Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendments Nos. 1 and 2, To Amend the Codes of Arbitration Procedure To Modify the Current Process Relating to the Expungement of Customer Dispute Information

Federal RegisterApr 19, 2023

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97294; File No. SR-FINRA-2022-024]

Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendments Nos. 1 and 2, To Amend the Codes of Arbitration Procedure To Modify the Current Process Relating to the Expungement of Customer Dispute Information

April 12, 2023.

I. Introduction

On July 29, 2022, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”)

and Rule 19b-4 thereunder,

a proposed rule change to amend the FINRA Rule 12000 Series (Code of Arbitration Procedure for Customer Disputes) (“Customer Code”) and the FINRA Rule 13000 Series (Code of Arbitration Procedure for Industry Disputes) (“Industry Code”) (together, “Codes”) to modify the current process relating to the expungement of customer dispute information.

15 U.S.C. 78s(b)(1).

17 CFR 240.19b-4.

The proposed rule change was published for comment in the

Federal Register

on August 15, 2022.

See

Exchange Act Release No. 95455 (Aug. 9, 2022), 87 FR 50170 (Aug. 15, 2022) (File No. SR-FINRA-2022-024) (“Notice”).

The proposed rule change, as modified by Amendments Nos. 1 and 2, (hereinafter referred to as the “proposed rule change” unless otherwise specified) would amend the Codes to: (1) set forth requirements on expungement requests (a) filed during an investment-related, customer initiated arbitration (“customer arbitration”) by an associated person, or by a party to the customer arbitration on behalf of an associated person (an “on-behalf-of request”), or (b) filed by an associated person separate from a customer arbitration (“straight-in request”); (2) establish a roster of experienced public arbitrators from which a three-person panel

would be randomly selected to decide straight-in requests (the “Special Arbitrator Roster”);

(3) establish procedural requirements for expungement hearings; and (4) codify and update FINRA's Notice to Arbitrators and Parties on Expanded Expungement Guidance (“Guidance”) that arbitrators and parties would be required to follow.

In addition, the proposed rule change would amend the Customer Code to specify procedures for requesting expungement of customer dispute information arising from simplified arbitrations.

The proposed rule change would also amend the Codes to establish requirements for notifying state securities regulators and customers of expungement requests and allow participation of state securities regulators in straight-in requests.

Under the Codes, the term “panel” means the arbitration panel, whether it consists of one or more arbitrators.

See

FINRA Rules 12100(u) and 13100(s). Under the Codes, a customer's or claimant's damage request determines whether a single arbitrator or a three-person panel will consider and decide an arbitration case, though in some cases the parties may agree to a different number.

See

FINRA Rules 12401 and 13401;

see also

Notice at 50171 n.10. Unless otherwise specified in the Order, the term “panel” will mean either a panel or single arbitrator.

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).

See

Guidance, available at

https://www.finra.org/arbitration-and-mediation/notice-arbitrators-and-parties-expanded-expungement-guidance.

See

Notice at 50170.

See id.

at 50171.

The proposed rule change was published for comment in the

Federal Register

on August 15, 2022.

On September 27, 2022, FINRA consented to an extension of the time period in which the Commission must approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change to November 11, 2022.

On November 10, 2022, FINRA responded to the comment letters received in response to the Notice and filed an amendment to the proposed rule change (“Amendment No. 1”).

On November 10, 2022, the Commission published a notice of filing of Amendment No. 1 and an order instituting proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1.

On December 8, 2022, FINRA consented to an extension of the time period in which the Commission must approve or disapprove the proposed rule change to April 12, 2023.

On April 3, 2023 FINRA responded to the comment letters received in response to the Order Instituting Proceedings and filed a second amendment to the proposed rule change (“Amendment No. 2”).

The Commission is publishing this notice to solicit comments on Amendment No. 2 from interested persons and is approving the proposed rule change, as modified by Amendments Nos. 1 and 2, on an accelerated basis.

See

Notice

supra

note 3.

See

letter from Mignon McLemore, Associate General Counsel, Office of General Counsel, FINRA, to Lourdes Gonzalez, Assistant Chief Counsel, Division of Trading and Markets, Commission, dated September 27, 2022, available at

https://www.finra.org/sites/default/files/2022-09/sr-finra-2022-024-extension1.pdf.

See

letter from Mignon McLemore, Associate General Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, Secretary, Commission, dated November 10, 2022 (“FINRA November 10 Letter”). The FINRA November 10 Letter is available at the Commission's website at

https://www.sec.gov/comments/sr-finra-2022-024/srfinra2022024-20150592-319706.pdf.

Comment letters received on the proposed rule change are available at

https://www.sec.gov/comments/sr-finra-2022-024/srfinra2022024.htm.

See

Exchange Act Release No. 96298 (Nov. 10, 2022), 87 FR 68779 (Nov. 16, 2022) (File No. SR-FINRA-2022-024) (“Order Instituting Proceedings”).

See

https://www.finra.org/sites/default/files/2022-12/sr-finra-2022-024-extension2.pdf.

See

letter from Mignon McLemore, Associate General Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, Secretary, Commission, dated April 3, 2023, (“FINRA April 3 Letter”) available at

https://www.sec.gov/comments/sr-finra-2022-024/srfinra2022024-20163319-333785.pdf.

Amendment No. 2 is available at

https://www.finra.org/sites/default/files/2023-04/sr-finra-2022-024-partial-amendment-2.pdf.

II. Description of the Proposed Rule Change

Background

Information regarding customer disputes involving associated persons is maintained in the Central Registration Depository (“CRD”). In general, the information in the CRD system is reported by registered broker-dealer firms (“firms” or “member firms”),

associated persons, and regulatory authorities in response to questions on the uniform registration forms.

These

forms are used to collect registration information, which includes, among other things, administrative, regulatory, and criminal history, and financial and other information about associated persons, such as investment-related, customer-initiated arbitrations, civil litigations, or customer complaints (

i.e.,

“customer dispute information”).

Among other things, FINRA makes specific information in the CRD system publicly available through BrokerCheck, including customer dispute information for associated persons who are currently or were formerly registered with FINRA.

Under the Codes, a “member” includes any broker or dealer admitted to membership in FINRA, whether or not the membership has been terminated, suspended, cancelled, revoked, the member has been expelled or barred from FINRA, or the member is otherwise defunct.

See

FINRA Rules 12100(s) and 13100(q);

see also

Exchange Act Release No. 88254 (Feb. 20, 2020), 85 FR 11157 (Feb. 26, 2020) (Order Approving File No. SR-FINRA-2019-027).

The uniform registration forms are Form BD (Uniform Application for Broker-Dealer Registration), Form BDW (Uniform Request for Broker-Dealer Withdrawal), Form BR (Uniform Branch Office Registration Form), Form U4 (Uniform Application for Securities Industry Registration or Transfer), Form U5 (Uniform Termination Notice for Securities Industry Registration), and Form U6 (Uniform Disciplinary Action Reporting Form).

See

Notice at 50172 n.20.

See

Notice at 50172.

BrokerCheck is a free tool available on FINRA's website to help investors make informed choices about the associated persons and broker-dealer firms with whom they may conduct business.

See

“About BrokerCheck,” available at

http://www.finra.org/investors/about-brokercheck.

Broker records are available in BrokerCheck for ten years after an associated person leaves the industry, and associated persons who are the subject of disciplinary actions and certain other events remain on BrokerCheck permanently.

See

Notice at 50172 at n.24.

FINRA rules allow broker-dealers and their associated persons to seek expungement of certain customer dispute information from the CRD system and BrokerCheck.

In general, an associated person seeks expungement of customer dispute information through the FINRA arbitration process.

The Customer Code, which comprises the series of rules governing customer arbitrations, governs expungement requests filed by firms or associated persons during customer arbitrations.

In contrast, the Industry Code comprises the series of rules governing arbitrations for disputes between or among industry parties, such as between a broker-dealer and an associated person, including straight-in requests.

As a result, whether an expungement request is governed by the Customer Code or Industry Code will generally depend on whether the request is filed during a customer arbitration or is a straight-in request filed separately from a customer arbitration.

See

Notice at 50172-73.

See id.

at 50190. An associated person may also seek expungement by going directly to court without first going to arbitration. According to FINRA, from January 2016 through December 2021, associated persons sought expungement of 194 customer dispute information disclosures in direct-to-court expungement cases, or less than 2 percent of the customer dispute information disclosures that were sought to be expunged in FINRA's Dispute Resolution Forum (“DRS arbitration forum”).

See id.

at 50191.

See id.

at 50175-78;

see also

FINRA Rule 12000 series.

See Notice

at 50178-80;

see also

FINRA Rule 13000 series.

See infra

notes 69-70 and accompanying text.

Both the Customer Code and the Industry Code require arbitrators to hold a recorded hearing regarding, and review materials related to, the appropriateness of expungement of customer dispute information.

According to FINRA, its rules and guidance provide that arbitrators may recommend expungement for only three reasons: (1) the claim, allegation, or information is factually impossible or clearly erroneous; (2) the associated person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or (3) the claim, allegation, or information is false.

In addition, arbitrators are required to indicate which reason is the basis for a recommendation (

i.e.,

“factual impossibility, mistake, or falsity”)

and to provide a brief written explanation of the reasons for recommending expungement.

See

FINRA Rules 12805 and 13805;

see also

Notice at 50173.

See

Notice at 50173.

See

FINRA Rules 2080, 12805, and 13805. These requirements are supplemented by the Guidance, providing arbitrators with “best practices” and recommendations to follow when deciding expungement requests.

See

Notice at 50173 n.35 and accompanying text.

See

FINRA Rules 12805(c) and 13805(c).

Regardless of whether expungement of customer dispute information is sought directly through a court or in arbitration, FINRA Rule 2080 requires a broker-dealer firm or associated person seeking expungement to obtain an order of a court of competent jurisdiction directing such expungement or confirming an award containing expungement.

FINRA will expunge customer dispute information only pursuant to a court order.

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

See

Notice at 50172;

see also

FINRA Rule 2080.

See

Notice at 50172. FINRA Rule 2080 also requires firms and associated persons seeking a court order or confirmation of the arbitration award containing expungement to name FINRA as a party and serve FINRA with all appropriate documents. FINRA may, however, waive the requirement to be named as a party if it determines that the award containing expungement is based on affirmative judicial or arbitral findings that: (1) the claim, allegation, or information is factually impossible or clearly erroneous; (2) the associated person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or (3) the claim, allegation, or information is false. In addition, FINRA has sole discretion “under extraordinary circumstances” to waive the requirement that it be named in a court proceeding if it determines that the request for expungement and accompanying award are meritorious and expungement would not have a material adverse effect on investor protection, the integrity of the information in the CRD system, or regulatory requirements.

See

FINRA Rule 2080(b).

See

Notice at 50173-74.

Proposed Rule Change

A. Requests for Expungement Under the Customer Code

FINRA Rule 12805 requires that arbitrators meet certain conditions in order to issue an award containing expungement of customer dispute information under the Customer Code.

The rule generally does not, however, address when and how a request for expungement can be made by an associated person or as an on-behalf-of request during a customer arbitration, including the types of expungement requests that can and cannot be made during a customer arbitration, or when arbitrators must make expungement determinations during the customer arbitration.

FINRA Rule 12805 provides that a panel must comply with the following requirements in order to grant expungement: (1) hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement; (2) in cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement; (3) indicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2080 grounds for expungement applies to the facts of the case; and (4) assess all DRS arbitration forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief.

See also

FINRA Rule 13805.

The proposed rule change would amend FINRA Rule 12805 to set forth requirements addressing the method and timing for, and required contents of, expungement requests filed during a customer arbitration by an associated person or as an on-behalf-of request, including the types of expungement requests that must (or cannot) be made.

Among other restrictions, proposed Rule 12805 would require that an expungement request made during a customer arbitration involve the same customer dispute information that is associated with the customer's statement of claim.

It would further require an associated person who is a named respondent in a customer arbitration to seek expungement of customer dispute information associated with the arbitration claim during the arbitration proceedings or forfeit the ability to seek to expunge the customer dispute information associated with the customer's statement of claim in any

subsequent proceeding.

In addition, the proposed rule would authorize the Director of FINRA Dispute Resolution Services (“Director”) to deny the forum to expungement requests that do not meet, among other things, the proposed method, timing, or content requirements.

In addition, the proposed rule change would also provide guidance on when a panel can rule on an expungement request made in the course of a customer arbitration.

Further, the proposed rule change would prohibit an associated person from: (1) intervening in an ongoing customer arbitration to request expungement

or (2) filing an expungement request as a new claim against a customer separate from a customer arbitration.

See

Notice at 50174-77 (methods), 50180-81 (limitations), 50181-82 (timing).

See id.

at 50174-77.

See

proposed Rule 12805(a)(1)(A).

See

Notice at 50182;

see also

proposed Rules 12203 and 13203.

See

Notice at 50177-78.

See id.

at 50178;

see also

proposed Rules 12805(a)(2)(E)(iii) and 12800(d)(2)(D).

See

Notice at 50178;

see also

proposed Rule 12805(a)(3). As elaborated below, where an associated person is neither named in a customer arbitration nor the subject of an on-behalf-of request, the associated person would be required to file a request to expunge customer dispute information as a straight-in request under proposed Rule 13805 against the member firm with whom they were associated at the time the subject of the request arose. Similarly, requests to expunge customer dispute information that is not associated with a customer arbitration—and that as a result are ineligible for expungement under proposed Rule 12805—would need to be filed as straight-in requests under proposed Rule 13805 against member firms under the proposed rule change.

See

proposed Rule 12805(a)(2)(E)(iii)b.;

see also

Section II.A.2. “No Intervening in Customer Arbitrations to Request Expungement.”

