FINRA Files with SEC Board-Approved Changes to Expungement Rules
Posted on Categories Arbitration, Arbitration Awards, Expungement, FINRA Code of Arbitration, RulemakingTags , , , ,

By George H. Friedman, SAA Publisher & Editor-in-Chief

FINRA staff this week followed up on recent Board approval to file a new expungement rule.

As reported in SAAs 2022-20 (May 26), -18 (May 12) & -17 (May 5), FINRA’s Board of Governors met in person May 11 – 12 and as described in a May 20 Press Release: “The Board approved proposed amendments to a proposal that was previously filed with the SEC establishing specialized arbitration panels for expungement requests.” The Release provided no other details, and the Board update memo and video contained therein were similarly cryptic (ed: Board member Jim Crowley refers to it briefly from 1:49 – 2:05).

Recent History

Recall that, as reported in SAA 2021-22 (Jun. 3), FINRA in May 2021 temporarily withdrew a proposal for improving the expungement process -- SR-FINRA-2020-030 -- which had its origins in the Dispute Resolution Task Force and its Final Report and Recommendations. A Press Release, FINRA Statement on Temporary Withdrawal of Specialized Arbitrator Roster Rule Filing, announced: “Following consultations with the SEC staff, we temporarily withdrew from SEC consideration our rule filing establishing specialized arbitration panels for expungement requests so that we can further consider whether modifications to the filing are appropriate.” The two-page regulatory filing provided no further insights. As later reported in SAA 2022-17 (May 5), the Authority on April 28 issued a 26-page Discussion Paper – Expungement of Customer Dispute Information. The Discussion Paper recommended a dual-track approach of adopting expungement reforms contained in the withdrawn rule, while at the same time considering new ideas. We later reported in SAA 2022-18 (May 12) that, just days after FINRA issued the Discussion Paper, SIFMA on May 6 submitted to the SEC a comment letter accusing FINRA of overreaching.

New Rule Filing

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 298-page 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’).”

With an emphasis on “straight-in” cases, the proposed rule change would:

“(1) require that a straight-in request be decided by a three-person panel that is randomly selected from a roster of experienced public arbitrators with enhanced expungement training; (2) prohibit parties to a straight-in request from agreeing to fewer than three arbitrators to consider their expungement requests, striking any of the selected arbitrators, stipulating to an arbitrator’s removal, or stipulating to the use of pre-selected arbitrators; (3) provide notification to state securities regulators of all expungement requests and a mechanism for state securities regulators to attend and participate in expungement hearings in straight-in requests; (4) impose strict time limits on the filing of straight-in requests; (5) codify and update the best practices in the Notice to Arbitrators and Parties on Expanded Expungement Guidance (‘Guidance’) applicable to all expungement hearings, including amendments to establish additional requirements for expungement hearings, to facilitate customer attendance and participation in expungement hearings and to codify the panel’s ability to request any evidence relevant to the expungement request; (6) require the unanimous agreement of the panel to issue an award containing expungement relief; and (7) establish procedural requirements for filing expungement requests, including for on-behalf-of requests” (footnotes omitted).”

The proposed rule change would also amend the Customer Code: “to specify procedures for requesting expungement of customer dispute information during simplified arbitrations.

(ed: *Federal Register publication will trigger the comment period, which we are sure will be robust. **Expungement is a never-ending source of Alert content.)