By George H. Friedman, SAA Publisher & Editor-in-Chief
Those who thought we were nearing the end of the road for FINRA’s proposed changes to the expungement process need to rethink their assumptions. There’s much going on, including possible SEC disapproval.
We reported in SAA 2022-41 (Nov. 13) that FINRA had extended to November 11 the SEC’s time to act on the Authority’s proposed changes to the expungement process. Much has transpired in the recent past. First, some background, borrowed from our past coverage.
We reported in SAA 2022-30 (Aug. 4) that FINRA staff had followed up on Board approval to file a new expungement rule. Specifically, FINRA on August 1 filed with the SEC SR-FINRA-2022-024, Proposed Rule Change to Amend the Codes of Arbitration Procedure to Modify the Current Process relating to the Expungement of Customer Dispute Information. The introduction to the massive rule filing would amend the Codes: “to impose requirements on expungement requests (a) filed by an associated person during an investment-related, customer-initiated arbitration (‘customer arbitration’), or filed by a party to the customer arbitration on behalf of an associated person (‘on-behalf-of request’), or (b) filed by an associated person separate from a customer arbitration (‘straight-in request’).”
Federal Register Publication and Comments
We later reported in SAA 2022-32 (Aug. 18) that Federal Register publication occurred on August 15 (Vol. 87, No. 156, P. 50170), and that comments were due September 6. Last, we analyzed in SAA 2022-35 (Sep. 15) the over 40 comment letters that were posted on the SEC’s Website. The institutional comment letters – including those from PIABA, NASAA, and SIFMA – were mostly supportive, but suggested further improvements. Individual industry commenters, however, mostly panned the proposed rule changes and the expungement process in general (see our analysis in the September 14 Blog post, Institutional Comments, Mostly Supportive But with All Suggesting Further Modifications, on FINRA’s Proposed Expungement Changes. Individual Industry Commenters Uniformly Oppose the Rule).
Extension Given to SEC by FINRA
We had thought it most likely that staff would return to the National Arbitration and Mediation Committee or the Board with changes resulting from the comments received. Then, FINRA would respond to the comments. While at that time there had not yet been a FINRA response to the comments, the Authority on September 27 extended until November 11 the SEC’s time to act on the rule filing. No explanation was given in Associate General Counsel Mignon McLemore’s filing.
FINRA Responds to Comments
On November 10 Ms. McLemore responded to comments in a 35-page, 148 footnote letter. Although FINRA rejected most changes proposed by the commenters, it filed the same day a proposed amendment offering three significant changes. The SEC describes them as follows: “Amendment No. 1 would modify the proposed rule change in three ways. First, it would amend proposed Rules 12805(c)(3)(A) and 13805(c)(3)(A) to state that all customers whose customer arbitrations, civil litigations or customer complaints are a subject of the expungement request are entitled to attend and participate in all aspects of the prehearing conferences and the expungement hearing. Second, it would modify proposed Rules 12805(c)(8)(C) and13805(c)(9)(C) to state that a panel shall not give any evidentiary weight to a decision by a customer or an authorized representative not to attend or participate in an expungement hearing when making a determination of whether expungement is appropriate. Finally, Amendment No.1 would modify the proposed rule change to provide that an associated person shall not file a claim requesting expungement of customer dispute information from the CRD system if the customer dispute information is associated with a customer arbitration or civil litigation in which a panel or court of competent jurisdiction previously found the associated person liable.”
Amendment Published and Comments Sought on Disapproval
The Commission on November 10 noticed the proposed amendment, which was published November 16 in the Federal Register (Vol. 87, No. 220, P. 68779) along with an Order Instituting Proceedings to Determine Whether to Approve or Disapprove the Proposed Rule Change. Why the activity on possible disapproval? Says the Order: “The Commission is publishing this order pursuant to Section 19(b)(2)(B) of the Exchange Act to solicit comments on the proposed rule change, as modified by Amendment No.1, and to institute proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1…. The Commission is instituting proceedings to allow for additional analysis and input concerning whether the proposed rule change, as modified by Amendment No. 1, is consistent with the Exchange Act and the rules thereunder” (footnotes omitted). Comments on the amended rule and potential disproval are due December 7. Rebuttals are due by December 21.
(ed: *With apologies to Alice in Wonderland, it gets curiouser and curiouser. **As we’ve said before, this is a complex topic, so better right than rushed.)