1. Expungement Requests During a Customer Arbitration

a. Expungement Requests by a Respondent Named in a Customer Arbitration

Currently, an associated person who is named as a respondent in a customer arbitration (“named associated person”) is not required to seek expungement of customer dispute information associated with the arbitration claim during the arbitration proceedings. Rather, the associated person can either request expungement at any time during the customer arbitration or separately from the customer arbitration in a straight-in request.

If a named associated person requests expungement during the customer arbitration, does not withdraw the request, and the case goes to hearing and closes by award, the panel in the customer arbitration will decide the expungement request and include the decision as part of the customer's award.

If the customer arbitration does not close by award after a hearing (

e.g.,

the case settles), and the associated person continues to pursue the expungement request, the panel from the customer arbitration will hold an expungement-only hearing to decide the expungement request.

See

Notice at 50175. There are currently several ways in which a named associated person may request expungement during a customer arbitration. The request may be included in the answer to the statement of claim that must be submitted within 45 days of receipt of the statement of claim, and may include other claims and remedies requested.

See

FINRA Rules 12303(a) and (b);

see also

FINRA Rules 13303(a) and (b). The expungement request may also be included in other pleadings (

e.g.,

a counterclaim, a cross claim, or a third party claim).

See

FINRA Rule 12100(x). In general, parties must file initial statements of claim and all pleadings and other documents with the Director.

See

FINRA Rule 12300(b). The associated person may also request at any time during the case (outside of a pleading) that the panel consider the person's expungement request during the hearing. Under FINRA Rule 12503, such a request is treated like a motion, which gives the other parties an opportunity to state objections. If there is an objection, the panel must decide the motion pursuant to FINRA Rule 12503(d)(5).

See also

FINRA Rule 13503(d)(5).

FINRA stated that if an arbitration closes by award after a hearing, the panel from the customer arbitration would be best situated to decide the related issue of expungement.

See

Notice at 50175.

See id.

The proposed rule change would amend FINRA Rule 12805 to modify existing requirements and set forth new requirements for when and how a named associated person would file an expungement request during a customer arbitration.

Under proposed Rule 12805(a)(1)(A), if a named associated person wants to seek expungement of customer dispute information associated with the customer's statement of claim, the named associated person would be required to make the expungement request during the customer arbitration.

As discussed below, these requests would be subject to limitations on how and when the requests may be made.

If the associated person does not request expungement of the customer dispute information associated with the customer's statement of claim during the customer arbitration, the associated person would forfeit the opportunity to seek expungement of that customer dispute information in any subsequent proceeding.

See

proposed Rule 12805.

See

proposed Rule 12805(a)(1)(A). FINRA stated that “[r]equiring the named associated person to request expungement in the customer arbitration increases the likelihood that a panel will have input from all parties and access to all of the evidence, testimony and other documents to make an informed decision on the expungement request.” Notice at 50175.

See

proposed Rule 12805(a)(1)(B);

see also

Section II.C., “Limitations on Expungement Requests.”

See

proposed Rule 12805(a)(1)(A).

Proposed Rule 12203(b) would authorize the Director to deny the DRS arbitration forum to requests made during a customer arbitration to expunge customer dispute information that is not associated with the customer's statement of claim. The Director would also be authorized to deny the forum if a named associated person does not request expungement of the customer dispute information associated with the customer's statement of claim during the customer arbitration but then seeks expungement of the same customer dispute information in a subsequent proceeding.

See

proposed Rule 12203(c).

i. Method and Timing of Requesting Expungement in Customer Arbitration

The proposed rule change would limit how and when expungement requests may be made by a named associated person during the customer arbitration. Under the proposed rule change, if a named associated person requests expungement during the customer arbitration, the request would be required to be included in the answer to the statement of claim or in a separate pleading requesting expungement.

If the request is included in the answer, it must be filed within 45 days of receipt of the customer's statement of claim in accordance with existing requirements under the Codes.

If the named associated person requests expungement in a separate pleading, rather than the answer, the request would be required to be filed no later than 60 days before the first scheduled hearing begins.

FINRA believes these proposed deadlines should provide adequate time for: (1) the named associated person to assess the customer's case, the potential merits of an expungement request, and whether to file the request; and (2) the parties to the customer arbitration to prepare their expungement-related arguments, since the expungement issues will overlap with the issues raised by the customer's claim.

To request expungement after the filing deadline, the named associated person would be required to file a motion requesting an extension, which would be decided by the panel.

See

proposed Rule 12805(a)(1)(C)(i). FINRA Rules 12100(x) and 13100(v) would be amended to include a “separate document requesting expungement” as a pleading under the Codes.

See

FINRA Rule 12303(a).

See

proposed Rule 12805(a)(1)(C)(i).

See

Notice at 50176.

See id.

Pursuant to FINRA Rule 12503, if an associated person files a motion seeking an extension of the 60-day deadline, the opposing parties may state objections to extending the deadline, and the panel would decide the motion.

ii. Required Contents of an Expungement Request in Customer Arbitration

The proposed rule change would also set forth content requirements for an expungement request made by a named associated person during a customer arbitration. Under the proposed rule change, a request for expungement by a named associated person in a customer arbitration would be required to include the applicable filing fee under the Customer Code.

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.

Moreover, the proposed rule change would require the named associated person requesting expungement to explain whether expungement of the same customer dispute information was previously requested and, if so, how that request was decided.

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.

See

proposed Rule 12805(a)(1)(C)(ii)a.

See

proposed Rule 12805(a)(1)(C)(ii)b. through d. An occurrence is a disclosure event that is reported to the CRD system via one or more Disclosure Reporting Pages.

See

Notice at 50176 n.58. For example, Form U4 (Uniform Application for Broker-Dealer Registration) requires disclosure of information concerning an associated person that relates to the occurrence of an event reportable under Item 14 of Form U4 (

e.g.,

certain customer complaints, arbitrations, and civil litigations) on the appropriate Disclosure Reporting Page. FINRA stated that these content requirements “would help ensure that FINRA, the panel, and the parties understand who is requesting expungement and which customer dispute information is the subject of the request.”

See

Notice at 50176;

see also

Guidance (stating that “arbitrators should ask a party requesting expungement whether an arbitration panel or a court previously denied expungement of the customer dispute information at issue and, if there was a prior denial, the expungement request should be denied.”

See supra

note 6.

See

proposed Rule 12805(a)(1)(C)(ii)e.

See

proposed Rules 12307(a)(8) through (11) and 12805(a)(1)(C)(ii). FINRA stated that “these proposed requirements for named associated persons requesting expungement are necessary for the timely consideration and orderly administration of expungement requests as well as to maintain the integrity of the CRD system.” Notice at 50176.

b. Expungement Requests by a Party Named in a Customer Arbitration on Behalf of an Unnamed Person

According to FINRA, the Codes do not specifically address on-behalf-of requests.

Currently, a party to a customer arbitration may file an on-behalf-of request for expungement during the customer arbitration. If the party files the request and the customer arbitration closes by award after a hearing, the panel will decide the expungement request and include the decision in the award. If the customer arbitration does not close by award after a hearing (

e.g.,

the case settles), either the requesting party or the unnamed person could ask the panel to consider and decide the expungement request before it disbands. Under current practice, in this circumstance the panel from the customer arbitration will hold a hearing regarding the appropriateness of expungement pursuant to FINRA Rule 12805.

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).

See

Notice at 50176.

Proposed Rule 12805(a)(2) would codify this practice to permit a party to a customer arbitration to file an on-behalf-of request that seeks to expunge customer dispute information associated with the customer's statement of claim during the customer arbitration (provided the request is eligible for arbitration under proposed Rule 12805).

As with expungement requests made by a named associated person, the proposed rule change would set forth requirements governing how and when an on-behalf-of request may be made, and the contents of such request.

See

proposed Rule 12805(a)(2)(B). As with expungement requests filed by a named associated person in a customer arbitration, proposed Rule 12203(b) would authorize the Director to deny the DRS arbitration forum to requests made during a customer arbitration to expunge customer dispute information that is not associated with the customer's statement of claim.

See

Notice at 50175.

i. Method and Timing of Requesting Expungement on Behalf of an Unnamed Person

To help ensure that an associated person that is the subject of an on-behalf-of request is aware of the request, the proposed rule change would require the unnamed person to consent in writing

to the on-behalf-of request by signing the Form Requesting Expungement on Behalf of an Unnamed Person (“Form”).

By signing the Form, the unnamed person would be: (1) consenting to the on-behalf-of request;

(2) agreeing to be bound by the panel's decision on the request;

and (3) acknowledging their understanding that if the customer arbitration closes by award after a hearing, the unnamed person would be barred from filing a request for expungement for the same customer dispute information in a subsequent proceeding.

See

proposed Rule 12805(a)(2)(A).

The unnamed person whose CRD record would be expunged and the party requesting expungement on the unnamed person's behalf must both sign the Form.

See

proposed Rule 12805(a)(2)(C)(ii).

See

Notice at 50176.

See

proposed Rule 12805(a)(2)(D)(i). Signing the Form would also obligate the unnamed person to maintain the confidentiality of documents and information from the customer arbitration to which the unnamed person is given access and to adhere to any confidentiality agreements or orders associated with the customer arbitration.

See

proposed Rule 12805(a)(2)(D)(ii).

See

Notice at 50177.

The party making the request would also be required to file the request (including the Form) no later than 60 days before the first scheduled hearing.

Under the proposed rule change, filing and serving the on-behalf-of request would obligate the requesting party to represent the unnamed person and the unnamed person's interests and to pursue the request for expungement on behalf of the unnamed person during the customer arbitration.

See

proposed Rule 12805(a)(2)(C)(iii).

See

proposed Rule 12805(a)(2)(D)(iii). FINRA stated that requiring the parties' consent “would help ensure that the unnamed person is fully aware of the request and that the firm is agreeing to represent the unnamed person for the purpose of requesting expungement during the customer arbitration.”

See

Notice at 50176. This would help prevent “associated persons filing arbitration claims seeking expungement of the same customer dispute information that was the subject of a previous denial by a panel of an on-behalf-of request.”

See

Notice at 50177.

ii. Required Contents of an On-Behalf-Of Request and Filing Fee

Under the proposed rule change, an on-behalf-of request would be required to include the same elements as a request for expungement by a named associated person during a customer arbitration.

Thus, the party requesting expungement on behalf of an unnamed person would be required to provide the applicable filing fee; the CRD number of the unnamed person; each CRD occurrence number that is the subject of the request; the case name and docket number associated with the customer dispute information; and an explanation of whether expungement of the same customer dispute information was previously requested and, if so, how it

was decided.

In addition, the party requesting expungement would be required to include the Form, signed by the unnamed person whose CRD record is the subject of the expungement request and the party filing the request.

See

proposed Rules 12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i).

See

proposed Rules 12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i).

See

proposed Rule 12805(a)(2)(C)(ii).

c. Deciding Expungement Requests during Customer Arbitrations

The proposed rule change would change when a panel is required to decide an expungement request (whether made by a named associated person or on behalf of an unnamed one) made during a customer arbitration. Specifically, when the panel would be required to decide an expungement request would depend on whether or not the customer arbitration closes: (1) by award after a hearing or (2) other than by award or by award without a hearing.

i. Panel Decides the Expungement Request if the Customer's Arbitration Closes by Award After a Hearing

Currently, if a named associated person requests expungement, or a party files an on-behalf-of request, and the customer's claim closes by award after a hearing, the panel may consider and decide the expungement request during the customer arbitration and issue its decision in the award. If, however, the party requesting expungement does not pursue the issue of expungement during the hearing, the panel may not decide the request and may deem it withdrawn.

Under these circumstances, the associated person may request expungement again at a later date.

See

Notice at 50177;

see also

FINRA Rules 12702 and 13702.

See

Notice at 50177.

Under the proposed rule change, if a named associated person requests expungement or a party files an on-behalf-of request during a customer arbitration and the customer's claim closes by award after a hearing, the panel in the customer arbitration would be required to consider and decide the expungement request and issue its decision in the same award, even if the requesting party withdraws or fails to pursue the request (in which case the panel would deny the expungement request with prejudice).

See

proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i). FINRA stated that requiring a panel to deny with prejudice such requests “would prevent associated persons from withdrawing expungement requests to avoid having their requests decided by the panel that heard the evidence on the customer's arbitration claim, then seeking to re-file the request and receiving a potentially more favorable decision from a different set of arbitrators.” Notice at 50177.

ii. Panel Does Not Decide Expungement if the Customer's Arbitration Closes Other Than by Award or by Award Without a Hearing

Currently, if a named associated person requests expungement, or a party files an on-behalf-of request, the customer arbitration does not close by award after a hearing (

e.g.,

the case settles), and the requesting party continues to pursue the expungement request, the panel from the customer arbitration will hold a hearing regarding the appropriateness of expungement.

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.

See

FINRA Rule 12805;

see also

Notice at 50177.

See

Notice at 50177.

The proposed rule change would change this process. If the customer arbitration closes other than by award or by award without a hearing, the panel from the customer arbitration would not be permitted to decide the expungement request.

Instead, the associated person could only seek expungement through a straight-in-request under proposed Rule 13805 against the member firm at which the person was associated at the time the customer dispute arose, and a panel from the Special Arbitrator Roster would decide the request.

See

proposed Rules 12805(a)(1)(D)(ii)a. and 12805(a)(2)(E)(ii)a.

See

proposed Rules 12805(a)(1)(D)(ii)b. and 12805(a)(2)(E)(ii)b.

See also

Section II.B., “Straight-in Requests under the Industry Code and the Special Arbitrator Roster.”

2. No Intervening in Customer Arbitrations To Request Expungement

The proposed rule change would provide that if an associated person is not a party to a customer arbitration (

i.e.,

they are an unnamed person), and no party to the customer arbitration requests expungement on their behalf, the unnamed person would be prohibited from intervening in the customer arbitration to request expungement.

