(2)(A) and (B).
\361\ See proposed Rule 13805(c)(6)(A).
---------------------------------------------------------------------------
While an authorized representative of a state securities regulator
would not be a party to 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.\362\ 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.\363\
---------------------------------------------------------------------------
\362\ See proposed Rule 13805(c)(6)(B).
\363\ See proposed Rule 13805(c)(6)(C).
---------------------------------------------------------------------------
In the Notice, FINRA stated that 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.\364\ Moreover, FINRA believes that state participation in
straight-in requests is important in light of the importance of the CRD
to state registration and oversight responsibilities.\365\
---------------------------------------------------------------------------
\364\ See Notice at 50186.
\365\ See id.; see also NASAA September 6 Letter at 1 (stating
that securities regulators depend on accurate information to make
regulatory decisions).
---------------------------------------------------------------------------
Seven commenters supported the proposed rule change's inclusion of
state securities regulators in the expungement process.\366\ These
commenters supported including a representative of a state securities
regulator in straight-in expungement requests on the basis that such
participation would serve to counterbalance a potentially unopposed
expungement request since customers are less likely to participate in
straight-in requests,\367\ and would therefore help protect the
integrity of the information in the CRD system needed for the
performance of state regulatory obligations.\368\ One commenter stated
that while it appreciates the opportunity to appear for arbitration
proceedings hearing expungement requests, state participation in such
proceedings would be limited by resources and state-specific procedural
hurdles that could inhibit the ability to appear.\369\
---------------------------------------------------------------------------
\366\ See letter from Benjamin P. Edwards, Associate Professor
of Law, University of Nevada, Las Vegas William S. Boyd School of
Law, to the Commission, dated September 6, 2022 (``Edwards'') at 1-
2; Miami at 6-7; PIABA September 6 Letter at 2; Cornell at 3; NASAA
September 6 Letter at 3-4; PIABA Foundation September 6 Letter at 2;
St. John's at 3-4.
\367\ See PIABA Foundation September 6 Letter at 2; Miami at 6-
7; Cornell at 3; Edwards at 1-2.
\368\ See PIABA September 6 Letter at 3; NASAA September 6
Letter at 3-4; Cornell at 3; St. John's at 3-4.
\369\ See NASAA September 6 Letter at 3.
---------------------------------------------------------------------------
Five commenters expressed concern about permitting state securities
regulator participation in straight-in expungement hearings.\370\ One
of these commenters suggested that notification to state securities
regulators should instead occur at the point FINRA seeks to obtain an
order from a court of competent jurisdiction confirming an award
containing expungement.\371\ Another commenter objected to a non-party
participating in an expungement proceeding without being subject to the
forum's jurisdiction because: (1) a panel could not sanction a non-
party for perjury, and (2) ``increasing the barriers'' to expungement
would decrease the proceeding's efficiency.\372\ A third commenter
argued that participation of state securities regulators would increase
costs.\373\
---------------------------------------------------------------------------
\370\ See letter from Michael Neal, Financial Advisor, M. A.
NEAL Financial Services, to the Commission, dated August 31, 2022
(``Neal''); Hennion at 6; AdvisorLaw at 3; Beckner; Grebenik
(supporting notification and attendance of state regulators, but
opposing participation).
\371\ See Hennion at 6; see also supra notes 28-30.
\372\ See AdvisorLaw at 3.
\373\ See Neal.
---------------------------------------------------------------------------
FINRA responded that state securities regulators are already
notified about, and can participate in, proceedings at the state court
confirmation level. FINRA Rule 2080 requires that FINRA be named as a
party in such proceedings, unless this requirement is waived by FINRA.
Upon receipt of a complaint naming FINRA or a request for a waiver from
the requirement to name FINRA as an additional party, FINRA will notify
NASAA of the complaint or waiver request. NASAA, in turn, will notify
the appropriate state securities regulator.\374\ FINRA stated that
under the proposed rule change FINRA would notify state securities
regulators within 15 days of receiving a request for expungement,
giving them time to review and decide whether to participate in a
straight-in request, including in any prehearing conference.\375\
---------------------------------------------------------------------------
\374\ See FINRA November 10 Letter at 8 n.33.
\375\ See Notice at 50196 n.251 and accompanying text.
---------------------------------------------------------------------------
FINRA also responded that the arbitrators who would decide
straight-in
[[Page 24304]]
requests would have the experience, qualifications and training
necessary to conduct a fair and impartial expungement hearing in
accordance with the proposed rules and that the proposed rule change
would provide an associated person requesting expungement the
opportunity to cross-examine any witness called by a state securities
regulator's authorized representative. FINRA stated that these
mechanisms should be sufficient to help ensure that a non-party's
testimony or documentary information presented is appropriately
scrutinized.\376\ FINRA responded further by stating that concerns
about state participation increasing costs to file an expungement
request may be overstated, as under the proposed rule change the
authorized representative would not be a party to the request, and
thus, would not be permitted to take actions that could delay the
proceeding or add to the parties' costs.\377\
---------------------------------------------------------------------------
\376\ See FINRA November 10 Letter at 9-10.
\377\ See id. at 9; see also FINRA April 3 Letter at 8.
---------------------------------------------------------------------------
FINRA acknowledged that in person attendance and participation by
an authorized state representative may be limited given state resource
constraints. FINRA pointed out that the proposed rule change provides
low-cost options to help facilitate state participation; specifically,
that it would permit the authorized representative to attend and
participate via video conference or submit a state's position in
writing.\378\
---------------------------------------------------------------------------
\378\ See FINRA November 10 Letter at 8; see also proposed Rule
13805(c)(6)(A).
---------------------------------------------------------------------------
The Commission believes that permitting attendance and
participation by state securities regulators in straight-in expungement
proceedings, which have a higher likelihood of proceeding unopposed,
and providing state regulators low-cost options to do so, will enhance
the straight-in expungement process. Specifically, including state
securities regulators and providing them with access to documents
relevant to the expungement request provides them the opportunity to
fulfill their own regulatory obligations, while at the same time
increasing the likelihood that the panel in an expungement proceeding
will hear evidence from multiple viewpoints, thus allowing the panel to
make more informed decisions. At the same time, the conditions
applicable to state securities regulator participation are designed so
that they do not delay the resolution of an expungement request and
allow the claimants the opportunity to challenge any information
presented in the forum by the state's representative. As such, the
proposed rule change appropriately balances the interests of state
regulators in the expungement process, as well as their need to
allocate and preserve resources, with the importance of maintaining an
efficient and cost effective process for associated persons requesting
expungement.
Two commenters recommended that FINRA extend the option for a state
regulator's representative to participate in other expungement
requests, including those in customer arbitration,\379\ and simplified
arbitration.\380\ These commenters considered state participation in
other contexts as providing a similar counterbalance as in a straight-
in request because expungement requests in both customer arbitrations,
whether standard or simplified, are similarly often unopposed because
customers do not participate in that aspect of the proceeding.\381\
---------------------------------------------------------------------------
\379\ See Edwards at 1-2.
\380\ See Miami at 6-7.
\381\ See Edwards 1-2; see also Miami at 6-7.
---------------------------------------------------------------------------
FINRA declined to amend the proposed rule change in response to
these comments. FINRA stated that attendance or participation in a
customer arbitration could substantially disrupt the customer's case
and would likely be less impactful, as the panel from the customer
arbitration hears the customer's evidence on the merits.\382\
Furthermore, in simplified arbitration the expungement-only hearing
would likely be scheduled shortly after the customer's dispute is
decided or closes, increasing the likelihood of customer attendance and
participation. Thus, FINRA does not believe that it is necessary for
state securities regulators to also attend and participate in
expungement-only hearings in simplified arbitrations.\383\
---------------------------------------------------------------------------
\382\ See FINRA November 10 Letter at 8.
\383\ See id. at 22.
---------------------------------------------------------------------------
The Commission believes that it is reasonable for FINRA to limit
state securities regulator participation to straight-in requests where
there is a higher likelihood of proceeding without meaningful
opposition and state participation may provide the greatest benefit. In
customer arbitration, the panel will have the benefit of a balanced
presentation of the merits of the case that should allow it to make an
informed decision on the expungement request. Moreover, in simplified
arbitration it is more likely that a customer will participate,
providing their version of events, in an expungement hearing when it
occurs soon after the panel makes an award based on the merits of the
claim. Finally, FINRA stated it will continue to evaluate whether there
are other ways to further strengthen the current expungement process,
including whether to allow state securities regulators to attend and
participate in separate expungement-only hearings in simplified
arbitrations.\384\
---------------------------------------------------------------------------
\384\ See FINRA April 3 Letter at 18-19.
---------------------------------------------------------------------------
5. Alternatives to Deciding Expungement Requests Through Arbitration
While expressing support for the proposed rule change, three
commenters contended that expungement determinations are more
appropriately a regulatory decision not properly adjudicated by FINRA's
arbitration process.\385\ One of these commenters argued that the
degree to which such records are preserved in CRD and BrokerCheck for
all stakeholders should not turn on the varying abilities of any
party--state securities regulator, authorized representative or
customer--to appear to make an argument. According to the commenter,
doing so would continue to lead to inconsistent results that have no
relationship to the importance of this information.\386\
---------------------------------------------------------------------------
\385\ See PIABA September 6 Letter at 3-4; PIABA Foundation
September 6 Letter at 2; NASAA September 6 Letter at 3-4.
\386\ See NASAA September 6 Letter at 3.
---------------------------------------------------------------------------
FINRA did not amend the proposed rule change in response to these
comments. FINRA stated that it believes it is important to pursue a
two-track approach to improving the expungement process. In the near
term, FINRA stated the integrity of the information in the CRD system
should be better protected by adopting the ``substantial improvements''
to the current expungement process that can be achieved with the
proposed rule change.\387\ Concurrently, FINRA stated that it would
continue working with NASAA and other interested parties to consider a
redesign of the current expungement process.\388\
---------------------------------------------------------------------------
\387\ See FINRA November 10 Letter at 6.
\388\ See id. at 6-7.
---------------------------------------------------------------------------
The proposed rule change is designed to strengthen the current
expungement framework and to protect investors and the public interest.
The proposed rule change's establishment of a special roster of
specially qualified and trained arbitrators to decide certain
expungement requests should help mitigate the potentially non-
adversarial nature of straight-in expungement requests. In particular,
the Commission believes that having three specially qualified and
trained arbitrators available to ask questions and
[[Page 24305]]
empowered to request evidence, along with the proposed rule change's
inclusion of state securities regulators in straight-in requests where
there may otherwise be no opposing viewpoint, should help ensure that a
complete factual record is created upon which the arbitrators can base
a decision in such expungement hearings. The proposed rule change also
updates the Codes to incorporate provisions from FINRA Guidance that,
among other things, facilitate customer attendance and participation in
expungement hearings, permit panels to request additional documents or
evidence relevant to an expungement request, and codify the grounds for
awarding expungement.\389\ In addition, the Commission believes that
continuing dialogue among FINRA, state regulators, industry
participants, consumer advocates, and other stakeholders in the
expungement process will lead to future improvements as the expungement
process continues to evolve.
---------------------------------------------------------------------------
\389\ See Section III.D., ``Procedural Requirements Relating to
All Expungement Hearings.''
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6. Limitations Applicable to Straight-In Requests Only
The proposed rule change also would codify and expand upon other
aspects of the Guidance applicable to straight-in requests, in
particular those related to eligibility to file the request. For
example, the proposed rule change would: prohibit an associated person
from filing a straight-in request if the customer arbitration, civil
litigation, or customer complaint that gave rise to the customer
dispute information has not closed; establish time limits for
expungement requests that are specifically tied to the close of
customer arbitrations and civil litigations, or the reporting of
customer complaints in the CRD system; and, prevent an associated
person from filing an expungement request if (1) a panel or court of
competent jurisdiction previously found the associated person liable in
a customer arbitration or civil litigation associated with the same
customer dispute information or (2) the customer dispute information
involves the same conduct that is the basis of a final regulatory
action \390\ taken by a securities regulator or SRO.\391\
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\390\ FINRA stated that a ``final regulatory action'' includes
any final action, including any action that is on appeal, by a
securities regulator or SRO. See FINRA Rule 8312(c); see also
Regulatory Notice 09-66 (November 2009) (stating that ``actions that
are delineated in current Form U4 Questions 14C, 14D or 14E will be
considered `final regulatory actions.' Similarly, actions that are
detailed in current Form U5 Question 7D, and have a status of
`final' or `on appeal,' will be considered `final regulatory
actions' as such actions are also addressed in Form U4.''). For
example, a Letter of Acceptance, Waiver, and Consent and an accepted
Offer of Settlement are two examples, among others, of final
regulatory actions taken by FINRA. See FINRA Rule 9216(a)(4) and
Rule 9270(g). A ``final regulatory action'' may also include a final
action reported by a regulator on Form U6. See Regulatory Notice 09-
66 (November 2009). See FINRA April 3 Letter at 14 n.49. For
purposes of this proposed rule, a ``final regulatory action'' would
not include a final action by a securities regulator or SRO that is
dismissed, vacated or withdrawn. If, after dismissal, vacatur, or
withdrawal of the final regulatory action, the associated person's
expungement request in the DRS arbitration forum would be ineligible
pursuant to Rule 13805(a)(2) (e.g., because the request is time
barred), the associated person could seek a court order directing
expungement of the customer dispute information. See FINRA April 3
Letter at 14 n.52.
