Notice2022-17430
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend the Codes of Arbitration Procedure To Modify the Current Process Relating to the Expungement of Customer Dispute Information
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 15, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 156 (Monday, August 15, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 156 (Monday, August 15, 2022)]
[Notices]
[Pages 50170-50200]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-17430]
[[Page 50169]]
Vol. 87
Monday,
No. 156
August 15, 2022
Part II
Securities and Exchange Commission
-----------------------------------------------------------------------
Self-Regulatory Organizations; Financial Industry Regulatory Authority,
Inc.; Notice of Filing of a Proposed Rule Change To Amend the Codes of
Arbitration Procedure To Modify the Current Process Relating to the
Expungement of Customer Dispute Information; Notice
Federal Register / Vol. 87 , No. 156 / Monday, August 15, 2022 /
Notices
[[Page 50170]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95455; File No. SR-FINRA-2022-024]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
the Codes of Arbitration Procedure To Modify the Current Process
Relating to the Expungement of Customer Dispute Information
August 9, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on July 29, 2022, the Financial Industry
Regulatory Authority, Inc. (``FINRA'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by FINRA. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend the Code of Arbitration Procedure for
Customer Disputes (``Customer Code'') and the Code of Arbitration
Procedure for Industry Disputes (``Industry Code'') (together,
``Codes'') to modify the current process relating to the expungement of
customer dispute information.
The proposed rule change would amend the Codes to impose
requirements on expungement requests (a) filed by an associated person
during an investment-related, customer-initiated arbitration
(``customer arbitration''), or filed by a party to the customer
arbitration on behalf of an associated person (``on-behalf-of
request''), or (b) filed by an associated person separate from a
customer arbitration (``straight-in request''). Specifically, the
proposed rule change would: (1) require that a straight-in request be
decided by a three-person panel that is randomly selected from a roster
of experienced public arbitrators with enhanced expungement training;
\3\ (2) prohibit parties to a straight-in request from agreeing to
fewer than three arbitrators to consider their expungement requests,
striking any of the selected arbitrators, stipulating to an
arbitrator's removal, or stipulating to the use of pre-selected
arbitrators; (3) provide notification to state securities regulators of
all expungement requests and a mechanism for state securities
regulators to attend and participate in expungement hearings in
straight-in requests; (4) impose strict time limits on the filing of
straight-in requests; (5) codify and update the best practices in the
Notice to Arbitrators and Parties on Expanded Expungement Guidance
(``Guidance'') applicable to all expungement hearings, including
amendments to establish additional requirements for expungement
hearings, to facilitate customer attendance and participation in
expungement hearings and to codify the panel's \4\ ability to request
any evidence relevant to the expungement request; \5\ (6) require the
unanimous agreement of the panel to issue an award containing
expungement relief; and (7) establish procedural requirements for
filing expungement requests, including for on-behalf-of requests. The
proposed rule change would also amend the Customer Code to specify
procedures for requesting expungement of customer dispute information
during simplified arbitrations.
---------------------------------------------------------------------------
\3\ Among other requirements, public arbitrators are not
employed in the securities industry and do not devote 20 percent or
more of their professional work to the securities industry or to
parties in disputes concerning investment accounts or transactions
or employment relationships within the financial industry. See FINRA
Rules 12100(aa) and 13100(x).
\4\ Under the Codes, the term ``panel'' means the arbitration
panel, whether it consists of one or more arbitrators. See FINRA
Rules 12100(u) and 13100(s). Unless otherwise specified, the rule
filing uses the term ``panel'' to mean either a panel or single
arbitrator.
\5\ See FINRA Dispute Resolution Services, Notice to Arbitrators
and Parties on Expanded Expungement Guidance, <a href="https://www.finra.org/arbitration-and-mediation/notice-arbitrators-and-parties-expanded-expungement-guidance">https://www.finra.org/arbitration-and-mediation/notice-arbitrators-and-parties-expanded-expungement-guidance</a> (last updated Sept. 2017).
---------------------------------------------------------------------------
The text of the proposed rule change is available on FINRA's
website at <a href="http://www.finra.org">http://www.finra.org</a>, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
I. Background and Discussion
A. Overview
Over the course of many years, FINRA has adopted a number of rules
\6\ governing the use of the arbitration forum administered by FINRA
Dispute Resolution Services (``DRS'') to seek expungement of customer
dispute information.\7\ These rules seek to balance the interests of
securities regulators in having accurate and relevant information to
fulfill their regulatory responsibilities; the interests of investors
in having access to accurate and meaningful information about
associated persons with whom they may entrust their money; the
interests of broker-dealer firms in having accurate information for use
in making informed employment decisions; and the interests of the
brokerage community in having a fair process to address inaccurate
customer dispute information.
---------------------------------------------------------------------------
\6\ A chronology of the steps FINRA has taken to strengthen the
expungement framework is available at <a href="https://www.finra.org/rules-guidance/key-topics/expungement">https://www.finra.org/rules-guidance/key-topics/expungement</a>.
\7\ The DRS arbitration forum is operated in accordance with
rules approved by the SEC and is subject to ongoing oversight by the
SEC. Decisions in the DRS arbitration forum are made by independent
arbitrators selected by the parties, not by DRS staff. In almost
every arbitration proceeding seeking expungement of customer dispute
information, all or a majority of the arbitrators reviewing requests
for expungement are public arbitrators (who, among other
requirements, have never been employed in the securities industry).
See also supra note 3. DRS's role in the arbitration process is to
administer cases brought to the DRS arbitration forum in a neutral,
efficient and fair manner.
---------------------------------------------------------------------------
FINRA is concerned, however, that the current expungement process
is not working as intended--as a remedy that is appropriate only in
limited circumstances in accordance with the narrow standards in FINRA
rules. As a result, over the past several years, FINRA has taken
numerous, meaningful steps to address the concerns that FINRA and other
interested parties have identified with the current expungement process
\8\ and to enhance that process, including by:
---------------------------------------------------------------------------
\8\ See infra Item II.A.1.I.D., ``Concerns With the Current
Expungement Process,'' (discussing concerns with the current
expungement process).
---------------------------------------------------------------------------
<bullet> publishing Regulatory Notice 17-42 to seek comment on
proposed changes
[[Page 50171]]
to further enhance the current expungement process; \9\
---------------------------------------------------------------------------
\9\ Regulatory Notice 17-42 (December 2017) (``Notice''),
<a href="https://www.finra.org/rules-guidance/notices/17-42">https://www.finra.org/rules-guidance/notices/17-42</a>. The Notice
requested comment on, among other things: establishing a roster of
public chairpersons with additional training and experience from
which a panel would be selected to decide straight-in requests;
imposing time limits on when an associated person can request
expungement in a straight-in request; limiting an associated person
who is named as a party in a customer arbitration to one opportunity
to request expungement, and that opportunity must be exercised
during the customer arbitration; codifying a party's ability to
request expungement on behalf of an associated person who is the
subject of a customer arbitration, but unnamed, and establishing
procedures for such requests; and applying a minimum fee to
expungement requests.
---------------------------------------------------------------------------
<bullet> amending FINRA rules to apply minimum fees to requests for
expungement of customer dispute information to address concerns about
practices to avoid fees that were intended to be applicable to
expungement requests; \10\ and
---------------------------------------------------------------------------
\10\ An expungement request is a non-monetary or not specified
claim (``non-monetary claim''). The fees applicable to non-monetary
claims are higher than those applicable to small monetary claims.
See FINRA Rule 13900(a)(1). If an associated person files a
straight-in request and does not add a monetary claim to the
request, the associated person will be assessed the filing fee
associated with a non-monetary claim. The Codes require that non-
monetary claims are decided by a three-person panel unless the
parties agree in writing to one arbitrator. See FINRA Rules 12401
and 13401. FINRA amended the Codes to apply minimum fees to
expungement requests, whether the request is made as part of the
customer arbitration or the associated person files a straight-in
request. As a result of the amendments, parties requesting
expungement can no longer avoid the fees intended for such requests
under the Codes or automatically qualify for a single arbitrator.
The amendments also apply a minimum process fee and member surcharge
to straight-in requests, as well as a minimum hearing session fee to
expungement-only hearings. See Securities Exchange Act Release No.
88945 (May 26, 2020), 85 FR 33212 (June 1, 2020) (Order Approving
File No. SR-FINRA-2020-005); see also Regulatory Notice 20-25 (July
20, 2020) (announcing a September 14, 2020 effective date), <a href="https://www.finra.org/rules-guidance/notices/20-25">https://www.finra.org/rules-guidance/notices/20-25</a>.
---------------------------------------------------------------------------
<bullet> in September 2020, filing with the SEC a rule filing to
make several significant enhancements to the current expungement
process by establishing special arbitration procedures for expungement
requests (``2020 Rule Filing'').\11\
---------------------------------------------------------------------------
\11\ See infra note 263. The 2020 Rule Filing, comments received
in response to the filing and FINRA's responses to the comments are
discussed below in Item II.C.
---------------------------------------------------------------------------
On May 28, 2021, following discussions with SEC staff, FINRA
withdrew the 2020 Rule Filing from the SEC in order to consider whether
modifications to the filing were appropriate in response to concerns
raised by SEC staff and commenters.\12\ At that time, FINRA indicated
its intent to continue pursuing enhancements to the current expungement
process, while also continuing discussions with the North American
Securities Administrators Association (``NASAA'') and other interested
parties regarding a more fundamental redesign of the current
expungement process, separate from and in addition to the changes
included in the 2020 Rule Filing.\13\
---------------------------------------------------------------------------
\12\ See FINRA Statement on Temporary Withdrawal of Specialized
Arbitrator Roster Rule Filing (May 28, 2021), <a href="https://www.finra.org/media-center/newsreleases/2021/finra-statement-temporary-withdrawal-specialized-arbitrator-roster">https://www.finra.org/media-center/newsreleases/2021/finra-statement-temporary-withdrawal-specialized-arbitrator-roster</a>.
\13\ See supra note 12. In addition, FINRA recently published a
Discussion Paper on Expungement of Customer Dispute Information
(April 2022) (``Discussion Paper''), <a href="https://www.finra.org/sites/default/files/2022-04/Expungement_Discussion_Paper.pdf">https://www.finra.org/sites/default/files/2022-04/Expungement_Discussion_Paper.pdf</a>. The
Discussion Paper provides background and data regarding expungement
of customer dispute information and explores potential alternatives
to the current expungement process. The Discussion Paper also
explains how the proposed changes in the 2020 Rule Filing would
address key concerns with the current expungement process and that
FINRA's Board of Governors was continuing to consider further
changes to enhance the 2020 Rule Filing.
---------------------------------------------------------------------------
FINRA believes the proposed amendments discussed below are
responsive to the concerns that have been identified with the current
expungement process and would help protect the integrity of the Central
Registration Depository (``CRD[supreg]''), the central licensing and
registration system used by the U.S. securities industry and its
regulators,\14\ by making substantial improvements to the current
expungement process. Key proposed changes include:
---------------------------------------------------------------------------
\14\ See infra note 18 and accompanying text (discussing the CRD
system).
---------------------------------------------------------------------------
[rtarr8] For All Requests for Expungement of Customer Dispute
Information:
<bullet> Requiring that the panel deciding the expungement request
issue an award containing expungement relief only if the panel
unanimously finds that the information to be expunged is factually
impossible, clearly erroneous or false, or that the associated person
was not involved in the alleged misconduct.
<bullet> Providing state securities regulators with notification of
all expungement requests.
<bullet> Requiring associated persons to appear at the expungement
hearing in person or by video conference.
<bullet> Facilitating customer attendance and participation by
notifying customers of the time, date and place of any prehearing
conferences and the expungement hearing; codifying that customers are
entitled to attend and participate in prehearing conferences and the
expungement hearing and to be represented, if they choose; and
providing customers with access to all relevant documents filed in the
arbitration.
<bullet> Specifically authorizing the panel to request any
documentary, testimonial or other evidence that it deems relevant from
the broker-dealer firm or associated person seeking expungement.
<bullet> Requiring that the panel provide enough detail in the
award to explain its rationale for including expungement relief in the
award.
<bullet> Precluding an associated person from requesting
expungement of customer dispute information if a panel previously
considered the merits of, or a court previously denied, a request to
expunge the same customer dispute information.
<bullet> Prohibiting an associated person who withdraws an
expungement request from refiling the request at a later date, thereby
preventing ``arbitrator shopping.''
[rtarr8] For Straight-in Requests: \15\
---------------------------------------------------------------------------
\15\ As discussed in more detail below, under the proposed
amendments, a straight-in request would include a request to expunge
customer dispute information from the CRD system filed under the
Industry Code: (1) by an associated person named in a customer
arbitration after the customer arbitration closes other than by
award or by award without a hearing; (2) arising from a customer
complaint or civil litigation rather than a customer arbitration; or
(3) by an associated person who was the subject of a customer
arbitration, but unnamed, and where a named party in the customer
arbitration did not request expungement on behalf of the unnamed
associated person, or where a named party made an on-behalf-of
request, but the customer arbitration closed other than by award or
by award without a hearing.
---------------------------------------------------------------------------
<bullet> Imposing strict time limits within which associated
persons may request expungement--DRS would deny the DRS arbitration
forum if the expungement request is made:
[ssquf] more than three years after the date the customer complaint
was initially reported in the CRD system (if the customer complaint
does not evolve into a customer-initiated arbitration or civil
litigation); or
[ssquf] more than two years after the close of the customer-
initiated arbitration or civil litigation associated with the customer
dispute information.
<bullet> Requiring that straight-in requests be filed under the
Industry Code against the broker-dealer firm at which the associated
person was associated at the time of the events giving rise to the
customer dispute.
<bullet> Permitting an authorized representative of state
securities regulators to attend and participate as a non-party in
prehearing conferences and the expungement hearing to the same extent
as customers could attend and participate.
<bullet> Requiring that all straight-in requests be decided by a
three-person panel, randomly selected from a roster of experienced
public arbitrators with enhanced expungement training and with no
significant ties to the industry (``Special Arbitrator Roster'').
[[Page 50172]]
<bullet> Prohibiting the parties from: (1) agreeing to fewer than
three arbitrators to consider their expungement requests; (2) striking
any of the selected arbitrators; (3) stipulating to an arbitrator's
removal; or (4) stipulating to the use of pre-selected arbitrators.\16\
---------------------------------------------------------------------------
\16\ Under the Codes, the DRS arbitrator selection process uses
the Neutral List Selection System (``NLSS''), a computer algorithm,
to generate lists of arbitrators on a random basis from DRS's
rosters of arbitrators for the selected hearing location. After the
parties receive the arbitrator lists, the parties select their panel
through a process of striking and ranking the arbitrators on the
lists. Under the proposed amendments, NLSS would randomly select
three arbitrators from the Special Arbitrator Roster to consider the
straight-in request. The parties, whose interests may be aligned,
would not have the ability to select the arbitrators.
---------------------------------------------------------------------------
[rtarr8] For Expungement Requests Considered During a Customer
Arbitration:
<bullet> Requiring an associated person named in a customer
arbitration to request expungement during that customer arbitration or
forfeit the opportunity to request expungement in any subsequent
proceeding, thereby ensuring that the panel that hears the full merits
of a customer arbitration also reviews a related expungement request.
<bullet> Conditioning and limiting the ability of a party to a
customer arbitration to request expungement during the customer
arbitration on behalf of an associated person who is the subject of a
customer arbitration, but unnamed, so that the associated person cannot
later claim they were not aware of the prior expungement request made
on their behalf.
Prior to discussing each of the proposed amendments, FINRA provides
below background information regarding the reporting of customer
dispute information to the CRD system and its public disclosure through
BrokerCheck[supreg],\17\ the current process for requesting expungement
through the DRS arbitration forum and concerns regarding the current
process.
---------------------------------------------------------------------------
\17\ See infra note 22 and accompanying text.
---------------------------------------------------------------------------
B. Customer Dispute Information in the CRD System
FINRA is mandated by federal statute to collect and maintain
registration information about broker-dealer firms and their associated
persons. To satisfy this statutory responsibility, FINRA operates the
CRD system, the central licensing and registration system used by
FINRA, the SEC, other self-regulatory organizations (``SROs''), state
securities regulators and broker-dealer firms.\18\ FINRA operates the
CRD system pursuant to policies developed by FINRA and NASAA. FINRA,
state securities regulators and the SEC use the CRD system as an
important source of regulatory information to help inform
registrations, examinations, investigations and disciplinary actions to
protect investors and safeguard the markets. In addition, broker-dealer
firms use information in the CRD system to help them make informed
employment decisions.\19\
---------------------------------------------------------------------------
\18\ The concept for the CRD system was developed by FINRA
jointly with NASAA. The CRD system fulfills FINRA's statutory
obligation to establish and maintain a system to collect and retain
registration information set forth in Section 15A(i) of the Exchange
Act. NASAA and state regulators play a critical role in the ongoing
development and implementation of the CRD system.
\19\ As of December 31, 2021, over 60 million registrations for
associated persons have been processed through the CRD system over a
period spanning more than 20 years.
---------------------------------------------------------------------------
In general, the information in the CRD system is reported by
registered broker-dealer firms, associated persons and regulatory
authorities in response to questions on the uniform registration
forms.\20\ These forms are used to collect registration information,
which includes, among other things, administrative, regulatory,
criminal history, financial and other information about associated
persons, such as investment-related, customer-initiated arbitrations,
civil litigations or customer complaints (i.e., ``customer dispute
information''). Customer dispute information maintained in the CRD
system is reported through Forms U4 and U5.\21\
---------------------------------------------------------------------------
\20\ The uniform registration forms are Form BD (Uniform
Application for Broker-Dealer Registration), Form BDW (Uniform
Request for Broker-Dealer Withdrawal), Form BR (Uniform Branch
Office Registration Form), Form U4 (Uniform Application for
Securities Industry Registration or Transfer), Form U5 (Uniform
Termination Notice for Securities Industry Registration) and Form U6
(Uniform Disciplinary Action Reporting Form).
\21\ FINRA, NASAA and state securities regulators developed
Forms U4 and U5. Any amendments to these uniform registration forms
require collaboration with, and agreement between FINRA, NASAA and
state securities regulators before being filed with the SEC for
approval. Several questions on Forms U4 and U5 require associated
persons to disclose certain investment-related, customer-initiated
arbitrations, civil litigations or customer complaints which allege
sales practice violations. See Form U4, Question 14I, <a href="https://www.finra.org/sites/default/files/form-u4.pdf">https://www.finra.org/sites/default/files/form-u4.pdf</a> and Form U5, Question
7E, <a href="https://www.finra.org/sites/default/files/form-u5.pdf">https://www.finra.org/sites/default/files/form-u5.pdf</a>.