Instead, the unnamed person would be able to file the request as a new claim against the member firm at which the person was associated at the time the customer dispute arose under proposed Rule 13805 under the Industry Code, and a panel from the Special Arbitrator Roster would decide the request.

See

proposed Rules 12805(a)(2)(E)(iii) and 12800(d)(2)(D).

See

proposed Rule 12805(a)(2)(E)(iii)b.

3. No Straight-In Requests Against Customers

Currently, although the practice is relatively rare, associated persons sometimes file expungement requests against customers as new claims, separate from a customer arbitration.

FINRA stated that such requests may unduly delay the resolution of a customer's claim and require a customer to participate in the resolution of the request.

The proposed rule change would prevent an associated person from requiring a customer to participate once the customer's claims have been resolved, by prohibiting the associated person from filing a request for expungement of the customer dispute information as a new claim against a customer separate from the investment-related, customer-initiated arbitration.

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.

See

Notice at 50178. From January 2016 through December 2021, FINRA identified 6,476 straight-in requests to expunge customer dispute information, 116 of which were requests filed against a customer.

See id.

at 50178 n.89.

See id.

at 50178.

See

proposed Rule 12805(a)(3). FINRA stated that customers should not be compelled to attend or participate in a separate proceeding to decide an expungement request after the customer has resolved their arbitration claim or civil litigation.

See

Notice at 50178.

See

Notice at 50178.

B. Straight-In Requests Under the Industry Code and the Special Arbitrator Roster

As stated above, the Industry Code comprises the series of rules governing arbitrations for disputes between or among industry parties, such as between a member firm and an associated person. Under the proposed rule change, all requests to expunge customer dispute information that is not associated with a customer arbitration would be required to be filed as a straight-in request against the member firm with whom the associated person was associated at the time the subject of the request arose under proposed Rule 13805.

In addition, an associated person could request expungement of

customer dispute information that was associated with a customer arbitration under proposed Rule 13805 if: (1) the associated person is named in the arbitration or is the subject of an on-behalf-of request and the customer arbitration closes other than by award or by award without a hearing;

or (2) the associated person is the subject of a customer arbitration, but is neither named in the arbitration nor is the subject of an on-behalf-of request, and the customer arbitration closes for any reason.

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.

See

proposed Rules 12805(a)(1)(A) and 13805(a)(1). As discussed above, under proposed Rule 12805, an associated person may request expungement in a customer arbitration of a customer complaint or civil litigation associated with a customer's statement of claim.

See supra

note 43 and accompanying text.

See

proposed Rules 12805(a)(2)(D)(ii) and 12805(a)(2)(E)(ii).

See

proposed Rule 13805(a)(1).

See

Notice at 50178.

1. Filing a Straight-In Request Under the Industry Code

a. Applicability

The process for initiating a straight-in-request for expungement of customer dispute information under the Industry Code would be governed, in part, by FINRA Rule 13302. This rule provides, in relevant part, that to initiate an arbitration, a claimant must file with the Director a signed and dated Submission Agreement, and a statement of claim specifying the relevant facts and remedies requested through the DR Party Portal (“Portal”).

Under proposed Rule 13805, an associated person requesting expungement of customer dispute information as a straight-in request under the Industry Code would be required to file a statement of claim, in accordance with the procedures contained in FINRA Rule 13302, against the member firm at which the person was associated at the time the customer dispute arose.

Under the proposed rule change, the Director would be authorized to deny the use of the DRS arbitration forum for the request if this connection is not present.

FINRA's DR Portal, among other things, permits arbitration case participants to file an arbitration claim, view case documents, submit documents to FINRA and send documents to other Portal case participants, and schedule hearing dates.

See

FINRA Dispute Resolution Services, DR Portal, available at

www.finra.org/arbitration-mediation/dr-portal.

See

proposed Rule 13805(a)(1).

See

proposed Rule 13203(b).

b. Required Content of Straight-In Requests

The required content of a straight-in request under the Industry Code would be the same as that required for expungement requests filed under the Customer Code.

Thus, the associated person's straight-in 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, if applicable; and an explanation of whether expungement of the same customer dispute information was previously requested and, if so, how it was decided.

In addition, as discussed below, the proposed rule change would impose limitations on when such requests may be made.

See

proposed Rule 13805(a)(3);

see also

Section II.A.1.a.ii, “Required Contents of an Expungement Request in Customer Arbitration.”

FINRA stated that it “would not assess a second filing fee when an associated person files a straight-in request if the associated person, or the requesting party in the case of an on-behalf-of request, had previously paid the filing fee to request expungement of the same customer dispute information during a customer arbitration.” Notice at 50179 n.95.

See

proposed Rule 13805(a)(3). If an expungement request under the Industry Code fails to include any of the proposed requirements for requesting expungement, the request would be considered deficient and would not be served unless the deficiency is corrected.

See

proposed Rule 13307(a).

See

Section II.C., “Limitations on Expungement Requests.” As discussed in more detail below, the straight-in request would be ineligible for arbitration under the Industry Code if: (1) a panel held a hearing to consider the merits of the associated person's request for expungement of the same customer dispute information; (2) a court of competent jurisdiction previously denied the associated person's request to expunge the same customer dispute information; (3) the customer arbitration or civil litigation or customer complaint associated with the customer dispute information is not closed; (4)(a) a panel or court of competent jurisdiction previously found the associated person liable in a customer arbitration or civil litigation associated with the same customer dispute information, or (b) the customer dispute information involves the same conduct that is the basis of a final regulatory action taken by a securities regulator or SRO; (5) more than two years have elapsed since the customer arbitration or civil litigation associated with the customer dispute information has closed; (6) there was no customer arbitration or civil litigation associated with the customer dispute information and more than three years have elapsed since the date that the customer complaint was initially reported to the CRD system; or (7) a named associated person is seeking expungement even though they did not request expungement in the associated customer arbitration under proposed Rule 12805(a)(1)(A).

See

proposed Rule 13805(a)(2).

2. Panel From the Special Arbitrator Roster Decides Requests Filed Under the Industry Code

If an associated person files a straight-in request in accordance with proposed Rule 13805, a three-person panel randomly selected from the Special Arbitrator Roster pursuant to proposed Rule 13806 would be required to hold an expungement hearing, decide the expungement request, and issue an award.

The proposed rule change would provide that if the associated person withdraws or does not pursue the request, the panel would be required to deny the expungement request with prejudice.

See

proposed Rule 13805(a)(4).

See id.

According to FINRA, “[t]his requirement would foreclose the ability of associated persons to withdraw expungement requests to avoid having their requests decided by a panel that they believe does not favor their request, and then seek to re-file the request with the hope of obtaining a potentially more favorable decision from a different panel.” Notice at 50179.

a. Eligibility Requirements for the Special Arbitrator Roster

The proposed rule change would include several requirements to help ensure that arbitrators on the Special Arbitrator Roster have the qualifications and training to decide straight-in requests.

First, the proposed rule change would require arbitrators on the Special Arbitrator Roster to be public arbitrators who are eligible for the chairperson roster (“public chairperson”).

In general, public arbitrators are persons who are not employed in the securities industry and do not devote 20 percent or more of their professional work to the securities industry or to parties in disputes concerning investment accounts or transactions, or employment relationships within the financial industry.

Arbitrators are eligible for the chairperson roster if they have completed chairperson training provided by FINRA and: (1) have a law degree and are either a member of a bar of at least one jurisdiction and have served as an arbitrator through award on at least one arbitration administered by a self-regulatory organization (“SRO”) in which hearings were held; or (2) have served as an arbitrator through award on at least three arbitrations administered by an SRO in which hearings were held.

FINRA stated that 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.

See

proposed Rule 13806(b).

See

Notice at 50170 n.3;

see also

FINRA Rules 12100(aa) and 13100(x).

See

FINRA Rules 12400(c) and 13400(c). FINRA stated that for purposes of this proposed rule change, “public arbitrators who are eligible for the chairperson roster would include those arbitrators who have met the chairperson eligibility requirements of FINRA Rules 12400(c) or 13400(c), regardless of whether they have already served as a chair on an arbitration case.” Notice at 50179 n.102.

See

Notice at 50179.

Second, the proposed rule change would require arbitrators on the Special Arbitrator Roster to have evidenced successful completion of, and agreement with, enhanced expungement training provided by FINRA.

FINRA currently provides an Expungement Training module for arbitrators.

100

This training, however, would be expanded for arbitrators seeking to qualify for the Special Arbitrator Roster.

101

See

proposed Rule 13806(b)(2)(A).

100

See

Notice at 50179.

101

See id.

Third, the proposed rule change would require arbitrators on the Special Arbitrator Roster to have served as an arbitrator through award on at least four customer arbitrations administered by FINRA or by another SRO in which a hearing was held.

102

FINRA stated that “if an arbitrator has served on four arbitrations through to award, it would indicate that the arbitrator has gained the knowledge and experience in the DRS arbitration forum to conduct hearings.”

103

102

See

proposed Rule 13806(b)(2)(B). This requirement would not be satisfied by serving on arbitrations administered under the special proceeding option of the simplified arbitration rules.

Id.; see also

FINRA Rule 12800(c)(3)(B).

103

Notice at 50179-80.

b. Composition of the Panel

The proposed rule change would require the Neutral List Selection System (“NLSS”)

104

to select randomly the three public chairpersons from the Special Arbitrator Roster to decide a straight-in request filed by an associated person.

105

The parties would not be permitted to agree to fewer than three arbitrators.

106

The parties requesting expungement also would not be permitted to strike any arbitrators selected by NLSS nor stipulate to their removal,

107

but would be permitted to challenge an arbitrator selected for cause.

108

If an arbitrator is removed, NLSS would randomly select a replacement.

109

FINRA stated that the proposed rule change would “prevent the associated person and member firm from collaboratively seeking to influence the outcome of the expungement request through arbitrator selection.”

110

104

NLSS is a computer algorithm used to generate lists of arbitrators on a random basis from DRS's rosters of arbitrators for the selected hearing location.

105

See

proposed Rule 13806(b)(1). The first arbitrator selected would be the chair of the panel.

See

proposed Rule 13806(b)(3).

106

See

proposed Rule 13806(b)(5).

107

See

proposed Rule 13806(b)(4), as modified by Amendment No. 2. The parties also would not be permitted to stipulate to the use of pre-selected arbitrators (

i.e.,

arbitrators that the parties find on their own to use in their cases).

See

proposed Rule 13806(b)(1).

108

See

proposed Rule 13806(b)(4). The Director may remove an arbitrator for conflict of interest or bias (

i.e.,

“cause”) upon request of a party. The Director will grant a party's request to remove an arbitrator if it is reasonable to infer, based on information known at the time of the request, that the arbitrator is biased, lacks impartiality, or has a direct or indirect interest in the outcome of the arbitration. The interest or bias must be definite and capable of reasonable demonstration, rather than remote or speculative.

See

FINRA Rule 13410.

109

See

proposed Rule 13806(b)(4).

110

Notice at 50180. FINRA stated that “outside of the expungement context, the parties to an arbitration are typically adverse, which means that during arbitrator selection, each side may rank arbitrators on the lists whom they believe may be favorable to their case. The adversarial nature of the proceedings serves to minimize the impact of each party's influence in arbitrator selection. In contrast, a straight-in request filed by an associated person against a firm is less likely to be adversarial in nature.”

Id.

C. Limitations on Expungement Requests

Currently, the Codes provide minimal constraints on making expungement requests. FINRA Rules 12805 and 13805 do not address when a party would not be permitted to file an expungement request in the DRS arbitration forum.

111

The Guidance, however, describes circumstances in which an expungement request should be ineligible for arbitration. The proposed rule change would incorporate the limitations contained in the Guidance and add time limits to when an associated person may file a straight-in request.

111

But see infra

note 127 (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 should deny the expungement request.

112

See supra

note 6;

see also

Notice at 50180.

The proposed rule change would codify the Guidance by providing that an associated person may not file a request for expungement of customer dispute information if: (1) a panel held a hearing to consider the merits of the associated person's expungement request for the same customer dispute information; or (2) a court of competent jurisdiction previously denied the associated person's request to expunge the same customer dispute information.

113

According to FINRA, these proposed amendments would prevent an associated person from forum shopping, or seeking to return to the DRS arbitration forum to garner a favorable outcome on his or her expungement request.

114

113

See

proposed Rules 12805(a)(1)(B)(i) and (ii) and 13805(a)(2)(A)(i) and (ii). The proposed rule change would require that the requesting party provide information about previous expungement requests and how such requests were decided.

See

proposed Rules 12805(a)(1)(C)(ii)e. and 13805(a)(3)(E).

114

FINRA stated that if a panel holds a hearing that addresses the merits of an associated person's request for expungement, the Director would be authorized to deny the DRS arbitration forum to any subsequent request by the associated person or another party on behalf of the associated person to expunge the same customer dispute information.

See

proposed Rules 12203(b) and 13203(b).

See

Notice at 50180 n.117.

2. Limitations Applicable to Straight-In Requests Only

As discussed below, under the proposed amendments, four additional limitations would apply to straight-in requests.

a. No Straight-In Request if the Customer Arbitration, Civil Litigation or Customer Complaint Has Not Closed

The Guidance provides that an associated person may not file a separate request for expungement of customer dispute information arising from a customer arbitration until the customer arbitration has concluded.

115

The proposed rule change would codify and expand upon this limitation by providing that an associated person may not file a straight-in request under proposed Rule 13805 if the customer arbitration, civil litigation or customer complaint associated with the customer dispute information has not closed.

116

According to FINRA, the proposed rule change would, among other things, prevent an associated person from filing a straight-in request while a customer arbitration or civil litigation associated with the customer dispute information that is the subject of the straight-in request is pending.

117

115

See

Notice at 50180;

see also

Section II.A.1.a., “Expungement Requests by a Respondent Named in a Customer Arbitration.”