\391\ See Amendment No. 2; see also infra note 430 and
accompanying text.
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a. No Expungement Request Until Underlying Case Closes
The proposed rule change would codify and expand upon the Guidance
by providing that an associated person may not file a straight-in
request if the customer arbitration, civil litigation, or customer
complaint that gave rise to the customer dispute information has not
closed, a limitation that is designed to prevent an associated person
from obtaining a decision on an expungement request while the related
customer dispute is ongoing.\392\ FINRA stated this change would
prevent potentially inconsistent expungement decisions on related
customer dispute information and help ensure that the panel that would
decide the straight-in request is able to consider the final factual
record from the customer arbitration or civil litigation.\393\ The
Commission received no comment letters supporting or opposing this
proposed rule change.
---------------------------------------------------------------------------
\392\ See proposed Rule 13805(a)(2)(A)(iii); see also Notice at
50180.
\393\ See Notice at 50180.
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The proposed rule change would help maintain the integrity of the
information in the CRD system by helping to prevent inconsistent
expungement decisions on related customer dispute information. The
proposed rule change would also help ensure that the panel deciding the
straight-in request is able to consider the final factual record from
the customer arbitration or civil litigation.
b. Time Limits for Expungement Requests
Currently, FINRA Rules 12206(a) and 13206(a) require an associated
person to submit an arbitration claim, including requests for
expungement of customer dispute information, within six years from the
occurrence or event giving rise to the claim.\394\ The proposed rule
change would eliminate this six-year eligibility rule and instead
establish shorter time limits for expungement requests that are
specifically tied to the close of customer arbitrations and civil
litigations, or the reporting of customer complaints in the CRD system,
as applicable.\395\ FINRA stated that the time periods provided for in
the proposed rule changes for each situation would provide a sufficient
amount of time for associated persons and their firms to, among other
things, gather the documents, information, and other resources required
to file the expungement request.\396\
---------------------------------------------------------------------------
\394\ See supra note 125 and 127 and accompanying text.
\395\ See Notice at 50181. As described above, the proposed rule
change would prescribe different time limits in connection with
customer arbitrations or civil litigations and customer complaints.
In the case of a customer arbitration or civil litigation that gave
rise to the customer dispute information in question, proposed Rule
13805(a)(2)(A)(iv) would require an associated person to file a
straight-in request within two years of such matters closing. In the
case of customer complaints, proposed Rule 13805(a)(2)(A)(v) would
prohibit an associated person from filing a straight-in request
where more than three years has elapsed from the time the complaint
was first reported to the CRD system and there was no customer
arbitration or civil litigation that gave rise to the customer
dispute information. The proposed rule change would also establish
similar 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. See Notice at 50181-82; see also Section II.C.2.d.,
``Time Limits Applicable to Disclosures Arising After the Effective
Date of the Proposed Rule Change.''
\396\ See Notice at 50181.
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With respect to customer arbitrations and civil litigations, FINRA
stated that it believes the two-year period would help ensure that
expungement hearings are held close enough in time to the customer
arbitration or civil litigation such that information regarding the
dispute is available and in a timeframe that could increase the
likelihood of customer participation where a customer so chooses. The
shorter timeframe, FINRA believes, should help encourage customer
attendance and participation in expungement proceedings and help ensure
that straight-in requests are brought before relevant evidence and
testimony
[[Page 24306]]
becomes stale or unavailable.\397\ Accordingly, FINRA believes the
proposed time limit would help provide panels with more complete
factual records on which to base their expungement decisions, while at
the same time allowing the associated person adequate time to determine
whether to seek expungement.\398\
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\397\ See id.
\398\ See id.
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With respect to customer complaints where there was no customer
arbitration or civil litigation associated with the customer dispute
information, FINRA stated that it believes that the three-year period
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. The three-year
time limitation 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. FINRA also believes that the three-year time limitation
may 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.\399\
---------------------------------------------------------------------------
\399\ See id.
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Six commenters supported the proposed time limitations.\400\ Two of
these commenters stated that the time limitations will make it more
likely that customers will participate \401\ and one of these
commenters stated that the timeframes provide enough time for
associated persons to determine whether to file an expungement request
and gather the relevant information to support their request.\402\
Another commenter stated that the time limitations would increase the
efficiency of the expungement process and decrease the cost to member
firms because when expungement requests are filed ``four or five or
even ten years'' after the event giving rise to the request, a party's
ability to respond to discovery requests and produce relevant
information becomes much more difficult and time consuming.\403\
---------------------------------------------------------------------------
\400\ See Miami at 5; Cambridge at 2; Cornell at 3-4; NASAA at
2; St. John's at 3; PIABA September 6 Letter at 4.
\401\ See Cornell at 4; St. John's at 3.
\402\ See Cornell at 3-4.
\403\ See Cambridge at 2.
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Seven commenters objected to the time period limitations.\404\ One
commenter stated that time limits for filing an expungement request
should mirror those provided to customers (a six-year period of
eligibility with expansion for good cause).\405\ This commenter argued
that providing the associated person the opportunity to file for
expungement within a six-year time frame--regardless of whether there
was a customer-filed arbitration--recognizes that representatives may
not have been meaningfully involved in the underlying arbitration for a
variety of reasons (e.g., separation from the firm).\406\ Two other
commenters stated that the amount of time that passes has no bearing on
the merits of the expungement request.\407\ Another commenter stated
that time limits may preclude expungement requests because associated
persons are not aware of the expungement process and suggested
grandfathering in associated persons with existing disclosures or
sending notifications to such persons.\408\ Two other commenters stated
that associated persons may lack the resources to seek expungement
within the proposed two-year time limit.\409\ One of these commenters
added that associated persons may not consider expungement important at
the time only to change their minds later on in their careers; however,
the commenter recommended that if FINRA moved forward with the two-year
time limit, it should ensure all associated persons affected by a given
arbitration claim are given proper notice of the case's closure, as
well as a description of any applicable time limits for making an
expungement request.\410\ Finally, one commenter that otherwise
supported the proposed rule change argued that less time was necessary
and urged FINRA to adopt a shorter, one-year time period for all
straight-in expungement requests.\411\
---------------------------------------------------------------------------
\404\ See letter from James P. Galvin, Esq., Galvin Legal PLLC,
to the Commission, dated April 7, 2023 (Galvin) at 2; Hennion at 6;
AdvisorLaw at 3; Grebenik; Beckner; Del Toro; Barber.
\405\ See Hennion at 6. See also FINRA Rule 12206 (Time Limits)
(stating that no claim shall be eligible for submission to
arbitration under the Customer Code where six years have elapsed
from the occurrence or event giving rise to the claim).
\406\ See Hennion at 6.
\407\ See AdvisorLaw at 3; Barber; see also letter from John
O'Bannon, Financial Advisor, Diversified Financial Group, to the
Commission, dated October 11, 2022 (stating that ``[i]f a customer
complaint is truly meritless, then the advisor should not continue
to be potentially harmed by having there [sic] meritless disclosures
continue to be on record.'' And recommending: (1) that
``[d]isclosures that were dropped by clients should be dropped by
FINRA no later than 3 years after filing''; (2) allowing ``[e]diting
of [Form] U4 listings [to] correctly describe the issue and
resolution [in a manner that does not] immediately give the negative
connotation that the advisor is a cheat/liar if it's not accurate'';
and (3) establish ``an expungement process for those convictions
that [are more than 15 years old]''); see also Grebenik (stating
that ``FINRA should evaluate the complaint first to determine a
basic level of legitimacy. Otherwise, the meritless and frivolous
complaints will continue to be filed and will continue to be
expunged at a high rate of success.''). These comments from O'Bannon
and Grebnik are outside the scope of the proposed rule change.
\408\ See Grebenik.
\409\ See Galvin at 2; Del Toro.
\410\ See Del Toro.
\411\ See PIABA September 6 Letter at 4.
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FINRA considered these comments but declined to amend the proposed
rule change. FINRA responded that it believes that the proposed time
limitations appropriately address its concern that a number of
expungement requests are currently filed many years after a customer
arbitration closes or the reporting of a customer complaint in the CRD
system.\412\ FINRA stated that requiring associated persons to file
straight-in requests within three years of the filing of the customer
complaint, rather than six, would help ensure that expungement hearings
are held close in time to the events that led to the customer dispute
information disclosure.\413\ FINRA stated that, in turn, this may: (1)
increase the likelihood of customer participation; (2) ensure that
straight-in requests are filed before relevant evidence and testimony
becomes stale or unavailable; and (3) generally help to develop a more
complete factual record on which to decide an expungement request.\414\
---------------------------------------------------------------------------
\412\ See FINRA November 10 Letter at 19. In response to a
commenter's request that associated persons with existing disclosure
be ``grandfathered in'' or provide notice, FINRA stated such
``grandfathering'' would be contrary to the purpose of the proposed
rule change to address concerns about expungement requests made many
years after the fact, and further stated that if the proposed rule
change is approved, it would issue a Regulatory Notice that will
provide notice to associated persons of when the time period will
commence for seeking expungement of customer dispute information
already on their records. See Grebenik; FINRA April 3 Letter at 11-
12.
\413\ See FINRA April 3 Letter at 10-11.
\414\ See id. FINRA recognized that as a result of the three-
year time limitation, an associated person may be prevented from
filing a request for expungement of customer dispute information
because the member firm's investigation of the customer complaint
has not concluded and, therefore, the customer complaint associated
with the customer dispute information has not closed. However, FINRA
stated that it believes that such instances would occur rarely.
Furthermore, in the event that an associated person is prevented
from filing a request for expungement of customer dispute
information in the DRS arbitration forum because of the three-year
time limitation, the associated person could seek a court order
directing expungement of the customer dispute information. See id.
---------------------------------------------------------------------------
FINRA also stated that allowing two years from the close of the
customer arbitration or civil litigation to bring an
[[Page 24307]]
expungement request would provide a reasonable amount of time for
associated persons and firms to gather the necessary documents,
information and other necessary resources required to file the
expungement request and help ensure that the expungement hearing is
held close enough in time to the customer arbitration. In addition, the
two-year time limitation would reduce the potential for such
information to become stale and increase the likelihood of customer
participation.\415\ Moreover, FINRA stated that it believes the three-
year time period for expungement requests in connection with customer
complaints would: (1) allow firms to complete their investigation of
the customer complaint and close it in the CRD system; (2) allow
associated persons to develop a sense of whether the complaint may
evolve into an arbitration or civil litigation; and (3) allow
associated persons to determine whether to proceed with a request to
expunge the complaint.\416\
---------------------------------------------------------------------------
\415\ See FINRA November 10 Letter at 19; FINRA April 3 Letter
at 11-12 and n.39.
\416\ See FINRA November 10 Letter at 19.
---------------------------------------------------------------------------
FINRA acknowledged that there could be instances when associated
persons may not be aware that a customer arbitration has closed, and
that the two-year time limit for requesting expungement of customer
dispute information has begun to run.\417\ To facilitate an associated
person's awareness of the proposed time limits, FINRA stated that if
the proposed rule change is approved, it would issue a Regulatory
Notice providing notice to associated persons of when the time period
will commence for seeking expungement of customer dispute information
already on their records. FINRA also stated it would update the cover
letter that is provided by DRS to respondents once a statement of claim
has been filed to explain that: (1) an associated person is prohibited
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; (2) an associated person
is 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, unless such request is barred under
the Industry Code; and (3) associated persons may remain apprised of
the status of the customer arbitration, including case closure, by
contacting the parties to the arbitration or DRS.\418\ FINRA further
stated that the updated cover letter would also encourage member firms
to provide updates about the status of the customer arbitration to
associated persons who are not named parties to the customer
arbitration, including case closure.\419\ Finally, FINRA stated it
would publish guidance on its website about the changes to the Codes
that would include information about how associated persons can remain
apprised of the status of a customer arbitration, including through
contacting DRS.\420\
---------------------------------------------------------------------------
\417\ See FINRA April 3 Letter at 9.
\418\ Id.
\419\ Id. at 9-10.
\420\ Id. at 10.