---------------------------------------------------------------------------
Pursuant to rules approved by the SEC and pursuant to its statutory
mandate, FINRA makes specific CRD information publicly available
through BrokerCheck.\22\ BrokerCheck is a free tool available on
FINRA's website to help investors make informed choices about the
associated persons and broker-dealer firms with whom they may conduct
business.\23\ As part of its statutory obligation, FINRA publishes on
BrokerCheck extensive disclosure information, including customer
dispute information for associated persons who are currently or were
formerly registered with FINRA.\24\
---------------------------------------------------------------------------
\22\ BrokerCheck fulfills FINRA's statutory obligation under
Section 15A(i) of the Exchange Act to establish and maintain a
readily accessible electronic or other process, to receive and
promptly respond to inquiries regarding registration information on,
among others, broker-dealer firms and associated persons. A detailed
description of the information made available through BrokerCheck is
available at <a href="http://www.finra.org/investors/about-brokercheck">http://www.finra.org/investors/about-brokercheck</a>.
\23\ In 2021 alone, almost 38.3 million searches of firms and
financial professionals were conducted on BrokerCheck.
\24\ As of December 31, 2021, BrokerCheck disclosed information
about approximately 3,400 broker-dealer firms and approximately
612,000 associated persons. BrokerCheck also disclosed information
about more than 17,000 broker-dealer firms and 548,000 associated
persons formerly registered with FINRA. Formerly registered
associated persons, although no longer in the securities industry in
a registered capacity, may work in other investment-related
industries or may seek to attain other positions of trust with
potential investors. Pursuant to FINRA rules which are approved by
the SEC, records for formerly registered associated persons are
available in BrokerCheck for 10 years after an associated person
leaves the brokerage industry, and associated persons who are the
subject of disciplinary actions and certain other disclosure events
remain on BrokerCheck permanently.
---------------------------------------------------------------------------
The collection of registration information in the CRD system and
the disclosure of the information through BrokerCheck serves three
important purposes: (1) allowing investors to obtain information about
an associated person or broker-dealer firm with whom they may do
business; (2) providing securities regulators with a critical
regulatory tool in overseeing the activities of associated persons and
in detecting regulatory problems; and (3) providing broker-dealer firms
with information for use in making informed employment decisions. The
value of the information is dependent on its completeness and accuracy.
The absence of accurate information, as well as the presence of clearly
inaccurate information, decreases the reliability and hence the value
of the disclosure regime.
Sometimes, associated persons seek to remove, or ``expunge,''
customer dispute information from the CRD system and, thereby, from
BrokerCheck. To do this, FINRA rules require that an associated person
must obtain an order from a court of competent jurisdiction (1)
directing such expungement or (2) confirming an arbitration award
containing expungement relief.\25\ FINRA will expunge customer dispute
information from the CRD system only pursuant to a court order.
---------------------------------------------------------------------------
\25\ See FINRA Rule 2080.
---------------------------------------------------------------------------
As discussed in more detail below, FINRA rules specify a narrow set
of
[[Page 50173]]
circumstances in which expungement of customer dispute information from
the CRD system is appropriate. An arbitrator considering an expungement
request in the DRS arbitration forum must make a finding that the
information to be expunged is factually impossible, clearly erroneous
or false, or that the associated person was not involved in the alleged
misconduct.\26\ When these standards were approved by the SEC, it was
contemplated that expungement would be an extraordinary remedy that
would be allowed only in these limited circumstances.\27\
---------------------------------------------------------------------------
\26\ See FINRA Rules 2080, 12805 and 13805.
\27\ See Securities Exchange Act Release No. 58886 (October 30,
2008), 73 FR 66086 (November 6, 2008) (Order Approving File No. SR-
FINRA-2008-010).
---------------------------------------------------------------------------
C. Requesting Expungement Through the DRS Arbitration Forum
The process of seeking expungement through the DRS arbitration
forum originally developed when associated persons who were not found
liable in a customer arbitration asked the panel in that same case to
expunge the underlying customer dispute from the CRD system. Use of the
DRS arbitration forum for expungement subsequently expanded when
associated persons began requesting expungement through straight-in
requests. Typically, these straight-in requests for expungement are
filed after the customer arbitration settles or where a customer
complaint has not evolved into a customer arbitration. Straight-in
requests present inherent difficulties and panels deciding straight-in
requests issue awards containing expungement relief more often than
panels deciding expungement requests made in customer arbitrations.\28\
---------------------------------------------------------------------------
\28\ From January 2016 to December 2021 (the ``sample period''),
an arbitrator or panel issued awards containing expungement relief
in response to 58 percent of requests made during a customer
arbitration but issued awards containing expungement relief in
response to 84 percent of straight-in requests. See infra Item
II.B.2., ``Economic Baseline,'' for further discussion.
---------------------------------------------------------------------------
For either type of expungement request initiated in the DRS
arbitration forum, an independent arbitrator or a panel of independent
arbitrators decides whether the party requesting expungement has
established one of the Rule 2080(b)(1) grounds for expungement.\29\
Pursuant to FINRA rules, in order to issue an award containing
expungement relief, the panel shall first hold a recorded hearing
session regarding the appropriateness of expungement of the customer
dispute information, and in cases involving settlements, review
settlement documents and consider the amount of payments made to any
party and any other terms and conditions of the settlement.\30\
---------------------------------------------------------------------------
\29\ See infra note 31 and accompanying text (discussing the
grounds for issuing an award containing expungement relief).
\30\ See FINRA Rules 12805 and 13805.
---------------------------------------------------------------------------
FINRA rules also require the panel to specify in the award which of
the Rule 2080(b)(1) grounds serves as a basis for the expungement order
and provide a brief written explanation of the reasons for its finding
that one or more of the Rule 2080(b)(1) grounds applies to the facts of
the case.\31\ Thus, to include expungement relief in an award, the
panel must find that: (1) the claim, allegation or information is
factually impossible or clearly erroneous; (2) the associated person
was not involved in the alleged investment-related sales practice
violation, forgery, theft, misappropriation or conversion of funds; or
(3) the claim, allegation or information is false.\32\ Arbitration
awards are final and binding unless vacated based on one of the limited
grounds set forth in applicable state or federal statutes.\33\
---------------------------------------------------------------------------
\31\ See supra note 30; see also Securities Exchange Act Release
No. 58886 (October 30, 2008), 73 FR 66086, 66087 (November 6, 2008)
(Order Approving File No. SR-FINRA-2008-010) (stating that new Rules
12805 and 13805 require the arbitration panel to indicate ``which of
the grounds for expungement in Rule [2080](b)(1)(A)-(C) serves as
the basis for the expungement . . . ''); Regulatory Notice 08-79
(December 2008) (stating that ``[t]he arbitration panel must
indicate which of the grounds for expungement under Rule
[2080](b)(1)(A)-(C) serve as the basis for their expungement order,
and provide a brief written explanation of the reasons for ordering
expungement''); FINRA Dispute Resolution Services Arbitrators Guide,
p. 74, <a href="https://www.finra.org/sites/default/files/arbitrators-ref-guide.pdf">https://www.finra.org/sites/default/files/arbitrators-ref-guide.pdf</a> (explaining that ``FINRA Rule 2080 establishes procedures
to ensure that expungement occurs only when the arbitrators find and
document one of [the three grounds that are listed in FINRA Rule
2080(b)]''); Guidance, supra note 5. DRS's Basic Arbitrator Training
Program also explains that expungement may occur only after the
arbitrators find and document one of these three grounds. See also
infra note 162.
\32\ See FINRA Rules 2080(b)(1), 12805 and 13805.
\33\ Arbitration awards are subject to very limited judicial
review under the Federal Arbitration Act and state arbitration
statutes. A court of competent jurisdiction will typically confirm
an award unless it is vacated or modified. Generally, an award that
contains expungement of customer dispute information will not be
vacated unless there is evidence that the panel exceeded its
authority, was biased, or engaged in misconduct. See 9 U.S.C. 10
(providing grounds for vacatur of an arbitration award under the
Federal Arbitration Act).
---------------------------------------------------------------------------
These FINRA rules are supplemented with extensive guidance and
training provided to DRS's independent arbitrators. DRS has enhanced
its expungement training for arbitrators to emphasize the importance of
the information in the CRD system and BrokerCheck, and to underscore
the arbitrator's important role in maintaining the relevancy and
integrity of the information in those systems. DRS requires arbitrators
to take mandatory online training on expungement to be eligible to
serve as an arbitrator. The training includes materials that
arbitrators should review when considering expungement requests, with a
particular focus on the Guidance, first published in 2013 and expanded
further periodically thereafter.\34\ The Guidance explains the
requirements of FINRA Rules 12805 and 13805 and provides arbitrators
with best practices and recommendations to follow when deciding
expungement requests.\35\
---------------------------------------------------------------------------
\34\ See Guidance, supra note 5.
\35\ See Guidance, supra note 5. DRS also periodically provides
additional materials to arbitrators to keep them informed about any
changes to the expungement rules or DRS arbitration forum practices.
DRS offers an updated online ``Neutral Workshop'' on expungement,
which further emphasizes the best practices described in the
Guidance. A Neutral Workshop is an online discussion between or
among experienced arbitrators on a specific arbitration topic, with
a DRS staff member as a moderator. The discussions are posted on
FINRA's website as a free, educational tool. Additional information
about expungement rules and DRS arbitration forum practices have
been provided to arbitrators via a number of articles in a DRS staff
quarterly newsletter, The Neutral Corner, which provides arbitrators
and mediators with updates on important rules and procedures within
the DRS arbitration forum and is distributed to FINRA neutrals
(arbitrators and mediators) and published on FINRA's website. See,
e.g., The Neutral Corner Volume 1-2016 (Changes to Expungement
Requests), <a href="https://www.finra.org/sites/default/files/The_Neutral_Corner_Volume_1_2016_0.pdf">https://www.finra.org/sites/default/files/The_Neutral_Corner_Volume_1_2016_0.pdf</a>; The Neutral Corner Volume 4-
2015 (Questions and Answers: Parties Making Second Expungement
Requests After Previous Denial), <a href="https://www.finra.org/sites/default/files/The_Neutral%20Corner_Volume_4_2015.pdf">https://www.finra.org/sites/default/files/The_Neutral%20Corner_Volume_4_2015.pdf</a>; The Neutral
Corner Volume 1-2015 (Updated Expungement Guidance), <a href="https://www.finra.org/sites/default/files/Neutral_Corner_Volume.1_2015.pdf">https://www.finra.org/sites/default/files/Neutral_Corner_Volume.1_2015.pdf</a>;
and The Neutral Corner Volume 3-2014 (Prohibited Conditions Relating
to Expungement of Customer Dispute Information; Expanded Expungement
Guidance; Questions and Answers: Expungement; Expungement Training:
Updated to Include Rule 2081), <a href="https://www.finra.org/sites/default/files/Neutral%20Corner_Volume%203_0.pdf">https://www.finra.org/sites/default/files/Neutral%20Corner_Volume%203_0.pdf</a>.
---------------------------------------------------------------------------
As stated above, FINRA will expunge customer dispute information
from the CRD system only pursuant to a court order. FINRA Rule 2080,
which was developed in close consultation with representatives of NASAA
and state securities regulators, provides that associated persons
seeking expungement of customer dispute information from the CRD system
must obtain an order from a court of competent jurisdiction directing
expungement relief or confirming an arbitration award that contains
expungement relief.\36\ If a court directs
[[Page 50174]]
expungement or confirms an arbitration award containing expungement,
the customer dispute information is removed from the CRD system, and is
no longer made public through BrokerCheck.
---------------------------------------------------------------------------
\36\ FINRA Rule 2080(a). FINRA Rule 2080 also requires that
FINRA be named as an additional party in any court proceeding
related to the expungement of customer dispute information, unless
FINRA waives being named. See FINRA Rule 2080(b).
---------------------------------------------------------------------------
D. Concerns With the Current Expungement Process
While commenters have raised concerns generally about associated
persons' use of the DRS arbitration forum to seek expungement, their
concerns have been particularly focused on straight-in requests. Some
of these concerns, however, also apply to expungement requests filed in
customer arbitrations that settle, where the panel from the customer
arbitration then holds a hearing to consider the expungement
request.\37\
---------------------------------------------------------------------------
\37\ Concerns with the expungement process were previously
considered by the FINRA Dispute Resolution Task Force (``Task
Force''), whose members included representatives from the industry
and the public with a broad range of interests in securities dispute
resolution. See FINRA Dispute Resolution Task Force, <a href="https://www.finra.org/arbitration-mediation/finra-dispute-resolution-task-force">https://www.finra.org/arbitration-mediation/finra-dispute-resolution-task-force</a>. FINRA formed the Task Force to consider possible enhancements
to the DRS arbitration and mediation forum. At the time, the Task
Force noted that the majority of issues that arise in the
expungement process are those involving settled cases that do not go
to final resolution because in such cases: (1) the panel selected by
the parties may not have heard the full merits of the customer
dispute and, therefore, may not bring to bear any special insights
in determining whether to grant an expungement request and (2)
claimants or their counsel have little incentive to participate in
an expungement hearing once their dispute has been settled. The Task
Force unanimously recommended, in its final report, the creation of
a special arbitration panel consisting of experienced arbitrators
from the chairperson roster who have received enhanced training on
expungement to decide expungement requests in settled customer
arbitrations. See Final Report and Recommendations of the FINRA
Dispute Resolution Task Force (Dec. 16, 2015), <a href="http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf">http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf</a>. The Task Force
issued its final report with 51 recommendations. DRS has taken
action on all of the 51 recommendations. See FINRA Dispute
Resolution Task Force Recommendations Final Status Report (Jan. 15,
2019), <a href="https://www.finra.org/sites/default/files/DR_task_report_status_011519.pdf">https://www.finra.org/sites/default/files/DR_task_report_status_011519.pdf</a>.
---------------------------------------------------------------------------
First, straight-in requests often involve aged customer dispute
information reported on the associated person's CRD record a number of
years prior to the expungement request.\38\ As a result, documents or
information relating to the dispute may no longer be available.\39\
---------------------------------------------------------------------------
\38\ FINRA rules provide that no claim shall be eligible for
submission to arbitration under the Codes where six years have
elapsed from the occurrence or event giving rise to the claim. See
FINRA Rules 12206(a) and 13206(a). This six-year eligibility rule
applies to all arbitration claims, including those requesting
expungement of customer dispute information. The issue of
eligibility may be raised in a motion by the parties or sua sponte
by the arbitrators. See Horst v. FINRA, No. A-18-777960-C (Dist. Ct.
Nevada Oct. 25, 2018) (Order Denying Motion to Vacate Arbitration
Award). In addition, FINRA Rules 12409 and 13413 provide that the
arbitrators have the authority to interpret and determine the
applicability of all provisions under the Codes. Thus, the decision
of whether to dismiss a claim pursuant to this six-year eligibility
rule is within the sole discretion of the panel. See Howsam v. Dean
Witter Reynolds, 537 U.S. 79, 85-86 (2002) (finding that an
arbitrator properly decides issues of eligibility). Such
interpretations and decisions are final and binding upon the
parties.
\39\ For example, during the sample period, approximately three-
fifths of the 6,476 customer dispute information disclosures were
sought to be expunged in straight-in requests that were filed six
years or longer after the close of a customer arbitration or the
initial reporting of the customer complaint.
---------------------------------------------------------------------------
Second, although the Guidance provides that an arbitrator must
ensure the customer has notice and an opportunity to participate in the
expungement hearing, customers and their representatives typically do
not participate in hearings in straight-in requests and, therefore, the
panel may receive information only from the associated person
requesting expungement.\40\
---------------------------------------------------------------------------
\40\ See also supra note 37 (discussing similar concerns with
expungement hearings in settled customer arbitrations).
---------------------------------------------------------------------------
Third, the broker-dealer firm named in the straight-in request by
the associated person may not have any relevant documents pertaining to
the customer dispute because the event occurred while the associated
person was employed at a different firm, or the respondent firm may
support the expungement request because it has an interest in removing
negative information from the associated person's CRD record.\41\
---------------------------------------------------------------------------
\41\ FINRA rules do not currently specify who associated persons
must name when filing a straight-in request. Typically, associated
persons file their straight-in requests against the broker-dealer
firm at which the associated person is currently employed. On rare
occasions, straight-in requests are filed against a customer. As
discussed below, the proposed amendments would prohibit these
filings against the customer. See proposed Rule 12805(a)(3).
---------------------------------------------------------------------------
Fourth, associated persons are also making repeated attempts to
seek expungement of the same customer dispute information. For example,
some associated persons make requests for expungement (by filing
straight-in requests) after withdrawing or deciding not to pursue an
expungement request made in the customer arbitration, presumably
believing that another panel that has not heard the merits of the
customer's claim may be more likely to decide expungement in their
favor. FINRA is concerned about this practice of ``arbitrator
shopping,'' particularly when associated persons withdraw an original
expungement request after the panel has been made aware of evidence
that could result in the denial of the expungement request.
FINRA has also observed that persons who are not named as a party
in a customer arbitration may attempt to seek expungement (using
straight-in requests) after expungement was denied in the customer
arbitration to which they were not a party, claiming they were not
aware of the expungement request in the customer arbitration.\42\ In
addition, FINRA has observed that associated persons are moving to
vacate arbitration awards that deny expungement relief and then seeking
expungement in a new proceeding.\43\
---------------------------------------------------------------------------
\42\ In these circumstances, the customer arbitration is filed
against the broker-dealer firm, without formally naming the
associated person, but alleging that the associated person was
involved in the alleged violation. In 2009, the SEC approved
amendments to Forms U4 and U5 to require a broker-dealer firm to
report allegations of sales practice violations made against an
associated person in an arbitration or a civil litigation even when
the associated person is not a named party in the proceeding. The
information reported about such disputes is now maintained in the
CRD system as part of the associated person's record and is
disclosed through BrokerCheck. See Securities Exchange Act Release
No. 59916 (May 13, 2009), 74 FR 23750 (May 20, 2009) (Order
Approving File No. SR-FINRA-2009-008).
These ``unnamed persons'' may seek to expunge customer dispute
information from the CRD system by: (1) asking a party to the
customer arbitration, usually the firm, to request expungement on
their behalf; (2) seeking to intervene in the customer arbitration;
(3) initiating a new arbitration in which the unnamed person
requests expungement and names the customer or firm as the
respondent; or (4) seeking expungement in a court of competent
jurisdiction.