123

See

Notice at 50175.

124

See

proposed Rule 13805(a)(2)(A)(viii).

d. Time Limits Applicable to Disclosures Arising After the Effective Date of the Proposed Rule Change

FINRA Rules 12206(a) and 13206(a) require an associated person to submit a claim within six years from the occurrence or event giving rise to the claim. This six-year eligibility rule applies to all arbitration claims, including those requesting expungement of customer dispute information.

125

As a result, FINRA stated that many straight-in requests are filed many years after the customer arbitration closes or the customer complaint is reported in the CRD system.

126

To encourage prompt filing of expungement requests, the proposed amendments would establish time limits for expungement requests that are specifically tied to the closure of customer arbitrations and civil litigations, or the reporting of customer complaints in the CRD system, as applicable.

127

The proposed rule change would allow an associated person to request expungement of customer dispute information associated with a customer arbitration or civil litigation—including any associated customer complaint disclosures—within two years after the customer arbitration or civil litigation closes.

128

If no customer arbitration or civil litigation associated with the customer complaint is filed, the associated person would have three years from the date the customer complaint was initially reported in the CRD system to file the expungement request.

129

If a customer arbitration is filed after a panel has issued an award on a request to expunge a customer complaint associated with the newly filed customer arbitration, the proposed rule would provide that the prior expungement award shall not be admissible in the customer arbitration.

130

125

See

Notice at 50174 n.38.

126

See id.

at 50181.

127

See

proposed Rules 13805(a)(2)(A)(vi) and (vii). FINRA Rules 12206 and 13206 provide that no claim shall be eligible for submission to arbitration where six years have elapsed from the occurrence or event giving rise to the claim. Under these Rules, the panel has discretion to determine if the claim, including an expungement request, is eligible for arbitration.

See supra

note 125. As discussed below, under the proposed rule change, requests to expunge customer dispute information that arose up to six years prior to the effective date of the proposed rule change would continue to be eligible for expungement but would need to be filed within two or three years, as applicable.

See

proposed Rule 13805(a)(2)(B).

128

See

proposed Rule 13805(a)(2)(A)(vi). FINRA stated that with respect to requests to expunge customer dispute information associated with a customer arbitration, an associated person would be permitted to file a straight-in request under this two-year time limitation only if expungement of the customer dispute information was not required to be decided during the customer arbitration.

See

Notice at 50181 n.126. FINRA stated that a two-year limitation period would allow the associated person sufficient time to determine whether to seek expungement by filing a straight-in request and provide a sufficient amount of time for the associated person to gather the documents, information and other resources required to file the expungement request. In addition, a two-year period would help ensure that the expungement hearing is held close enough in time to the customer arbitration or civil litigation, when information regarding the customer arbitration or civil litigation is available and in a timeframe that could increase the likelihood for the customer to attend and participate if the customer chooses to do so.

See

Notice at 50181.

129

See

Notice at 50181. FINRA stated that the three-year time limitation would help ensure that the expungement hearing is held close in time to the events that gave rise to the customer dispute and increase the likelihood of customer attendance and participation. Three years should also provide sufficient time for firms to complete their investigation of the complaint, for associated persons to develop a sense of whether the complaint may evolve into an arbitration or civil litigation, and for the associated person to gather the necessary resources and determine whether to seek expungement.

See id.

130

See

proposed Rules 12604(c) and 13604(c). FINRA stated that the proposed rule change would avoid unfairly impacting the customer arbitration.

See also

Notice at 50181.

The proposed rule change would also establish time limits for requests to expunge customer dispute information arising from customer arbitrations and civil litigations that close, and for customer complaints that were initially reported to the CRD system, on or prior to the effective date of the proposed rule change.

131

Specifically, the proposed rule change would provide that if an expungement request is otherwise eligible under the six-year limitation

period of FINRA Rule 13206(a),

132

an associated person would be permitted to file a straight-in request under the Industry Code if: (1) the request for expungement is made within two years of the effective date of proposed rule change, and the disclosure to be expunged is associated with a customer arbitration or civil litigation that closed on or prior to the effective date;

133

or (2) the request for expungement is made within three years of the effective date of the proposed rule change, and the disclosure to be expunged is associated with a customer complaint initially reported to the CRD system on, or prior to, the effective date.

134

131

See

Notice at 50182.

132

The Codes provide that no claim shall be eligible for submission to arbitration where six years have elapsed from the occurrence or event giving rise to the claim.

See

FINRA Rules 12206(a) and 13206(a).

133

See

proposed Rule 13805(a)(2)(B)(i).

134

See

proposed Rule 13805(a)(2)(B)(ii).

3. Director's Authority To Deny the Forum

The proposed rule change would require the Director to decline the use of the DRS arbitration forum if an associated person files an expungement request that the Director determines is ineligible for arbitration under proposed Rules 12805 and 13805.

135

The proposed rule change would also provide the Director with authority to decline the use of the DRS arbitration forum if the Director determines that the expungement request was not filed under, or considered in the DRS arbitration forum in accordance with, proposed Rules 12805 or 13805.

136

FINRA stated that the proposed rule change would help ensure additional safeguards around the expungement process by expanding the circumstances in which the Director is authorized to deny the DRS arbitration forum.

137

135

See

proposed Rules 12203(b) and 13203(b). For example, FINRA stated that under the proposed rule change the Director would decline the use of the DRS arbitration forum if: (1) an expungement request is ineligible under the proposed time limitations; (2) a panel has previously considered the merits of, or a court has previously decided, an expungement request associated with the same customer dispute information; (3) an associated person was named as a respondent in a customer arbitration but did not request expungement; (4) an associated person requested expungement but withdrew or did not pursue the expungement request; or (5) a party to a customer arbitration requested expungement on behalf of an unnamed person but the party withdrew or did not pursue an expungement request on behalf of the unnamed person.

See

Notice at 50182.

136

See

proposed Rules 12203(c) and 13203(c). For example, FINRA stated that the Director may decline the use of the DRS arbitration forum if the Director determines that: (1) a panel is proposing to issue an award containing expungement of customer dispute information other than pursuant to proposed Rules 12805, 12800(d) and (e) or 13805, as applicable; or (2) an associated person seeks expungement of customer dispute information other than pursuant to proposed Rules 12805, 12800(d) and (e) or 13805, as applicable.

See

Notice at 50182.

137

See

Notice at 50182.

D. Procedural Requirements Relating to All Expungement Hearings

FINRA Rules 12805 and 13805 currently provide a list of requirements panels must follow in order to issue an award containing expungement relief.

138

In addition, the Guidance recommends that arbitrators follow certain practices when deciding expungement requests. The proposed rule change would amend the current expungement hearing requirements by incorporating relevant provisions from the Guidance. The proposed amended requirements would apply to all expungement hearings.

139

138

See supra note

31.

139

See

proposed Rules 12805(c) and 13805(c). The proposed requirements for expungement hearings would apply to expungement hearings held during a customer arbitration under proposed Rule 12805, a simplified customer arbitration under proposed Rule 12800 (

see

Section II.G., “Expungement Requests During Simplified Customer Arbitrations”) and a straight-in request under proposed Rule 13805, unless otherwise specified.

See

Notice at 50182 n.137.

1. Recorded Hearing Sessions

The Codes currently require a panel deciding an expungement request to hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement.

140

The proposed rule change would provide that the panel would be required to hold one or more separate recorded hearing sessions regarding the expungement request, clarifying that the panel would not be limited in the number of hearing sessions it should hold to decide the expungement request. The proposed rule change would also eliminate the reference to the hearing being held by telephone or in person since the participants in the hearing may, under the proposed rule change, also appear by video conference; the proposed rule change would also allow different participants to attend using different methods (

e.g.,

one by phone, one by video conference).

141

140

See

FINRA Rules 12805(a) and 13805(a).

141

See

proposed Rules 12805(c)(1) and 13805(c)(1).

2. Requesting Party's Appearance

The proposed rule change would require the associated person whose information in the CRD system is the subject of the expungement request to appear in person or by video conference at the expungement hearing and eliminate the ability to appear via telephone.

142

The proposed rule change would also require a party requesting expungement on behalf of an unnamed person or the party's representative to appear in person or by video conference at the hearing.

143

The panel would determine the method of appearance.

144

FINRA stated that requiring that attendance be in person or by video conference would help the panel assess the associated person's credibility.

145

142

See

proposed Rules 12805(c)(2) and 13805(c)(2).

143

See id.

144

See id.

145

See

Notice at 50182.

3. Customer's Attendance and Participation During the Expungement Hearing

The Guidance states that it is important to allow customers and their representatives to participate in the expungement hearing if they wish to do so.

146

Specifically, the Guidance provides that arbitrators should:

146

The Guidance states that arbitrators should permit customers and their counsel to participate in the expungement hearing.

See supra

note 6.

• Allow the customer and their representative to appear at the expungement hearing;

• Allow the customer to testify (telephonically, in person, or by other method) at the expungement hearing;

• Allow the representative for the customer or a pro se customer to introduce documents and evidence at the expungement hearing;

• Allow the representative for the customer or a pro se customer to cross-examine the associated person or other witnesses called by the party seeking expungement; and

• Allow the representative for the customer or a pro se customer to present opening and closing arguments if the panel allows any party to present such arguments.

The proposed rule change would codify these provisions of the Guidance.

147

See

Notice at 50182-83.

Specifically, the proposed rule change would state that all customers whose customer dispute information is associated with the expungement request are entitled to attend and participate in all aspects of the prehearing conferences and the expungement hearing.

148

And the

proposed rule change would provide that the customer could choose to attend and participate by telephone, in person or by video conference.

149

148

See

proposed Rules 12805(c)(3)(A) and 13805(c)(3)(A). A prehearing conference is any hearing session, including an Initial Prehearing Conference, that takes place before the hearing on the merits begins.

See

FINRA Rules 12100(y) and 13100(w);

see also

FINRA Rules 12500 and 13500. Under the proposed rule change, all customers whose customer dispute information is associated with the straight-in request would be entitled to representation at prehearing conferences.

See

proposed Rule 13805(c)(4).

149

See

proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B).

The proposed rule change would also specify certain parameters of the customer's participation.

150

First, the proposed rule change would provide that a customer or a customer's representative could introduce evidence during the expungement hearing.

151

If the customer or customer's representative introduces any evidence at the expungement hearing, a party could state objections to the introduction of the evidence during the expungement hearing.

152

150

See

Notice at 50183.

151

See

proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).

152

See id.

Second, the customer and the customer's witnesses would be allowed to testify at the expungement hearing and be questioned by the customer or customer's representative.

153

If a customer or their witnesses testify, the associated person or a party requesting expungement on behalf of an unnamed person would be allowed to conduct cross-examination.

154

153

See

proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B).

154

See id.

Third, the customer or customer's representative would be permitted to state objections to evidence and cross-examine the associated person or party requesting expungement on behalf of an unnamed person and any other witnesses called during the expungement hearing.

155

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.

156

See

proposed Rules 12805(c)(5)(D) and 13805(c)(5)(D).

FINRA stated that customer attendance and participation during an expungement hearing would provide the panel with important information and perspective that it might not otherwise receive. In addition, by providing customers with options for how to attend and participate in hearings FINRA seeks to encourage customer attendance and participation.

157

However, FINRA also stated that the proposed rule should give the associated person or party requesting expungement on behalf of an unnamed person the opportunity to substantiate arguments in support of the expungement request.

158

157

See

Notice at 50183.

158

Id.

4. Panel Requests for Additional Documents or Evidence

The proposed rule change would explicitly authorize a panel to request from the associated person, the party requesting expungement on behalf of an unnamed person, and the member firm at which the person was associated at the time the customer dispute arose, as applicable, any documentary, testimonial or other evidence that the panel deems relevant to the expungement request.

159

FINRA stated that this proposed rule change would help ensure that arbitrators have the information necessary to make an informed decision on an expungement request, particularly in cases that settle before an evidentiary hearing or in cases where the customer does not attend or participate in the expungement hearing.

160

159

See

proposed Rules 12805(c)(6) and 13805(c)(7).

160

See

Notice at 50183.

5. Review of Settlement Documents

Current FINRA Rules 12805(b) and 13805(b) provide that, in the event a customer dispute is resolved by settlement, the panel considering the expungement request must review the settlement documents and consider the amount of payments made to any party and any other terms and conditions of the settlement.

161

The proposed rule change would retain this requirement.

162

161

FINRA stated that the panel must review settlement documents that are related to the customer dispute information associated with the expungement request, regardless of whether the associated person was a party to the settlement.

Id.

at 50183 n.152.

162

See

proposed Rules 12805(c)(7) and 13805(c)(8). FINRA Rule 2081 provides that no member firm or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer's agreement to consent to, or not to oppose, the member's or associated person's request to expunge such customer dispute information from the CRD system.

See also

Prohibited Conditions Relating to Expungement of Customer Dispute Information FAQ,

https://www.finra.org/arbitration-mediation/faq/prohibited-conditions-relating-expungement-customer-dispute-information.

In addition, the Guidance currently recommends that arbitrators inquire and fully consider whether a party conditioned a settlement of a customer dispute upon an agreement not to oppose the request for expungement in cases in which the customer does not attend or participate in the expungement hearing or the requesting party states that a customer has indicated that the customer will not oppose the expungement request.

163

The proposed rule change would codify the language in the Guidance,

164

in part, because conditioned settlements violate FINRA Rule 2081 and may be grounds to deny an expungement request.

165

163

See

Notice at 50184.

164

See

proposed Rules 12805(c)(7) and 13805(c)(8).

165

See

Notice at 50184.

6. Unanimous Decision To Issue an Award Containing Expungement Relief

Unlike arbitration cases generally, which may be decided based on a majority decision of the panel, the proposed rule change would require that the arbitrators agree unanimously to issue an award containing expungement relief.