---------------------------------------------------------------------------
FINRA's time limitations seek to balance two competing interests:
(1) promoting customer participation and the availability of evidence
and (2) providing sufficient time for an associated person to determine
whether to seek expungement and, in the case of customer complaints,
for firms to investigate and close a complaint and for the complaint to
evolve, or not, into arbitration or civil litigation. The Commission
believes that the proposed rule change strikes a reasonable balance
between these competing interests. Holding expungement hearings closer
in time to the event that gave rise to the customer dispute information
should promote the availability of evidence and customer participation,
which would help contribute to more informed expungement determinations
and therefore to investor protection and the integrity of information
in the CRD system.\421\
---------------------------------------------------------------------------
\421\ As stated above, the proposed rule changes would give the
Director the express authority to deny the use of the DRS
arbitration forum to decide expungement requests, including where
the request is ineligible under the proposed time limitations. The
Commission believes that these powers are a reasonable method to
help ensure adherence to the limitations contained in proposed Rules
12805 and 13805.
---------------------------------------------------------------------------
c. Preclusion of Certain Expungement Requests
The proposed rule change, as modified by Amendments No. 1 and No.
2, would also preclude an associated person from filing an expungement
request if: (1) a panel or court of competent jurisdiction previously
found the associated person liable in a customer arbitration or civil
litigation associated with the same customer dispute information or (2)
the customer dispute information involves the same conduct that is the
basis of a final regulatory action \422\ taken by a securities
regulator or SRO.\423\
---------------------------------------------------------------------------
\422\ See supra note 390.
\423\ See proposed Rule 13805(a)(2)(A)(v).
---------------------------------------------------------------------------
FINRA included the proposed preclusion of expungement requests
where the associated person was previously found liable in a customer
arbitration or civil litigation associated with the same customer
dispute information as an amendment to its proposed rule change in
response, in part, to a commenter's recommendation.\424\ FINRA reasoned
that these expungement requests are in effect a collateral attack on
the binding arbitration award and that a collateral attack is not
contemplated under FINRA rules and is contrary to the Codes.\425\ FINRA
stated that the only avenue for challenging a prior adverse arbitration
award is to file a timely motion with an appropriate court to vacate,
modify, or correct the award.\426\
---------------------------------------------------------------------------
\424\ See St. John's at 2 (suggesting that associated persons be
prohibited from seeking expungement if there has been a finding of
liability in the underlying customer arbitration). See Amendment No.
1; see also FINRA November 10 Letter at 28.
\425\ See FINRA November 10 Letter at 28; see also FINRA Rules
12904(b) and 13904(b).
\426\ See FINRA November 10 Letter at 28.
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Two commenters supported the amendment.\427\ These commenters
agreed that an arbitral or judicial finding that a claim is valid
should preclude the ability to have such information expunged.\428\ A
third commenter supported the amendment, but suggested the reason for
the amendment would apply equally in other contexts, and recommended
that associated persons should be prevented from seeking expungement of
customer dispute information that forms the basis for a finding of
liability in all of the contexts in which such information forms part
of a regulatory record, such as state regulatory proceedings,
proceedings brought by the Commission, or self-regulatory
proceedings.\429\
---------------------------------------------------------------------------
\427\ See letters from Celiza P. Bragan[ccedil]a, Past-President
& Director, et. al., The PIABA Foundation, to the Commission, dated
December 7, 2022 (``PIABA Foundation December 7 Letter'') at 2; see
also Hugh D. Berkson, President, Public Investors Arbitration Bar
Association, to the Commission, dated December 7, 2022 (``PIABA
December 7 Letter'') at 2-3.
\428\ See id.
\429\ See letter from Andrew Hartnett, President, North American
Securities Administrators Association, Inc., to the Commission,
dated December 7, 2022 (``NASAA December 7 Letter'') at 3.
---------------------------------------------------------------------------
After further consideration of the issue, FINRA proposed a
modification to the proposed rule change in Amendment No. 2 to provide
that an associated person shall not file a claim requesting expungement
of customer dispute information from the CRD system against a member
firm at which the person was associated at the time the customer
dispute arose if the customer dispute information involves
[[Page 24308]]
the same conduct that is the basis of a final regulatory action taken
by a securities regulator or SRO. If an associated person requests
expungement of such customer dispute information, the Director would
deny the forum to the expungement request.\430\ FINRA stated that
prohibiting an associated person from filing such expungement requests
would promote greater efficiency in the DRS arbitration forum because
it would preclude requests that otherwise would be unsuccessful.\431\
---------------------------------------------------------------------------
\430\ See FINRA April 3 Letter at 14; Amendment No. 2; see also
proposed Rule 13203(b).
\431\ See FINRA April 3 Letter at 13-14.
---------------------------------------------------------------------------
Permitting expungement following a finding of liability in an
arbitration or civil litigation associated with the same customer
dispute information or a final regulatory action based on the same
conduct sought to be expunged would be inconsistent with the specified
grounds that can form the basis for an expungement award under the
proposed rule change (i.e., factual impossibility, mistake, or
falsity). Permitting an expungement claim in these circumstances would,
in addition to constituting a collateral attack on the results of the
underlying dispute, contribute to inefficiencies in the expungement
process by allowing for claims to proceed that could not succeed.
C. Expungement Requests During Simplified Arbitrations
1. Filing and Considering Requests During Simplified Arbitration
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,\432\ and would establish procedures for
requesting and considering expungement requests in simplified
arbitrations that are consistent with the expedited nature of these
proceedings.\433\
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\432\ See proposed Rule 12800(d)(1)(A). If the requesting party
requests expungement in a pleading other than an answer, the request
must be filed within 30 days from the date that FINRA notifies the
associated person of arbitrator appointment. See proposed Rule
12800(d)(1)(B). When FINRA notifies the parties that 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.
See Notice at 50187 n.193 and accompanying text. The request would
be required to include the same information as a request filed in a
non-simplified arbitration. See proposed Rules 12800(d)(1)(B)(i) and
12805(a)(1)(C)(ii); see also Notice at 50187.
\433\ See proposed Rules 12800(d) and (e); see also Notice at
50186. See Section II.A., ``Requests for Expungement under the
Customer Code.''
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The proposed rule change would require an arbitrator in a
simplified arbitration to decide an expungement request that is filed
by an associated person or as an on-behalf-of request.\434\ In
addition, as in the proposed rule change governing regular customer
arbitration, under the proposed rule change if the requesting party
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.\435\ FINRA stated that these proposed rule changes
would help eliminate arbitrator-shopping by requiring the panel in
which the request is made to decide the request.\436\ FINRA also stated
that, unlike the proposed amendments to a regular customer arbitration,
FINRA was not proposing that a panel from the Special Arbitrator Roster
decide an expungement request made during a simplified customer
arbitration where the arbitration closes other than by award or closes
by award without a hearing, because the public chairpersons who decide
simplified arbitrations would be fully capable of making appropriate
expungement decisions on the basis of their experience and would have
the same enhanced expungement training as the arbitrators on the
Special Arbitrator Roster.\437\
---------------------------------------------------------------------------
\434\ See proposed Rules 12800(d)(1)(B)(ii) and 12800(e)(1); see
also Notice at 50187.
\435\ See proposed Rule 12800(d)(1)(C); see also Notice at
50187.
\436\ See Notice at 50187.
\437\ See Notice at 50188. Under the proposed rule change, 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. See also proposed Rule 12800(b).
---------------------------------------------------------------------------
In addition, unlike in a regular customer arbitration, if
expungement is not requested during a simplified arbitration, the
proposed rule change would permit the associated person to file a
straight-in expungement request for the same customer dispute
information under the Industry Code and have the request decided by a
three-person panel randomly selected from the Special Arbitrator
Roster.\438\
---------------------------------------------------------------------------
\438\ See proposed Rule 12800(e)(2).
---------------------------------------------------------------------------
One commenter requested that a named associated person should be
required to request expungement during the arbitration of the
customer's claim, as proposed for non-simplified cases.\439\ The
commenter stated that arbitrators in simplified arbitrations are
experienced public arbitrators who have the same enhanced expungement
training as the arbitrators on the Special Arbitrator Roster and would
therefore be able to make an informed decision on the merits of an
expungement request.\440\ The commenter also stated that requiring a
named party to request expungement during the arbitration of the
customer's claim in simplified arbitration would encourage customer
participation because the expungement request would be closer in time
to the complained-about conduct and therefore easier for the customer
to recall the facts.\441\
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\439\ See Miami at 2-3.
\440\ See Miami at 3-4. Similarly, Cornell requested that FINRA
add to the proposed rule change that if an expungement is requested
during a simplified arbitration and if the parties agree to have a
specific arbitrator, this arbitrator must be required to undergo the
enhanced expungement training provided to the arbitrators on the
Special Arbitrator Roster prior to considering the expungement
request. See Cornell at 4-5. In response, FINRA stated that the
proposed rule change would require that arbitrators deciding
expungement requests in simplified arbitrations be experienced
public arbitrators who have taken the same expungement training as
arbitrators on the Special Arbitrator Roster, including where the
parties agree to a specific arbitrator. See FINRA November 10 Letter
at 22.
\441\ See Miami at 3-4.
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FINRA declined to amend the proposed rule change, referencing the
expedited nature of simplified arbitrations.\442\ FINRA stated that
because there may be less discovery in simplified arbitration and the
customer can dictate the extent of the evidence presented to the
arbitrator, there may be less information available for the arbitrator
to evaluate an expungement request.\443\ Accordingly, FINRA stated that
it is appropriate that an associated person should retain the ability
to choose to file the request as a straight-in request under the
Industry Code.\444\ FINRA also stated, however, that it will continue
to monitor expungement requests and decisions in simplified
arbitrations to determine if additional changes are warranted,
including whether a panel from the Special Arbitrator Roster should be
required to decide an expungement request in simplified
arbitrations.\445\
---------------------------------------------------------------------------
\442\ See FINRA November 10 Letter at 23.
\443\ See id.; see also Notice at 50187.
\444\ See Notice at 50187.
\445\ See id.; see also FINRA April 3 Letter at 18-19.
---------------------------------------------------------------------------
Requiring an arbitrator to decide an expungement request that is
filed in a simplified arbitration, regardless of the outcome of that
arbitration, along with requiring an arbitrator to a reject such a
request with prejudice if it is withdrawn, will help protect the
integrity of the information in the CRD system by limiting an
associated person's ability to request expungement for the same claim
(even if it has been denied in the past) until they find a panel
willing to award it. By allowing an associated person to determine
[[Page 24309]]
whether to request expungement in a simplified arbitration or to
instead file the request as a straight-in request under the Industry
Code, the proposed rule change appropriately puts the decision to seek
expungement in the hands of the party most impacted by the outcome.
Because claims in simplified arbitration generally are decided by one
arbitrator based on the documents that are submitted by the parties,
with limited discovery, and without a hearing, there may be less
information available for the arbitrator to evaluate an expungement
request during a simplified arbitration. Therefore, the Commission
believes that associated persons should be given the choice of how they
want to proceed with their request for expungement, while at the same
time balancing customer and regulator interests in the process. The
Commission notes, however, that FINRA has stated it will monitor this
issue and propose changes as warranted.
2. Deciding Requests in Simplified Arbitration
As stated above, if expungement is requested during a simplified
arbitration, the proposed rule change would require the arbitrator to
decide the expungement request regardless of how the simplified
arbitration case closes, including by settlement, in one of two ways,
depending on the how the customer chooses to have their claim
decided.\446\
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\446\ See Notice at 50187-88; see also proposed Rules
12800(d)(1)(B)(ii) and 12800(e)(1).
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If the customer chooses to have their claim decided either (1) ``on
the papers'' (i.e., without a hearing) or (2) in an ``Option Two''
special proceeding, the arbitrator would decide the customer's dispute
first and then issue an award before deciding the expungement
request.\447\ After the customer's dispute is decided, the arbitrator
would hold a separate expungement-only hearing to consider and decide
the expungement request and issue a separate award.\448\ FINRA reasoned
that this requirement would minimize any delays in resolving the
customer arbitration and in determining any potential recovery that a
customer may be awarded.\449\ FINRA further stated that the separate
expungement-only hearing would be necessary to enable the arbitrator to
request any documentary, testimonial, or other evidence it deems
relevant to the expungement request to make a fully informed
decision.\450\
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\447\ See proposed Rule 12800(e)(1)(A).
\448\ See proposed Rule 12800(e)(1)(A). The arbitrator would
have to conduct the expungement hearing pursuant to proposed Rule
12805(c); the expungement award would have to meet the requirements
of proposed Rule 12805(c)(8); and forum fees would be assessed
pursuant to proposed Rule 12805(c)(9). See id.; see also Notice at
50188 n.206.
\449\ See Notice at 50188.
\450\ See id. FINRA stated that the customer arbitration may not
be as fully developed when a customer has requested an ``on the
papers'' or special proceeding. See id.