\43\ If an award denying expungement is vacated and the
associated person then seeks expungement in court, FINRA may oppose
expungement in court if FINRA was not provided notice or an
opportunity to be heard in the proceeding to vacate the award.
---------------------------------------------------------------------------
As discussed in detail below, the proposed amendments would make
significant enhancements to the current expungement process. These
enhancements would address the concerns identified by FINRA, the Task
Force and other interested parties and provide additional safeguards
for ensuring that the information maintained in the CRD system and
disclosed through BrokerCheck is accurate and complete.\44\
---------------------------------------------------------------------------
\44\ The proposed rule change would apply to all members,
including members that are funding portals or have elected to be
treated as capital acquisition brokers (``CABs''), given that the
funding portal and CAB rule sets incorporate the impacted FINRA
rules by reference.
---------------------------------------------------------------------------
II. Proposed Rule Change
Under the proposed rule change, an associated person would only be
permitted to seek expungement of customer dispute information in the
[[Page 50175]]
DRS arbitration forum by complying with the requirements of proposed
Rules 12805 (expungement requests in a customer arbitration), 13805
(straight-in requests under the Industry Code) or 12800(d) (expungement
requests in a simplified customer arbitration). The discussion below of
the proposed rule change is divided into seven areas: (A) requests for
expungement under the Customer Code; (B) straight-in requests under the
Industry Code and the Special Arbitrator Roster; (C) limitations on
expungement requests; (D) requirements relating to all expungement
hearings; (E) notifications to customers and to state securities
regulators regarding expungement requests; (F) attendance and
participation of an authorized representative of state securities
regulators in straight-in requests; and (G) expungement requests during
simplified customer arbitrations.
A. Requests for Expungement Under the Customer Code
FINRA Rule 12805 sets forth requirements that arbitrators must meet
in order to issue an award containing expungement of customer dispute
information under the Customer Code.\45\ The rule does not, however,
provide guidance for associated persons on how and when they may
request expungement during the customer arbitration, or on when
arbitrators must make expungement determinations. The proposed rule
change would amend FINRA Rule 12805 to set forth requirements for
expungement requests filed by an associated person during a customer
arbitration.
---------------------------------------------------------------------------
\45\ FINRA Rule 12805 provides that a panel must comply with the
following requirements in order to grant expungement: (a) hold a
recorded hearing session (by telephone or in person) regarding the
appropriateness of expungement; (b) in cases involving settlements,
review settlement documents and consider the amount of payments made
to any party and any other terms and conditions of a settlement; (c)
indicate in the arbitration award which of the Rule 2080 grounds for
expungement serve(s) as the basis for its expungement order and
provide a brief written explanation of the reason(s) for its finding
that one or more Rule 2080 grounds for expungement applies to the
facts of the case; and (d) assess all DRS arbitration forum fees for
hearing sessions in which the sole topic is the determination of the
appropriateness of expungement against the parties requesting
expungement relief. See also FINRA Rule 13805.
---------------------------------------------------------------------------
1. Expungement Requests During the Customer Arbitration
a. By a Respondent Named in a Customer Arbitration
Under current practice, an associated person who is named as a
respondent in a customer arbitration (``named associated person'') may
request expungement at any time during the customer arbitration or
separately from the customer arbitration in a straight-in request.\46\
If a named associated person requests expungement during the customer
arbitration, does not withdraw the request and the case goes to hearing
and closes by award, the panel in the customer arbitration will also
decide the expungement request and include the decision as part of the
award. If the customer arbitration does not close by award after a
hearing (e.g., settles) and the associated person continues to pursue
the expungement request, the panel from the customer arbitration will
hold a hearing regarding the appropriateness of expungement.\47\
---------------------------------------------------------------------------
\46\ There are several ways in which a named associated person
may request expungement during a customer arbitration. The request
may be included in the answer to the statement of claim that must be
submitted within 45 days of receipt of the statement of claim, and
may include other claims and remedies requested. See FINRA Rules
12303(a) and (b); see also FINRA Rules 13303(a) and (b). The
expungement request may also be included in other pleadings (e.g., a
counterclaim, a cross claim, or a third party claim) and must be
filed with the Director. See FINRA Rule 12100(x). The associated
person may also request at any time during the case (outside of a
pleading) that the panel consider the person's expungement request
during the hearing. Under FINRA Rule 12503, such a request is
treated like a motion, which gives the other parties an opportunity
to state objections. If there is an objection, the panel must decide
the motion pursuant to FINRA Rule 12503(d)(5). See also FINRA Rules
13503 and 13503(d)(5).
\47\ See FINRA Rule 12805.
---------------------------------------------------------------------------
Under the proposed rule change, if a named associated person seeks
to expunge customer dispute information associated with the customer's
statement of claim, the named associated person must make the
expungement request during the customer arbitration.\48\ As discussed
below, these requests would be subject to limitations on how and when
the requests may be made.\49\ If the associated person does not request
expungement of the customer dispute information associated with the
customer's statement of claim during the customer arbitration, the
associated person would forfeit the opportunity to seek expungement of
the same customer dispute information in any subsequent proceeding.\50\
The Director would be authorized to deny the DRS arbitration forum to
requests made during a customer arbitration to expunge customer dispute
information that is not associated with the customer's statement of
claim.\51\ The Director would also be authorized to deny the forum if a
named associated person does not request expungement of the customer
dispute information associated with the customer's statement of claim
during the customer arbitration but then seeks expungement of the same
customer dispute information in a subsequent proceeding.\52\
---------------------------------------------------------------------------
\48\ See proposed Rule 12805(a)(1)(A). The customer dispute
information associated with a customer's statement of claim would
include a written customer complaint or civil litigation brought by
the same customer that addresses the same allegations.
\49\ See proposed Rule 12805(a)(1)(B); see also infra Item
II.A.1.II.C., ``Limitations on Expungement Requests.''
\50\ See proposed Rule 12805(a)(1)(A).
\51\ See proposed Rule 12203(b); see also infra Item
II.A.1.II.C.3., ``Director's Authority to Deny the Forum.''
\52\ See proposed Rules 12805(a)(1)(A), 13203(b) and
13805(a)(2)(A)(vi); see also infra Item II.A.1.II.C.3., ``Director's
Authority to Deny the Forum.''
---------------------------------------------------------------------------
FINRA is proposing to require that a named associated person
request expungement of customer dispute information associated with a
customer's statement of claim during the customer arbitration because,
if the arbitration closes by award after a hearing, the panel from the
customer arbitration will be best situated to decide the related issue
of expungement. Requiring the named associated person to request
expungement in the customer arbitration increases the likelihood that a
panel will have input from all parties and access to all of the
evidence, testimony and other documents to make an informed decision on
the expungement request.
FINRA recognizes that this requirement could result in some named
associated persons filing expungement requests to preserve their
ability to make an expungement request, regardless of the potential
outcome. FINRA believes, however, that the potential costs that would
be incurred by associated persons, arbitrators and the DRS arbitration
forum if named associated persons file expungement requests to preserve
the ability to request expungement are appropriate given the potential
benefit of having customer input and a complete factual record for the
panel to decide an expungement request.
i. Method of Requesting Expungement
The proposed rule change would limit how and when expungement
requests may be made during the customer arbitration. Under the
proposed rule change, if a named associated person requests expungement
during the customer arbitration, the request must be included in the
answer or a separate pleading requesting expungement.\53\ If the
request is included in the answer, it must be filed within 45 days of
receipt
[[Page 50176]]
of the customer's statement of claim in accordance with existing
requirements under the Codes.\54\ If the named associated person
requests expungement in a separate pleading requesting expungement,
rather than the answer, the request must be filed no later than 60 days
before the first scheduled hearing begins.\55\ The proposed deadline
should provide the named associated person with enough time to assess
the customer's case and the potential merits of an expungement request
and decide whether to file the request. The 60-day timeframe would also
provide the parties to the customer arbitration with reasonable case
preparation time, since the expungement issues will overlap with the
issues raised by the customer's claim. If a named associated person
seeks to request expungement after the 60-day filing deadline, the
associated person would be required to file a motion requesting an
extension, which would be decided by the panel.\56\
---------------------------------------------------------------------------
\53\ See proposed Rule 12805(a)(1)(C)(i). FINRA Rules 12100(x)
and 13100(v) would be amended to define a ``separate document
requesting expungement'' as a pleading under the Codes.
\54\ See supra note 46.
\55\ See proposed Rule 12805(a)(1)(C)(i).
\56\ See proposed Rule 12805(a)(1)(C)(i). Pursuant to FINRA Rule
12503, if an associated person files a motion seeking an extension
of the 60-day deadline, the opposing parties may state objections to
extending the deadline, and the panel would decide the motion.
---------------------------------------------------------------------------
ii. Required Contents of an Expungement Request
Under the proposed rule change, a request for expungement by a
named associated person in a customer arbitration must include the
applicable filing fee under the Code.\57\ In addition, a named
associated person would be required to provide the CRD number of the
party requesting expungement, each CRD occurrence number that is the
subject of the request and the case name and docket number associated
with the customer dispute information.\58\ These requirements would
help ensure that FINRA, the panel, and the parties understand who is
requesting expungement and which customer dispute information is the
subject of the request.
---------------------------------------------------------------------------
\57\ See proposed Rule 12805(a)(1)(C)(ii)a.
\58\ See proposed Rule 12805(a)(1)(C)(ii)b. through d. An
occurrence is a disclosure event that is reported to the CRD system
via one or more Disclosure Reporting Pages. Each occurrence contains
details regarding a specific disclosure event. An occurrence can
have as many as three sources reporting the same event: Forms U4, U5
and U6.
---------------------------------------------------------------------------
The proposed rule change would also require the named associated
person requesting expungement to explain whether expungement of the
same customer dispute information was (i) previously requested and, if
so (ii) how it was decided.\59\ This requirement would assist with
implementation of the proposed prohibition on parties making second
requests for expungement, discussed in more detail below.\60\ This
proposed requirement is also consistent with language in the existing
Guidance stating that arbitrators should ask a party requesting
expungement whether an arbitration panel or a court previously denied
expungement of the customer dispute information at issue and, if there
was a prior denial, the expungement request should be denied.\61\
---------------------------------------------------------------------------
\59\ See proposed Rule 12805(a)(1)(C)(ii)e.
\60\ See infra Item II.A.1.II.A.1.b.i., ``Method of Requesting
Expungement On Behalf Of an Unnamed Person.''
\61\ See Guidance, supra note 5.
---------------------------------------------------------------------------
Under the proposed rule change, if an expungement request fails to
include any of the proposed requirements for requesting expungement,
the request would be considered deficient and would not be served
unless the deficiency is corrected.\62\
---------------------------------------------------------------------------
\62\ See proposed Rules 12307(a)(8) through (11) and
12805(a)(1)(C)(ii).
---------------------------------------------------------------------------
FINRA believes these proposed requirements for named associated
persons requesting expungement are necessary for the timely
consideration and orderly administration of expungement requests as
well as to maintain the integrity of the CRD system.
b. Expungement Requests by a Party Named in the Customer Arbitration On
Behalf Of an Unnamed Person
The Codes do not specifically address on-behalf-of requests, i.e.,
expungement requests made by a party named in a customer arbitration on
behalf of an unnamed person.\63\ Under current practice, a party to a
customer arbitration may file an on-behalf-of request for expungement
during the customer arbitration. If the party (typically, a firm) files
the request and the customer arbitration closes by award after a
hearing, the panel will decide the expungement request and include the
decision in the award. If the customer arbitration does not close by
award after a hearing (e.g., settles), either the requesting party or
the unnamed person could ask the panel to consider and decide the
expungement request before it disbands. In this circumstance, the panel
from the customer arbitration will hold a hearing regarding the
appropriateness of expungement.\64\
---------------------------------------------------------------------------
\63\ The proposed rule change would define an unnamed person as
``an associated person, including a formerly associated person, who
is identified in a Form U4, Form U5, or Form U6, as having been the
subject of an investment-related, customer-initiated arbitration
claim that alleged that the associated person or formerly associated
person was involved in one or more sales practice violations, but
who is not named as a respondent in the arbitration.'' See proposed
Rule 12100(ff).
\64\ See FINRA Rule 12805.
---------------------------------------------------------------------------
The proposed rule change would codify the ability of a party to the
customer arbitration to file an on-behalf-of request during a customer
arbitration.\65\ Under the proposed rule change, a party to a customer
arbitration may file an on-behalf-of request that seeks to expunge
customer dispute information associated with the customer's statement
of claim, provided the request is eligible for arbitration under
proposed Rule 12805.\66\ Filing an on-behalf-of request would be
permissive, not mandatory.\67\ However, as discussed below, if the
named party and the unnamed person agree to such a request, FINRA would
require them to sign a form consenting to the on-behalf-of request
which would help ensure that the unnamed person is fully aware of the
request and that the firm is agreeing to represent the unnamed person
for the purpose of requesting expungement during the customer
arbitration.
---------------------------------------------------------------------------
\65\ See proposed Rule 12805(a)(2).
\66\ See proposed Rule 12805(a)(2)(B).
\67\ See proposed Rule 12805(a)(2)(A).
---------------------------------------------------------------------------
i. Method of Requesting Expungement On Behalf Of an Unnamed Person
The unnamed person would be required to consent to the on-behalf-of
request in writing.\68\ In particular, the party filing an on-behalf-of
request would be required to submit a signed Form Requesting
Expungement on Behalf of an Unnamed Person (``Form'') and a statement
requesting expungement with the Director.\69\ The proposed rule change
would not require that an on-behalf-of request be included in an answer
or a separate pleading requesting expungement (although it could be),
since the request seeks relief on behalf of a person who is not a party
to the arbitration. However, the party making the request would be
required to file the request, which would include the Form, no later
than 60 days before the first scheduled hearing.\70\ By filing and
serving the expungement request on behalf of the unnamed person, the
requesting party would be agreeing to represent the unnamed person and
the unnamed person's interests and to pursue the request for
expungement on
[[Page 50177]]
behalf of the unnamed person during the customer arbitration.\71\
---------------------------------------------------------------------------
\68\ See proposed Rule 12805(a)(2)(A).
\69\ See proposed Rule 12805(a)(2)(C)(i) and (ii). The unnamed
person whose CRD record would be expunged and the party requesting
expungement on the unnamed person's behalf must sign the Form.
\70\ See proposed Rule 12805(a)(2)(C)(iii). The 60-day deadline
is the same as the proposed deadline for a named associated person
to request expungement through a separate pleading requesting
expungement in a customer arbitration.
\71\ See proposed Rule 12805(a)(2)(D)(iii).
---------------------------------------------------------------------------
FINRA believes that requiring the submission of the Form would help
address the issue of an unnamed person not being made aware of the on-
behalf-of request. As discussed above, FINRA is concerned that some
associated persons are filing arbitration claims seeking expungement of
the same customer dispute information that was the subject of a
previous denial by a panel of an on-behalf-of request.\72\ By signing
the Form, the unnamed person would be consenting to the on-behalf-of
request and agreeing to be bound by the panel's decision on the
request.\73\ In addition, the Form would provide that, if the customer
arbitration closes by award after a hearing, the unnamed person would
be barred from filing a request for expungement for the same customer
dispute information in a subsequent proceeding. The unnamed person's
signature would serve as acknowledgement of this consequence.
---------------------------------------------------------------------------
\72\ See supra note 42 and accompanying text.
\73\ See proposed Rule 12805(a)(2)(D)(i). By signing the Form,
the unnamed person would also be agreeing to maintain the
confidentiality of documents and information from the customer
arbitration to which the unnamed person is given access and to
adhere to any confidentiality agreements or orders associated with
the customer arbitration. See proposed Rule 12805(a)(2)(D)(ii). The
breach of this provision by the unnamed person could potentially
subject the unnamed person to a claim for damages by an aggrieved
party.
---------------------------------------------------------------------------
ii. Required Contents of an On-Behalf-Of Expungement Request
Under the proposed rule change, an on-behalf-of request would be
required to include the same elements as a request for expungement by a
named associated person during a customer arbitration.\74\ Thus, the
party requesting expungement on behalf of an unnamed person (typically,
the firm) would be required to provide the applicable filing fee; the
CRD number of the unnamed person; each CRD occurrence number that is
the subject of the request; the case name and docket number associated
with the customer dispute information; and an explanation of whether
expungement of the same customer dispute information was (i) previously
requested and, if so (ii) how it was decided. In addition, as discussed
above, the party requesting expungement would be required to include
the Form, signed by the unnamed person whose CRD record is the subject
of the expungement request and the party filing the request.
---------------------------------------------------------------------------
\74\ See proposed Rule 12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i);
see also supra Item II.A.1.II.A.1.a.ii., ``Required Contents of an
Expungement Request.''
---------------------------------------------------------------------------
c. Deciding Expungement Requests during Customer Arbitrations
The proposed amendments would require that if a named associated
person or a party on behalf of an unnamed person has requested
expungement during a customer arbitration and the case closes by award
after a hearing, the panel from the customer arbitration must decide
the expungement request during the customer arbitration in accordance
with Rule 12805(c) and issue its decision on the request in the same
award.\75\ If the customer arbitration closes other than by award
(e.g., settles) or by award without a hearing, the panel would not
consider the expungement request.\76\ Instead, to seek expungement
relief, the associated person would need to file a straight-in request
to expunge the customer dispute information associated with the
customer arbitration as a new claim under proposed Rule 13805 against
the member firm at which the associated person was associated at the
time the customer dispute arose.\77\ A panel from the Special
Arbitrator Roster would decide the straight-in request, as discussed in
more detail below.\78\
---------------------------------------------------------------------------
\75\ See proposed Rules 12805(a)(1)(D)(i) and (a)(2)(E)(i).
\76\ See proposed Rules 12805(a)(1)(D)(ii) and (a)(2)(E)(ii).
\77\ Under the Codes, a ``member'' includes any broker or dealer
admitted to membership in FINRA, whether or not the membership has
been terminated, suspended, cancelled, revoked, the member has been
expelled or barred from FINRA or the member is otherwise defunct.
See FINRA Rules 12100(s) and 13100(q); see also Securities Exchange
Act Release No. 88254 (February 20, 2020), 85 FR 11157 (February 26,
2020) (Order Approving File No. SR-FINRA-2019-027).
\78\ See infra Item II.A.1.II.B.2., ``Panel from the Special
Arbitrator Roster Decides Requests Filed Under the Industry Code.''