166

The proposed amendments would also provide that in order to issue an award containing expungement relief, the panel must unanimously find that one or more of the grounds for expungement enumerated in the proposed rule has been established: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the associated person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.

167

The proposed rule change would also state that the panel shall not issue, and the Director shall not serve, an award containing expungement relief based on any other grounds.

168

FINRA stated that these proposed rule changes would help ensure that expungement is awarded only in limited circumstances in

accordance with the narrow standards in its rules.

169

166

See

proposed Rules 12805(c)(8)(A) and 13805(c)(9)(A). FINRA stated that when deciding a customer's claims, a majority decision of the arbitrators would continue to be sufficient. Notice at 50184 n.156.

167

See

proposed Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i). FINRA stated that current FINRA Rules 12805 and 13805 require that, in order to issue an award containing expungement of customer dispute information, the panel must indicate in the arbitration award which of the FINRA Rule 2080 grounds for expungement serves as the basis for its expungement order.

See

Notice at 50184;

see also

FINRA Rule 2080 (Obtaining an Order of Expungement of Customer Dispute Information from the Central Registration Depository (CRD) System). FINRA Rule 2080 is not part of the Codes, and the proposed rule change would not amend FINRA Rule 2080. FINRA explained that the proposed rule change would codify the grounds identified in FINRA Rule 2080(b)(1) as the exclusive grounds upon which an arbitration panel may issue an award containing expungement of customer dispute information from the CRD system.

See

Notice at 50184 at n.162.

168

See

proposed Rules 12805(c)(8)(A)(ii) and 13805(c)(9)(A)(ii).

169

See

Notice at 50184;

see also

FINRA Rules 12805(c) and 13805(c).

171

See

Notice at 50184.

172

See

proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B).

173

See

Notice at 50184.

8. Evidentiary Weight of Decision Not To Attend or Participate

The proposed rule change would state that a panel shall not give any evidentiary weight to a decision by a customer or an authorized representative of state securities regulators (“authorized representative”) not to attend or participate in an expungement hearing when making a determination of whether expungement is appropriate.

174

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

175

174

See

proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C);

see also

Amendment No. 1;

see also

Section II.F., “Attendance and Participation of an Authorized Representative of State Securities Regulators in Straight-in Requests” (discussing the attendance and participation in straight-in requests of an authorized representative of state securities regulators).

175

See

Notice at 50185;

see also

FINRA November 10 Letter at 10-11.

9. Forum Fees

The proposed rule change would retain the current requirements in FINRA Rules 12805(d) and 13805(d) that address how DRS arbitration forum fees are assessed in expungement hearings. Specifically, the proposed rule change would state that the panel must assess against the parties requesting expungement all DRS arbitration forum fees for each hearing session in which the sole topic is the determination of the appropriateness of expungement.

176

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

According to FINRA, the Guidance suggests that when a straight-in request is filed against a firm, arbitrators order the associated person to provide a copy of the statement of claim to the customers involved in the customer dispute that gave rise to the customer dispute information maintained in the CRD system.

177

The proposed rule change would codify this practice in the Industry Code by requiring the associated person to serve all customers whose customer arbitrations, civil litigations or customer complaints are a subject of the expungement request with a copy of the statement of claim requesting expungement and any answer.

178

The associated person would be required to serve a copy of the statement of claim and a copy of any answer within 10 days of filing.

179

The panel would be authorized to decide whether extraordinary circumstances exist that make service on the customers impracticable.

180

177

See

Notice at 50185;

see also

supra

note 6.

178

See

proposed Rule 13805(b)(1)(A)(i) and (ii). This proposed requirement would apply to straight-in requests filed under the Industry Code; notice to customers would not be necessary for requests filed under proposed Rule 12805 of the Customer Code as the customer would be a named party.

See

Notice at 50185 n.168.

179

See

proposed Rules 13805(b)(1)(A)(i) and (ii).

180

See id.

The proposed rule change also would require the associated person to file with the panel proof of service for the statement of claim and any answers, copies of all documents provided by the associated person to the customers, and copies of all communications sent by the associated person to the customers and any responses received from the customers.

181

See

proposed Rule 13805(b)(1)(A)(iv).

FINRA stated that providing notification to customers would help ensure that the customers know about the expungement request and have an opportunity to attend and participate in the expungement hearing or provide a position in writing regarding the associated person's request. FINRA also stated that requiring the panel to review all documents that the associated person used to inform the customers about the expungement request as well as any customer responses received would help ensure that the associated person does not attempt to dissuade a customer from attending or participating in the expungement hearing.

182

See

Notice at 50185.

2. Notifications to the Customer by the Director

The proposed rule change would require the Director to notify all customers whose customer arbitrations, civil litigations or customer complaints are a subject of the expungement request, of the time, date and place of any prehearing conferences and the expungement hearing.

183

The Director would also provide the notified customers with access to all documents on the Portal related to the request for expungement prior to their attendance and participation in the expungement hearing.

184

183

See

proposed Rule 13805(b)(1)(B)(i). This requirement would apply to straight-in requests filed under the Industry Code; notice to customers would not be necessary for requests filed under proposed Rule 12805 of the Customer Code as the customer would be a named party.

See also

Section II.G.3., “Customer Notification of Expungement Hearings during Simplified Arbitrations” (discussing customer notification of expungement hearings in connection with simplified arbitrations). FINRA stated that the Director would be required to include language in the notice encouraging the customer to attend and participate in the expungement hearing.

See

Notice at 50185.

184

See

proposed Rule 13805(b)(1)(B)(ii);

see also

Notice at 50185. FINRA would provide customers with access to the documents through the Portal. The Portal has two parts: the DR Neutral Portal is for arbitrators and mediators serving on the Dispute Resolution roster, and the DR Party Portal is for arbitration and mediation case participants. Once registered on the Portal, parties may use the portal to, among other things, file an arbitration claim, view case documents, submit documents to FINRA and send documents to other portal case participants, and schedule hearing dates.

See supra

note 86. FINRA stated that these proposed rule changes would help encourage customer attendance and participation in the expungement hearing, which would help the panel fully develop a record on which to decide the expungement request.

See

Notice at 50185.

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.

185

FINRA stated that the proposed notification requirement would help ensure that state securities regulators are timely notified of expungement requests.

186

185

See

proposed Rules 12800(f)(1), 12805(b) and 13805(b)(2)(A). FINRA stated that it would make this notification in connection with expungement requests under the Customer and Industry Codes. Such notification could be achieved by notifying NASAA of the expungement requests.

See

Notice at 50185 n.176.

186

See

Notice at 50185.

F. Attendance and Participation of an Authorized Representative of State Securities Regulators in Straight-In Requests

The proposed rule change would provide a mechanism for an authorized representative of a state securities regulator to provide their position or positions on an expungement request in writing or by attending and participating in the expungement hearing in person or by video conference.

187

The proposed rule change would limit attendance and participation by an authorized representative to straight-in requests.

188

187

See

proposed Rule 13805(c)(6)(A).

188

See

Notice at 50185-86;

see also

proposed Rule 1305(c)(6). The proposed rule change would not allow an authorized representative to attend or participate in a customer arbitration where expungement has been requested; FINRA believes that such attendance or participation could substantially disrupt the customer's case and would be less impactful, as the panel hears the customer's evidence on the merits.

See id.

at 50186.

The proposed rule change would also require the Director to provide state securities regulators with access to all documents relevant to: (1) the expungement request filed in the arbitration requesting expungement relief; and (2) any other customer arbitration brought under the Customer Code that is associated with the customer dispute information that is a subject of the expungement request.

189

Such access would be required to be provided at the same time as providing notification to state securities regulators of the straight-in request.

190

189

See

proposed Rule 13805(b)(2)(B).

190

See id.;

see also Notice at 50186. The state securities regulators' access to the documents would be subject to confidentiality restrictions.

See

proposed Rule 13805(b)(2)(B).

If the Director receives notification from an authorized representative no later than 30 days after the last answer is due that the authorized representative intends to attend and participate in the expungement hearing, the proposed rule change would require the Director to notify the authorized representative of the time, date and place of any prehearing conferences and the expungement hearing.

191

Under proposed Rule 13805(c)(6), at the expungement hearing, the authorized representative would be permitted to: (1) introduce documentary, testimonial, or other evidence; (2) cross-examine witnesses; and (3) present opening and closing arguments if the panel allows any party to present such arguments.

192

Under the proposed rule change, the other persons appearing at the expungement hearing could state objections to the authorized representative's evidence and cross-examine the authorized representative's witnesses.

193

191

See

proposed Rule 13805(b)(3).

192

See

proposed Rule 13805(c)(6)(B).

193

See

proposed Rule 13805(c)(6)(C).

According to FINRA, the authorized representative would not be considered a party to the proceeding and their attendance and participation would be limited to what is authorized by proposed Rule 13805(c)(6).

194

As such, an authorized representative would not be entitled to seek discovery from the parties through the DRS arbitration forum, file motions, or seek to postpone a hearing.

195

In addition, the proposed rule change provides that the panel would not be permitted to allow the attendance or participation of the authorized representative to materially delay the scheduling of the expungement hearing.

196

194

See

Notice at 50186.

195

See id.

at 50186 n.182.

196

See

proposed Rule 13805(c)(6)(A).

FINRA stated that allowing an authorized representative to attend and participate in straight-in requests may provide meaningful opposition to the expungement request, which might otherwise be unopposed, and thus help create a more complete factual record for the panel to rely upon to decide the expungement request.

197

See

Notice at 50186. FINRA also stated that NASAA and state securities regulators have a shared interest with FINRA in protecting the integrity of the information contained in the CRD system, as it is a crucial tool in their registration and oversight responsibilities.

See id.

G. Expungement Requests During Simplified Customer Arbitrations

FINRA Rule 12800, governing simplified arbitration,

198

was designed to make the DRS arbitration process less burdensome for customer arbitrations involving $50,000 or less (exclusive of interest and expenses) by providing such customers with expedited procedures. Simplified arbitrations are decided on the pleadings and other materials submitted by the parties, unless the customer requests a hearing.

199

Further, a single arbitrator from the public chairperson roster is appointed to consider and decide simplified arbitrations, unless the parties agree in writing otherwise.

200

198

See supra

note 7 and accompanying text.

199

See

FINRA Rule 12800(a).

200

See

FINRA Rule 12800(b). The parties could agree to have a three-person panel decide the simplified case. For ease of reference, when discussing expungement requests in simplified arbitrations under the proposed rule change, this order uses the term “arbitrator,” unless otherwise specified, to mean either a panel or single arbitrator.

The customer who files a simplified arbitration determines how the claim will be decided. In particular, the customer has the option of having the case decided in one of three ways: (1) without a hearing (referred to as “on the papers”), where the arbitrator decides the case on the pleadings or other materials; (2) in an “Option One” full hearing, in which prehearings and hearings on the merits take place pursuant to the regular provisions of the Customer Code; or (3) in an “Option Two” special proceeding, whereby the parties present their case in a hearing to the arbitrator in a compressed timeframe, so that the hearings last no longer than one day.

201

See

FINRA Rule 12800(c).

FINRA Rule 12800 does not expressly address how an expungement request should be filed or considered during a simplified arbitration.

202

The proposed rule change would codify an associated person's ability to request expungement when named as a respondent in a simplified arbitration, and for other parties to request expungement on behalf of an unnamed person. The proposed rule change would also establish procedures for requesting and considering expungement requests in simplified arbitrations that are consistent with the expedited nature of these proceedings.

203

202

See

Notice at 50186.

203

See

Notice at 50186, proposed Rules 12800(d) and (e).

1. Requesting Expungement

The proposed rule change would permit a named associated person to request expungement, or a party to file an on-behalf-of request, during a simplified arbitration.

204

Unlike in a non-simplified arbitration, if expungement is not requested during the simplified arbitration, the associated person would be permitted to request it as a straight-in request filed under the Industry Code.

205

204

See

proposed Rules 12800(d)(1) and (2).

205

See

proposed Rule 12800(e)(2).

See

Section II.G.1.c., “No Expungement Request is Filed.”

a. Request by a Named Associated Person During a Simplified Arbitration

Under the proposed rule change, an associated person named as a respondent in a simplified arbitration could request expungement during the arbitration of the customer dispute information associated with the customer's statement of claim, provided the request is eligible for arbitration.

206

If a named associated person requests expungement during a simplified arbitration, the proposed rule change would require the request to be filed in an answer or a separate pleading requesting expungement.

207

If the named associated person requests expungement in a pleading other than an answer, the request would be required to be filed within 30 days after the date FINRA notifies the parties of the appointment of the arbitrator.

208

The request would be required to include the same information as a request filed in a non-simplified arbitration.

209

206

See

proposed Rule 12800(d)(1)(A). The limitations that apply to expungement requests filed by a named associated person under proposed Rule 12805(a)(1)(B) would apply to requests made in simplified arbitration.

See

Notice at 50187 n.191.

See

Section II.C., “Limitations on Expungement Requests.”

207

See

proposed Rule 12800(d)(1)(B)(i). Pursuant to FINRA Rule 12303(a), a respondent's answer must be submitted within 45 days of receipt of the statement of claim.

See

Notice at 50187 n.192;

see supra

note 48 and accompanying text.

208

See

proposed Rule 12800(d)(1)(B)(i). FINRA stated that when it notifies the parties that an arbitrator has been appointed, it informs the parties that they have 30 days from the date of notification to submit additional documents or other information before the case is submitted to the arbitrator.

See

Notice at 50187 n.193.

209

See

proposed Rules 12800(d)(1)(B)(i) and 12805(a)(1)(C)(ii). More specifically, the associated person's expungement request would be required to contain the applicable filing fee; the CRD number of the party requesting expungement; each CRD occurrence number that is the subject of the request; the case name and docket number associated with the customer dispute information; and an explanation of whether expungement of the same customer dispute information was previously requested and, if so, how it was decided.