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Alternatively, if the customer chooses to have their claim decided
by an ``Option One'' full hearing and it closes by award, the proposed
rule change would require the arbitrator to consider and decide the
expungement request during the customer arbitration and include the
decision in the award.\451\ This process would be the same as deciding
an expungement request during a regular customer arbitration that
closes by award after a hearing, where the customer's claim and
expungement request are addressed during the customer arbitration.\452\
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\451\ See proposed Rule 12800(e)(1)(B)(i); see also Section
III.A.3., ``Deciding Expungement Requests during Customer
Arbitrations.''
\452\ See Notice at 50188.
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If a simplified arbitration closes other than by award or closes by
award without a hearing, however, the proposed rule change would
require the arbitrator 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.\453\ Under the
proposed rule change, the Director would notify all customers from the
simplified arbitration of the separate expungement-only hearing, if
applicable.\454\ FINRA believes that a separate expungement hearing
would be necessary in these circumstances for the arbitrator to develop
a complete factual record in order to make a fully informed decision on
the expungement request.\455\ FINRA also believes that the Director's
notice would further this objective by providing a timely reminder to
customers of the expungement hearing so that they may plan and prepare
to attend and participate if they choose.\456\ Moreover, FINRA stated
that it would continue to monitor expungement requests and decisions in
simplified arbitrations to determine if additional changes are
warranted.\457\
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\453\ See proposed Rule 12800(e)(1)(B)(ii).
\454\ See proposed Rule 12800(f)(2).
\455\ See Notice at 50188.
\456\ See id.
\457\ See id.
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Three commenters voiced support for the proposed rule change,
specifically identifying the bifurcation of the expungement hearing and
simplified arbitration where the customer's claim is decided ``on the
papers'' or in an ``Option Two'' hearing.\458\ One of these commenters
reasoned that by requiring a separate hearing on the expungement
request following a final decision on the customer's claim, the
proposed rule change would allow for a just resolution of the request
because the arbitrator would have all of the facts and special insights
necessary to decide whether to award expungement, while ensuring the
resolution of the investor's claim is not delayed.\459\ Another
commenter similarly stated that deciding the customer dispute before
the request for expungement would minimize delays in customer recovery
but allow the arbitrator to make a more fully developed record before
deciding the expungement request.\460\
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\458\ See Miami at 2-3; St. John's at 2; Cornell at 4.
\459\ See St. John's at 2.
\460\ See Cornell at 4.
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Another commenter suggested that FINRA create a simplified process
for expungement with similar fees and an ``on the papers'' option
before a single arbitrator for requests for expungement associated with
customer complaints and customer arbitrations under $50,000.\461\ In
response, FINRA declined to amend the proposed rule change, stating
that an important part of ensuring the expungement process works as
intended is for arbitrators to hold recorded expungement hearings
during which they can hear testimony and assess the credibility of the
associated person requesting expungement and any witnesses.\462\
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\461\ See Hennion at 6.
\462\ See FINRA November 10 Letter at 23.
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The proposed rule change's procedure for determining the order in
which a panel would decide an expungement request in a simplified
arbitration based on the type of proceeding chosen by the customer is
reasonable. For example, where a customer opts to have their claim
decided without a hearing (i.e., ``on the papers'') or chooses an
``Option Two'' special proceeding, the arbitrator would hold a separate
expungement-only hearing to consider and decide the expungement request
after it decides the customer's dispute. The Commission believes that
this process benefits both customers and associated persons. The
customer would avoid any delay in resolving their claim that
consideration of an expungement request would cause; and the associated
person would have a separate hearing to help ensure that the arbitrator
has sufficient evidence upon which to rule on their expungement
request. Alternatively, where the customer chooses to have their claim
decided after a full hearing
[[Page 24310]]
(i.e., an ``Option One'' proceeding), it is reasonable to allow the
panel to rule on an expungement request because the request would not
unduly burden the customer or an associated person requesting
expungement in the hearing. By choosing ``Option One'', a customer has
agreed to participate in a more involved and time-consuming process
than having their claim decided ``on the papers.'' Likewise, the
customer has assumed the risk that the resolution of their claim could
be delayed by an associated person's expungement request. In addition,
the associated person gets an opportunity during the hearing to help
the panel fully develop a record on which to decide the expungement
request.
D. Procedural Requirements Relating to All Expungement Hearings
The proposed rule changes would include certain procedural
provisions that would apply to all expungement hearings. As described
above, these would include procedural requirements relating to: (1)
hearing format; (2) associated person's appearance; (3) customer
attendance and participation; (4) panel requests for additional
documents or evidence; (5) review of settlement documents; (6)
requirement for a unanimous decision to issue an award containing
expungement relief; (7) contents of an expungement award; (8) grounds
for awarding expungement; (9) evidentiary weight of a decision by
customers or authorized representatives not to attend or participate;
and, (10) forum fees.\463\ In addition, the proposed rule change would
expand the authority of the Director to deny the use of the DRS
arbitration forum.\464\
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\463\ See Section II.D., ``Procedural Requirements Relating to
All Expungement Hearings.''
\464\ See Section II.C.3, ``Director's Authority to Deny the
Forum.''
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1. Hearing Format
Current FINRA rules 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.\465\ The proposed rule
change would also permit the panel to hold a recorded hearing session
by video conference. The proposed rule change would also clarify that a
panel would not be limited in the number of hearing sessions it could
hold to decide an expungement request.\466\ No commenter supported or
objected to these proposed changes.
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\465\ See FINRA Rules 12805(a) and 13805(a).
\466\ See proposed Rules 12805(c)(1) and 13805(c)(1).
---------------------------------------------------------------------------
This is an appropriate approach. Permitting parties to hold a
recorded hearing session by video conference enhances party
participation by making it more convenient and allowing others to read
facial expressions of those testifying. In addition, by not limiting
the number of hearing sessions a panel could schedule to hear an
expungement request, the proposed rule change would help ensure that
parties would not be limited in presenting their arguments.\467\
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\467\ Arbitrators would remain in control of the number of
hearings needed to decide an expungement request. See FINRA Rule
12500 (Initial Prehearing Conference) (requiring the Director to
schedule an Initial Prehearing Conference during which the panel
will, among other things, schedule any subsequent hearing sessions
during which a request would be heard).
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2. Appearance by Associated Person or Party Requesting Expungement
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.\468\ Likewise, 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.\469\ The panel
would determine the method of appearance.\470\ FINRA stated that it
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 the associated person's appearance to
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.\471\
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\468\ See proposed Rules 12805(c)(2) and 13805(c)(2).
\469\ See id.; see also FINRA April 3 Letter at 7.
\470\ See id.
\471\ See Notice at 50182.
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No commenter supported or objected to these proposed changes. One
commenter stated that ``FINRA should be mindful that not all persons
have the same kind of access to technology and bandwidth. As such, the
panel should also have discretion to decide the appropriateness of the
manner and form of the requesting . . . [associated person's]
participation given the circumstances.'' \472\ FINRA responded that the
proposed rule change provides the panel with that discretion. However,
FINRA stated that the method of appearance would be required to be in
person or by video conference because FINRA believes the panel may be
better able to assess the associated person's credibility through these
methods of appearance.\473\
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\472\ Del Toro.
\473\ See FINRA April 3 Letter at 7.
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Given the importance of protecting the integrity of the information
in the CRD system, FINRA reasonably determined to require that a party
requesting expungement appear at the expungement hearing either in
person or by video conference. Such a requirement will allow the panel
to better assess the testimony of such persons, but also provides
flexibility to accommodate instances in which it may not be reasonable
or necessary to require an in-person hearing. Leaving the manner of
appearance within the panel's discretion is appropriate, as the panel
will be free to require an in-person appearance where, from the panel's
perspective, the record requires or will be improved by such an
appearance.
3. Customer's Attendance and Participation During the Expungement
Hearing
The proposed rule change would codify certain provisions of the
Guidance to: (1) allow the customer and their representative to appear
at the expungement hearing; \474\ (2) allow the customer to testify
(telephonically, in person, or by other method) at the expungement
hearing; \475\ (3) allow the representative for the customer or a pro
se customer to introduce documents and evidence at the expungement
hearing; \476\ (4) 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; \477\ and (5) 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.\478\
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\474\ See proposed Rules 12805(c)(3)-(4) and 13805(c)(3)-(4).
\475\ See proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B).
\476\ See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).
\477\ See proposed Rules 12805(c)(5)(C) and 13805(c)(5)(C).
\478\ See proposed Rules 12805(c)(5)(D) and 13805(c)(5)(D).
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FINRA stated that it believes that customer participation during an
expungement hearing provides the panel with important information and
perspective that it might not otherwise receive. Through the proposed
rule change, FINRA seeks to make it easier for customers to participate
and, thereby, to encourage them to do so.\479\ FINRA further stated
that the proposed rule change strikes the right balance
[[Page 24311]]
between allowing the customer to participate fully in the hearing and,
on the other hand, giving the requesting party the opportunity to
substantiate arguments in support of the expungement request.\480\ This
opportunity includes the ability of the requesting party to cross-
examine a customer who chooses to testify and to object to evidence
introduced by a customer.\481\
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\479\ See Notice at 50183.
\480\ See id.
\481\ See id.
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Commenters both supporting and opposing the proposed rule change
recommended modifications to these provisions.\482\ One commenter who
opposed the proposed rule change objected to the participation of non-
parties (such as customers in a straight-in proceeding) without such
parties submitting to FINRA jurisdiction because non-parties who commit
perjury cannot be sanctioned or reprimanded.\483\ Another commenter
supported the proposed rule change but recommended that the proposed
rule change be amended to make clear that customers would have the
opportunity and ability to participate ``in all aspects'' of the
hearing, such that customers could attend the entire hearing, introduce
arguments, and make their points at any time they deem
appropriate.\484\
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\482\ See AdvisorLaw at 3; NASAA September 6 Letter at 4.
\483\ See AdvisorLaw at 3. The Commission notes that, with
respect to customer participation for purposes of FINRA Rules 13512
(Subpoenas), 13513 (Authority of Panel to Direct Appearances of
Associated Person Witnesses and Production of Documents Without
Subpoenas), 13602 (Attendance at Hearings), and 13903 (Hearing
Session Fees, and Other Costs and Expenses), the customer would be a
non-party only to the extent that an expungement request was made as
a straight-in request under the Industry Code.
\484\ See NASAA September 6 Letter at 4.
---------------------------------------------------------------------------
In response to the first commenter, FINRA stated that arbitrators
on the Special Arbitrator Roster would have the experience necessary to
assess the credibility of those attending and participating in the
hearing, as well as any documentary information. In addition, FINRA
pointed out that the proposed rule change would give an associated
person requesting expungement the opportunity to cross-examine a non-
party customer if the person chooses to testify or any witness called
by the customer or authorized representative.\485\ FINRA believes these
mechanisms should be sufficient to ensure that a non-party's testimony
or documentary information presented is appropriately scrutinized.\486\
---------------------------------------------------------------------------
\485\ See FINRA November 10 Letter at 9.
\486\ See id. at 10.
---------------------------------------------------------------------------
FINRA responded to the other comment by making one of the proposed
modifications in Amendment No. 1 to provide that customers would have
the opportunity and ability to participate in all aspects of the
hearing.\487\ Three commenters supported this amendment, stating that
the amendment would enable arbitration panels to have a more detailed
and balanced view of the relevant facts and events underlying the
expungement request.\488\ Another commenter recommended limiting a
customer's ability to participate in a hearing, stating that while
allowing customer participation ``can provide value,'' for logistics
reasons, the customer should not be able to request discovery.\489\
---------------------------------------------------------------------------
\487\ See Amendment No. 1; see also supra note 11.
\488\ See PIABA Foundation December 7 Letter at 2; PIABA
December 7 Letter at 2; NASAA December 7 Letter at 2.
\489\ See Grebenik.
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In response, FINRA stated that customer attendance and
participation in expungement hearings helps the panel fully develop a
record on which to decide the expungement request.\490\ FINRA further
responded that as a non-party to the straight-in request, the customer
would not be permitted under the proposed rule change to seek discovery
from the parties through the DRS arbitration forum, so the proposed
rule change is consistent with the commenter's view in this
regard.\491\
---------------------------------------------------------------------------
\490\ See FINRA April 3 Letter at 12.
\491\ See id. 11-12; see also Notice at 50186 n.182.
---------------------------------------------------------------------------
Customer participation during an expungement hearing should provide
a panel with important information and perspective that it might not
otherwise receive. The Commission also understands that customers may
have little personal interest in participating in a hearing once their
claim has been resolved. The proposed rule changes would implement
enhancements to facilitate customer participation in those cases where
customers wish to participate. The Commission further believes that the
procedural safeguards will appropriately balance the ability of a
customer to participate in a hearing and provide relevant information
with the interest of an associated person in testing any such
information through objection or cross-examination. This ability to
object or cross-examine should also help address concerns that non-
parties are not themselves subject to FINRA's jurisdiction.
4. Panel Requests for Additional Documents or Evidence
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.\492\ FINRA stated that 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.\493\ FINRA further stated that, 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.\494\
---------------------------------------------------------------------------
\492\ See proposed Rules 12805(c)(6) and 13805(c)(7).