---------------------------------------------------------------------------
i. Panel Decides the Expungement Request if the Customer's Arbitration
Closes by Award After a Hearing
Currently, if a named associated person requests expungement, or a
party files an on-behalf-of request, and the customer's claim closes by
award after a hearing, the panel may consider and decide the
expungement request during the customer arbitration and issue its
decision in the award. If, however, the party requesting expungement
does not raise the issue of expungement during the hearing, the panel
may not decide the request and may deem it withdrawn.\79\ In this
instance, the associated person may seek to file the request again at a
later date.
---------------------------------------------------------------------------
\79\ See FINRA Rules 12702 and 13702.
---------------------------------------------------------------------------
Under the proposed rule change, if a named associated person
requests expungement or a party files an on-behalf-of request during a
customer arbitration and the customer's claim closes by award after a
hearing, the panel in the customer arbitration would be required to
consider and decide the expungement request and issue its decision in
the same award.\80\ This would help ensure that the panel from the
customer's arbitration--which has received input from all parties,
reviewed the pleadings, and considered the evidence on the merits--
would decide the expungement request.\81\
---------------------------------------------------------------------------
\80\ See proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i).
\81\ See proposed Rules 12805(a)(1)(D) and 12805(a)(2)(E).
---------------------------------------------------------------------------
The proposed rule change would require the panel to decide the
request even if the requesting party withdraws or fails to pursue the
request. In this instance, the panel would deny the expungement request
with prejudice.\82\ This would prevent associated persons from
withdrawing expungement requests to avoid having their requests decided
by the panel that heard the evidence on the customer's arbitration
claim, then seeking to re-file the request and receiving a potentially
more favorable decision from a different set of arbitrators.
---------------------------------------------------------------------------
\82\ See proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i).
---------------------------------------------------------------------------
ii. Panel Does Not Decide Expungement if the Customer's Arbitration
Closes Other Than by Award or by Award Without a Hearing
Currently, if a named associated person requests expungement or a
party files an on-behalf-of request, the customer arbitration does not
close by award after a hearing (e.g., settles) and the requesting party
continues to pursue the expungement request, the panel from the
customer arbitration will hold a hearing regarding the appropriateness
of expungement.\83\ If the named associated person or party requesting
expungement does not request that the panel hold a separate hearing to
decide the expungement request, the panel may deem the request
withdrawn, and the associated person may seek to file the request again
at a later date.
---------------------------------------------------------------------------
\83\ See FINRA Rule 12805.
---------------------------------------------------------------------------
The proposed rule change would provide that if, during a customer
arbitration, a named associated person requests expungement or a party
files an on-behalf-of request and the customer arbitration closes other
than by award or by award without a hearing, the panel from the
customer arbitration would not be permitted to decide the expungement
[[Page 50178]]
request.\84\ Instead, the associated person would be required to seek
expungement by filing a request to expunge the same customer dispute
information as a straight-in request against the member firm at which
the person was associated at the time the customer dispute arose under
proposed Rule 13805, where a panel that is randomly selected from the
Special Arbitrator Roster would decide the request.\85\
---------------------------------------------------------------------------
\84\ See proposed Rules 12805(a)(1)(D)(ii)a. and
12805(a)(2)(E)(ii)a.
\85\ See proposed Rules 12805(a)(1)(D)(ii)b. and
12805(a)(2)(E)(ii)b.; see also infra Item II.A.1.II.B.2., ``Panel
from the Special Arbitrator Roster Decides Requests Filed Under the
Industry Code.''
---------------------------------------------------------------------------
FINRA believes this approach reflects the importance of maintaining
the integrity of information in the CRD system. When the customer
arbitration closes other than by award or by award without a hearing,
the panel selected by the parties in the customer arbitration may not
have heard the presentation of the evidence on the merits of the case
and, therefore, may not bring to bear any special insights in
determining whether to issue an award containing expungement relief. In
addition, customers or their representatives have little incentive to
attend and participate in an expungement hearing once their case has
settled. Requiring that an associated person file the expungement
request as a straight-in request under the Industry Code to be heard
and decided by a three-person panel that is randomly selected from the
Special Arbitrator Roster would strengthen the expungement framework.
As discussed in more detail below, while keeping in mind the importance
of maintaining the integrity of information in the CRD system, this
corps of experienced and specially trained arbitrators would follow the
procedures set forth in proposed Rule 13805 to decide whether one or
more of three grounds--the same three grounds contained in FINRA Rule
2080(b)(1)--exist in order to issue an award containing expungement
relief.
2. No Intervening in Customer Arbitrations To Request Expungement
The proposed amendments would prohibit unnamed persons from
intervening in a customer arbitration and requesting expungement.\86\
If the associated person is neither a party to the arbitration nor the
subject of an on-behalf-of request by another party to the arbitration,
the associated person should not be able to intervene in the customers'
arbitration to request expungement. In these circumstances, the
associated person's conduct is unlikely to be fully addressed by the
parties during the customer arbitration, and FINRA does not believe
that the customer should have the presentation of their case
interrupted or delayed by an associated person's intervention to
request expungement. In addition, there have been instances in customer
arbitrations in which the unnamed person learns that the customer's
arbitration case is nearing conclusion. The associated person then
files a motion to intervene in the case to ask the panel to consider an
expungement request. As an unnamed person, the individual is not a
party to the case and, therefore, has not made any arguments in support
of the expungement request. Further, if the motion is granted, the
parties to the case will be required to wait for a decision on the
expungement request (which may necessitate another hearing) before
their dispute is resolved, causing delay and additional cost to the
parties.
---------------------------------------------------------------------------
\86\ See proposed Rules 12805(a)(2)(E)(iii) and 12800(d)(2)(D).
---------------------------------------------------------------------------
Accordingly, under the proposed rule change, unnamed persons would
be prohibited from intervening in a customer arbitration and requesting
expungement. Instead, the unnamed person would be able to file the
request as a new claim against the member firm at which the person was
associated at the time the customer dispute arose under proposed Rule
13805, where a panel from the Special Arbitrator Roster would decide
the request.\87\
---------------------------------------------------------------------------
\87\ See proposed Rule 12805(a)(2)(E)(iii)b.
---------------------------------------------------------------------------
3. No Straight-In Requests Against Customers
The proposed amendments would also prohibit an associated person
from filing a straight-in request against a customer.\88\ Currently,
straight-in requests are rarely filed against a customer.\89\ FINRA
does not believe that customers should be compelled to attend or
participate in a separate proceeding to decide an expungement request
after the customer has resolved their arbitration claim or civil
litigation. Accordingly, the proposed amendments would prohibit an
associated person from filing a straight-in request against a customer.
As discussed below, however, under the proposed rule change, customers
would have the option to attend and participate in expungement hearings
in straight-in requests, and the proposed rule change would include
provisions to facilitate such attendance and participation.
---------------------------------------------------------------------------
\88\ See proposed Rule 12805(a)(3).
\89\ During the sample period, FINRA is able to identify
requests to expunge 11,619 customer dispute information disclosures
from the CRD system. Of those, 6,476 were sought to be expunged in
straight-in requests; 116 were sought to be expunged in straight-in
requests filed against a customer. See infra Item II.B.2.,
``Economic Baseline,'' for further discussion.
---------------------------------------------------------------------------
B. Straight-In Requests Under the Industry Code and the Special
Arbitrator Roster
Under the proposed rule change, all requests to expunge customer
dispute information that is not associated with a customer arbitration
would be required to be filed as a straight-in request under proposed
Rule 13805.\90\ In addition, an associated person could request
expungement of customer dispute information associated with a customer
arbitration under proposed Rule 13805 if: (1) the associated person is
named in the arbitration or is the subject of an on-behalf-of request
and the customer arbitration closes other than by award or by award
without a hearing; or (2) the associated person is the subject of a
customer arbitration, but is neither named in the arbitration nor the
subject of an on-behalf-of request, and the customer arbitration closes
for any reason. If an associated person requests expungement under
proposed Rule 13805, a three-person panel randomly selected from the
Special Arbitrator Roster in accordance with proposed Rule 13806 would
decide the expungement request.\91\
---------------------------------------------------------------------------
\90\ See proposed Rules 12805(a)(1)(A) and 13805(a)(1). As
discussed above, under proposed Rule 12805, an associated person may
request expungement in a customer arbitration of a customer
complaint or civil litigation associated with a customer's statement
of claim. See supra note 48 and accompanying text.
\91\ See infra Item II.A.1.II.B.2.a. and b. (discussing
eligibility requirements for and composition of the Special
Arbitrator Roster).
---------------------------------------------------------------------------
1. Filing a Straight-In Request Under the Industry Code
a. Applicability
Under the proposed rule change, an associated person requesting
expungement of customer dispute information as a straight-in request
under the Industry Code must file a statement of claim in accordance
with FINRA Rule 13302 against the member firm at which the person was
associated at the time the customer dispute arose, unless the request
is ineligible for arbitration under proposed Rule 13805(a)(2).\92\ The
only way to request expungement of customer dispute information under
the Industry Code
[[Page 50179]]
would be to file the request under proposed Rule 13805.
---------------------------------------------------------------------------
\92\ See proposed Rule 13805(a)(1). FINRA Rule 13302 provides,
in relevant part, that to initiate an arbitration, a claimant must
file with the Director a signed and dated Submission Agreement, and
a statement of claim specifying the relevant facts and remedies
requested.
---------------------------------------------------------------------------
The requirement that the associated person file the straight-in
request against the member firm at which the person was associated at
the time the customer dispute arose would help ensure that there is a
connection between the respondent firm and the subject matter of the
expungement request. For example, the firm at which the person
requesting expungement was associated at the time the dispute arose
should have knowledge of the dispute and access to documents or other
evidence relating to the dispute. In addition, the proposed requirement
would help ensure that the panel from the Special Arbitrator Roster
would be able to request evidence from the member firm with information
that is relevant to the expungement request. If the requisite
connection is not present, the Director would be authorized to deny the
use of the DRS arbitration forum for the request.\93\
---------------------------------------------------------------------------
\93\ See proposed Rule 13203(b).
---------------------------------------------------------------------------
b. Required Contents of Straight-In Requests
The required contents of a straight-in request would be the same as
those required for expungement requests filed under proposed Rule
12805.\94\ Thus, the associated person's straight-in request would be
required to contain the applicable filing fee; \95\ the CRD number of
the party requesting expungement; each CRD occurrence number that is
the subject of the request; the case name and docket number associated
with the customer dispute information, if applicable; and an
explanation of whether expungement of the same customer dispute
information was previously requested and, if so, how it was
decided.\96\ In addition, as discussed below, the proposed rule change
would impose limitations on when such requests may be made.\97\
---------------------------------------------------------------------------
\94\ See proposed Rule 13805(a)(3); see also supra Item
II.A.1.II.A.1.a.ii., ``Required Contents of an Expungement
Request.''
\95\ FINRA would not assess a second filing fee when an
associated person files a straight-in request if the associated
person, or the requesting party in the case of an on-behalf-of
request, had previously paid the filing fee to request expungement
of the same customer dispute information during a customer
arbitration.
\96\ See proposed Rule 13805(a)(3). If an expungement request
under the Industry Code fails to include any of the proposed
requirements for requesting expungement, the request would be
considered deficient and would not be served unless the deficiency
is corrected. See proposed Rules 13307(a)(7) through (11).
\97\ See infra Item II.A.1.II.C., ``Limitations on Expungement
Requests.'' As discussed in more detail below, the straight-in
request would be ineligible for arbitration under the Industry Code
if: (1) a panel held a hearing to consider the merits of the
associated person's request for expungement of the same customer
dispute information; (2) a court of competent jurisdiction
previously denied the associated person's request to expunge the
same customer dispute information; (3) the customer arbitration or
civil litigation or customer complaint associated with the customer
dispute information is not closed; (4) more than two years have
elapsed since the customer arbitration or civil litigation
associated with the customer dispute information has closed; (5)
there was no customer arbitration or civil litigation associated
with the customer dispute information and more than three years have
elapsed since the date that the customer complaint was initially
reported to the CRD system; or (6) a named associated person is
prohibited from seeking expungement because they did not request
expungement in the associated customer arbitration under proposed
Rule 12805(a)(1)(A). See proposed Rule 13805(a)(2).
---------------------------------------------------------------------------
2. Panel From the Special Arbitrator Roster Decides Requests Filed
Under the Industry Code
If a straight-in request is filed in accordance with proposed Rule
13805, a three-person panel randomly selected from the Special
Arbitrator Roster pursuant to proposed Rule 13806 would be required to
hold an expungement hearing, decide the expungement request and issue
an award.\98\ The proposed amendments would also provide that if the
associated person withdraws or does not pursue the request, the panel
would be required to deny the expungement request with prejudice.\99\
This requirement would foreclose the ability of associated persons to
withdraw expungement requests to avoid having their requests decided by
a panel that they believe does not favor their request, and then seek
to re-file the request with the hope of obtaining a potentially more
favorable decision from a different panel.
---------------------------------------------------------------------------
\98\ See proposed Rule 13805(a)(4).
\99\ See proposed Rule 13805(a)(4).
---------------------------------------------------------------------------
a. Eligibility Requirements for the Special Arbitrator Roster
The proposed rule change would include several requirements to help
ensure that arbitrators on the Special Arbitrator Roster have the
qualifications and training to decide straight-in requests.
First, arbitrators on the Special Arbitrator Roster would be public
arbitrators who are eligible for the chairperson roster.\100\ Public
arbitrators are not employed in the securities industry and do not
devote 20 percent or more of their professional work to the securities
industry or to parties in disputes concerning investment accounts or
transactions or employment relationships within the financial
industry.\101\ Arbitrators are eligible for the chairperson roster if
they have completed chairperson training provided by FINRA and: (1)
have a law degree and are a member of a bar of at least one
jurisdiction and have served as an arbitrator through award on at least
one arbitration administered by an SRO in which hearings were held; or
(2) have served as an arbitrator through award on at least three
arbitrations administered by an SRO in which hearings were held.\102\
These requirements would help ensure that the persons conducting the
expungement hearing are impartial and experienced in managing and
conducting arbitration hearings in the DRS arbitration forum.\103\
---------------------------------------------------------------------------
\100\ See proposed Rule 13806(b).
\101\ See supra note 3.
\102\ See FINRA Rules 12400(c) and 13400(c). For purposes of
this proposed rule change, public arbitrators who are eligible for
the chairperson roster would include those arbitrators who have met
the chairperson eligibility requirements of FINRA Rules 12400(c) or
13400(c), regardless of whether they have already served as a chair
on an arbitration case.
\103\ The Task Force suggested that the arbitrators on its
recommended special arbitration panel be chair-qualified, in part
because of the training that arbitrators must complete before they
can be added to the chairperson roster. See FINRA, Advanced
Arbitrator Training, <a href="https://www.finra.org/arbitration-mediation/advanced-arbitrator-training">https://www.finra.org/arbitration-mediation/advanced-arbitrator-training</a>; see also supra note 37.
---------------------------------------------------------------------------
Second, the public chairpersons must have evidenced successful
completion of, and agreement with, enhanced expungement training
provided by FINRA.\104\ FINRA currently provides an Expungement
Training module for arbitrators.\105\ This training, however, would be
expanded for arbitrators seeking to qualify for the Special Arbitrator
Roster. This would allow FINRA to further emphasize with the
arbitrators on the Special Arbitrator Roster the unique, distinct role
they play in determining whether to issue an award containing
expungement relief, and that expungement should be issued in limited
circumstances and only if the arbitrators unanimously find that the
information to be expunged is factually impossible, clearly erroneous
or false, or that the associated person was not involved in the alleged
misconduct.
---------------------------------------------------------------------------
\104\ See proposed Rule 13806(b)(2)(A).
\105\ See supra note 35 and accompanying text.
---------------------------------------------------------------------------
Third, arbitrators on the Special Arbitrator Roster would also be
required to have served as an arbitrator through award on at least four
customer arbitrations administered by FINRA or by another SRO in which
a hearing was held.\106\ FINRA believes that if an arbitrator has
served on four arbitrations through to award, it would indicate that
the arbitrator has gained the knowledge
[[Page 50180]]
and experience in the DRS arbitration forum to conduct hearings.\107\
---------------------------------------------------------------------------
\106\ See proposed Rule 13806(b)(2)(B). This requirement would
not be satisfied by serving on arbitrations administered under the
special proceeding option of the simplified arbitration rules. See
FINRA Rule 12800(c)(3)(B).
\107\ In 2021, 87 percent of FINRA customer arbitrations closed
other than by award.
---------------------------------------------------------------------------
b. Composition of the Panel
To minimize the potential for influence in the arbitrator selection
process by the associated person and member firm, whose interests may
be aligned, and to help ensure the development of a more complete
factual record, the proposed rule change would require NLSS to select
randomly the three public chairpersons from the Special Arbitrator
Roster to decide a straight-in request filed by an associated
person.\108\ The parties would not be permitted to agree to fewer than
three arbitrators. The parties also would not be permitted to strike
any arbitrators selected by NLSS nor stipulate to their removal,\109\
but would be permitted to challenge an arbitrator selected for
cause.\110\ If an arbitrator is removed, NLSS would randomly select a
replacement.\111\
---------------------------------------------------------------------------
\108\ See proposed Rule 13806(b)(1). The first arbitrator
selected would be the chair of the panel. See proposed Rule
13806(b)(3).
\109\ The parties also would not be permitted to stipulate to
the use of pre-selected arbitrators (i.e., arbitrators that the
parties find on their own to use in their cases). See proposed Rule
13806(b)(1).
\110\ See proposed Rule 13806(b)(4).
\111\ See proposed Rule 13806(b)(4).
---------------------------------------------------------------------------
The current process for selecting arbitrators--striking and
combining ranked lists--would not be appropriate to use to select
arbitrators to decide straight-in requests.\112\ In arbitrations
outside of the expungement context, the parties are typically adverse,
which means that during arbitrator selection, each side may rank
arbitrators on the lists whom they believe may be favorable to their
case. The adversarial nature of the proceedings serves to minimize the
impact of each party's influence in arbitrator selection. In contrast,
a straight-in request filed by an associated person against a firm is
less likely to be adversarial in nature. FINRA believes that the
proposed rule change would prevent the associated person and member
firm from collaboratively seeking to influence the outcome of the
expungement request through arbitrator selection.
---------------------------------------------------------------------------
\112\ See generally FINRA Rules 13403 and 13404.