The arbitrator would be required to decide an expungement request that is filed by the associated person.

210

If an associated person withdraws or does not pursue the request after filing, the arbitrator would be required to deny the request with prejudice so that it could not be re-filed.

211

210

See

proposed Rules 12800(d)(1)(B)(ii) and 12800(e)(1).

211

See

proposed Rule 12800(d)(1)(C). FINRA stated this provision would limit arbitrator-shopping.

See

Notice at 50187.

b. Request by a Party on Behalf of an Unnamed Person

Under the proposed rule change, the requirements for a party to file an on-behalf-of request during a simplified arbitration would be the same as the requirements for a named associated person filing an expungement request during a simplified arbitration. A named party would only be able to file an on-behalf-of request during a simplified arbitration with the consent of the unnamed person.

212

As with on-behalf-of requests filed in customer arbitrations under proposed Rule 12805(a)(2), the unnamed person who would benefit from the expungement request would be required to consent to such filing by signing the Form.

213

212

See

proposed Rule 12800(d)(2)(A).

213

See

proposed Rule 12800(d)(2). The request must also meet the same requirements as an on-behalf-of request filed under proposed Rule 12805(a)(2).

See

proposed Rules 12805(a)(1)(C)(ii), 12805(a)(2)(C)(ii) and 12805(a)(2)(D);

see also

Section II.A.1.b., “Expungement Requests By a Party Named in a Customer Arbitration on Behalf of an Unnamed Person.”

The arbitrator would be required to decide an on-behalf-of request that is filed by the requesting party.

214

If the requesting party withdraws or does not pursue the on-behalf-of request after filing, the arbitrator would be required to deny the request with prejudice so that it could not be re-filed.

215

214

See

proposed Rules 12800(d)(2)(B)(ii) and 12800(e)(1).

215

See

proposed Rule 12800(d)(2)(C).

c. No Expungement Request Is Filed

If expungement is not requested during a simplified arbitration under proposed Rule 12800(d), the associated person would be able to file a straight-in request under proposed Rule 13805 and have the request decided by a three-person panel randomly selected from the Special Arbitrator Roster.

216

The request would be subject to the limitations on whether and when such requests may be filed under the Industry Code.

217

216

See

proposed Rules 12800(e)(2), 13805(a)(1) and 13806. FINRA stated that because there may be less information available for the arbitrator to evaluate an expungement request during a simplified arbitration—even when the simplified arbitration results in an award—the associated person would retain the ability to choose to file the request as a straight-in request under the Industry Code. This would allow the associated person to obtain and present evidence from the member firm at which they were associated at the time the customer dispute arose without interfering with the simplified customer arbitration process.

See

Notice at 50187 n.203 and accompanying text.

217

See

proposed Rule 12800(e)(2);

see also

Section II.C., “Limitations on Expungement Requests.”

2. Deciding Expungement Requests During Simplified Arbitrations

If expungement is requested during simplified arbitration, the arbitrator would be required to decide the expungement request, regardless of how the simplified arbitration closes (

e.g.,

even if the arbitration settles).

218

Under the proposed rule change, how and when the expungement request is decided would depend on which option the customer selects to decide the simplified arbitration.

219

218

See

proposed Rule 12800(e)(1). Simplified arbitration is a more streamlined arbitration process.

See

Notice at 50186. In part, a single arbitrator from the public chairperson roster is appointed to consider and decide simplified arbitrations, unless the parties agree in writing otherwise.

Id.

219

See

proposed Rule 12800(e).

a. No Hearing or “Option Two” Special Proceeding

If the customer opts not to have a hearing or chooses an “Option Two” special proceeding, the arbitrator would decide the customer's dispute first and issue an award.

220

After the customer's dispute is decided, the arbitrator would hold a separate expungement-only hearing to consider and decide the expungement request and issue a separate, subsequent award.

221

FINRA stated that the proposed rule change is designed to minimize any delays in resolving the customer arbitration and any delays in potential recovery that a customer may be awarded.

222

220

See

proposed Rule 12800(e)(1)(A).

221

See id.

The arbitrator must conduct the expungement hearing pursuant to proposed Rule 12805(c). The expungement award must meet the requirements of proposed Rule 12805(c)(8), and the DRS arbitration forum fees would be assessed pursuant to proposed Rule 12805(c)(9).

See

Notice at 50188 n.206.

222

See

Notice at 50188.

b. “Option One” Full Hearing

If the customer chooses to have an “Option One” full hearing on their claim and it closes by award, the arbitrator would be required to consider and decide the expungement request during the customer arbitration and include the decision on the expungement request in the same award as the decision on the customer arbitration.

223

This process would be the same as deciding an expungement request during a non-simplified customer arbitration that closes by award after a hearing, where the customer's claim and expungement request are addressed during the customer arbitration.

224

223

See

proposed Rule 12800(e)(1)(B)(i).

224

See

Notice at 50188.

If the customer arbitration closes other than by award or by award without a hearing, the arbitrator would be required to hold a separate expungement-only hearing to consider and decide the expungement request and issue a separate award containing the decision on the expungement

request.

225

The arbitrator would conduct a separate expungement-only hearing to develop the factual record and help the arbitrator make a fully informed decision on the expungement request.

226

225

See

proposed Rule 12800(e)(1)(B)(ii).

226

See

Notice at 50188.

3. Customer Notification of Expungement Hearings During Simplified Arbitrations

The proposed rule change would require the Director to notify all customers from the simplified arbitration of a separate expungement-only hearing.

227

FINRA stated that the Director's notice would provide the customers with timely notice of the expungement hearing so that the customers and their representatives may participate.

228

227

See

proposed Rule 12800(f)(2).

228

See

Notice at 50188.

H. Non-Substantive Changes

The proposed rule change would also amend the Codes to make non-substantive, technical changes to the rules impacted by the proposed rule change. For example, the proposed rule change would require the renumbering of paragraphs and the updating of cross-references in the rules impacted by the proposed rule change. In addition, the title of Part VIII of the Customer Code would be amended to add a reference to “Expungement Proceedings.” Similarly, the title of Part VIII of the Industry Code would be amended to add a reference to “Expungement Proceedings” and “Promissory Note Proceedings.” FINRA is also proposing to re-number current FINRA Rule 13806 (Promissory Note Proceedings) as new FINRA Rule 13807, without substantive change to the current rule language and to amend FINRA Rule 13214 to change the cross references from Rules 13806(d)(1) and 13806(f) to Rules 13807(d)(1) and 13807(f), respectively. Finally, FINRA would also amend FINRA Rule 13600 to change the cross reference from Rule 13806(e)(1) to Rule 13807(e)(1).

III. Discussion and Commission Findings

After careful review of the proposed rule change, the comment letters, and FINRA's responses to the comments, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder that are applicable to a national securities association.

229

Specifically, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Exchange Act,

230

which requires, among other things, that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The Commission also finds that the proposed rule change is consistent with Section 15A(b)(5) of the Exchange Act,

231

which requires, among other things, that FINRA rules provide for the equitable allocation of reasonable dues, fees and other charges among members and issuers and other persons using any facility or system that FINRA operates or controls.

229

In approving this rule change, the Commission has considered the rule's impact on efficiency, competition, and capital formation.

See

15 U.S.C. 78c(f).

230

15 U.S.C. 78o-3(b)(6).

231

15 U.S.C. 78o-3(b)(5).

A. Requests for Expungement Under the Customer Code

1. Expungement Requests by Respondents Named in Customer Arbitration

The proposed rule change to amend FINRA Rule 12805 would, in part, govern how and when named associated persons may request expungement during a customer arbitration. Among other things, the proposed rule change would require that a named associated person file a request for expungement of the customer dispute information associated with the customer's statement of claim in the customer arbitration or forfeit the ability to request expungement of the same customer dispute information in a subsequent proceeding.

232

See

proposed Rule 12805(a)(1)(A).

The proposed rule change would also dictate the method of and deadline for filing an expungement request.

233

Under the proposed rule change, a named associated person would need to include their request for expungement in their answer to the customer's statement of claim or in a separate pleading requesting expungement.

234

If the associated person includes their request in the answer, they must file the answer within 45 days of receipt of the statement of claim.

235

If the named associated person requests expungement in a separate pleading requesting expungement, rather than the answer, they would need to file the pleading no later than 60 days before the first scheduled hearing begins.

236

233

See

proposed Rule 12805(a)(1)(C)(i).

234

See id.

235

See

FINRA Rule 12303(a).

236

See

proposed Rule 12805(a)(1)(C)(i);

see also

supra

notes 49-50 and accompanying text.

See also

Section II.A.1.a.i., “Method and Timing of Requesting Expungement in Customer Arbitration.”

Finally, the proposed rule change would further prescribe the contents of an expungement request.

237

For example, the proposed rule change would require the named associated person requesting expungement to explain whether expungement of the same customer dispute information was: (1) previously requested and, if so, (2) how it was decided.

238

237

See

proposed Rule 12805(a)(1)(C)(ii).

238

See

proposed Rule 12805(a)(1)(C)(ii)e.

FINRA stated that requiring the named associated person to request expungement in the customer arbitration increases the likelihood that a panel will have input from all parties and access to all of the evidence, testimony and other documents to make an informed decision on the expungement request.

239

FINRA further stated that the potential costs that would be incurred by associated persons, arbitrators and the DRS arbitration forum if named associated persons file expungement requests are appropriate given the potential benefit of having customer input and a complete factual record for the panel to decide an expungement request.

240

Moreover, FINRA stated that requiring the named associated person requesting expungement to explain whether expungement of the same customer dispute information was previously requested and, if so, how it was decided would further link the request to a specific case and help prevent multiple requests for expungement.

241

239

See

Section II.A.1.a., “Expungement Requests by a Respondent Named in a Customer Arbitration.”

240

See

Notice at 50175.

241

See id.

at 50176.

Finally, FINRA stated the proposed 60-day deadline would provide adequate time for: (1) the named associated person to assess the customer's case, the potential merits of an expungement request, and whether to file the request; and (2) the parties to a customer arbitration to prepare their expungement-related arguments, since the expungement issues will overlap with the issues raised by the customer's claim.

242

Id.

Four commenters supported, and there was no opposition to, these aspects of the proposed rule change.

243

One commenter stated that requiring an associated person to request expungement in a customer dispute matter, if the associated person is a party to the matter, reduces the need for additional hearings, filing fees, attorney fees, and other arbitration costs concerning the same parties and the same evidence.

244

Three commenters supported the proposed rule change on the basis that it would allow the panel that heard all of the evidence, including the customer's evidence, to be best situated to decide the expungement request.

245

One of these commenters stated that the requirement would prevent “arbitrator-shopping” (

i.e.,

purposefully not raising, or withdrawing, an expungement request in an arbitration in order to file a request with a panel more likely to award expungement).

246

243

See

letters from Seth A. Miller, General Counsel, President, Advocacy & Administration, Cambridge Investment Research, Inc., to the

Commission, dated September 6, 2022 (“Cambridge”) at 1-2; Melanie Senter Lubin, NASAA President and Maryland Securities Commissioner, North American Securities Administrators Association, Inc., to the Commission, dated September 6, 2022 (“NASAA September 6 Letter”) at 2-3; Scott Eichhorn, et. al., Acting Director, University of Miami Investor Rights Clinic, to the Commission, dated September 6, 2022 (“Miami”) at 2-3; William A. Jacobson, Esq., Clinical Professor, Cornell Law School, and Director, Cornell Securities Law Clinic, et. al., to the Commission, dated September 6, 2022 (“Cornell”) at 2.

244

See

Cambridge at 2.

245

See

NASAA September 6 Letter at 2-3; Miami at 2-3; Cornell at 2.

246

See

Cornell at 2.

The Commission believes that the proposed rule change should improve the integrity of the expungement process. Where a customer arbitration closes by award after a hearing, the panel's experience with the parties and the dispute, as well as the panel's review of the documents, testimony, and other evidence in connection with the arbitration, should leave the panel well positioned to make a decision regarding the related expungement request. Moreover, requiring the expungement request to be made within 45 days of receipt of the customer's statement of claim (if included in the answer) or no later than 60 days before the first scheduled hearing begins (if included in a pleading) should allow the requesting party a reasonable amount of time to make an informed decision about whether to request expungement while at the same time providing the parties with reasonable case-preparation time, since the expungement issues will likely overlap with the issues raised by the customer's claim.

Further, the content required for an expungement request under the proposed rule change, including the CRD occurrence number that is the subject of the request, the case name and docket number associated with the customer dispute information, and whether expungement of such information had previously been requested and any resolution thereof, should improve the expungement process by clearly documenting both the request and whether it repeats a previous request. The required content would provide the panel with information sufficient to understand who is requesting expungement and in connection with which customer dispute.

247

In addition, requiring the party requesting expungement to explain whether expungement of the same customer dispute information was previously requested and, if so, how it was decided will help prevent parties from pursuing second requests for expungement, consistent with the proposed rule change prohibiting repeat requests, which is discussed in more detail below.

248

247

See

Notice at 50176.

248

See

Section III.A.5., “Limitations Applicable to Straight-in Requests and Expungement Requests during a Customer Arbitration.”

2. Content and Timing of on-Behalf-of Requests in Customer Arbitration

As with expungement requests made by a named associated person, the proposed rule change would, in part, govern how and when an on-behalf-of request may be made during a customer arbitration. For example, proposed Rule 12805(a)(2)(C)(iii) would require the party making the request to file it no later than 60 days before the first scheduled hearing.