\493\ See Notice at 50183.
\494\ See id.
---------------------------------------------------------------------------
One commenter expressed support for the proposed rule change and
suggested that FINRA amend the proposed rule change to consider the
failure to produce requested documents to be grounds for denial of the
expungement request with prejudice.\495\ FINRA declined to amend the
proposed rule change in response to this comment.\496\ FINRA stated
that its rules already provide arbitrators with authority to determine
whether sanctions should be imposed for failure to comply with any
provision of the Code, or any order of a panel or single arbitrator
authorized to act on behalf of the panel.\497\ FINRA specifically
pointed out that: (1) a panel may assess monetary penalties payable to
one or more parties; preclude a party from presenting evidence; make an
adverse inference against a party; assess postponement and forum fees;
and assess attorneys' fees, costs and expenses; \498\ (2) a panel may
dismiss a claim, defense, or arbitration with prejudice as a sanction
for material and intentional failure to comply with an order of the
panel if prior warnings or sanctions have proven ineffective; \499\ (3)
a member or an associated person could be subject to disciplinary
action for failure to produce requested documents; \500\ and (4) such
failure may
[[Page 24312]]
be deemed conduct inconsistent with just and equitable principles of
trade and a violation of FINRA Rule 2010.\501\
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\495\ See NASAA September 6 Letter at 5.
\496\ See FINRA November 10 Letter at 30-31.
\497\ See id.
\498\ See id. at 30 (citing FINRA Rules 12212(a) and 13212(a)).
\499\ See id. at 30-31 (citing FINRA IM-12000(c), FINRA Rule
12212(c), FINRA IM-13000(c), and FINRA Rule 13212(c)).
\500\ See id. at 31 (citing FINRA Rules 12212(b) and 13212(b)).
\501\ See id. (citing FINRA IM-12000(c) and FINRA IM-13000(c)).
---------------------------------------------------------------------------
The proposed rule change should help ensure that a panel receives
the documents or information that it requests, and further that a panel
is already empowered to dismiss a claim with prejudice for failure to
comply with an order of the panel. Further, the arbitrator's critical
role as fact-finder in deciding expungement requests requires that
arbitrators have the ability to request evidence relevant to their
decisions. By providing arbitrators with this power, the proposed rule
change will help panels establish more fully developed records upon
which to base awards.
5. Review of Settlement Documents
The proposed rule change would retain current FINRA Rules
12805(b)'s and 13805(b)'s requirement for a panel considering an
expungement request to review any related settlement documents and
consider the amount of payments made to any party, and any other terms
and conditions of the settlement.\502\ In addition, in cases in which a
customer does not participate in the expungement hearing, or a
requesting party states that a customer has indicated that they will
not oppose the expungement request, the proposed rule change would
codify the suggestion, currently in the Guidance, that the panel should
inquire and fully consider whether a party impermissibly conditioned a
settlement of the arbitration upon the customer's agreement not to
oppose the request for expungement.\503\ No commenter supported or
objected to these proposed changes. The proposed rule change should
provide arbitrator oversight of past settlement agreements which should
help ensure (through deterrence) that future settlements are not
impermissibly conditioned on a customer's agreement not to oppose the
request for expungement.
---------------------------------------------------------------------------
\502\ See proposed Rules 12805(c)(7) and 13805(c)(8); see also
Notice at 50183-84.
\503\ See id.
---------------------------------------------------------------------------
6. Unanimous Decision To Issue an Award Containing Expungement Relief
Under current FINRA rules, consistent with arbitration cases
generally, a panel may award expungement based on a majority decision
of the arbitrators.\504\ The proposed rule change would require that
the arbitrators agree unanimously to issue an award containing
expungement relief.\505\ FINRA stated that, although the vast majority
of expungement decisions are already unanimous,\506\ 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.\507\
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\504\ See FINRA Rules 12410 and 13414.
\505\ See proposed Rules 12805(c)(8)(A) and 13805(c)(9)(A).
\506\ In the Notice, FINRA stated that during the sample period
of January 2016 to December 2021, in arbitrations decided by a
three-person arbitration panel and involving an expungement request,
the panel decision was unanimous in 98 percent and not unanimous in
2 percent of arbitrations. See Notice at 50184 n.157; see also id.
at 50173 n.28 (defining the length of the sample period).
\507\ See id. at 50184.
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Five commenters supported the proposed unanimity requirement.\508\
Two of these commenters reasoned that the unanimity requirement would
further safeguard the integrity of the information in the CRD
system.\509\ Three commenters also supported the unanimity requirement
as ensuring that expungement is an ``extraordinary'' \510\ or
``exceptional'' \511\ remedy.
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\508\ See Cornell at 4; NASAA September 6 Letter at 3; Edwards
at 1; St. John's at 3; PIABA September 6 Letter at 2.
\509\ See Cornell at 4 and St. John's at 3.
\510\ See St. John's at 3; PIABA September 6 Letter at 2.
\511\ See Cornell at 4.
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Six commenters, on the other hand, opposed the unanimity
requirement.\512\ One of these commenters argued that the requirement
of the written rationale would encourage unanimity of the decision
without mandating it and would further ensure the remedy is
extraordinary, thus maintaining the necessary balance between investor
protection and regulatory value with fairness to advisors.\513\ Two of
these commenters argued that no single arbitrator should hold veto
power over an expungement decision because it would lead to more
inaccurate and misleading data in the CRD system,\514\ while a fourth
argued that requiring unanimous agreement does not value the opinions
of all arbitrators.\515\
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\512\ See letter from Victoria Staudinger, to the Commission,
dated August 16, 2022; SIFMA September 2 Letter at 7; FSI at 5;
Grebenik; Beckner; Del Toro.
\513\ See FSI at 5.
\514\ See SIFMA September 2 Letter at 7; see also Del Toro.
\515\ See Grebenik.
---------------------------------------------------------------------------
FINRA declined to amend the proposed rule change and responded that
requiring a unanimous decision of the arbitrators would help protect
the integrity of the information in the CRD system and help ensure that
the expungement process operates as intended.\516\
---------------------------------------------------------------------------
\516\ See FINRA November 10 Letter at 11; see also FINRA April 3
Letter at 4-5.
---------------------------------------------------------------------------
Requiring a unanimous decision will help enhance the integrity of
the information in the CRD system by helping ensure expungement will
only be awarded when there is no disagreement among the arbitrators
that the factual record supports it. The importance of the CRD system
extends to all aspects of regulation of broker-dealers and registered
representatives. Among other things, the information about firms and
registered representatives available on CRD facilitates regulators,
such as FINRA and the other SROs, state regulators, as well as the
Commission, in meeting their regulatory obligations. In addition,
certain information in the CRD system is available to the public
through BrokerCheck; this information helps investors make better-
informed choices about the registered representatives and broker-dealer
firms with whom they may conduct business. For these reasons, the
importance of the integrity of information in the CRD system militates
against awarding expungement in circumstances where there may be
disagreement about the merits of a claim.
One commenter recommended that the panel's unanimous decisions to
expunge records should only be reached when the evidence presented in
support of expungement meets a clear and convincing standard of
proof.\517\ This commenter reasoned that such an evidentiary standard
would be consistent with the extraordinary nature of expungement.\518\
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\517\ See NASAA September 6 Letter at 3.
\518\ See id.
---------------------------------------------------------------------------
FINRA declined to amend the proposed rule change in response to
this recommendation. FINRA stated that to further clarify the limited
circumstances under which arbitrators must decide expungement requests,
the proposed rule change would expressly list in the Codes the narrow
grounds in FINRA Rule 2080(b)(1) for deciding these requests.\519\
FINRA stated that it believes that the explicit incorporation of these
grounds into the Codes and the requirement for a unanimous decision by
arbitrators from the Special Arbitrator Roster would achieve the goal
of balancing the competing interests in the expungement process of
providing a fair process and protecting the integrity of the
information in the CRD system.\520\
[[Page 24313]]
Finally, FINRA stated it will continue to evaluate whether there are
other ways to further strengthen the expungement process, including
whether to require that a panel find that the evidence presented in
support of an expungement request meets a clear and convincing standard
of proof in order to issue an award containing expungement relief.\521\
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\519\ See FINRA November 10 Letter at 17; see also proposed
Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i).
\520\ See FINRA November 10 Letter at 17.
\521\ See FINRA April 3 Letter at 18-19.
---------------------------------------------------------------------------
The importance of the integrity of information in the CRD system
militates against awarding expungement in circumstances where there may
be disagreement about the merits of a claim. Thus, as stated above,
requiring a unanimous decision will enhance the integrity of the
information in the CRD system by helping ensure expungement will only
be awarded when there is no disagreement among the arbitrators that the
factual record supports it. Furthermore, by requiring a three-person
panel of specially trained, specially qualified arbitrators to
unanimously decide an expungement request based on three specified
grounds \522\ (in addition to the proposed reforms to the process for
selecting arbitrators and the enhanced training and qualification), the
proposed rule change is reasonably designed to help ensure that
arbitrators only award expungement when there is evidentiary support of
their decisions. Therefore, FINRA's decision regarding the evidentiary
standard is reasonable in light of the implementation of a unanimous
decision requirement, and other proposed safeguards.
---------------------------------------------------------------------------
\522\ See Section III.D.8., ``Grounds for Recommending
Expungement.''
---------------------------------------------------------------------------
7. Awards
Current FINRA Rules 12805(c) and 13805(c) require that the panel
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. The proposed rule change would retain the requirements of
current Rules 12805(c) and 13805(c) but would remove the word
``brief.'' As a result, the panel would be required to provide enough
detail in the award to explain its rationale for awarding expungement
relief.\523\ In addition, the proposed rule change would incorporate
language from the Guidance by requiring that the panel's explanation
identify any specific documentary, testimonial or other evidence on
which the panel relied in awarding expungement relief.\524\
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\523\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B); see
also Notice at 50184.
\524\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B).
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One commenter suggested that FINRA ``strengthen'' this aspect of
the proposed rule change by requiring arbitrators to provide a thorough
explanation of how a request meets expungement's extraordinary
standard, including an explanation of how the arbitrators determined
that the requesting party's uncontested assertions accurately reflected
the truth of the matter.\525\
---------------------------------------------------------------------------
\525\ See NASAA September 6 Letter at 5.
---------------------------------------------------------------------------
FINRA declined to amend the proposed rule change and responded that
the panel's explanation would be required to not be solely a recitation
of one of the grounds for awarding expungement relief or language
provided in the expungement request and that the proposed rule change
would require the panel to identify any specific documentary,
testimonial, or other evidence on which the panel relied in awarding
expungement relief.\526\ In addition, FINRA stated that it would
specify in its enhanced expungement training for arbitrators the
importance of explaining their rationale for awarding expungement
relief.\527\
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\526\ See FINRA November 10 Letter at 18.
\527\ See id.
---------------------------------------------------------------------------
Requiring a written rationale that specifically identifies the
basis for an expungement award and the documents or other evidence that
supports such an award should be sufficient both to help ensure that a
panel has considered the available evidence and its bearing on the
available bases for an expungement award and should help ensure that a
panel has correctly identified a permissible ground for expungement.
Further, the written rationale requirement should provide interested
parties with enough information to understand the reasons for an
expungement award.
8. Grounds for Recommending Expungement
As stated above, both currently and under the proposed rule change,
an associated person may seek expungement of customer dispute
information by obtaining a court expungement order by either: (1) going
through the arbitration process and obtaining an award recommending
expungement (and then obtaining a court order confirming the
arbitration award); or (2) going directly to court (without first going
through arbitration). Regardless of whether expungement of customer
dispute information is sought directly through a court or by first
going through arbitration, FINRA Rule 2080 requires an associated
person seeking expungement to obtain a court order directing such
expungement or confirming an award containing such expungement.\528\
Moreover, under FINRA Rule 2080(b) members or associated persons
petitioning a court for expungement relief, or seeking judicial
confirmation of an arbitration award containing expungement relief,
must name FINRA as an additional party and serve FINRA with all
appropriate documents unless this requirement is waived by FINRA
pursuant to either Rule 2080(b)(1) or 2080(b)(2). Specifically, FINRA
Rule 2080(b)(1) provides that FINRA may waive the requirement to name
FINRA as a party in situations where ``expungement relief is based on
affirmative judicial or arbitral findings'' of factual impossibility,
mistake, or falsity.\529\
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\528\ See supra notes 25-30 and accompanying text.
\529\ See FINRA Rule 2080(b)(1). FINRA Rule 2080 is not part of
the Codes. FINRA stated that it is not proposing amendments to FINRA
Rule 2080 at this time but is considering whether enhancements to
the current expungement process through changes to FINRA Rule 2080
may be warranted. See Notice at 50184 n.162.