---------------------------------------------------------------------------
FINRA recognizes that the proposed arbitrator selection process for
straight-in requests would also limit the associated person and member
firm's input on arbitrator selection for reasons that may be unrelated
to whether the arbitrator would potentially be sympathetic to the
expungement request, such as their perception of the arbitrator's
competence or efficiency. However, the arbitrators on the Special
Arbitrator Roster would have the experience, qualifications and
training necessary to conduct a fair and impartial expungement hearing
in accordance with the proposed rules, and to make their determination
based on a complete factual record developed during the expungement
hearing. FINRA believes that the higher standards that the arbitrators
must meet to serve on the Special Arbitrator Roster should mitigate the
impact of the absence of party input on the selection of arbitrators.
In addition, associated persons and member firms would still be
permitted to challenge any arbitrator for cause.\113\
---------------------------------------------------------------------------
\113\ See proposed Rule 13806(b)(4).
---------------------------------------------------------------------------
C. Limitations on Expungement Requests
Currently, Rules 12805 and 13805 do not address when a party would
not be permitted to file an expungement request in the DRS arbitration
forum.\114\ The Guidance, however, describes several circumstances in
which an expungement request should be ineligible for arbitration. The
proposed rule change would incorporate the limitations contained in the
Guidance and add time limits to when an associated person may file a
straight-in request.
---------------------------------------------------------------------------
\114\ But see supra note 38 (describing time limits that apply
to all arbitration claims, including expungement requests).
---------------------------------------------------------------------------
1. Limitations Applicable to Both Straight-In Requests and Expungement
Requests During a Customer Arbitration
The Guidance provides that if a panel or a court has issued an
award or decision denying an associated person's expungement request,
the associated person may not request expungement of the same customer
dispute information in another arbitration proceeding. In particular,
the Guidance states that arbitrators should ask a party requesting
expungement whether an arbitration panel or a court previously denied
expungement of the customer dispute information at issue and, if there
has been a prior denial, the arbitration panel must deny the
expungement request.\115\
---------------------------------------------------------------------------
\115\ See Guidance, supra note 5.
---------------------------------------------------------------------------
The proposed rule change would codify the Guidance by providing
that an associated person may not file a request for expungement of
customer dispute information if (1) a panel held a hearing to consider
the merits of the associated person's expungement request for the same
customer dispute information or (2) a court of competent jurisdiction
previously denied the associated person's request to expunge the same
customer dispute information.\116\ These proposed amendments would
prevent an associated person from forum shopping, or seeking to return
to the DRS arbitration forum to garner a favorable outcome on his or
her expungement request.\117\
---------------------------------------------------------------------------
\116\ See proposed Rules 12805(a)(1)(B)(i) and (ii) and
13805(a)(2)(A)(i) and (ii). The proposed rule change would require
that the requesting party provide information about previous
expungement requests and how such requests were decided. See
proposed Rules 12805(a)(1)(C)(ii)e. and 13805(a)(3)(E).
\117\ FINRA notes that if a panel holds a hearing that addresses
the merits of an associated person's request for expungement, the
Director would be authorized to deny the DRS arbitration forum to
any subsequent request by the associated person or another party on
behalf of the associated person to expunge the same customer dispute
information. See proposed Rules 12203(b) and 13203(b).
---------------------------------------------------------------------------
2. Limitations Applicable to Straight-In Requests Only
As discussed below, under the proposed amendments, four additional
limitations would apply to straight-in requests.
a. No Straight-In Request if the Customer Arbitration, Civil Litigation
or Customer Complaint Has Not Closed
The Guidance provides that an associated person may not file a
separate request for expungement of customer dispute information
arising from a customer arbitration until the customer arbitration has
concluded. The proposed rule change would codify and expand upon this
limitation in the Guidance by providing that an associated person may
not file a straight-in request under proposed Rule 13805 if the
customer arbitration, civil litigation or customer complaint associated
with the customer dispute information has not closed.\118\
---------------------------------------------------------------------------
\118\ See proposed Rule 13805(a)(2)(A)(iii).
---------------------------------------------------------------------------
The proposed rule change would prevent an associated person from
filing a straight-in request while a customer arbitration or civil
litigation associated with the customer dispute information that is the
subject of the straight-in request is pending. It would also prevent
potentially inconsistent expungement decisions on related customer
dispute information. The proposed rule change would also help ensure
that the panel which will decide the straight-in request is able to
consider the final factual record from the customer arbitration or
civil litigation.
[[Page 50181]]
b. Straight-In Request Prohibited if Named Associated Person Did Not
Request Expungement in Customer Arbitration
Under the proposed change, an associated person who is named in a
customer arbitration must request expungement during the arbitration or
forfeit the ability to seek to expunge the customer dispute information
associated with the customer's statement of claim in any subsequent
proceeding.\119\ Accordingly, the proposed rule change would prohibit
these associated persons from filing a straight-in request under the
Industry Code seeking to expunge the customer dispute information
associated with the customer's statement of claim.\120\
---------------------------------------------------------------------------
\119\ See supra Item II.A.1.II.A.1.a., ``Expungement Requests
During the Customer Arbitration, By a Respondent Named in a Customer
Arbitration,'' and accompanying text.
\120\ See proposed Rule 13805(a)(2)(A)(vi).
---------------------------------------------------------------------------
c. Time Limits Applicable to Disclosures Arising After the Effective
Date of the Proposed Rule Change
FINRA is aware that many straight-in requests are filed many years
after the customer arbitration closes or the customer complaint is
reported in the CRD system.\121\ To encourage prompt filing of
expungement requests, the proposed amendments would establish time
limits for expungement requests that are specifically tied to the
closure of customer arbitrations and civil litigations, or the
reporting of customer complaints in the CRD system, as applicable.\122\
The proposed time limits should help encourage customer attendance and
participation in expungement proceedings and help ensure that straight-
in requests are brought before relevant evidence and testimony becomes
stale or unavailable.\123\ The proposed time limits may also curtail
the common practice of bundling multiple unrelated and aged expungement
requests in one straight-in request.\124\
---------------------------------------------------------------------------
\121\ See supra note 39.
\122\ FINRA Rules 12206 and 13206 provide that no claim shall be
eligible for submission to arbitration where six years have elapsed
from the occurrence or event giving rise to the claim. Under these
Rules, the panel has discretion to determine if the claim, including
an expungement request, is eligible for arbitration. See supra note
38. As discussed below, if the proposed rule change is approved by
the Commission, this six-year eligibility rule would continue to
apply to requests to expunge customer dispute information that arose
prior to the effective date of the proposed rule change.
\123\ All customers from a customer arbitration or civil
litigation, and all customers who initiated a customer complaint,
would be notified of the expungement request and encouraged to
attend and provide their input. See proposed Rule 13805(b)(1)(A).
\124\ For example, under the proposed time limits, associated
persons would not have been able to include all customer dispute
information disclosures in 44 percent of the straight-in requests.
See infra Item II.B.3.D, ``Time Limits for Filing Straight-in
Requests--Quantitative Description.''
---------------------------------------------------------------------------
(i) Two Years From the Close of a Customer Arbitration or Civil
Litigation
Under the proposed rule change, an associated person would be
permitted to file a straight-in request within two years of the close
of a customer arbitration or a civil litigation associated with the
customer dispute information.\125\ The proposed amendments would allow
an associated person to request expungement of customer dispute
information associated with the customer arbitration or civil
litigation--including any associated customer complaint disclosures--
within two years after the customer arbitration or civil litigation
closes.\126\
---------------------------------------------------------------------------
\125\ See proposed Rule 13805(a)(2)(A)(iv).
\126\ With respect to requests to expunge customer dispute
information associated with a customer arbitration, an associated
person would be permitted to file a straight-in request under this
two-year time limitation only if expungement of the customer dispute
information was not required to be decided during the customer
arbitration.
---------------------------------------------------------------------------
A two-year limitation period would allow the associated person
sufficient time to determine whether to seek expungement by filing a
straight-in request and provide a reasonable amount of time for the
associated person to gather the documents, information and other
resources required to file the expungement request. In addition, a two-
year period would help ensure that the expungement hearing is held
close enough in time to the customer arbitration or civil litigation,
when information regarding the customer arbitration or civil litigation
is available and in a timeframe that could increase the likelihood for
the customer to attend and participate if the customer chooses to do
so. The two-year time limit may also curtail the common practice of
bundling multiple unrelated and aged expungement requests in one
straight-in request.
(ii) Three Years From the Date a Customer Complaint Is Reported to the
CRD System
Under the proposed rule change, an associated person would be
prohibited from filing a straight-in request to expunge a customer
complaint where more than three years have elapsed since the customer
complaint was initially reported to the CRD system and there was no
customer arbitration or civil litigation associated with the customer
dispute information.\127\ This means that if no customer arbitration or
civil litigation associated with the customer complaint is filed, the
associated person would have three years from the date the customer
complaint was initially reported in the CRD system to file the
expungement request.\128\
---------------------------------------------------------------------------
\127\ See proposed Rule 13805(a)(2)(A)(v).
\128\ A customer complaint can be reported to the CRD system via
a Form U4 or Form U5. Pursuant to FINRA Rule 1010, an associated
person should be made aware of the filing of a Form U4 and any
amendments thereto by the associated person's member firm. In
addition, Article V, Section 3 of the FINRA By-Laws requires that a
member firm provide an associated person a copy of an amended Form
U5, including one reporting a customer complaint involving the
associated person. FINRA also provides several methods for
associated persons and former associated persons to check their
records, including online through BrokerCheck.
---------------------------------------------------------------------------
The three-year time limitation would help ensure that the
expungement hearing is held close in time to the events that gave rise
to the customer dispute and increase the likelihood of customer
attendance and participation. Three years should also provide
sufficient time for firms to complete their investigation of the
complaint, for associated persons to develop a sense of whether the
complaint may evolve into an arbitration or civil litigation, and for
the associated person to gather the necessary resources and determine
whether to seek expungement. The three-year time limitation may also
curtail requests to expunge customer complaints that are filed many
years after first being reported to the CRD system and the bundling of
multiple unrelated and aged disclosures in a single expungement
request.
As discussed above, the Codes provide that no claim shall be
eligible for submission to arbitration where six years have elapsed
from the occurrence or event giving rise to the claim.\129\ As a result
of this six-year eligibility rule, a customer arbitration may be filed
after an associated person has filed and received an award in
connection with a customer complaint associated with the customer
arbitration. To avoid unfairly impacting a customer arbitration filed
after a panel has issued an award on a request to expunge a customer
complaint associated with the customer arbitration, the proposed rule
change would provide that a prior expungement award shall not be
admissible in the customer arbitration.\130\
---------------------------------------------------------------------------
\129\ See supra note 38.
\130\ See proposed Rules 12604(c) and 13604(c).
---------------------------------------------------------------------------
[[Page 50182]]
d. Time Limits Applicable to Disclosures Arising on or Prior to the
Effective Date of the Proposed Rule Change
The proposed amendments would also establish time limits for
requests to expunge customer dispute information arising from customer
arbitrations and civil litigations that close, and for customer
complaints that were initially reported to the CRD system, on or prior
to the effective date of the proposed rule change.
Specifically, the proposed amendments would provide that if an
expungement request is otherwise eligible under the six-year limitation
period of FINRA Rule 13206(a), an associated person would be permitted
to file a straight-in request under the Industry Code if: (1) the
request for expungement is made within two years of the effective date
of proposed rule change, and the disclosure to be expunged is
associated with a customer arbitration or civil litigation that closed
on or prior to the effective date; \131\ or (2) the request for
expungement is made within three years of the effective date of the
proposed rule change, and the disclosure to be expunged is associated
with a customer complaint initially reported to the CRD system on or
prior to its effective date.\132\
---------------------------------------------------------------------------
\131\ See proposed Rule 13805(a)(2)(B)(i).
\132\ See proposed Rule 13805(a)(2)(B)(ii).
---------------------------------------------------------------------------
3. Director's Authority To Deny the Forum
The Codes provide the Director with authority to decline the use of
the DRS arbitration forum if the Director determines that ``given the
purposes of FINRA and the intent of the Code, the subject matter of the
dispute is inappropriate, or that accepting the matter would pose a
risk to the health or safety of arbitrators, staff, or parties or their
representatives.'' \133\
---------------------------------------------------------------------------
\133\ See FINRA Rules 12203 and 13203.
---------------------------------------------------------------------------
To ensure additional safeguards around the expungement process, the
proposed rule change would provide the Director with express authority
to decline the use of the DRS arbitration forum if an associated person
files an expungement request that the Director determines is ineligible
for arbitration under proposed Rules 12805 and 13805.\134\ For example,
the Director would decline the use of the DRS arbitration forum if an
expungement request is ineligible under the proposed time limitations.
The Director would also decline the use of the DRS arbitration forum if
a panel has previously considered the merits of, or a court has
previously decided, an expungement request associated with the same
customer dispute information. The Director would also decline the use
of the DRS arbitration forum if an associated person was named as a
respondent in a customer arbitration but did not request expungement;
if an associated person requested expungement but withdrew or did not
pursue the expungement request; or if a party to a customer arbitration
requested expungement on behalf of an unnamed person but the party
withdrew or did not pursue an expungement request on behalf of the
unnamed person.
---------------------------------------------------------------------------
\134\ See proposed Rules 12203(b) and 13203(b).
---------------------------------------------------------------------------
The proposed rule change would also provide the Director with
express authority to decline the use of the DRS arbitration forum if
the Director determines that the expungement request was not filed
under, or considered in the DRS arbitration forum in accordance with,
proposed Rules 12805 or 13805.\135\ For example, the Director may
decline the use of the DRS arbitration forum if the Director determines
that a panel is proposing to issue an award containing expungement of
customer dispute information other than pursuant to proposed Rules
12805, 12800(d) and (e) or 13805, as applicable. The Director may also
decline the use of the DRS arbitration forum if an associated person
seeks expungement of customer dispute information other than pursuant
to proposed Rules 12805, 12800(d) and (e) or 13805, as applicable.
---------------------------------------------------------------------------
\135\ See proposed Rules 12203(c) and 13203(c).
---------------------------------------------------------------------------
D. Requirements Relating to All Expungement Hearings
FINRA Rules 12805 and 13805 currently provide a list of
requirements panels must follow in order to issue an award containing
expungement relief.\136\ In addition, the Guidance provides best
practices that arbitrators should follow when deciding expungement
requests. To further guide the arbitrators' decision-making, the
proposed rule change would expand the expungement hearing requirements
currently in FINRA Rules 12805 and 13805 and incorporate relevant
provisions from the Guidance. The proposed requirements would apply to
all expungement hearings.\137\
---------------------------------------------------------------------------
\136\ See supra note 45.
\137\ See proposed Rules 12805(c) and 13805(c). The proposed
requirements for expungement hearings would apply to expungement
hearings held during a customer arbitration under proposed Rule
12805, a simplified customer arbitration under proposed Rule 12800
(see infra Item II.A.1.II.G., ``Expungement Requests During
Simplified Customer Arbitrations'') and a straight-in request under
proposed Rule 13805, unless otherwise specified.
---------------------------------------------------------------------------
1. Recorded Hearing Sessions
The Codes require a panel that is deciding an expungement request
to hold a recorded hearing session (by telephone or in person)
regarding the appropriateness of expungement.\138\ The proposed rule
change would provide that the panel must hold one or more separate
recorded hearing sessions regarding the expungement request, clarifying
that the panel would not be limited in the number of hearing sessions
it should hold to decide the expungement request.\139\ The proposed
amendments would also remove the specific reference to the hearing
being held by telephone or in person because, as discussed below, the
participants in the hearing may appear by different methods.
---------------------------------------------------------------------------
\138\ See FINRA Rules 12805(a) and 13805(a).
\139\ See proposed Rules 12805(c)(1) and 13805(c)(1).
---------------------------------------------------------------------------
2. Associated Person's Appearance
The proposed rule change would require the associated person whose
information in the CRD system is the subject of the expungement request
to appear in person or by video conference at the expungement
hearing.\140\ A party requesting expungement on behalf of an unnamed
person or the party's representative would also be required to appear
in person or by video conference at the hearing. The panel would
determine the method of appearance.
---------------------------------------------------------------------------
\140\ See proposed Rules 12805(c)(2) and 13805(c)(2).
---------------------------------------------------------------------------
As the associated person is seeking the permanent removal of
information from the CRD system, FINRA believes the associated person
should be required to appear in person or by video conference at the
expungement hearing and be available to respond to questions. Requiring
that the associated person's appearance be in person or by video
conference would help the panel assess the associated person's
credibility, which may be particularly important if the request is
unopposed.
3. Customer's Attendance and Participation During the Expungement
Hearing
The Guidance states that it is important to allow customers and
their representatives to participate in the expungement hearing if they
wish to do so.\141\ Specifically, the Guidance provides that
arbitrators should:
---------------------------------------------------------------------------
\141\ The Guidance directs arbitrators to permit customers and
their counsel to participate in the expungement hearing. See
Guidance, supra note 5. FINRA Rules 12208 and 13208 permit a party
to be represented pro se, by an attorney or by a person who is not
an attorney. Accordingly, the proposed amendments use the term
``representative'' rather than ``counsel.'' See also Securities
Arbitration--Should You Hire an Attorney? (Jan. 3, 2019), <a href="https://www.finra.org/investors/insights/securities-arbitration">https://www.finra.org/investors/insights/securities-arbitration</a>; How to Find
an Attorney, <a href="https://www.finra.org/arbitration-mediation/how-find-attorney">https://www.finra.org/arbitration-mediation/how-find-attorney</a>; and Resources for Investors Representing Themselves,
<a href="https://www.finra.org/arbitration-mediation/resources-investors-representing-themselves">https://www.finra.org/arbitration-mediation/resources-investors-representing-themselves</a>.
---------------------------------------------------------------------------
[[Page 50183]]
<bullet> Allow the customer and their representative to appear at
the expungement hearing;
<bullet> Allow the customer to testify (telephonically, in person,
or other method) at the expungement hearing;
<bullet> Allow the representative for the customer or a pro se
customer to introduce documents and evidence at the expungement
hearing;
<bullet> 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
<bullet> Allow the representative for the customer or a pro se
customer to present opening and closing arguments if the panel allows
any party to present such arguments.
The proposed rule change would codify these provisions of the
Guidance. The proposed rule change would make clear that all customers
whose customer arbitrations, civil litigations or customer complaints
are a subject of the expungement request are entitled to representation
and may attend and participate in the expungement hearing.\142\ These
customers would also be entitled to attend and participate in any
prehearing conferences held for straight-in requests.\143\ Because
expungement requests may otherwise be unopposed, FINRA believes that
the customers should be allowed to attend and participate in the
entirety of the expungement hearing and any prehearing conferences.