In addition, proposed Rule 12805(a)(2)(C)(ii) would require the party filing an on-behalf-of request to submit to the Director the Form signed by the unnamed person and a statement requesting expungement. As discussed above, by signing the Form the unnamed person would be: (1) consenting to the on-behalf-of request, (2) agreeing to be bound by the panel's decision on the on-behalf-of request, and (3) acknowledging their understanding that if the customer arbitration closes by award after a hearing, the unnamed person would be barred from filing a request for expungement for the same customer dispute information in a subsequent proceeding.

249

See

Notice at 50177;

see also

Section II.A.1.b., “Expungement Requests by a Party Named in a Customer Arbitration on Behalf of an Unnamed Person.”

Finally, proposed Rules 12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i) would require the party requesting expungement on behalf of an unnamed person to provide: the applicable filing fee; the CRD number of the unnamed person; each CRD occurrence number that is the subject of the request; the case name and docket number associated with the customer dispute information; and an explanation of whether expungement of the same customer dispute information was previously requested and, if so, how it was decided.

250

See

Notice at 50177.

FINRA believes that requiring associated persons to sign and submit the Form would help address its concern that some associated persons are filing arbitration claims seeking expungement of the same customer dispute information that was the subject of a previous denial by a panel of an on-behalf-of request.

251

Specifically, requiring submission of the signed Form would help ensure that an unnamed person is aware of an on-behalf-of request.

252

In addition, by signing the Form, the associated persons would be acknowledging that, if the customer arbitration closes by award after a hearing and an expungement decision is made, the unnamed person would be barred from filing a request for expungement for the same customer dispute information in a subsequent proceeding.

253

251

See id.

252

See id.

253

See id.

In addition, under the proposed rule change, on-behalf-of requests would resemble named associated person requests in timing (the proposed rule would require service on all parties no later than 60 days before the first scheduled hearing), and in content (an on-behalf-of request would be required to include the same elements as a named associated person request).

254

See id.

at 50176-77;

see also

Section III.A.1., “Expungement Requests by Respondents Named in Customer Arbitration.” The proposed rule change would not require that an on-behalf-of request be included in an answer or pleading requesting expungement (although it could be) as such requests are made on behalf of non-parties.

See

Notice at 50176.

The Commission received no comment letters supporting or opposing this proposed rule change.

For reasons similar to those discussed above for expungement requests made by a named associated person in a customer arbitration, the Commission believes that these timing and content requirements should improve the integrity of the expungement process.

255

In addition, the panel's decision would preclude the unnamed party from

seeking expungement of the same customer dispute information in another forum by claiming their interests were inadequately represented in the hearing under the terms of the Form. Moreover, requiring the expungement request to be made no later than 60 days before the first scheduled hearing begins should allow the requesting party a reasonable amount of time to make an informed decision about whether to request expungement while at the same time providing the parties with reasonable case-preparation time, as the expungement issues will overlap with the issues raised by the customer's claim.

255

See

Section III.A.1., “Expungement Requests by Respondents Named in Customer Arbitration.”

Further, the notice provided to the associated person pursuant to the requirement to submit the Form with the associated person's written consent should help ensure that the associated person is made aware of the on-behalf-of request and will likely help prevent inadvertent duplicative filings. The requirement that the associated person agree to be bound by the panel's decision on the request, and be barred from filing a request for expungement for the same customer dispute information, will help prevent the associated person from requesting expungement from a different panel if they are unsatisfied with the decision issued by the first panel. Such safeguards also help conserve resources and prevent inconsistent determinations.

3. Deciding Expungement Requests During Customer Arbitrations

As stated above, the proposed rule change would treat customer claims that close by award after a hearing differently from customer claims that close other than by award (

e.g.,

the case settles) or that close by award without a hearing. Where the customer's claim closes by award after a hearing, the proposed rule change would require the panel in a customer arbitration to consider and decide a request for expungement made during the proceeding. In addition, if the party requesting expungement withdraws or does not pursue the expungement request, the panel will be required to deny the expungement request with prejudice. FINRA stated that this change should make efficient use of the panel's familiarity with the case-in-chief, and help protect investors by precluding arbitrator-shopping by associated persons or those requesting expungement on their behalf.

256

See

Notice at 50177. FINRA expressed concern that, absent this change, associated persons (or other requesters) might seek to withdraw and refile their expungement requests to avoid having the requests decided by the panel who heard evidence on the customer's arbitration claim (receiving a new list of arbitrators and a potentially more favorable decision).

See id.

Conversely, where the customer's claim closes other than by award or closes by award without a hearing, the proposed rule change would preclude the panel that heard the customer claim from considering the ongoing expungement request.

257

In such cases, the efficiency rationale becomes less compelling, and FINRA believes that such expungement requests are best considered as straight-in requests by a panel from the Special Arbitrator Roster, discussed in more detail below.

258

These proposed rule changes are intended to protect investors by reducing opportunities for arbitrator-shopping and by providing arbitrators with special training and factual-development tools specific to the expungement context.

259

257

See id.

at 50177-78.

258

See

Section III.B., “Straight-in Requests under the Industry Code and the Special Arbitrator Roster.”

259

See

Notice at 50178 and 50194.

Two commenters supported the proposed requirement that the panel in a customer arbitration decide an expungement request where the customer arbitration closes by award after a hearing.

260

These commenters reasoned that because the panel would have presided over the case-in-chief, assessing input from all involved parties, it is best situated to decide the expungement request.

261

Three commenters further supported the proposed requirement that, in the event an expungement request is withdrawn or not pursued, the panel would be required to deny the request with prejudice, reasoning that the proposed rule change would prevent arbitrator-shopping by discouraging requesting parties from withdrawing an expungement request in order to seek a potentially more favorable panel.

262

260

See

letter from Christine Lazaro, Director of the Securities Arbitration Clinic and Professor of Clinical Legal Education, et. al., Securities Arbitration Clinic at St. John's University School of Law, to the Commission, dated September 6, 2022 (“St. John's) at 2; Cornell at 2.

261

See id.

262

See

Cornell at 2; Miami at 4; St. John's at 3.

Three commenters, however, suggested that associated persons should be able to voluntarily withdraw expungement requests without prejudice.

263

One of these commenters stated that customers are free to withdraw claims without prejudice,

264

while another argued that there is no evidence to support the claim that a person that withdraws an expungement request is doing so in the hopes of finding a more favorable panel.

265

A third commenter stated that there are a number of valid and practical reasons for why a non-party associated person's request for expungement may be withdrawn prior to final hearing (

e.g.,

time and costs), and thus that it is inappropriate to penalize an associated person for withdrawing their expungement request.

266

263

See

letters from Dochtor D. Kennedy, President & Founder, AdvisorLaw, LLC, to the Commission, dated August 9, 2022 (“AdvisorLaw”) at 2-3; Jennifer W. Burke, Esq., Hennion & Walsh, Inc., to the Commission, dated September 6, 2022 (“Hennion”) at 6; Russell Del Toro, Esq., TCM, P.S.C., to the Commission, dated December 21, 2022 (“Del Toro”).

264

See

Hennion at 6.

265

See

Advisorlaw at 2-3.

266

See

Del Toro.

FINRA declined to amend the proposed rule change in response to comments. FINRA expressed concern that arbitrator-shopping and repeated attempts to seek expungement of the same customer dispute information are inconsistent with the arbitration process and threaten the integrity of the information in the CRD system because they permit parties to request expungement until they get a favorable response.

267

FINRA highlighted the extent of its concern by pointing out that among the requests to expunge customer dispute information in arbitration from January 2016 through December 2021, FINRA identified 282 disclosures that were the subject of a previously withdrawn or denied requests to expunge.

268

FINRA further stated, in response to a commenter's statement that an associated person may have valid and practical reasons for withdrawing an expungement request, that it is not in a position to determine or assess, on a case-by-case basis, the legitimacy of an associated person's reason for withdrawing an expungement request during a customer arbitration.

269

267

See

FINRA November 10 Letter at 28-29.

268

See

FINRA November 10 Letter at 29;

see also

FINRA April 3 Letter at 5.

269

See

FINRA April 3 Letter at 5.

Two commenters also supported the proposed requirement that expungement requests made during customer arbitrations that close other than by award or close by award without a hearing, be heard by a panel from the Special Arbitrator Roster.

270

One of these commenters reasoned that the original arbitration panels do not get to hear the full presentation of the evidence on the merits of the underlying

customer case and that customers or their representatives have little incentive to attend and participate in an expungement hearing once their case has settled.

271

270

See

letter from Michael S. Edmiston, PIABA President, Public Investors Advocate Bar Association, to the Commission, dated September 6, 2022 (“PIABA September 6 Letter” at 3 and St. John's at 2.

271

See

PIABA September 6 Letter at 3.

One commenter, however, contended that a named associated person who requests expungement during a customer arbitration that closes other than by award or that closes by award without a hearing should continue to be allowed to request an expungement-only hearing before the same panel from the customer arbitration.

272

Specifically, this commenter stated that, even in cases that are settled or dismissed, the panel has often had an opportunity to review the pleadings, participate in the disposition of discovery and other prehearing motions, and otherwise familiarize itself with the facts of the case.

273

Furthermore, according to the commenter, permitting the same panel to decide an expungement hearing may be more efficient because, in many cases, the parties will have already researched and ranked the panel members and the expungement hearing will have been scheduled for the same day as the hearing on the merits.

274

According to the commenter, already-scheduled expungement hearings would reduce scheduling issues and increase the likelihood of customer participation, as customers will have already set aside the time.

275

272

See

letter from Kevin M. Carroll, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, to the Commission, dated September 2, 2022 (“SIFMA September 2 Letter”) at 8.

273

See id.

274

See id.

275

See id.

FINRA considered these comments but declined to amend the proposed rule change.

276

FINRA stated that, when a customer arbitration closes other than by award or by award without a hearing, the panel may not have heard the presentation of the evidence on the merits of the case. In addition, FINRA stated that customers or their representatives have little incentive to attend and provide their interpretation of the facts in a subsequent expungement hearing once their case has settled.

277

Because a customer arbitration that closes other than by award, or by award without a hearing, has the potential for an inadequately developed, or nonexistent, record, FINRA contended that the integrity of information in the CRD system would be better maintained by requiring a panel randomly selected from the Special Arbitrator Roster to hear and decide such expungement requests.

278

Furthermore, FINRA stated that requiring an associated person to file such an expungement request as a straight-in request under the Industry Code would strengthen the expungement process because the Special Arbitrator Roster panel deciding the request would have the experience, qualifications, and training necessary to help ensure the development of a more complete factual record;

279

in addition, FINRA stated that the proposed rule change would make it easier for customers to participate in the expungement proceeding, further helping the panel establish a more complete factual record.

280

276

See

FINRA November 10 Letter at 24.

277

See id.

FINRA formed its Dispute Resolution Task Force (“Task Force”), whose members included representatives from the industry and the public with a broad range of interests in securities dispute resolution, to consider possible enhancements to the DRS arbitration and mediation forum. In 2015, the Task Force stated that “the majority of issues that arise in the expungement process are those involving settled cases that do not go to final resolution because in such cases: (1) the panel selected by the parties may not have heard the full merits of the customer dispute and, therefore, may not bring to bear any special insights in determining whether to grant an expungement request and (2) claimants or their counsel have little incentive to participate in an expungement hearing once their dispute has been settled.”

See

Notice at 50174 n.37;

see also

Final Report and Recommendations of the FINRA Dispute Resolution Task Force (Dec. 16, 2015), available at

http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf.

278

See

FINRA November 10 Letter at 24.

279

See

Notice at 50178, 80;

see also

Section III.B.3., “Straight-in Requests under the Industry Code and the Special Arbitrator Roster, The Special Arbitrator Roster.”

280

See

Notice at 50183;

see also

Section III.D.3., “Customer's Attendance and Participation During the Expungement Hearing.”

The Commission believes the proposed rule changes are aimed at enhancing FINRA's expungement framework. On the one hand, they require a panel of arbitrators that has decided the merits of a case to leverage their understanding of the case to decide any related expungement requests; the panel would be required to decide the request even if the requesting party withdraws or fails to present a case in support of the request—in which case the panel would deny the expungement request with prejudice. This is both efficient and helps protect investors by preventing those requesting expungement from withdrawing and refiling their request to obtain new arbitrators when unsatisfied with the original panel. On the other hand, when a case closes other than by award or closes by award without a hearing, the efficiency benefits of having the same panel decide the request (while not eliminated) are diminished. Moreover, the risk that the expungement hearing will not benefit from either a fully developed record or the adversarial process increases. For example, a case may settle before the record has had a chance to develop and a customer who has settled their claims may have little incentive to commit more time and resources in a subsequent expungement hearing. Rather than leave it to arbitrators in individual cases to decide whether they have enough information to proceed to hear an expungement request, FINRA has established uniform, separate procedures to help ensure the development of an adequate factual record in connection with every expungement request. The proposed rule changes also aim to help ensure that arbitrators deciding straight-in expungement requests have the training and tools to develop an adequate factual record, particularly in the absence of customer participation. Finally, the proposed rule change allows for the effective administration of the expungement process and provides certainty to the parties about when requests for expungement may be made.

The Commission recognizes that in some cases the arbitrators from a customer arbitration could bring to a related standalone expungement hearing insights gleaned from their engagement with a well-developed factual record. Nevertheless, the proposed rule changes help ensure that every expungement request benefits from an adequate factual record. Moreover, it arms arbitrators on the Special Arbitrator Roster with the expungement-specific training and procedural tools necessary to develop and understand the factual record, regardless of both the state of the record prior to their involvement and the presence or absence of customers at the expungement hearing. Finally, it makes procedural improvements to facilitate customer participation in expungement hearings.

4. No Straight-In Requests Against Customers or Intervening in Customer Arbitrations To Request Expungement

The proposed rule changes would prohibit an associated person from filing a straight-in request against a customer, and would prohibit unnamed persons from intervening in a customer arbitration and requesting expungement. FINRA stated that the proposed rule would help protect investors by preventing associated persons from interrupting, and thus delaying,

customer cases, thereby safeguarding customer time and resources.

