By George H. Friedman, SAA Publisher & Editor-in-Chief
It’s been a while since FINRA temporarily withdrew its expungement rule change proposal. We thought it was time to check in. Spoiler alert: not much going on as far as we can see, but looks may be deceiving.
We reported in SAA 2021-22 (Jun. 3) that, on the last day for SEC review of FINRA’s latest proposal for improving the expungement process, the Authority temporarily withdrew the rule filing -- SR-FINRA-2020-030. Specifically, May 28 brought a Press Release, FINRA Statement on Temporary Withdrawal of Specialized Arbitrator Roster Rule Filing, announcing: “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 Original Rule Proposal
As discussed in SAAs 2020-37 (Oct. 7) & -36 (Sep. 23): “The proposed change, which incorporated comments and suggestions received on Regulatory Notice 17-42 (Feb. 5, 2008), was to amend the Codes to: “(1) impose 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 (‘on-behalf-of request’), or (b) filed by an associated person separate from a customer arbitration (‘straight-in request’); (2) establish a roster of arbitrators with enhanced training and experience from which a three-person panel would be randomly selected to decide straight-in requests; (3) establish procedural requirements for expungement hearings; and (4) codify and update the best practices of the Notice to Arbitrators and Parties on Expanded Expungement Guidance (Guidance) that arbitrators and parties must 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” (footnote omitted).
DRS Amends the Filing
DRS responded to comments in December 2020 in a 20-page letter from Assistant General Counsel Mignon McLemore. While urging approval, FINRA agreed to several amendments, which we repeat below essentially verbatim:
- FINRA has determined to amend proposed Rule 13805(b)(1) to require that the associated person serve the customers with the statement of claim within 10 days of filing the statement of claim with FINRA and any answer within 10 days of filing each answer with FINRA…. Where the customer does not actively participate in the expungement request, or the matter also involves issues unrelated to expungement, imposing the additional requirement of providing all other documents filed in the proceeding in all circumstances could be unnecessarily burdensome on the associated person.
- FINRA has determined to amend proposed Rule 13805(b)(2) to provide that the Director will notify these customers of the time, date and place of any prehearing conferences using the customers’ current address provided by the party seeking expungement.
- FINRA has also determined to amend proposed Rule 13805(c)(3)(A) to clarify that the customer is entitled to appear at prehearing conferences. FINRA will continue to consider customer participation in expungement hearings, including ways to further encourage customer participation (footnote omitted).
- Proposed Rule 13805(c)(4) would be amended to clarify that all parties from investment-related, customer-initiated arbitrations or civil litigations, and customers whose customer complaints gave rise to the customer dispute information that is a subject of the expungement request shall have the right to be represented at the prehearing conferences.
We provided in SAA 2021-20 (May 27) an extensive review of this long-running rule proposal, which has its origins in the Dispute Resolution Task Force and its Final Report and Recommendations. We won’t repeat here our review, but we encourage readers and followers to peruse the lead Squib in SAA 2021-20 (May 27), PIABA and the PIABA Foundation: Expungement Process is Still Flawed.
Looking Forward: Nothing Yet (Apparently)
As for what was next, we observed in #22 that, while the two-page regulatory filing provided no further insights, the FINRA Release stated that it: “remains committed to working with the SEC and other stakeholders who share a common interest in revising the process for reviewing the information on a broker’s record in the Central Record Depository (CRD®).” We added in our coverage: “FINRA will keep working with constituent groups to improve the proposal, which we imagine will include PIABA, NASAA, and SIFMA, and then go back to the NAMC, FINRA Board, and SEC. The ‘temporary’ nature of the withdrawal is a clear signal to us that in some iteration, this proposal will be back.” Thus far, no progress update has been provided by FINRA, although we imagine there has been activity that has not been reported publicly. The next opportunity for a public update will be the FINRA Board meeting set for September 23-24; thus far, the Agenda has not been published (ed: see our coverage elsewhere in this Alert.)
(ed: *We published a special blog post on June 1 describing the proposed rule and its history. **As we’ve said before: “This is a monumentally important rule, so going back to the drawing board was a better option. Better right than rushed.” ***We will keep tracking this one.)