---------------------------------------------------------------------------
\142\ See proposed Rules 12805(c)(3)(A), 12805(c)(4),
13805(c)(3)(A) and 13805(c)(4). The proposed rule change would make
clear that customers also have the option to provide their position
on the expungement request in writing in lieu of attending the
hearing.
\143\ See proposed Rule 13805(c)(3)(A). A prehearing conference
is any hearing session, including an Initial Prehearing Conference
(``IPHC''), that takes place before the hearing on the merits
begins. See FINRA Rules 12100(y) and 13100(w); see also FINRA Rules
12500 and 13500. Under the proposal, all customers whose customer
arbitrations, civil litigations or customer complaints are a subject
of the straight-in request would be entitled to representation at
prehearing conferences. See proposed Rule 13805(c)(4).
---------------------------------------------------------------------------
The proposed rule change would provide that the customer could
choose to attend and participate by telephone, in person or by video
conference.\144\ Customer attendance and participation during an
expungement hearing provides the panel with important information and
perspective that it might not otherwise receive. By providing customers
with options for how to attend and participate in hearings, FINRA seeks
to encourage customer attendance and participation by making it easier
for customers to do so.
---------------------------------------------------------------------------
\144\ See proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B).
---------------------------------------------------------------------------
The proposed rule change would also specify ways in which the
customer must be allowed to attend and participate in the expungement
hearing. First, the proposed rule change would provide that customers
or customers' representatives must be allowed to introduce evidence
during the expungement hearing.\145\ If the customer or customer's
representative introduces any evidence at the expungement hearing, a
party could state objections to the introduction of the evidence during
the expungement hearing.\146\
---------------------------------------------------------------------------
\145\ See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).
\146\ See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).
---------------------------------------------------------------------------
Second, the customers and the customers' witnesses would be allowed
to testify at the expungement hearing and be questioned by the customer
or customer's representative.\147\ If customers or their witnesses
testify, the associated person or a party requesting expungement on
behalf of an unnamed person would be allowed to conduct cross-
examination.\148\
---------------------------------------------------------------------------
\147\ See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B).
\148\ See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B).
---------------------------------------------------------------------------
Third, the customer or customer's representative would be permitted
to state objections to evidence and cross-examine the associated person
or party requesting expungement on behalf of an unnamed person and any
other witnesses called during the expungement hearing.\149\
---------------------------------------------------------------------------
\149\ See proposed Rules 12805(c)(5)(C) and 13805(c)(5)(C).
---------------------------------------------------------------------------
Fourth, the customer or customer's representative would be
permitted to present opening and closing arguments if the panel permits
any party to present such arguments.\150\
---------------------------------------------------------------------------
\150\ See proposed Rules 12805(c)(5)(D) and 13805(c)(5)(D).
---------------------------------------------------------------------------
FINRA believes the proposal strikes the right balance of allowing
the customer to attend and participate in the hearing and giving the
associated person or party requesting expungement on behalf of an
unnamed person the opportunity to substantiate arguments in support of
the expungement request.
4. Panel Requests for Additional Documents or Evidence
Arbitrators on the panel do not conduct their own research when
hearing an arbitration case; instead, they review the materials
provided by the parties. If they need more information, they can
request it from the parties. In deciding an expungement request,
particularly in cases that settle before an evidentiary hearing or in
cases where the customer does not attend or participate in the
expungement hearing, the panel's role as fact finder is critical. Given
this significant role, the panel must ensure that it has all of the
information necessary to make a fully informed decision on the
expungement request on the basis of a complete factual record.
Thus, the proposed rule change would codify the ability of the
panel to request from the associated person, the party requesting
expungement on behalf of an unnamed person and the member firm at which
the person was associated at the time the customer dispute arose, as
applicable, any documentary, testimonial or other evidence that the
panel deems relevant to the expungement request.\151\ This would allow
the panel, for example, to require the associated person to produce
documents that the panel deems relevant at the prehearing conference,
to testify in response to questions by the panel at the hearing or to
provide transcripts of previously obtained witness testimony.
---------------------------------------------------------------------------
\151\ See proposed Rules 12805(c)(6) and 13805(c)(7). The
Guidance also suggests that arbitrators should ask the associated
person seeking expungement or the party seeking expungement on an
associated person's behalf to provide a current copy of the
BrokerCheck report for the person whose record would be expunged,
paying particular attention to the ``Disclosure Events'' section of
the report. See Guidance, supra note 5. FINRA continues to encourage
arbitrators to request a current copy of the associated person's
BrokerCheck report.
---------------------------------------------------------------------------
5. Review of Settlement Documents
Current FINRA Rules 12805(b) and 13805(b) provide that, in the
event a customer dispute is resolved by settlement, the panel
considering the expungement request must review the settlement
documents and consider the amount of payments made to any party and any
other terms and conditions of the settlement.\152\ The proposed rule
[[Page 50184]]
change would retain this requirement.\153\
---------------------------------------------------------------------------
\152\ The panel must review settlement documents that are
related to the customer dispute information that is the subject of
the expungement request, regardless of whether the associated person
was a party to the settlement.
\153\ See proposed Rules 12805(c)(7) and 13805(c)(8). FINRA Rule
2081 provides that no member firm or associated person shall
condition or seek to condition settlement of a dispute with a
customer on, or to otherwise compensate the customer for, the
customer's agreement to consent to, or not to oppose, the member's
or associated person's request to expunge such customer dispute
information from the CRD system. See also Prohibited Conditions
Relating to Expungement of Customer Dispute Information FAQ, <a href="https://www.finra.org/arbitration-mediation/faq/prohibited-conditions-relating-expungement-customer-dispute-information">https://www.finra.org/arbitration-mediation/faq/prohibited-conditions-relating-expungement-customer-dispute-information</a>.
---------------------------------------------------------------------------
In addition, the Guidance encourages arbitrators to inquire and
fully consider whether a party conditioned a settlement of a customer
dispute upon an agreement not to oppose the request for expungement in
cases in which the customer does not attend or participate in the
expungement hearing or the requesting party states that a customer has
indicated that the customer will not oppose the expungement request.
Because conditioned settlements violate FINRA Rule 2081 and may be
grounds to deny an expungement request, the proposed rule change would
codify the language in the Guidance.\154\
---------------------------------------------------------------------------
\154\ See proposed Rules 12805(c)(7) and 13805(c)(8).
---------------------------------------------------------------------------
6. Unanimous Decision To Issue an Award Containing Expungement Relief
Current FINRA Rules 12805 and 13805 require that, in order to issue
an award containing expungement of customer dispute information, the
panel must indicate in the arbitration award which of the FINRA Rule
2080 grounds for expungement serves as the basis for its expungement
order. Consistent with arbitration cases generally, the panel may award
expungement based on a majority decision of the arbitrators.\155\
---------------------------------------------------------------------------
\155\ See FINRA Rules 12410 and 13414.
---------------------------------------------------------------------------
The proposed rule change would require that the arbitrators agree
unanimously to issue an award containing expungement relief.\156\
Although the vast majority of expungement decisions are already
unanimous,\157\ FINRA believes that this change would help protect the
integrity of the information in the CRD system and help ensure that the
expungement process operates as intended--as a remedy that is
appropriate only in limited circumstances in accordance with the narrow
standards in FINRA rules.\158\
---------------------------------------------------------------------------
\156\ See proposed Rules 12805(c)(8)(A) and 13805(c)(9)(A).
FINRA notes that when deciding a customer's claims, a majority
decision of the arbitrators would continue to be sufficient.
\157\ During the sample period, in arbitrations decided by a
three-person arbitration panel and involving an expungement request,
the panel decision was unanimous (not unanimous) in 98 percent (two
percent) of arbitrations. In one percent of the arbitrations, the
decision awarding expungement was not unanimous and would not have
been permitted under the proposed change.
\158\ See supra note 27 and accompanying text.
---------------------------------------------------------------------------
To further protect the integrity of the information in the CRD
system, the proposed amendments would also provide that in order to
issue an award containing expungement relief, the unanimous finding
must be that one or more of the grounds for expungement enumerated in
the proposed rule has been established: (1) the claim, allegation or
information is factually impossible or clearly erroneous; (2) the
associated person was not involved in the alleged investment-related
sales practice violation, forgery, theft, misappropriation or
conversion of funds; or (3) the claim, allegation or information is
false.\159\ To help ensure there is no confusion as to which standard
the arbitrators must apply, the proposed rule change would also state
that the panel shall not issue, and the Director shall not serve, an
award containing expungement relief based on any other grounds.\160\
---------------------------------------------------------------------------
\159\ See proposed Rules 12805(c)(8)(A)(i) and
13805(c)(9)(A)(i).
\160\ See proposed Rules 12805(c)(8)(A)(ii) and
13805(c)(9)(A)(ii). FINRA further notes that it would be
inappropriate to award expungement of customer dispute information
that is associated with a customer arbitration or civil litigation
in which the associated person was found liable. In this
circumstance, the liability finding would be inconsistent with a
finding that one of the three grounds has been established to issue
an award containing expungement relief.
---------------------------------------------------------------------------
The Codes, which include FINRA Rules 12805 and 13805, govern the
processes by which all arbitration cases are administered in the DRS
arbitration forum.\161\ Accordingly, the three grounds referenced in
proposed Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i) on which a panel
must unanimously make a finding to issue an award containing
expungement relief would be the exclusive grounds upon which a panel
could award expungement in the DRS arbitration forum.\162\
---------------------------------------------------------------------------
\161\ See FINRA Rules 12101 and 13101 (describing how the Codes
apply to disputes submitted to arbitration).
\162\ FINRA Rule 2080 is not part of the Codes, and FINRA is not
proposing amendments to FINRA Rule 2080 at this time. With this
proposed rule change, FINRA is proposing to codify the grounds
identified in FINRA Rule 2080(b)(1) as the exclusive grounds upon
which an arbitration panel may issue an award containing expungement
of customer dispute information from the CRD system. See also supra
note 31 (discussing prior statements by the SEC and FINRA that
expungement may occur only after the arbitrators find that one or
more of the grounds in FINRA Rule 2080(b)(1) serves as the basis for
the expungement award). The discretionary standard in FINRA Rule
2080(b)(2) would not be a basis for a panel to award expungement
relief in the DRS arbitration forum. FINRA Rule 2080(b)(2) provides
``FINRA''--not arbitrators in the DRS arbitration forum--the
ability, ``in [FINRA's] sole discretion and under extraordinary
circumstances,'' to waive the obligation to name FINRA as an
additional party to a court proceeding related to expungement of
customer dispute information from CRD if FINRA ``determines that:
(A) the expungement relief and accompanying findings on which it is
based are meritorious; and (B) the expungement would have no
material adverse effect on investor protection, the integrity of the
CRD system or regulatory requirements.''
Although FINRA is not proposing to amend FINRA Rule 2080 at this
time, it is considering whether enhancements to the current
expungement process through changes to FINRA Rule 2080 may be
warranted. See Discussion Paper, supra note 13 (exploring potential
alternatives to the current expungement process, including potential
changes to FINRA Rule 2080).
---------------------------------------------------------------------------
7. Contents of the Expungement Award
The panel is currently required to provide a ``brief'' written
explanation of the reasons for its finding that one or more of the
grounds for expungement applies to the facts of the case.\163\ The
proposed rule change would retain the requirement to provide the
written explanation, but would remove the word ``brief'' such that the
panel would be required to provide enough detail in the award to
explain its rationale for awarding expungement relief.\164\ As the
Guidance suggests, the panel's explanation must be complete and not
solely a recitation of one of the FINRA Rule 2080(b)(1) grounds or
language provided in the expungement request. For the same reason, the
proposed rule change would incorporate language from the Guidance that
the panel's explanation should identify any specific documentary,
testimonial or other evidence on which the panel relied in awarding
expungement relief.\165\
---------------------------------------------------------------------------
\163\ See FINRA Rules 12805(c) and 13805(c).
\164\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B).
\165\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B).
---------------------------------------------------------------------------
8. Evidentiary Weight of Decision of Customer or Authorized
Representative Not To Attend or Participate
The proposed amendments would also instruct the panel that the
decision of a customer or an authorized representative of state
securities regulators (``authorized representative'') not to attend or
participate in the expungement hearing shall not be material to the
determination of whether expungement is appropriate.\166\ FINRA is
aware that some panels have indicated in expungement awards that a
customer did not appear at the
[[Page 50185]]
expungement hearing. A customer or an authorized representative may not
attend, participate in or appear at an expungement hearing for a
variety of reasons that may be unrelated to the merits of the
expungement request. Accordingly, FINRA believes that a customer's or
an authorized representative's decision not to attend or participate
should not be given any evidentiary weight by the panel when making the
expungement determination.
---------------------------------------------------------------------------
\166\ See proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C); see
also infra Item II.A.1.II.F., ``Attendance and Participation of an
Authorized Representative of State Securities Regulators in
Straight-in Requests'' (discussing the attendance and participation
in straight-in requests of an authorized representative of state
securities regulators).
---------------------------------------------------------------------------
9. Forum Fees
The proposed rule change would retain the current requirements in
FINRA Rules 12805(d) and 13805(d) that address how DRS arbitration
forum fees are assessed in expungement hearings. Specifically, the
panel must assess against the parties requesting expungement all DRS
arbitration forum fees for each hearing session in which the sole topic
is the determination of the appropriateness of expungement.\167\
---------------------------------------------------------------------------
\167\ See proposed Rules 12805(c)(9) and 13805(c)(10).
---------------------------------------------------------------------------
E. Notifications to Customers and to State Securities Regulators
Regarding Expungement Requests
1. Notification to Customers by the Associated Person
The Guidance suggests that when a straight-in request is filed
against a firm, arbitrators order the associated person to provide a
copy of the statement of claim to the customers involved in the
customer dispute that gave rise to the customer dispute information
maintained in the CRD system. This helps ensure that the customers know
about the expungement request and have an opportunity to attend and
participate in the expungement hearing or provide a position in writing
on the associated person's request. The proposed rule change would
codify this practice in the Industry Code by requiring that the
associated person serve all customers whose customer arbitrations,
civil litigations or customer complaints are a subject of the
expungement request with a copy of the statement of claim requesting
expungement and any answer.\168\ The associated person would be
required to serve a copy of the statement of claim and a copy of any
answer within 10 days of filing.\169\ The panel would be authorized to
decide whether extraordinary circumstances exist that make service on
the customers impracticable.\170\
---------------------------------------------------------------------------
\168\ See proposed Rule 13805(b)(1)(A)(i) and (ii). This
requirement would apply to straight-in requests filed under the
Industry Code; notice to customers would not be necessary for
requests filed under proposed Rule 12805 of the Customer Code as the
customer would be a named party.
\169\ See proposed Rule 13805(b)(1)(A)(ii).
\170\ See proposed Rule 13805(b)(1)(A)(i).
---------------------------------------------------------------------------
Given the associated person's personal interest in obtaining
expungement, FINRA believes that the panel should review all documents
that the associated person used to inform the customers about the
expungement request as well as any customer responses received.
Accordingly, the proposed rule change would require the associated
person to file with the panel proof of service for the statement of
claim and any answers, copies of all documents provided by the
associated person to the customers, and copies of all communications
sent by the associated person to the customers and any responses
received from the customers.\171\ The proposed requirement would also
help ensure that the associated person does not attempt to dissuade a
customer from attending or participating in the expungement hearing.
---------------------------------------------------------------------------
\171\ See proposed Rule 13805(b)(1)(A)(iv).
---------------------------------------------------------------------------
2. Notifications to the Customer by the Director
Customer attendance and participation in expungement hearings helps
the panel fully develop a record on which to decide the expungement
request. Accordingly, the proposed rule change would require the
Director to notify all customers whose customer arbitrations, civil
litigations or customer complaints are a subject of the expungement
request, of the time, date and place of any prehearing conferences and
the expungement hearing.\172\
---------------------------------------------------------------------------
\172\ See proposed Rule 13805(b)(1)(B)(i). This requirement
would apply to straight-in requests filed under the Industry Code;
notice to customers would not be necessary for requests filed under
proposed Rule 12805 of the Customer Code as the customer would be a
named party. See also infra Item II.A.1.II.G.3., ``Customer
Notification of Expungement Hearings during Simplified
Arbitrations'' (discussing customer notification of expungement
hearings in connection with simplified arbitrations).
---------------------------------------------------------------------------
The Director would include language in the notice to encourage the
customer to attend and participate in the expungement hearing. The
associated person would be required to provide a current address for
the customer,\173\ or the expungement request would be considered
deficient and would not be served.\174\ The Director's notice to the
customer would serve as a reminder of the expungement request and would
provide the customer with timely notice of any prehearing conferences
and expungement hearings so that customers may plan and prepare to
attend and participate if they choose.
---------------------------------------------------------------------------
\173\ See proposed Rule 13805(b)(1)(B)(i).
\174\ See proposed Rule 13307(a)(7).
---------------------------------------------------------------------------
The Director would also provide the notified customers with access
to all documents that are relevant to (a) the expungement request that
are filed in the straight-in request and (b) any prior customer
arbitration brought by the customer that is a subject of the
expungement request.\175\ This would provide the customer with access
to the key documents surrounding the request for expungement prior to
their attendance and participation in the expungement hearing.
---------------------------------------------------------------------------
\175\ See proposed Rule 13805(b)(1)(B)(ii). FINRA would provide
customers with access to the documents through the DR Portal. The DR
Portal has two parts: the DR Neutral Portal is for FINRA neutrals
serving on the Dispute Resolution roster, and the DR Party Portal is
for arbitration and mediation case participants. Once registered on
the DR Portal, parties may use the portal to, among other things,
file an arbitration claim, view case documents, submit documents to
FINRA and send documents to other portal case participants, and
schedule hearing dates. See FINRA Dispute Resolution Services, DR
Portal, <a href="https://www.finra.org/arbitration-mediation/dr-portal">https://www.finra.org/arbitration-mediation/dr-portal</a>.
---------------------------------------------------------------------------
3. Notifications to State Securities Regulators
The proposed rule change would require FINRA to notify state
securities regulators, in the manner determined by the Director in
collaboration with state securities regulators, of an expungement
request within 15 days of receiving an expungement request.\176\ The
proposed notification requirement would help ensure that state
securities regulators are timely notified of expungement requests.