---------------------------------------------------------------------------
In addition to FINRA's ability to waive the obligation to name
FINRA as a party under FINRA Rule 2080(b)(1), FINRA may also waive the
requirement to name FINRA as a party to a court proceeding seeking
confirmation of an arbitration award pursuant to FINRA Rule
2080(b)(2).\530\ FINRA Rule 2080(b)(2) provides that FINRA may waive
this requirement in situations in which ``the expungement relief is
based on judicial or arbitral findings other than those described
above''--that is, situations in which an arbitrator has not found
factual impossibility, mistake, or falsity but, nevertheless, has
recommended expungement based on findings not named in Rule 2080. In
such situations, ``FINRA, in its sole discretion and under
extraordinary circumstances, also may waive the obligation to name
FINRA as a party 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.'' \531\ In other words, if an arbitrator recommends
expungement on grounds other than factual impossibility, mistake, or
falsity, FINRA may, in ``extraordinary circumstances'' nevertheless
decide to waive the obligation to name FINRA as a party if FINRA finds:
(1) that the alternative grounds supplied by the arbitrator and the
arbitrator's recommendation are
[[Page 24314]]
meritorious and (2) that the expungement would have no material adverse
effect on investor protection, the integrity of the information in the
CRD system, or regulatory requirements.\532\
---------------------------------------------------------------------------
\530\ See supra note 29 and accompanying text.
\531\ See FINRA Rule 2080(b)(2).
\532\ See Notice at 50184 n.162; see also FINRA November 10
Letter at 12 n.54.
---------------------------------------------------------------------------
It is FINRA's view that, currently, in order to issue an award
containing expungement relief, a panel must affirmatively find that one
of the three grounds contained in FINRA Rule 2080(b)(1) has been
met.\533\ More specifically, current FINRA Rules 12805 and 13805
require that, in order to issue an award containing expungement of
customer dispute information, a panel must indicate in the arbitration
award which of the FINRA Rule 2080 grounds for expungement serves as
the basis for its expungement order. In other words, according to
FINRA, to include expungement relief in an award, FINRA Rules 12805 and
13805 currently require a panel to 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.\534\
---------------------------------------------------------------------------
\533\ See Notice at 50173.
\534\ See id. at 50173 n.31 and accompanying text; see also id.
at 50184 n.162.
---------------------------------------------------------------------------
The proposed rule change would replace FINRA Rules 12805's and
13805's reference to FINRA Rule 2080 with an enumeration of the
specific grounds identified in FINRA Rule 2080(b)(1) (i.e., factual
impossibility, mistake, or falsity). FINRA stated that the proposed
rule change thus would codify, in the Codes, 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.\535\
---------------------------------------------------------------------------
\535\ See id. at 50184 n.162 and accompanying text.
---------------------------------------------------------------------------
In FINRA's view, both FINRA and the Commission historically have
treated the grounds in Rule 2080(b)(1) as the exclusive grounds upon
which expungement may be awarded.\536\ Consistent with this view, the
proposed rule change, in addition to codifying the FINRA Rule
2080(b)(1) grounds as the exclusive grounds upon which a panel may base
an expungement award, would also state that a panel shall not issue,
and the Director shall not serve, an award containing expungement
relief based on grounds other than those in proposed Rules
12805(c)(8)(A)(i) and 13805(c)(9)(A)(i).\537\ Three commenters
supported these proposed changes to FINRA Rules 12805 and 13805.\538\
Two of these commenters stated that the required grounds for issuing an
expungement award would help ensure that expungement is an
extraordinary remedy.\539\ The third commenter reasoned that the
proposed rule change should drive outcomes that are more consistent
with the limited circumstances under which expungement can be granted
and favors consistency in the expungement process.\540\
---------------------------------------------------------------------------
\536\ See id. at 50173 n.31 (citing, among other things,
Exchange Act Release No. 58886 (Oct. 30, 2008), 73 FR 66086, 66087
(Nov. 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'') and
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'')). Id. See also FINRA November 10 Letter at 13-
14 and 14 n.62; see also FINRA April 3 Letter at 16.
\537\ See proposed Rules 12805(c)(8)(A)(ii) and
13805(c)(9)(A)(ii).
\538\ See Cambridge at 2-3; Cornell at 4; St. John's at 3.
\539\ See Cornell at 4; St. John's at 3.
\540\ See Cambridge at 2.
---------------------------------------------------------------------------
One commenter objected to this provision of the proposed rule
change, positing that FINRA should not limit the grounds for when
arbitrators can recommend expungement to those contained in current
Rule 2080(b)(1), incorporated into proposed Rule 12805 and 13805, but
should also allow arbitrators to recommend expungement on the grounds
contained in Rule 2080(b)(2) by also incorporating those grounds into
the proposed rule change.\541\ The commenter stated that the current
grounds for granting expungement under FINRA rules are not limited to
the three grounds listed in Rule 2080(b)(1) (i.e., factual
impossibility, mistake, or falsity), but also include the grounds
listed in Rule 2080(b)(2) (i.e., (1) the expungement and accompanying
findings on which it is based are meritorious and (2) expungement would
have no material adverse effect on investor protection, the integrity
of the information in the CRD system, or regulatory requirements).\542\
Accordingly, and notwithstanding prior FINRA guidance purporting to
limit the grounds upon which a panel may grant expungement to those
contained Rule 2080(b)(1), in the commenter's view arbitrators may also
award expungement based on Rule 2080(b)(2).\543\ The commenter
disagreed with FINRA's position that subsection (b)(2) only provides
factors for FINRA to consider in deciding whether to waive the
obligation to name FINRA as a party in a court petition for expungement
relief. Instead, the commenter stated that Rules 2080(b)(1) and
2080(b)(2) operate in the same manner and that Rule 2080(b)(2) provides
additional grounds on which a panel may base an expungement award.\544\
In support of its recommendation, the commenter argued that failing to
permit expungement on the grounds contained in Rule 2080(b)(2) would
result in meritorious expungement requests being rejected, leading to
inaccurate and misleading information remaining in the CRD system.\545\
The commenter further stated that FINRA has not justified limiting the
grounds upon which expungement may be awarded to those contained in the
proposed rule change (i.e., the grounds in Rule 2080(b)(1)).\546\ The
commenter added that the proposed rule change is inconsistent with the
Exchange Act because FINRA: (1) circumvented the proper rulemaking
process by failing to provide adequate notice that it was proposing a
significant rule change to limit the expungement grounds to Rule
2080(b)(1) or an opportunity for comment; \547\ and (2) failed to
provide any cost-benefit analysis, or other justification, to support
limiting the grounds for expungement to those under Rule
2080(b)(1).\548\
---------------------------------------------------------------------------
\541\ See SIFMA September 2 Letter at 4-6; see also letter from
Kevin M. Carroll, Managing Director and Associate General Counsel,
Securities Industry and Financial Markets Association, to the
Commission, dated December 7, 2022 (``SIFMA December 7 Letter'')
(expanding on its argument that the proposed rule change should
permit arbitrators to recommend expungement if they find the grounds
contained in Rule 2080(b)(2), in addition to Rule 2080(b)(1), in
response to FINRA November 10 Letter); Del Toro (arguing that
``[e]xpungement awards based solely on Rule 2080(b)(2) are rare, but
they are nevertheless allowed under the current rules'').
\542\ See SIFMA September 2 Letter at 3-4 (quoting FINRA Rules
12805 and 13805); SIFMA December 7 Letter at 2.
\543\ See SIFMA September 2 Letter at 2-4; SIFMA December 7
Letter at 2.
\544\ See SIFMA September 2 Letter at 4; SIFMA December 7 Letter
at 2.
\545\ See SIFMA September 2 Letter at 5-6; SIFMA December 7
Letter at 3.
\546\ See SIFMA September 2 Letter at 4-6; SIFMA December 7
Letter at 3; Del Toro (stating that ``FINRA Rule 2080 is a
substantive rule and its modification requires a comprehensive
rulemaking process through which FINRA must provide justification
for making said change. FINRA has provided no such justification
here,'' and ``[FINRA] provides no evidence or data suggesting that
arbitrators are applying an incorrect standard in arbitration
cases'').
\547\ See SIFMA December 7 Letter at 2; see also SIFMA September
2 Letter at 4, 10; Del Toro (stating that ``some of the Proposal[']s
changes result in the indirect abrogation of FINRA Rule 2080(b)(2)
through a procedural rule change'').
\548\ See SIFMA December 7 Letter at 3.
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[[Page 24315]]
FINRA disagreed with the commenter, stating that Rules 12805 and
13805 and their rulemaking history and related guidance establish that
arbitrators in the forum are currently limited to the grounds
enumerated in FINRA Rule 2080(b)(1)(A)-(C) when awarding
expungement.\549\ According to FINRA, the plain language of current
FINRA Rules 12805 and 13805 is consistent with FINRA's position that,
currently, FINRA Rule 2080(b)(1) lists the exclusive grounds upon which
a panel may award expungement.\550\ Specifically, FINRA stated that
current FINRA Rules 12805 and 13805 describe what ``the panel must'' do
in order to grant expungement of customer dispute information, and only
FINRA Rule 2080(b)(1) describes grounds upon which arbitrators may
grant expungement in the forum.\551\ By contrast, Rule 2080(b)(2)
provides a general standard for FINRA to consider in making its own
regulatory determination in extraordinary circumstances when the court
or arbitrator makes findings ``other than those described in
[2080](b)(1)].'' \552\ According to FINRA, as a result, the language in
current FINRA Rules 12805 and 13805 requiring the panel to ``[i]ndicate
in the arbitration award which of the Rule 2080 grounds for expungement
serve(s) as the basis for its expungement order'' is properly
understood as referring only to the grounds listed in paragraph (b)(1),
as those are the only specific grounds listed in FINRA Rule 2080 that a
panel could affirmatively find in making an expungement
determination.\553\
---------------------------------------------------------------------------
\549\ See FINRA November 10 Letter at 12-15; see also FINRA
April 3 Letter at 15-16.
\550\ See FINRA November 10 Letter at 14.
\551\ See id. at 14-15.
\552\ See id. at 14.
\553\ See id. at 15.
---------------------------------------------------------------------------
FINRA further stated that by approving FINRA Rule 2080 and FINRA
Rules 12805 and 13805, the Commission demonstrated its expectation that
a panel should indicate in the arbitration award which of the grounds
for expungement in Rule 2080(b)(1)(A)-(C) serves as the basis for the
expungement order.\554\ According to FINRA, the Commission thus
``explicitly approved the FINRA Rule 2080(b)(1) limitation.'' \555\
---------------------------------------------------------------------------
\554\ Id. at 13-14 (citing Exchange Act Release No. 58886
(October 30, 2008), 73 FR 66086, 66087 (November 6, 2008) (Order
Approving File No. SR-FINRA-2008-010)).
\555\ Id. at 14 (citing Exchange Act Release No. 58886 (October
30, 2008), 73 FR 66086, 66087 (November 6, 2008) (Order Approving
File No. SR-FINRA-2008-010)).
---------------------------------------------------------------------------
FINRA also disagreed with the commenter that not permitting
expungement on Rule 2080(b)(2) grounds would lead to inaccurate and
misleading information in the CRD system.\556\ On the contrary, FINRA
stated that it believes that allowing arbitrators in the forum to issue
awards containing expungement relief by applying an ``equitable''
standard would not sufficiently protect the integrity of the
information in the CRD system, as, in FINRA's view, any removal of
information from the CRD system should be based on specific, enumerated
standards, such as those provided in FINRA Rule 2080(b)(1).\557\ If
FINRA were to change course and expand the grounds for expungement to
allow for (b)(2) grounds, as advocated by the commenter, FINRA believes
it would inappropriately broaden the grounds for expungement to allow
for removal of dispute information beyond the extraordinary
circumstances in which expungement is appropriate.\558\ In particular,
whereas (b)(1) identifies specific grounds for expungement, the (b)(2)
grounds are entirely open ended, as they refer only to grounds ``other
than those described'' in (b)(1).\559\
---------------------------------------------------------------------------
\556\ See id. at 12-13.
\557\ See id.
\558\ See FINRA November 10 Letter at 12-17; see also FINRA
April 3 Letter at 16-17.
\559\ See FINRA November 10 Letter at 12-17; see also FINRA
April 3 Letter at 16-17.