281

See

Notice at 50178;

see also

Section II.A.2., “No Intervening in Customer Arbitrations to Request Expungement.”

One commenter opposed the proposed prohibition against an associated person filing a straight-in request against a customer.

282

This commenter argued that permitting straight-in requests against customers would solve many of the issues addressed in the proposed rule change, including customer notice and participation.

283

282

See

Del Toro.

283

See id.

Two commenters objected to the proposed prohibition against expungement interventions by unnamed persons in customer arbitrations.

284

One of these commenters stated that prohibiting an unnamed person from intervening to clear their name results in potentially false allegations remaining in the CRD for upwards of a year (

i.e.,

until expungement can be awarded in the straight-in request and confirmed by a court).

285

The other commenter stated that the rules should allow for the most fair, speedy, and inexpensive resolution of the matters and recommended that the proposed rule change allow for a sub-proceeding between the intervening affected associated person and the parties where a separate award on the matter of expungement is issued by the same panel without affecting the resolution of the main award.

286

284

See

AdvisorLaw at 4 and Del Toro.

285

See

AdvisorLaw at 4.

286

See

Del Toro.

FINRA declined to amend the proposed rule change in response to comments. In the Notice and in response to comments, FINRA stated that in circumstances where an associated person is neither a named party nor the subject of an on-behalf-of request, the associated person's conduct is unlikely to be fully addressed by the parties during the customer arbitration, and permitting the unnamed person's intervention could unnecessarily interrupt or delay resolution of the case.

287

FINRA further stated that it does not believe that customers should be compelled to attend or participate in a separate proceeding to decide an expungement request after the customer has resolved their arbitration claim or civil litigation.

288

FINRA also stated that the requirement that an associated person file a straight-in request against the member firm at which the person was associated at the time the customer dispute arose would help ensure that there is a connection between the respondent firm and the subject matter of the expungement request.

289

287

See

FINRA November 10 Letter at 29;

see also

FINRA April 3 Letter at 5;

see also

Notice at 50178.

288

See

FINRA April 3 Letter at 6.

289

See id.

at 7.

The Commission believes that prohibiting straight-in requests against customers, and prohibiting expungement interventions by unnamed persons in customer arbitrations, as proposed, will protect investors by conserving their time, resources, and ability to make their case efficiently and without interruption. The Commission appreciates that this will require the associated person to wait until the customer claim has been resolved to initiate a straight-in expungement proceeding, but believes such a delay is reasonable to help ensure that the related customer arbitration can be resolved as expeditiously as possible. Moreover, the panel selected from the Special Arbitrator Roster deciding the expungement request would have the benefit of any final factual record from the related customer dispute.

5. Limitations Applicable to Straight-in Requests and Expungement Requests During a Customer Arbitration

The proposed rule change would provide that an associated person may not file a request for expungement of customer dispute information if: (1) a panel held a hearing to consider the merits of the associated person's expungement request for the same customer dispute information; or (2) a court of competent jurisdiction previously denied the associated person's request to expunge the same customer dispute information.

290

See

proposed Rule 12805(a)(1)(B).

FINRA stated that the proposed rule changes would prevent an associated person from forum shopping, or seeking to return to the DRS arbitration forum to garner a favorable outcome on their expungement request.

291

The Commission received no comment letters supporting or opposing this proposed rule change.

291

See

Notice at 50180.

The proposed rule changes should help prevent an associated person, or firm seeking expungement on their behalf, from forum-shopping to garner a more favorable outcome on an expungement request. As such, the proposed rule change should help protect the integrity of the information in the CRD system.

292

In addition, the proposed rule change should promote more efficient use of resources by precluding duplicative claims.

292

The proposed rule change would give unnamed persons the authority to reject the on-behalf-of request to preserve their ability to request expungement on their own if they believe their interests would be insufficiently represented by the named firm requesting expungement on their behalf.

See

proposed Rule 12805(a)(2)(C) and (D).

B. Straight-In Requests Under the Industry Code and the Special Arbitrator Roster

1. Filing a Straight-In Request

a. Form of a Straight-In Request

Proposed Rule 13805 would require an associated person to make any request to expunge disclosures of customer dispute information (other than requests made in a customer arbitration itself) as a straight-in request, and would limit the circumstances in which an associated person could request expungement.

293

Specifically, proposed Rule 13805(a)(1) would require an associated person to make such an expungement request against the member firm with which they were associated at the time the customer dispute arose.

294

FINRA stated that this requirement would help ensure that there is a connection between the respondent firm and the subject matter of the expungement request and that the panel selected from the Special Arbitrator Roster would be able to request evidence from the member firm with information that is relevant to the expungement request.

295

293

See

Section II.B.1., “Filing a Straight-in Request Under the Industry Code.”

294

Proposed Rule 13805(a)(2) would bar an associated person from filing a straight-in request against a member firm where the request has previously been heard or denied, the relevant customer dispute has not been resolved, specified temporal limitations have passed, the associated person is prohibited from seeking expungement under Rule 12805(a)(1)(A) (for example, by failing to seek expungement in the customer arbitration), or a panel or court of competent jurisdiction previously found the associated person liable or the customer dispute information involves the same conduct that is the basis of a final regulatory action taken by a securities regulator or self-regulatory organization.

See

Section III.B.6., “Limitations Applicable to Straight-in Requests Only.”

295

See

Notice at 50179.

Two commenters recommended that FINRA adopt an alternative for unnamed parties to request expungement other than by straight-in requests.

296

For example, one of these commenters recommended that FINRA establish a method for unnamed parties who “had no say in whether the [underlying] case should be settled.”

297

Similarly, the other commenter expressed concern that an unnamed

person may not be aware of a customer arbitration (or have input in the resolution of customer's case) and thus may not be aware they need to make a straight-in request.

298

296

See

letter from Robin M. Traxler, Senior Vice President, Policy & Deputy General Counsel, Financial Services Institute, to the Commission, dated September 6, 2022 (“FSI”) at 5-6; letter from Josh Barber to the Commission, dated August 24, 2022 (“Barber”).

297

See

Barber.

298

See

FSI at 5-6.

FINRA responded that its existing rules help ensure that associated persons are aware of arbitration disclosures on their Forms U4 and U5.

299

In addition, if a party to a customer arbitration is unwilling to file an on-behalf-of request or if a party files an on-behalf-of request and the arbitration settles, the proposed rule change would allow the associated person to seek expungement by filing a request to expunge the same customer dispute information as a straight-in request.

300

299

See

FINRA November 10 Letter at 30;

see, e.g.,

FINRA Rule 1010(c)(2)(A)-(B) and FINRA By-Laws, Article V, Sections 3(a) and 3(b).

300

See

FINRA November 10 Letter at 30.

Two commenters supported the proposed rule change regarding straight-in requests, but recommended that FINRA prohibit associated persons from filing a straight-in request to expunge multiple, unrelated requests in one arbitration claim.

301

According to one of these commenters, the practice of bundling expungement requests permits “gaming the system” by having such claims heard by “expungement-friendly arbitrators.”

302

One of these commenters further suggested that FINRA require a nexus between the hearing location and the conduct at issue so that customers and state regulators would have more of an incentive to participate.

303

These commenters reasoned that these changes would prevent unnecessary complications for the panel considering the expungement request and provide a common set of facts for the panel to consider.

304

301

See

PIABA September 6 Letter at 4-5; Miami at 4-5.

302

See

Miami at 4-5.

303

See id.

at 6.

304

See

PIABA September 6 Letter at 5; Miami at 5-6.

FINRA responded that the proposed time limits for filing a request

305

may curtail the common practice of bundling unrelated and aged expungement requests in one straight-in request; and the requirement under the proposed rule change that an associated person would be required to file a straight-in request against the member firm at which the person was associated at the time the customer dispute arose would help ensure that there is a connection between the respondent firm and the subject matter of the straight-in request. With respect to requiring a locational nexus, FINRA stated that the ability for a customer to attend and participate in an expungement hearing by telephone or by video conference should help address concerns about there being a connection between the hearing location and the allegation at issue.

306

FINRA further stated that concerns about expungement requests being brought before expungement-friendly arbitrators should be mitigated by several proposed requirements to minimize the potential for associated person or broker-dealer influence in the arbitrator selection process for straight-in requests. For example, the proposed change would require FINRA's list selection algorithm to randomly select a three-person panel from the Special Arbitrator Roster and the parties would not be able to agree to fewer than three arbitrators, strike any arbitrators selected by the list selection algorithm or stipulate to their removal, or be permitted to stipulate to the use of pre-selected arbitrators.

307

According to FINRA, “these requirements would help ensure that arbitrators on the Special Arbitrator Roster have the qualifications and training to decide straight-in requests and that the arbitrators conducting the expungement hearings are impartial and experienced in managing and conducting arbitration hearings in the DRS arbitration forum.”

308

305

See

Section III.B.6., “Limitations Applicable to Straight-in Requests Only.”

306

See

FINRA November 10 Letter at 20.

307

See id.

at 20-21.

308

See id.

at 21.

The Commission believes the requirements set forth in the proposed rule change are designed to promote investor protection because it should enhance the integrity of the CRD system. The firm with which the person requesting expungement was associated at the time the dispute arose should have knowledge of the dispute and access to relevant documentary or other evidence.

309

Thus, requiring that a straight-in request be filed against the member firm with which the person was associated at the time of the conduct would increase the likelihood that the firm would be in a position to contribute to the development of any record, including at the request of the panel.

310

309

See

Notice at 50179.

310

Proposed Rule 13203(b) would provide the Director authority to deny the use of the forum to decide the request if the requisite connection between the associated person and the firm is not present.

See

Notice at 50179. In addition, proposed Rule 13805(a)(2) would impose limitations on when such requests may be made.

See

Section III.B.6., “Limitations Applicable to Straight-in Requests Only.”

Also, the practice of bundling multiple, unrelated claims should be largely curtailed by the proposed time limits and requirement that claims be filed against the member firm at which the person was associated at the time the customer dispute arose; and that the constraints on parties' ability to influence the composition of the panel should minimize the use of pre-selected, expungement-friendly arbitrators.

Finally, associated persons should be aware of arbitration disclosures on their Forms U4 and U5.

311

To the extent they are not, the proposed time limits (discussed below) provide associated persons a reasonable amount of time to become aware and seek expungement by filing a request to expunge the same customer dispute information as a straight-in request.

312

Thus, seeking expungement via a straight-in request, with the procedural safeguards discussed herein, should not unduly burden an associated person seeking expungement.

311

See supra

note 299.

312

See supra

note 300;

see also

Section III.B.6.b., “Limitations Applicable to Straight-in Requests Only, Time Limits for Expungement Requests.”

b. Content of a Straight-In Request

In addition, as with named associated person requests, the proposed rule change also would establish content requirements for straight-in expungement requests.

313

The required content of a straight-in request would be the same as those required for expungement requests filed under proposed Rule 12805.

314

Specifically, an associated person would be required to include the following in a straight-in request: the applicable filing fee; the CRD number of the party requesting expungement; each CRD occurrence number that is the subject of the request; the case name and docket number associated with the customer dispute information, if applicable; and an explanation of whether expungement of the same customer dispute information was previously requested and, if so, how it was decided.

315

313

See

Notice at 50179.

314

See

proposed Rule 13805(a)(3);

see also

Notice at 50179;

see also

Section III.A.1., “Expungement Requests by Respondents Named in Customer Arbitration.”

315

See

proposed Rule 13805(a)(3);

see also

Notice at 50179.

The Commission received no comment letters supporting or opposing this proposed rule change.

The proposed form and content requirements are reasonable for straight-in requests. In particular, requiring an associated person to file their expungement request against the

member firm with which they were associated at the time the customer dispute arose should provide the panel deciding the expungement request with another source of documents potentially pertinent to its consideration of the request. As such, it could help a panel establish a more complete factual record upon which to base an award. In addition, as discussed in more detail above, the content required for an expungement request under the proposed rule change, including the CRD occurrence number that is the subject of the request, the case name and docket number associated with the customer dispute information, and whether expungement of such information had previously been requested and any resolution thereof, should improve the expungement process by clearly documenting both the request and whether it repeats a previous request. The required content would provide the panel with information sufficient to know who is requesting expungement and the customer dispute with which it is connected. In addition, requiring the party requesting expungement to explain whether expungement of the same customer dispute information was previously requested and, if so, how it was decided will help prevent parties from pursuing second requests for expungement, consistent with the proposed prohibition against repeat requests.

316

See

Section III.A.2., “Content and Timing of On-Behalf-of Requests in Customer Arbitration.”

2. Deciding Straight-In Expungement Requests

The proposed rule change would establish a new framework for arbitrators hearing straight-in expungement requests. The proposed rule change would require a three-person panel

317

to hold an expungement hearing, decide the expungement request, and issue an award in response to a straight-in request filed in accordance with proposed Rule 13805.

318

As with expungement requests decided in customer arbitration, the panel would be required to deny an expungement request with prejudice in cases in which an associated person withdraws or does not pursue the request. FINRA stated that requiring a panel to deny a request that is withdrawn or not pursued would protect investors by preventing associated persons from withdrawing and refiling expungement requests until they obtain a panel whose composition they believe is more likely to deliver a favorable recommendation.

319

317

As discussed in more detail below, the three-person panel would be selected from the Special Arbitrator Roster pursuant to proposed Rule 13806.

See

Section III.B.3., “Straight-in Requests under the Industry Code and the Special Arbitrator Roster, The Special Arbitrator Roster.”

318

See

proposed Rule 13805(a)(4).

319

See

Notice at 50179.

The Commission received no comment letters supporting or opposing this proposed rule change. However, as discussed above, the Commission received, and FINRA responded

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