---------------------------------------------------------------------------
\176\ See proposed Rules 12800(f)(1), 12805(b) and
13805(b)(2)(A). FINRA would make this notification in connection
with expungement requests under the Customer and Industry Codes.
Such notification could be achieved by notifying NASAA of the
expungement requests.
---------------------------------------------------------------------------
F. Attendance and Participation of an Authorized Representative of
State Securities Regulators in Straight-In Requests
The current expungement process does not include a mechanism to
facilitate state securities regulator involvement in expungement
hearings in the DRS arbitration forum. The proposed rule change would
provide a mechanism for an authorized representative to provide the
state securities regulators' position or positions on an expungement
request in writing or by attending and participating in the expungement
hearing in person or by video conference.\177\ This attendance and
participation by an authorized representative of the state securities
regulators would be limited to straight-
[[Page 50186]]
in requests, where the panel may otherwise only hear evidence from the
party requesting expungement.
---------------------------------------------------------------------------
\177\ See proposed Rule 13805(c)(6)(A).
---------------------------------------------------------------------------
At the same time as providing notification to state securities
regulators of a straight-in request, the Director would provide state
securities regulators with access to all documents relevant to (a) the
expungement request filed in the arbitration requesting expungement
relief and (b) any other customer arbitration brought under the
Customer Code that is associated with the customer dispute information
that is a subject of the expungement request.\178\ Providing state
securities regulators with these documents would help facilitate a
determination of whether to attend and participate in the expungement
hearing.
---------------------------------------------------------------------------
\178\ See proposed Rule 13805(b)(2)(B). The state securities
regulators' access to the documents would be subject to
confidentiality restrictions. Outside of the DRS arbitration
process, state securities regulators could choose to seek access to
additional documents and information pursuant to their separate
authority.
---------------------------------------------------------------------------
If the Director receives notification from an authorized
representative no later than 30 days after the last answer is due that
the authorized representative intends to attend and participate in the
expungement hearing, the Director shall notify the authorized
representative of the time, date and place of any prehearing
conferences and the expungement hearing.\179\ At the expungement
hearing, the authorized representative would be permitted to: (1)
introduce documentary, testimonial, or other evidence; (2) cross-
examine witnesses; and (3) present opening and closing arguments if the
panel allows any party to present such arguments.\180\ The other
persons appearing at the expungement hearing could state objections to
the authorized representative's evidence and cross-examine the
authorized representative's witnesses.\181\
---------------------------------------------------------------------------
\179\ See proposed Rule 13805(b)(3).
\180\ See proposed Rule 13805(c)(6)(B).
\181\ See proposed Rule 13805(c)(6)(C).
---------------------------------------------------------------------------
The authorized representative would not be considered a party to
the proceeding and their attendance and participation would be limited
to what is authorized by proposed Rule 13805(c)(6).\182\ In addition,
the panel would not be permitted to allow the attendance or
participation of the authorized representative to materially delay the
scheduling of the expungement hearing.\183\
---------------------------------------------------------------------------
\182\ As such, an authorized representative would not be
entitled to seek discovery from the parties through the DRS
arbitration forum, file motions, or seek to postpone a hearing.
\183\ See proposed Rule 13805(c)(6)(A).
---------------------------------------------------------------------------
Allowing an authorized representative to attend and participate in
straight-in requests may provide meaningful opposition to the
expungement request, which might otherwise be unopposed, and thus help
create a more complete factual record for the panel to rely upon to
decide the expungement request. NASAA and state securities regulators
have a shared interest with FINRA in protecting the integrity of the
information contained in the CRD system, as it is a crucial tool in
their registration and oversight responsibilities. According to NASAA,
``[s]tate securities regulators are often legally obligated to maintain
the information in the CRD system as a state record. Much of the
information in the CRD system is filed with state securities regulators
as part of the registration and qualification process, or filed by
state securities regulators themselves. The Uniform Securities Acts,
which form the basis of most state securities statutes, generally
provide that securities regulators must retain all information filed as
part of a registration application or as an amendment to the
information filed as part of the application.'' \184\ Thus, NASAA has
indicated that expungement of customer dispute information potentially
implicates the public records obligations of state governments.\185\
---------------------------------------------------------------------------
\184\ Brief of Amicus Curiae North American Securities
Administrators Association, Inc. in Support of the Division of
Securities and Retail Franchising, at 6-7, <a href="https://www.nasaa.org/wp-content/uploads/2021/06/Brief-of-Amicus-Curiae-NASAA-in-Support-of-the-Div-of-Securities-and-Retail-Franchising-06.23.21.pdf">https://www.nasaa.org/wp-content/uploads/2021/06/Brief-of-Amicus-Curiae-NASAA-in-Support-of-the-Div-of-Securities-and-Retail-Franchising-06.23.21.pdf</a>.
\185\ See supra note 184.
---------------------------------------------------------------------------
The proposal would not allow an authorized representative to attend
or participate in a customer arbitration where expungement has been
requested; such attendance or participation could substantially disrupt
the customer's case and would be less impactful, as the panel hears the
customer's evidence on the merits.
FINRA believes that the proposed rule change strikes the
appropriate balance between respecting states' interest in the
information in the CRD system and maintaining the integrity of the
arbitration process.
G. Expungement Requests During Simplified Customer Arbitrations
Customer arbitrations involving $50,000 or less, called simplified
arbitrations, are governed by FINRA Rule 12800. FINRA Rule 12800
provides customers with expedited procedures to make the DRS
arbitration forum economically feasible for these smaller claims.
Simplified arbitrations are decided on the pleadings and other
materials submitted by the parties, unless the customer requests a
hearing.\186\ Further, a single arbitrator from the public chairperson
roster is appointed to consider and decide simplified arbitrations,
unless the parties agree in writing otherwise.\187\
---------------------------------------------------------------------------
\186\ See FINRA Rule 12800(a).
\187\ See FINRA Rule 12800(b). The parties could agree to have a
three-person panel decide the simplified case. For ease of
reference, when discussing expungement requests in simplified
arbitrations under the proposed rule change, the rule filing uses
the term ``arbitrator,'' unless otherwise specified, to mean either
a panel or single arbitrator.
---------------------------------------------------------------------------
The customer who files a simplified arbitration determines how the
claim will be decided. In particular, the customer has the option of
having the case decided in one of three ways: (1) without a hearing
(referred to as ``on the papers''), where the arbitrator decides the
case on the pleadings or other materials; (2) in an ``Option One'' full
hearing, in which prehearings and hearings on the merits take place
pursuant to the regular provisions of the Code; or (3) in an ``Option
Two'' special proceeding, whereby the parties present their case in a
hearing to the arbitrator in a compressed timeframe, so that the
hearings last no longer than one day.\188\
---------------------------------------------------------------------------
\188\ See FINRA Rule 12800(c). Among the customer arbitrations
that closed in 2021, 14 percent were simplified cases. Among the
simplified customer cases which closed, 23 percent closed on the
papers, four percent closed with a full hearing, and four percent
closed by special proceeding. The remaining 69 percent closed by
other means including by settlement and withdrawal.
---------------------------------------------------------------------------
Currently, named associated persons and parties requesting
expungement on behalf of unnamed persons request expungement during
simplified arbitrations. FINRA Rule 12800 does not, however, expressly
address how an expungement request should be filed or considered during
a simplified arbitration. The proposed rule change would codify an
associated person's ability to request expungement when named as a
respondent in a simplified arbitration, and for other parties to
request expungement on behalf of an unnamed person. The proposed rule
change would also establish procedures for requesting and considering
expungement requests in simplified arbitrations that are consistent
with the expedited nature of these proceedings.\189\
---------------------------------------------------------------------------
\189\ See proposed Rules 12800(d) and (e). Under the proposed
rule change, an associated person would not be permitted to request
expungement in a simplified arbitration administered under the
Industry Code, FINRA Rule 13800. All expungement requests under the
Industry Code must be filed in accordance with proposed Rule 13805.
---------------------------------------------------------------------------
[[Page 50187]]
1. Requesting Expungement
The proposed rule change would permit a named associated person to
request expungement, or a party to file an on-behalf-of request, during
a simplified arbitration. As discussed in more detail below, unlike in
a non-simplified arbitration, if expungement is not requested during
the simplified arbitration, the associated person would be permitted to
request it as a straight-in request filed under the Industry Code.\190\
---------------------------------------------------------------------------
\190\ See infra Item II.A.1.II.G.1.c., ``When No Expungement
Request is Filed in a Simplified Arbitration.''
---------------------------------------------------------------------------
a. By a Named Associated Person During the Simplified Arbitration
Under the proposed rule change, an associated person named as a
respondent in a simplified arbitration could request expungement during
the arbitration of the customer dispute information associated with the
customer's statement of claim, provided the request is eligible for
arbitration.\191\
---------------------------------------------------------------------------
\191\ See proposed Rule 12800(d)(1)(A). The limitations that
apply to expungement requests filed by a named associated person
under proposed Rule 12805(a)(1)(B) would apply to these requests.
See supra Item II.A.1.II.C., ``Limitations on Expungement
Requests.''
---------------------------------------------------------------------------
If a named associated person requests expungement during a
simplified arbitration, the proposed rule change would require the
request to be filed in an answer or a separate pleading requesting
expungement.\192\ If the named associated person requests expungement
in a pleading other than an answer, the request must be filed within 30
days after the date FINRA notifies the parties of the appointment of
the arbitrator.\193\ Given the expedited nature of the simplified
arbitration process, tying the request to these milestones would ensure
that parties receive timely notice of the expungement request so that
they may prepare their cases accordingly. The request would be required
to include the same information as a request filed in a non-simplified
arbitration.\194\
---------------------------------------------------------------------------
\192\ See proposed Rule 12800(d)(1)(B)(i). A respondent's answer
must be submitted within 45 days of receipt of the statement of
claim. See supra note 46.
\193\ See proposed Rule 12800(d)(1)(B)(i). When FINRA notifies
the parties when an arbitrator has been appointed, FINRA informs the
parties that they have 30 days from the date of notification to
submit additional documents or other information before the case is
submitted to the arbitrator.
\194\ See proposed Rules 12800(d)(1)(B)(i) and
12805(a)(1)(C)(ii). Thus, the associated person's expungement
request would be required to contain the applicable filing fee; the
CRD number of the party requesting expungement; each CRD occurrence
number that is the subject of the request; the case name and docket
number associated with the customer dispute information; and an
explanation of whether expungement of the same customer dispute
information was previously requested and, if so, how it was decided.
---------------------------------------------------------------------------
To limit arbitrator shopping, the arbitrator would be required to
decide an expungement request once it is filed by the associated
person.\195\ If an associated person withdraws or does not pursue the
request after filing, the arbitrator would be required to deny the
request with prejudice so that it could not be re-filed.\196\
---------------------------------------------------------------------------
\195\ See proposed Rules 12800(d)(1)(B)(ii) and 12800(e)(1).
\196\ See proposed Rule 12800(d)(1)(C).
---------------------------------------------------------------------------
b. By a Party on Behalf of an Unnamed Person
Under the proposed amendments, the requirements for a party to file
an on-behalf-of request during a simplified arbitration would be the
same as the requirements for a named associated person filing an
expungement request during a simplified arbitration. A named party
would only be able to file an on-behalf-of request during a simplified
arbitration with the consent of the unnamed person.\197\ As with on-
behalf-of requests filed in customer arbitrations under proposed Rule
12805(a)(2), the unnamed person who would benefit from the expungement
request must consent to such filing by signing the Form.\198\
---------------------------------------------------------------------------
\197\ See proposed Rule 12800(d)(2)(A).
\198\ See proposed Rule 12800(d)(2). The request must also meet
the same requirements as an on-behalf-of request filed under
proposed Rule 12805(a)(2). See proposed Rules 12805(a)(1)(C)(ii),
12805(a)(2)(C)(ii) and 12805(a)(2)(D); see also supra Item
II.A.1.II.A.1.b., ``Expungement Requests By a Party Named in the
Customer Arbitration On Behalf Of an Unnamed Person.''
---------------------------------------------------------------------------
To limit arbitrator shopping, the arbitrator would be required to
decide an on-behalf-of request once it is filed by the requesting
party.\199\ If the requesting party withdraws or does not pursue the
on-behalf-of request after filing, the arbitrator would be required to
deny the request with prejudice so that it could not be re-filed.\200\
---------------------------------------------------------------------------
\199\ See proposed Rules 12800(d)(2)(B)(ii) and 12800(e)(1).
\200\ See proposed Rule 12800(d)(2)(C).
---------------------------------------------------------------------------
c. When No Expungement Request Is Filed in a Simplified Arbitration
If expungement is not requested during the simplified arbitration
under proposed Rule 12800(d), the associated person would be able to
file a straight-in request under proposed Rule 13805 and have the
request decided by a three-person panel randomly selected from the
Special Arbitrator Roster.\201\ The request would be subject to the
limitations on whether and when such requests may be filed under the
Industry Code.\202\
---------------------------------------------------------------------------
\201\ See proposed Rules 12800(e)(2), 13805(a)(1) and 13806.
\202\ See proposed Rule 13805(a)(2); see also supra Item
II.A.1.II.C., ``Limitations on Expungement Requests.''
---------------------------------------------------------------------------
Due to the expedited nature of simplified arbitrations, FINRA
believes that fairness dictates that the associated person have the
option to seek expungement separately under the Industry Code and have
the expungement request decided by a panel randomly selected from the
Special Arbitrator Roster. In simplified arbitrations, there may be
less discovery, and the customer can dictate the extent of the evidence
presented to the arbitrator. The customer may, for example, determine
to have the arbitration decided on the papers. Because there may be
less information available for the arbitrator to evaluate an
expungement request during a simplified arbitration--even when the
simplified arbitration results in an award--the associated person would
retain the ability to choose to file the request as a straight-in
request under the Industry Code.\203\
---------------------------------------------------------------------------
\203\ This would allow the associated person to obtain and
present evidence from the member firm at which they were associated
at the time the customer dispute arose without interfering with the
simplified customer arbitration process. See proposed Rule
13805(a)(1) and FINRA Rule 13506.
---------------------------------------------------------------------------
2. Deciding Expungement Requests During Simplified Arbitrations
If a named associated person or party on behalf of an unnamed
person requests expungement during a simplified arbitration, the
arbitrator would be required to decide the expungement request,
regardless of how the simplified arbitration closes (e.g., even if the
arbitration settles).\204\ As discussed in more detail below,
arbitrators deciding expungement requests in simplified arbitrations
would be experienced public arbitrators who would be required to
evidence successful completion of, and agreement with, the enhanced
expungement training provided by DRS prior to considering and deciding
the expungement request.
---------------------------------------------------------------------------
\204\ See proposed Rule 12800(e)(1).
---------------------------------------------------------------------------
Under the proposed rule change, how and when the expungement
request is decided would depend on which option the customer selects to
decide the simplified arbitration.
a. No Hearing or Option Two Special Proceeding
If the customer opts not to have a hearing or chooses an Option Two
special proceeding, the arbitrator would decide the customer's dispute
first and
[[Page 50188]]
issue an award.\205\ After the customer's dispute is decided, the
arbitrator must hold a separate expungement-only hearing to consider
and decide the expungement request and issue a separate, subsequent
award.\206\
---------------------------------------------------------------------------
\205\ See proposed FINRA Rule 12800(e)(1)(A).
\206\ See proposed Rule 12800(e)(1)(A). The arbitrator must
conduct the expungement hearing pursuant to proposed Rule 12805(c).
The expungement award must meet the requirements of proposed Rule
12805(c)(8), and the DRS arbitration forum fees would be assessed
pursuant to proposed Rule 12805(c)(9).
---------------------------------------------------------------------------
The arbitrator would decide the customer's dispute first and issue
an award to minimize any delays in resolving the customer arbitration
and any delays in potential recovery that a customer may be awarded.
Further, because the customer arbitration may not be as fully developed
when an ``on the papers'' or special proceeding is requested, the
arbitrator would conduct a separate expungement-only hearing to develop
the factual record and make a fully informed decision on the
expungement request, and could request any documentary, testimonial or
other evidence it deems relevant to the expungement request.
b. Option One Hearing
If the customer chooses to have a full ``Option One'' hearing on
his or her claim and it closes by award, the arbitrator would be
required to consider and decide the expungement request during the
customer arbitration and include the decision on the expungement
request in the same award as the decision on the customer
arbitration.\207\ This process would be the same as deciding an
expungement request during a non-simplified customer arbitration that
closes by award after a hearing, where the customer's claim and
expungement request are addressed during the customer arbitration.
---------------------------------------------------------------------------
\207\ See proposed Rule 12800(e)(1)(B)(i).
---------------------------------------------------------------------------
If the customer arbitration closes other than by award or by award
without a hearing, the arbitrator would be required to hold a separate
expungement-only hearing to consider and decide the expungement request
and issue a separate award containing the decision on the expungement
request.\208\ The arbitrator would conduct a separate expungement-only
hearing to develop the factual record and make a fully informed
decision on the expungement request.
---------------------------------------------------------------------------
\208\ See proposed Rule 12800(e)(1)(B)(ii).
---------------------------------------------------------------------------
FINRA does not believe that it is necessary for a panel from the
Special Arbitrator Roster to decide an expungement request if a
simplified customer arbitration is decided on the papers, in an Option
Two special proceeding, or if the simplified customer arbitration
closes other than by award or by award without a hearing. FINRA
believes that the public chairpersons who decide simplified
arbitrations would be fully capable of making appropriate expungement
decisions on the basis of their experience.\209\ In addition, the
public chairperson would be required to evidence successful completion
of, and agreement with, the enhanced expungement training provided by
DRS prior to considering and deciding the expungement request and,
therefore, would have the same enhanced expungement training as the
arbitrators on the Special Arbitrator Roster.
---------------------------------------------------------------------------
\209\ See supra note 102 and accompanying text.
---------------------------------------------------------------------------
If the Commission approves the proposed rule change, FINRA notes,
however, that it will continue to monitor expungement requests and
decisions in simplified arbitrations to determine if such requests
should be decided by the Special Arbitrator Roster.
3. Customer Notification of Expungement Hearings During Simplified
Arbitrations
The Director would notify all customers from the simplified
arbitration of the separate expungement-only hearing.\210\ The
Director's notice would serve as a reminder of the expungement request
and would provide the customers with timely notice of the expungement
hearing so that the customers and their representatives may plan and
prepare to attend and participate if they choose.
---------------------------------------------------------------------------
\210\ See proposed Rule 12800(f)(2).