---------------------------------------------------------------------------
In response to the commenter's assertion that FINRA has not
justified the proposed rule changes, FINRA reiterated its view, stated
in the Notice, that the proposed rule changes would further protect the
integrity of the information in the CRD system.\560\ FINRA stated the
proposed rule changes would reinforce that expungement is appropriate
only in extraordinary circumstances by specifying in the Codes the
narrow grounds that arbitrators must find in issuing an award
containing expungement relief.\561\ FINRA stated that amending Rules
12805 and 13805 to codify the three narrow grounds in Rule 2080(b)(1)
as the only grounds on which arbitrators may determine to award
expungement relief best aligns with FINRA's position that its
expungement framework should allow for the removal of customer dispute
information from the CRD system only in extraordinary circumstances in
accordance with FINRA's rules.\562\ These three narrow grounds, in
FINRA's view, fairly address the circumstances in which an associated
person would appropriately seek expungement of customer dispute
information in the DRS arbitration forum.\563\ In addition, FINRA
stated that allowing expungement only in these extraordinary
circumstances would continue to balance the competing interests of
providing regulators with broad access to information about customer
disputes to fulfill their regulatory obligations, providing a fair
process that recognizes an associated person's interest in protecting
their reputation, and ensuring investors have access to accurate
information about associated persons with whom they may decide to do
business.\564\ Furthermore, FINRA stated that is 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.\565\
---------------------------------------------------------------------------
\560\ See FINRA November 10 Letter at 12, 16; see also FINRA
April 3 Letter at 17; see also Notice at 50186.
\561\ See FINRA November 10 Letter at 12, 16; see also FINRA
April 3 Letter at 16.
\562\ See FINRA April 3 Letter at 16.
\563\ See id. at 16-17.
\564\ See id. at 17.
\565\ See id. (citing Notice at 50189-50198).
---------------------------------------------------------------------------
Finally, FINRA also disagreed with the commenter's assertion that
FINRA has not provided adequate notice or opportunity for public
comment of its intent to amend FINRA Rules 12805 and 13805 to codify
the exclusive grounds upon which an arbitration panel may issue an
award containing expungement of customer dispute information from the
CRD system.\566\ FINRA stated that by proposing the proposed rules it
has solicited comment on the proposed rule change, which FINRA stated
clearly articulates the amendment and the basis for it.\567\ In
addition, FINRA stated that it had also previously solicited comment in
Regulatory Notice 17-42.\568\ According to FINRA, adequate notice and
opportunity for comment in this instance is demonstrated by publication
of the proposed rules explaining the reasons for the proposed rule
change, the commenter's comment letters in response to the proposed
rules, and FINRA's consideration of and responses to comments.\569\
---------------------------------------------------------------------------
\566\ See FINRA November 10 Letter at 16; see also FINRA April 3
Letter at 17.
\567\ See FINRA November 10 Letter at 16; see also FINRA April 3
Letter at 17.
\568\ See FINRA November 10 Letter at 16.
\569\ See FINRA April 3 Letter at 17.
---------------------------------------------------------------------------
The Commission's order approving Rules 12805 and 13805 stated that
``in order to grant expungement of customer dispute information under
Rule [2080], the panel must . . . indicate in the arbitration award
which of the grounds
[[Page 24316]]
for expungement in Rule [2080](b)(1)(A)-(C) serves as the basis for the
expungement order.'' \570\ The proposed rule change would codify
FINRA's intended exclusive grounds for expungement. Codifying in FINRA
Rules 12805 and 13805 the grounds enumerated in Rule 2080(b)(1) as the
only grounds on which an arbitrator may recommend expungement would
give arbitrators a clear mandate. It would resolve any potential
uncertainty regarding the applicability of FINRA Rule 2080(b)(2) as an
appropriate ground upon which arbitrators may issue awards containing
expungement relief. Moreover, consistent with FINRA guidance, it would
help ensure that arbitrators recommend expungement only as an
extraordinary remedy in the extraordinary circumstances of factual
impossibility, mistake, or falsity.
---------------------------------------------------------------------------
\570\ Id. The Commission's approval order also similarly
describes FINRA's response to comments as stating ``that the
proposal requires arbitrators to evaluate fully whether the party
requesting expungement either in arbitration or in connection with a
settlement agreement has met the criteria promulgated under Rule
[2080](b)(1)(A)-(C).'' Id.
---------------------------------------------------------------------------
The proposed rule change would also help protect the integrity of
information in the CRD system by helping ensure that expungement
remains an extraordinary remedy limited to narrow, enumerated
circumstances. The Commission also believes that FINRA's decision to
limit the grounds for expungement to those enumerated in Rule
2080(b)(1) is appropriate. Because Rule 2080(b)(2) describes a general
standard for FINRA to consider in determining whether or not to waive
an associated person's obligation to name FINRA as a party when seeking
judicial confirmation of an expungement award, including Rule
2080(b)(2)'s standard would make the type of information that could be
expunged broader and less foreseeable and thus risk undermining the
integrity of the information in the CRD system.\571\
---------------------------------------------------------------------------
\571\ Although FINRA Rule 2080(b)(2) states that FINRA ``in its
sole discretion and in extraordinary circumstances'' may waive an
associated person's obligation to name FINRA as a party when seeking
judicial confirmation of an expungement award where FINRA
``determines that . . . the expungement relief and accompanying
findings on which it is based are meritorious'' and ``would have no
material adverse effect on investor protection, the integrity of the
CRD system or regulatory requirements,'' these ``extraordinary
circumstances'' are not further delineated by the rule and are at
FINRA's discretion. By contrast, proposed Rules 12805 and 13805
would specifically identify the extraordinary circumstances in which
a panel may award expungement--factual impossibility, mistake, or
falsity.
---------------------------------------------------------------------------
Further, in contrast to the commenter's statement, FINRA provided
justification to support limiting the grounds for awarding expungement
to those under Rule 2080(b)(1). In its filing, FINRA details the
economic impact analyzing ``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 [its] regulatory objectives.'' \572\ FINRA's analysis
covers the potential economic impact of the entire proposed rule
change, including proposed Rules 12805(c)(8)(A) and
13805(c)(9)(A).\573\ Thus, FINRA's economic analysis addressed its
codification, in the Codes, of 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.
---------------------------------------------------------------------------
\572\ Notice at 50189-98.
\573\ See id.
---------------------------------------------------------------------------
Furthermore, as stated above, BrokerCheck helps investors make more
informed choices about the associated persons and broker-dealer firms
with whom they may conduct business. Since the information on
BrokerCheck is populated by information from CRD, the integrity of the
information investors use to make their investment decisions is
dependent on the integrity of the information in the CRD system. An
expungement process limited to clear, enumerated standards helps ensure
that factually impossible, mistaken, or false information can be
removed from the CRD system, while also decreasing the likelihood that
arbitrators award expungement on unforeseen or unsound grounds to the
detriment of the quality of information in the CRD system. In light of
this, the Commission believes that FINRA has appropriately balanced the
investor protection benefits of the proposed rule change against the
potential harm to associated persons, and that FINRA has reasonably
considered the impacts of the proposed rule change as outlined in its
economic impact analysis and its response to comments.
Finally, Section 19(b) of the Act,\574\ and Rule 19b-4
thereunder,\575\ set forth the requirements for notice and comment for
an SRO proposed rule change. That process was followed for this
proposed rule change. The Notice articulated FINRA's proposed rule
change, as well as its bases for it. In response, the Commission
received forty-five comment letters including from commenters
expressing concern about the proposed codification of Rule 2080(b)(1)'s
grounds for expungement. On November 10, 2022, FINRA responded to those
commenters and filed Amendment No. 1, modifying the original proposed
rule change. In the Order Instituting Proceedings, the Commission
noticed Amendment No. 1 and requested comment on the proposed rule
change, as modified. In response, the Commission received seven comment
letters including from commenters expressing concern about the proposed
codification of Rule 2080(b)(1)'s grounds for expungement.
---------------------------------------------------------------------------
\574\ 15 U.S.C. 78s(b)(1).
\575\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
9. Evidentiary Weight of Decision of Customer or Authorized
Representative Not To Attend or Participate
Originally, the proposed rule change would have included an
instruction for arbitration panels that the decision of a customer or
an authorized representative of state securities regulators not to
attend or participate in the expungement hearing would not be material
to the determination of whether expungement is appropriate.\576\ One
commenter suggested that FINRA amend the proposed rule change to state
clearly that arbitrators must give no weight to such decisions.\577\
FINRA agreed 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, and accordingly amended the proposed rule change to
clarify this position.\578\
---------------------------------------------------------------------------
\576\ See Notice at 50184.
\577\ See NASAA September 6 Letter at 5.
\578\ See FINRA November 10 Letter at 11 and Amendment No. 1.
---------------------------------------------------------------------------
As amended, the proposed rule change states that a panel shall not
give any evidentiary weight to a decision by a customer or an
authorized representative not to attend or participate in an
expungement hearing when making a determination of whether expungement
is appropriate.\579\ FINRA stated that it is aware that some panels
have indicated in expungement awards that a customer did not appear at
the expungement hearing.\580\ But, FINRA stated that it believes that 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 and thus it
should not be considered by the panel when deciding a request for
[[Page 24317]]
expungement.\581\ Three commenters supported the amendment.\582\ The
Commission received no comment letters opposing the amendment.
---------------------------------------------------------------------------
\579\ See proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C).
\580\ See Notice at 50184-85.
\581\ See id.; see also FINRA November 10 Letter at 10-11.
\582\ See PIABA Foundation December 7 Letter at 2; PIABA
December 7 Letter at 2; NASAA December 7 Letter at 2.
---------------------------------------------------------------------------
The Commission agrees that customers or authorized representatives
of a state securities regulator may decide not to appear for a variety
of reasons unrelated to the merits of an expungement request and that
FINRA reasonably determined that such a decision by a customer or an
authorized representative should not be given weight by the panel
assessing the request.
10. Forum Fees
The proposed rule change would retain the current requirement that
the panel must assess against the parties requesting expungement all
forum fees for each hearing in which the sole topic is the
determination of the appropriateness of expungement.\583\
---------------------------------------------------------------------------
\583\ See proposed Rules 12805(c)(9) and 13805(c)(10); see also
FINRA Rules 12805(d) and 13805(d).
---------------------------------------------------------------------------
One commenter characterized the existing minimum member surcharge
and process fees that would be assessed to firms if an associated
person files a straight-in request, following an arbitration that
closes other than by award or closes by award without a hearing, as
``duplicative'' and suggested that these fees be eliminated.\584\
According to this commenter, in a customer arbitration that closes
other than by award or by award without a hearing, the member firm
would have already paid the member surcharge and processing fee for
using the forum.\585\ The member would then have to pay again if named
in a subsequent straight-in request.\586\ Another commenter stated
similarly that where firms have already paid the fee in the original
matter, associated persons should not then be required to pay another
full fee for expungement requests.\587\
---------------------------------------------------------------------------
\584\ See SIFMA September 2 Letter at 9.
\585\ See id.
\586\ See id.
\587\ See FSI at 6.
---------------------------------------------------------------------------
In response, FINRA stated that the member surcharge and process
fees that a member firm would be assessed if an associated person files
a straight-in request are not duplicate fees.\588\ FINRA stated it is
appropriate to assess these fees for straight-in requests because such
requests initiate separate arbitrations seeking different relief--
namely, expungement.\589\ FINRA also stated that if the associated
person, or the requesting party in the case of an on-behalf-of request,
files a straight-in request after having previously paid the filing fee
to request expungement of the same customer dispute information during
a customer arbitration that settles or is dismissed, FINRA would not
assess a second filing fee when the associated person files the
straight-in request.\590\ Moreover, FINRA explained that, in instances
in which DRS's fees may be challenging to pay due to financial
hardship, the Director has the authority to defer payment of all or
part of an associated person's filing fee on a showing of financial
hardship.\591\
---------------------------------------------------------------------------
\588\ See FINRA November 10 Letter at 31.
\589\ See id.
\590\ See id. at 32; see also Notice at 50179 n.95.
\591\ See FINRA November 10 Letter at 6.
---------------------------------------------------------------------------
FINRA may reasonably assess member surcharge and process fees for
straight-in requests. Straight-in requests are separate arbitrations
before a separate panel of specially trained arbitrators. Proceedings
have costs and it is appropriate that FINRA would require the parties
generating those costs to pay them.\592\
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\592\ Any such fee filings must be filed pursuant to Section
19(b) and Rule 19b-4, and must be consistent with all the relevant
statutory and rule requirements.
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11. Director's Authority To Deny the Forum
The proposed rule change would require the Director 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.\593\ The proposed
rule change would also provide the Director with 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.\594\ FINRA stated that the proposed rule change would help
ensure additional safeguards around the expungement process by
expanding the circumstances in which the Director is authorized to deny
the DRS arbitration forum.\595\
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\593\ See proposed Rules 12203(b) and 13203(b). For example,
FINRA stated that under the proposed rule change the Director would
decline the use of the DRS arbitration forum if: (1) an expungement
request is ineligible under the proposed time limitations; (2) a
panel has previously considered the merits of, or a court has
previously decided, an expungement request associated with the same
customer dispute information; (3) an associated person was named as
a respondent in a customer arbitration but did not request
expungement; (4) an associated person requested expungement but
withdrew or did not pursue the expungement request; or (5) 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. See Notice at
50182.