---------------------------------------------------------------------------
H. Non-Substantive Changes
FINRA is also proposing to amend the Codes to make non-substantive,
technical changes to the rules impacted by the proposed rule change.
For example, the proposed rule change would require the renumbering of
paragraphs and the updating of cross-references in the rules impacted
by the proposed rule change. In addition, the title of Part VIII of the
Customer Code would be amended to add a reference to ``Expungement
Proceedings.'' Similarly, the title of Part VIII of the Industry Code
would be amended to add a reference to ``Expungement Proceedings'' and
``Promissory Note Proceedings.'' FINRA believes the proposed changes to
the titles would more accurately reflect the contents of Part VIII of
the Customer and Industry Codes. FINRA is also proposing to re-number
current FINRA Rule 13806 (Promissory Note Proceedings) as new FINRA
Rule 13807, without substantive change to the current rule language and
to amend FINRA Rule 13214 to change the cross references from Rules
13806(d)(1) and 13806(f) to Rules 13807(d)(1) and 13807(f),
respectively. Finally, FINRA would also amend FINRA Rule 13600 to
change the cross reference from Rule 13806(e)(1) to Rule 13807(e)(1).
If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice following Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\211\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\211\ 15 U.S.C. 78o.
---------------------------------------------------------------------------
The proposed rule change seeks to balance the interests of
securities regulators in having accurate and relevant information to
fulfill their regulatory responsibilities; the interests of investors
in having access to accurate and meaningful information about
associated persons with whom they may entrust their money; the
interests of member firms in having accurate information for use in
making informed employment decisions; and the interests of the
brokerage community in having a fair process to address inaccurate
customer dispute information. The proposed rule change will help ensure
that the expungement process works as intended--as a remedy that is
appropriate only in limited circumstances in accordance with the narrow
standards in FINRA rules.
The current expungement framework has limitations that can make
deciding straight-in requests more challenging, particularly if the
customer or customer's representative does not attend and participate
in the hearing. By having three specially trained and randomly selected
arbitrators available to ask questions, request evidence and generally
to serve as fact-finders in the absence of customer input, the proposed
rule change will help ensure that a more complete factual record is
created to support the arbitrators' expungement decision. In addition,
the proposed rule change will specifically authorize all panels that
consider expungement requests to request any documentary,
[[Page 50189]]
testimonial or other evidence that they deem relevant to the
expungement request from a member firm or associated person.
To further support the development of a more complete factual
record, the proposed rule change will require that the associated
person appear at the expungement hearing in person or by video
conference. The proposed rule change will also codify the Guidance as
rules that arbitrators and parties must follow and facilitate the
attendance and participation of customers in all expungement hearings,
and by state securities regulators, through an authorized
representative, in expungement hearings in straight-in requests. If
they attend and participate, customer and authorized representative
attendance and participation will provide arbitrators with additional
insight to make more informed decisions on expungement requests. In the
absence of such input, however, the proposal will clarify that a
customer or authorized representative's decision not to attend or
participate in the expungement hearing is not evidence that is material
to the determination of whether expungement is appropriate.
The proposed rule change will also maintain the integrity of the
information in the CRD system by imposing strict time limits on the
filing of straight-in requests. The DRS arbitration forum will be
denied if the expungement request is made more than two years after the
close of the customer arbitration or civil litigation associated with
the customer dispute information or three years after the date the
customer complaint was initially reported in the CRD system. These
changes will ensure that expungement requests are timely filed and will
curtail the bundling of multiple aged, and often unrelated, disclosures
in a single arbitration.
The proposed rule change will also protect investors and the public
interest by requiring arbitrators to unanimously agree to issue an
award containing expungement relief, to make their finding for
expungement relief based on one or more of three grounds specified in
the proposed rule change, to identify the specific grounds on which
that relief is based and to provide a more detailed explanation in the
award of those grounds.
In addition, the proposed rule change will foreclose a practice
that has emerged in the existing expungement process where parties seek
expungement after a prior denial by a court or arbitration panel of a
request to expunge the same customer dispute information, or where
parties withdraw or do not pursue an expungement request and then make
another request for expungement of the same customer dispute
information before a potentially more favorable fact finder. The
proposed rule change imposes procedures and requirements around when
and how a party may request expungement, and expressly provides that
omission of certain of the requirements will make the expungement
request deficient. Further, the proposed rule change provides the
Director with express authority to deny the DRS arbitration forum if an
expungement request is ineligible for arbitration under the proposed
rules or if a request to expunge customer dispute information is not
filed under, or considered in accordance with, the requirements of the
proposed rules. Thus, FINRA believes the proposed rule change will add
tighter controls, additional safeguards and more transparency to the
expungement process.
In addition, the process of requesting expungement during a
simplified arbitration will be codified to help ensure that customers
are aware they can attend and participate in the expungement hearing
and how an expungement request will affect (and not affect) their
arbitration claims. By expressly incorporating the practice of
requesting expungement during simplified proceedings, the proposed
amendments add consistency and transparency to the rules and provide
more guidance to the arbitrators and the parties requesting
expungement.
For these reasons, the proposed rule change represents a
significant step towards addressing concerns with the current
expungement framework. FINRA believes that these changes will help to
maintain the accuracy and integrity of the information in the CRD
system and BrokerCheck, while also protecting associated persons from
the publication of inaccurate information about them.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Assessment
FINRA has undertaken an economic impact assessment to analyze the
regulatory need for the proposed rule change, its potential economic
impacts, including anticipated costs, benefits and distributional and
competitive effects, relative to the current baseline, and the
alternatives FINRA considered in assessing how best to meet FINRA's
regulatory objectives.
1. Regulatory Need
The proposed rule change would address concerns relating to the
expungement process that are not consistent with the regulatory intent
to permit expungement in limited circumstances in accordance with the
narrow standards in FINRA rules. The concerns include the timing of
expungement requests, the resulting impact on customer attendance and
participation in expungement hearings, and the ultimate impact on
expungement decisions made when customers do not attend or participate
and the panel receives information only from the associated person
requesting expungement. The concerns also include the selection of
arbitrators to hear straight-in requests when the associated person
files a statement of claim against a member firm whose interest in
expungement might be aligned with the associated person, and requests
to expunge the same customer dispute information in multiple
proceedings. The proposed rule change would also codify and expand upon
the provisions of the Guidance to help ensure that arbitrators and
parties are adhering to these procedures for all expungement requests.
2. Economic Baseline
The economic baseline for the proposed rule change includes the
current provisions under the Codes that address the process for parties
to seek expungement relief. The economic baseline includes the recent
amendments to the Codes to apply minimum fees to expungement
requests.\212\ In addition, because arbitrators are generally believed
to be adhering to the best practices and recommendations that are a
part of the Guidance, the economic baseline also includes the
Guidance.\213\ The proposed rule change is expected to affect
associated persons and other parties to expungement requests including
member firms, customers, state securities regulators, and arbitrators.
The proposed rule change is also expected to affect users of customer
dispute information contained in the CRD system and displayed through
BrokerCheck.\214\
---------------------------------------------------------------------------
\212\ See supra note 10.
\213\ See Guidance, supra note 5.
\214\ Users of customer dispute information include investors,
member firms and other companies in the financial services industry;
associated persons or individuals seeking employment in the
brokerage industry; and FINRA, state securities regulators, and
other regulators.
---------------------------------------------------------------------------
[[Page 50190]]
The customer dispute information contained in the CRD system is
submitted by registered securities firms in response to questions on
the uniform registration forms.\215\ The customer dispute information
must be reported regardless of the merit of the allegations. FINRA
makes specific CRD information disclosed by firms publicly available
through BrokerCheck.\216\
---------------------------------------------------------------------------
\215\ See supra notes 20 and 21 and accompanying text for
additional discussion of the uniform registration forms and the
information contained in the CRD system. Some of the information may
involve pending actions or allegations that have not been resolved
or proven.
\216\ See supra note 22 and accompanying text.
---------------------------------------------------------------------------
The information in BrokerCheck can be valuable to current and
prospective customers to learn about the conduct of associated
persons.\217\ Current and prospective customers may not select or
remain engaged with an associated person or a member firm that employs
an associated person with a record of customer disputes. Similarly,
member firms and other companies in the financial services industry may
use the information when making employment decisions. In this manner,
the customer dispute information contained in the CRD system (and
displayed through BrokerCheck) may positively or negatively affect the
business and professional opportunities of associated persons. Where
the information is reliable, it also provides for customer protections
and information useful for member firms.\218\
---------------------------------------------------------------------------
\217\ Recent academic studies provide evidence that the past
disciplinary and other regulatory events associated with a firm or
individual can be predictive of similar future events. See Hammad
Qureshi & Jonathan Sokobin, Do Investors Have Valuable Information
About Brokers? FINRA Office of the Chief Economist Working Paper,
Aug. 2015; see also Mark Egan, Gregor Matvos, & Amit Seru, The
Market for Financial Adviser Misconduct, 127(1) Journal of Political
Economy 233-295 (2019).
\218\ FINRA, state securities regulators, and other regulators
also use customer dispute information submitted to the CRD system to
regulate associated persons. See supra Item II.A.1.I.B., ``Customer
Dispute Information in the CRD System.''
---------------------------------------------------------------------------
A negative impact on the business and professional opportunities of
associated persons may be appropriate and consistent with investor
protection, such as when the customer dispute information has merit. A
negative impact may be inappropriate, however, if, for example, the
customer dispute information is factually impossible, clearly erroneous
or false, or the associated person was not involved in the alleged
misconduct. Regardless of the merit, associated persons have an
incentive to remove customer dispute information from the CRD system
and its public display through BrokerCheck.
An associated person, or a party on-behalf-of an unnamed person,
typically begins the process to remove customer dispute information
from the CRD system by filing an expungement request in the DRS
arbitration forum. During the sample period (January 2016 through
December 2021), FINRA is able to identify requests to expunge 11,619
customer dispute information disclosures in the DRS arbitration
forum.\219\ More than one customer dispute information disclosure may
be sought to be expunged in a single arbitration, and multiple
expungement requests may relate to the same arbitration, civil
litigation, or complaint if the dispute relates to more than one
associated person.
---------------------------------------------------------------------------
\219\ The 11,619 requests to expunge customer dispute
information disclosures include some requests to expunge the same
customer dispute information disclosure in more than one
arbitration.
---------------------------------------------------------------------------
The 11,619 customer dispute information disclosures consist of
5,143 disclosures (44 percent) that were sought to be expunged during a
customer arbitration, and 6,476 disclosures (56 percent) that were
sought to be expunged in a straight-in request.\220\ The 5,143
disclosures sought to be expunged during a customer arbitration include
4,714 sought to be expunged during a non-simplified customer
arbitration and 429 sought to be expunged during a simplified customer
arbitration. The associated person was a named party for 2,322 of the
5,143 disclosures (45 percent), and an unnamed party for 2,821 of the
5,143 disclosures (55 percent). The 6,476 customer dispute information
disclosures sought to be expunged in a straight-in request include 116
disclosures where the associated person named the customer as a
respondent.
---------------------------------------------------------------------------
\220\ Fifty requests to expunge customer dispute information
were made during industry arbitrations that were not straight-in
requests. To simplify the analysis, FINRA excludes these 50 requests
from the sample.
---------------------------------------------------------------------------
Associated persons often file a straight-in request long after the
close of the customer arbitration or civil litigation or the initial
reporting of the customer complaint to the CRD system. For example,
approximately three-fifths of customer dispute information disclosures
that were sought to be expunged in straight-in requests were filed more
than six years after the close of a customer arbitration or the initial
reporting of the customer complaint.\221\
---------------------------------------------------------------------------
\221\ A six-year time-period from the time-period start date
reflects the six-year eligibility rule which applies to all
arbitration claims, including those claims requesting expungement of
customer dispute information. See supra note 38.
---------------------------------------------------------------------------
As of December 2021, 10,156 of the 11,619 customer dispute
information disclosures were sought to be expunged in an arbitration
that closed.\222\ The 10,156 disclosures consist of 4,346 disclosures
(43 percent) sought to be expunged during a customer arbitration and
5,810 disclosures (57 percent) sought to be expunged in a straight-in
request. A panel made a decision in arbitrations relating to 6,997 of
the 10,156 disclosures in arbitrations that closed and made no decision
in arbitrations relating to the remaining 3,159 disclosures. A single
arbitrator made a decision in arbitrations relating to 5,311 of the
6,997 disclosures, and a (two- or) three-person panel made a decision
in arbitrations relating to the remaining 1,686 disclosures. For the
customer arbitrations, the decision by a panel may relate to the
arbitration, an expungement request, or both. For the straight-in
requests, the decision would relate to the expungement request only. In
arbitrations where no decision on the merits of the customer case or an
expungement request was made, the requests were either not eligible,
withdrawn, or otherwise not pursued by the associated person or party
that filed the request.
---------------------------------------------------------------------------
\222\ In order to focus on the rate at which panels award
expungement under different scenarios, the remaining discussion
considers only arbitrations in the sample period that closed.
---------------------------------------------------------------------------
Overall, 5,443 of the customer dispute information disclosures
sought to be expunged resulted in a panel issuing an award containing
expungement relief. The 5,443 disclosures reflect 54 percent of the
10,156 disclosures sought to be expunged in arbitrations that closed,
and 78 percent of the 6,997 disclosures sought to be expunged in
arbitrations where a panel made a decision.\223\ The percentage of
expungement requests that are awarded is higher when the panel receives
information only from the associated person or other party requesting
expungement. The panel is likely to receive information only from the
party requesting expungement when (1) the customer arbitration is
resolved without a hearing on the merits (e.g., settles), or (2) an
associated person files a straight-in request against a member firm. In
both circumstances, the customer has little incentive to attend or
participate in an expungement hearing and, in the experience of FINRA
staff, generally does not.
---------------------------------------------------------------------------
\223\ Another recent academic study provides evidence that
associated persons who receive an award containing expungement
relief in the DRS arbitration forum are ``3.3 times as likely to
engage in new misconduct as the average broker.'' See Colleen
Honigsberg & Matthew Jacob, Deleting Misconduct: The Expungement of
BrokerCheck Records, 139(3) Journal of Financial Economics 800-831
(2021): 800-831.
---------------------------------------------------------------------------
[[Page 50191]]
Among the 6,997 disclosures sought to be expunged in arbitrations
where a panel made a decision, 1,632 disclosures were sought to be
expunged during a non-simplified or simplified customer arbitration,
and 5,365 disclosures were sought to be expunged in a straight-in
request. A panel awarded expungement for 943 of the 1,632 disclosures
(58 percent) sought to be expunged during a customer arbitration. This
includes 267 of the 632 disclosures (42 percent) sought to be expunged
during a customer arbitration that resolved after a hearing on the
merits, and 676 of the 1,000 disclosures (68 percent) sought to be
expunged during a customer arbitration not resolved after a hearing on
the merits. A panel awarded expungement for 4,500 of the 5,365
disclosures sought to be expunged in a straight-in request (84
percent).
In general, whether an associated person obtains an award
containing expungement relief does not appear to be significantly
impacted by the number of arbitrators deciding the request. For
example, among the 1,632 disclosures sought to be expunged during a
non-simplified or simplified customer arbitration, a similar percentage
of requests were awarded by a one-person panel (279 of 490 disclosures,
or 57 percent) as were awarded by a three-person panel (664 of 1,142
disclosures, or 58 percent). In addition, among the 5,365 disclosures
sought to be expunged in straight-in requests, a similar percentage of
requests were awarded by a one-person panel (4,035 of 4,821
disclosures, or 84 percent) as were awarded by a three-person panel
(465 of 544 disclosures, or 85 percent).
Requests to expunge older customer dispute information also are
awarded at a similar rate to requests to expunge more recent customer
dispute information. FINRA measures the age of customer dispute
information from either the close of the customer arbitration or civil
litigation, or, if no customer arbitration or civil litigation, from
the initial reporting of the customer complaint to the CRD system
(i.e., time limit start date). Among the 5,365 customer dispute
information disclosures sought to be expunged in straight-in requests,
a similar percentage resulted in an award that were filed less than six
years from the time limit start date (1,673 of 1,984 disclosures, or 84
percent) as were filed more than six years from the time limit start
date (2,827 of 3,381 disclosures, or 84 percent).
Factors other than, or in combination with, the number of
arbitrators deciding the expungement request or the timing of the
expungement request, however, may affect whether an associated person
receives an award containing expungement relief. These factors include
the merits of the request, the attendance and participation by
customers or the availability of documents or information relating to
the dispute, and the potential influence of associated persons and
member firms on the selection of the panel who decides the request.
As stated above, FINRA will expunge customer dispute information
from the CRD system only pursuant to a court order. If the panel awards
expungement, then the firm or associated person must confirm the
arbitration award in a court of competent jurisdiction and serve the
confirmed award on FINRA.\224\ As of December 2021, FINRA had removed
4,717 customer dispute information disclosures from the CRD system from
the possible 5,443 disclosures (87 percent) for which a panel issued an
award containing expungement relief. Firms or associated persons may
have not yet sought or obtained a court order for the remaining
disputes. There also may be instances where expungement was sought and
awarded by a panel, but a court order was never obtained.
---------------------------------------------------------------------------
\224\ See supra note 25 and accompanying text.
---------------------------------------------------------------------------
During the sample period, approximately one-third of the 4,717
customer dispute information disclosures (1,447, or 31 percent) that
were expunged were submitted to the CRD system. The 1,447 customer
dispute information disclosures reflect five percent of the total
number of customer dispute information disclosures submitted to the CRD
system during the sample period (approximately 31,900). The remaining
3,270 customer dispute information disclosures were submitted to the
CRD system prior to the sample period. The number of customer dispute
information disclosures expunged during the sample period that were
submitted to the CRD system prior to 2016 suggests that associated
persons may yet still expunge customer dispute information disclosures
submitted to the CRD system during the sample period. The five percent
of expunged customer dispute information disclosures should therefore
be considered a lower bound for the share of customer dispute
information disclosures submitted during the sample period that may
ultimately be expunged.
An associated person may seek a court order directing expungement
of customer dispute information without first seeking expungement
through arbitration (``direct-to-court expungement cases''). During the
sample period, associated persons sought expungement of 194 customer
dispute information disclosures in direct-to-court expungement cases,
or less than 2 percent of the customer dispute information disclosures
that were sought to be expunged in the DRS arbitration forum. As of
December 2021, court proceedings had concluded for 173 of tho
[…truncated; see source link]Indexed from Federal Register on August 15, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.