\594\ See proposed Rules 12203(c) and 13203(c). For example,
FINRA stated that the Director may decline the use of the DRS
arbitration forum if the Director determines that: (1) 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; or (2) an associated
person seeks expungement of customer dispute information other than
pursuant to proposed Rules 12805, 12800(d) and (e) or 13805, as
applicable. See Notice at 50182.
\595\ See Notice at 50182.
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No commenter supported or objected to these proposed changes. The
Commission believes that providing the Director with the authority to
deny the use of the DRS arbitration forum should enhance the integrity
of the expungement process and the CRD system.
E. Notifications to Customers and States Regarding Expungement Requests
1. Associated Persons Notify Customers
The proposed rule change would codify a practice from the Guidance
to require the associated person who files a straight-in request to
serve all customers whose customer arbitrations, civil litigations, and
customer complaints are a subject of the expungement request with a
copy of the statement of claim requesting expungement and any
answer.\596\ The panel would be authorized to decide whether
extraordinary circumstances exist that make service on the customers
impracticable.\597\ The proposed rule change would further 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.\598\ FINRA stated that these
proposed rule changes would help ensure that a customer knows about the
expungement request and has an opportunity to attend and participate in
the expungement hearing.\599\
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\596\ See proposed Rule 13805(b)(1)(A)(i) and (ii). Proposed
Rule 13805(b)(1)(A)(ii) would require the associated person to serve
a copy of the statement of claim and a copy of any answer within 10
days of filing.
\597\ See proposed Rule 13805(b)(1)(A)(i).
\598\ See proposed Rule 13805(b)(1)(A)(iv).
\599\ See Notice at 50185.
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Three commenters supported this aspect of the proposed rule
change.\600\ Two commenters reasoned that the notification requirement
would
[[Page 24318]]
encourage customer participation and reduce unopposed expungement
hearings.\601\ For the same reasons, one of these commenters further
supported the requirement that the associated person file proof of
service and copies of all communications with the panel.\602\
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\600\ See Cornell at 3; NASAA September 6 Letter at 4; St.
John's at 3.
\601\ See Cornell at 3; St. John's at 3.
\602\ See Cornell at 3.
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The proposed customer notification provision will help ensure that
customers are aware of expungement requests and have an opportunity to
participate. Further, requiring filing of proof of service and any
communications will help ensure that customers are notified in
accordance with the proposed rule change and that customers are not
inappropriately dissuaded from participating in an expungement
proceeding. Under these proposed rule changes, customers should be more
likely to participate in a hearing to decide an expungement request,
which helps ensure that the panel has a more fully formed set of
evidence upon which to base its decision. With this additional
information, the panel should be more likely to award expungement only
when appropriate, thereby helping protect the integrity of the
information in the CRD system.
2. Director Notifies Customers
To facilitate customer notification of an expungement request,
proposed Rule 13805(b)(1)(B)(i) would require an associated person to
include in any request to expunge customer dispute information a
current address for the relevant customer.\603\ To help ensure an
associated person complies with this proposed obligation, proposed Rule
13307(a)(7) would provide that an expungement request that does not
include such address is ``deficient,'' and the Director may not serve
any expungement request that does not include such address, the effect
being that such request would not move forward.\604\
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\603\ See proposed Rule 13805(b)(1)(B)(i).
\604\ Specifically, under proposed Rule 13307(a)(7), a request
for expungement that does not include a current address for the
customer would be considered deficient. Pursuant to FINRA Rule
13307(a), the Director will not serve a deficient claim, effectively
halting the expungement request until the deficiency is corrected.
See also FINRA Rule 13302.
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Proposed Rule 13805(b)(1)(B)(i) would require the Director to
notify all customers whose customer arbitrations, civil litigations, or
customer complaints are the subject of an expungement request of the
time, date, and place of any prehearing conferences and the expungement
hearing. FINRA stated that this proposed notification requirement would
facilitate customer participation in the expungement process by
providing the customer the time to plan and prepare for the
hearing.\605\ The proposed rule change would also require the Director
to: (1) include language in the notice encouraging the customer to
attend and participate; and (2) provide the notified customers with
access to all documents on the Portal relevant to the expungement
request that are filed in: (a) the arbitration requesting expungement
relief and (b) a customer-initiated arbitration brought by the customer
under the Customer Code that is a subject of the expungement
request.\606\
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\605\ See Notice at 50185.
\606\ See proposed Rule 13805(b)(1)(B)(ii); see also Notice at
50185; see also supra notes 86 and 184 and accompanying text
(discussing the Portal).
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Three commenters recommended amendments to these provisions.\607\
One of these commenters argued that for logistics reasons, customers
should only be notified once for the pre-hearing conference and should
not be notified again for the expungement hearing.\608\ Another
commenter recommended that the proposed rule change be amended to
provide that FINRA ``will `deliver' the relevant documents to customers
upon request,'' rather than providing customers with ``access.'' \609\
The third commenter recommended that FINRA amend the rule to allow
firms to provide the customer's last known address instead of the
current address, stating that an error in the listed current address in
the petition for expungement, after the appropriate diligence and
attempts to correct the error, should not preclude the filing and
granting of the expungement request.\610\
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\607\ See Grebenik; NASAA September 6 Letter at 4; Del Toro.
\608\ See Grebenik.
\609\ See NASAA September 6 Letter at 4.
\610\ See Del Toro.
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With respect to the notification requirements, FINRA stated that
customer attendance and participation in expungement hearings helps the
panel fully develop a record on which to decide the expungement
request.\611\ FINRA further stated that the associated person seeking
expungement should provide the customer's current address, so that the
Director will have the most recent contact information to timely notify
the customer of the expungement request, prehearing conferences, and
expungement hearings.\612\ FINRA accordingly declined to amend the
proposed rule change in response to these comments.\613\
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\611\ See FINRA April 3 Letter at 12.
\612\ See id. at 7.
\613\ See id. at 8, 12-13.
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FINRA likewise declined to amend the proposed rule change in
response to one commenter's suggestion that FINRA ``will deliver''
materials on request, rather than providing access.\614\ FINRA
responded that these changes were unnecessary because the Portal
currently helps ensure that customers receive necessary notifications
regarding their arbitration and mediation cases.\615\ FINRA stated that
it provides case participants with access to documents through the
Portal. FINRA explained that once registered on the Portal, a customer
may, among other things, view documents and submit documents to FINRA
and, for those customers who are unable to access the Portal, DRS would
provide paper documents upon request.\616\
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\614\ See id. at 12-13; see also supra notes 86 and 184 and
accompanying text (discussing the Portal).
\615\ See FINRA November 10 Letter at 10.
\616\ See id.
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The proposed rule change related to customer notification would
help ensure that customers are notified of expungement requests and
able to access related necessary documents. The requirement that an
associated person include a current address for the relevant customer
would help ensure that customers are notified of expungement requests
in a timely manner. Moreover, DRS will provide paper documents to
customers that may not have the ability to access the Portal upon
request. Notified customers would be more likely to participate in a
hearing to decide an expungement request, which would help ensure that
the panel has a more fully formed set of evidence upon which to base
its decision. With this additional information, the panel is more
likely to appropriately decide whether to award expungement, thereby
helping protect the integrity of the information in the CRD system.
3. FINRA Notifies State Securities Regulators
The proposed rule change would require FINRA to notify state
securities regulators, in the manner to be determined by the Director
in collaboration with state securities regulators, of an expungement
request within 15 days of receiving an expungement request.\617\ FINRA
stated that the proposed notification requirement would help ensure
that
[[Page 24319]]
state securities regulators are timely notified of expungement
requests.\618\
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\617\ See proposed Rules 12800(f)(1), 12805(b) and
13805(b)(2)(A). FINRA stated that it would make this notification in
connection with expungement requests under the Customer and Industry
Codes. See Notice at 50185 n.176.
\618\ See Notice at 50185.
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No commenter supported or objected to these proposed changes. Two
commenters, however, recommended that FINRA take further action.\619\
One commenter suggested that FINRA consider notifying state securities
regulators about separate, expungement-only hearings following a
simplified arbitration.\620\ The other commenter suggested that FINRA
provide notification to state securities regulators regarding
expungement requests ``at the time when they have the ability to become
involved--at the state court confirmation level.'' \621\
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\619\ See Miami at 7; Hennion at 6.
\620\ See Miami at 7.
\621\ Hennion at 6.
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In response, FINRA stated that FINRA Rule 2080 requires an
associated person seeking to confirm an arbitration award containing
expungement relief to name FINRA as an additional party unless this
requirement is waived by FINRA.\622\ In addition, it is FINRA's
practice to notify state regulators when it receives a complaint naming
FINRA, or a request for a waiver.\623\ Furthermore, FINRA stated that
it is not necessary for state securities regulators to participate in
separate expungement-only hearings in simplified arbitrations because
the panel already would have sufficient information upon which to
develop a complete factual record in order to make a fully-informed
decision on the expungement request.\624\ For example, expungement-only
hearings in simplified arbitrations would occur after the arbitrator
has heard the merits of the customer's case in an adversarial
process.\625\ Similarly, FINRA stated that it expects an expungement-
only hearing to be scheduled shortly after the customer's dispute is
decided or closes, increasing the likelihood of customer attendance and
participation.\626\ Accordingly, FINRA did not amend the proposed rule
change in response to these comments.\627\
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\622\ See FINRA November 10 Letter at 8 n.33.
\623\ See id.; see also FINRA Rule 2080.
\624\ See FINRA November 10 Letter at 22.
\625\ See id.
\626\ See id.
\627\ See id. at 22 and 8 n.33.
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The Commission believes that notification to state securities
regulators within 15 days of receiving an expungement request should
provide adequate notice and, for straight-in requests, allow the state
securities regulator to determine whether to participate in the
expungement proceeding. As stated above, permitting attendance and
participation by state securities regulators in straight-in expungement
proceedings should enhance the straight-in expungement process.
Specifically, inclusion of state securities regulators provides them
the opportunity to fulfill their own regulatory obligations, while at
the same time increasing the likelihood that the panel in an
expungement proceeding that may not involve a customer will hear
evidence from multiple viewpoints. With this additional information,
the panel is more likely to award expungement only when appropriate,
thereby helping protect the integrity of the information in the CRD
system. The Commission also believes that panels deciding separate
expungement-only hearings in simplified arbitrations should have
sufficient information from the underlying claim to develop a complete
factual record in order to make a fully-informed decision on the
expungement request. In this way, the rule as proposed would help
protect the integrity of the information in the CRD system. Finally,
FINRA has stated that it will continue to monitor the expungement
process to evaluate whether additional rule changes may be necessary to
further strengthen the expungement process, including whether to allow
state securities regulators to attend and participate in separate
expungement-only hearings in simplified arbitrations.\628\
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\628\ See FINRA April 3 Letter at 18-19.
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IV. Solicitation of Comments on Amendment No. 2
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 2 is consistent with the
Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an 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 10:00 a.m. and
3:00 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 May 10, 2023.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendments Nos. 1 and 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendments Nos. 1 and 2, prior to the thirtieth
day after the date of publication of notice of the filing of Amendment
No. 2 in the Federal Register.\629\ In Amendment No. 2, FINRA modified
the proposed rule change to provide that an associated person would be
precluded from filing a straight-in request if the customer dispute
information involves the same conduct that was the basis of a final
regulatory action taken by a securities regulator or SRO. The basis for
extending this prohibition is the same as the basis for the original
proposed rule change prohibiting an associated person from filing a
straight-in request if the customer dispute information is associated
with a finding of liability in an arbitration or civil litigation--
permitting an expungement claim in these circumstances would constitute
a collateral attack on the results of the underlying resolved dispute.
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\629\ See 15 U.S.C. 78s(b)(2)(C)(iii).
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After consideration of the comments FINRA received on the proposed
rule change, the Commission believes that Amendment No. 2 represents a
[[Page 24320]]
reasonable extension of, and is substantially similar to, the original
prohibition of an associated person filing a straight-in request where
the customer dispute information formed the basis for a past finding of
liability and is appropriate and responsive to commenter's concerns.
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\630\ to approve the proposed rule change, as
modified by Amendments Nos. 1 and 2, on an accelerated basis.
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\630\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change, as modified by Amendments Nos. 1 and 2, is
consistent with the provisions of Exchange Act Section 15A(b)(6),\631\
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 Commission also finds that the
proposed rule change is consistent with Section 15A(b)(5) of the
Exchange Act,\632\ which requires, among other things, that FINRA rules
provide for the equitable allocation of reasonable dues, fees and other
charges among members and issuers and other persons using any facility
or system that FINRA operates or controls.
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\631\ 15 U.S.C. 78o-3(b)(6).
\632\ 15 U.S.C. 78o-3(b)(5).
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It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \633\ that the proposed rule change (SR-FINRA-2022-024),
as modified by Amendments Nos. 1 and 2, be, and hereby is, approved on
an accelerated basis.
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\633\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\634\
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\634\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-08147 Filed 4-18-23; 8:45 am]
BILLING CODE 8011-01-P
