United States: Changes Coming To FINRA 's Expungement Process

On April 12, 2023, the U.S. Securities and Exchange Commission approved FINRA's proposed changes to the process for brokers to expunge customer complaint information from their Central Registration Depository ("CRD") records.

As background, FINRA Rule 2080 establishes two methods to expunge a broker's CRD records. One method is to "obtain an order from a court of competent jurisdiction directing such expungement," while the second method is to obtain a court order "confirming an arbitration award containing expungement relief."

The approved changes do not affect Rule 2080, but instead primarily modify arbitration Rules 12800, 12805, and 13805. Thus, the updates will affect expungement requests made within all FINRA arbitrations, whether in a pending customer arbitration governed by FINRA's 12000 series of rules (the "Customer Code"), or a separate "straight-in" request filed by a broker against his or her firm, which is governed by FINRA's 13000 series of rules (the "Industry Code").

Timing Limitations

FINRA has not established an effective date for the updates, and we expect that will come in the form of a future regulatory notice. Once the updates are effective, FINRA Rule 13805 will include the following time limitations, subject to the six-year eligibility requirement in Rule 13206(a):

• Where the CRD information relates to an arbitration or court case that was "closed" (i.e. dismissed or settled) before the effective date of the rule changes (which again, has not been set), any straight-in expungement request must be filed within two years of the effective date of the rule change. Rule 13805(a)(2)(B)(i).

• Where customer complaint information was initially reported to the CRD before the effective date of the rule change, but never led to the filing of an arbitration or lawsuit, any straight-in request must be filed within three years of the effective date of the rule change. Rule 13805(a)(2)(B)(ii).

Seeking Expungement Where a Customer Arbitration Is Filed

FINRA Rule 12805 governs expungement requests made in the context of a customer arbitration. As explained below, once the updates are in effect, if a broker is named a Respondent in a non-simplified arbitration, they must request expungement in that matter if they seek that relief. If a broker is not named but their conduct is at issue, the broker-dealer they are associated with may make an expungement request on their behalf.

Where Broker Is Named a Respondent

Request Must Be Made in Customer Arbitration: Brokers named a Respondent in a customer arbitration would be required to request expungement in that matter. If not, they would forfeit the opportunity to seek expungement in "any subsequent proceeding." Rules 12805(a)(1)(A); 13805(a)(2)(A)(viii).

Denied Requests Cannot Be Refiled: Rule 12805(a)(1)(B) provides that an associated person shall not file a request for expungement if an arbitration panel previously held a hearing on the same request or a court previously denied expungement of the same customer dispute information.

Timing of Requests: Generally, if named a Respondent, a broker would be required to request expungement in their Answer. Later requests must be in a separate pleading and be filed no later than 60 days before the first scheduled hearing. After that, a motion to extend the 60-day deadline would be required.

Form of Request: Rule 12805(a)(1)(C)(ii) provides that all requests for expungement must include: (1) the applicable filing fee; (2) the requestor's CRD number; (3) the specific CRD occurrence that is the subject of the request; (4) the case name and docket number associated with the underlying customer dispute information; and (5) an explanation of whether the subject expungement request was previously made and, if so, how the matter was decided.

Failure to Prosecute: Rule 12805(a)(1)(D) provides that if a broker requests expungement in a customer arbitration, but then withdraws or fails to pursue the request, the panel must deny the request with prejudice.

Arbitration Settlement: If a customer arbitration is settled (and an expungement request had been made) that arbitration panel may not decide the expungement issue. Instead, the broker must file a separate arbitration under FINRA Rule 13805(a) and name his or her firm (at the time of the occurrence) as the Respondent.

No Separate Arbitration Claims Against Customers: Rule 12805(a)(3) prohibits brokers from filing separate arbitrations against customers seeking expungement (the request must be made in the customer-initiated arbitration).

Notice to State Regulators: Rule 12805(b) requires FINRA to notify the relevant state securities regulator(s) within 15 days of receiving an expungement request.

Where Broker Is Not Named a Respondent

Written Acknowledgment: Both the firm and the unnamed broker would be required to sign a new form entitled "Form Requesting Expungement on Behalf of an Unnamed Person." Rule 12805(a)(2)(D). That form would reflect an agreement that the broker would be bound by a decision on the expungement request and would be barred from filing a duplicate request in a "subsequent proceeding.

Denied Requests Cannot Be Refiled: Rule 12805(a)(1)(B)'s prohibition on filing an expungement request after another panel or a court denied the same request would also apply.

Form of Request: In addition to the five elements referenced above under Rule 12805(a)(1)(C)(ii), the firm must also submit the signed Form Requesting Expungement on Behalf of an Unnamed Person.

Timing of Request: Regarding timing, a firm must make the request "as soon as practicable" but no later than 60 days before the first scheduled hearing. Otherwise, a motion to extend the 60-day deadline would be required.

Arbitration Settlement: If the customer arbitration is settled (and the firm had made an expungement request) that panel may not decide the expungement issue. Instead, the broker must file a separate arbitration under FINRA Rule 13805(a) and name his or her firm (at the time of the occurrence) as the Respondent.

If Named Firm Does Not Make Request: If the Respondent firm decides it does not want to seek expungement on behalf of a registered representative, the broker may not move to intervene under updated Rule 12805(a)(2)(E)(iii). Instead, the broker may file a separate arbitration per Rule 13805(a).

Simplified Customer Arbitrations Under Rule 12800

Unlike non-simplified arbitrations, if a broker is named a Respondent, they have the option of either requesting expungement in the customer arbitration or filing a separate straight-in request.

If a broker (or a firm on behalf of a named broker) requests expungement in a simplified arbitration, the request will be decided by that arbitrator even if the case settles. The request must generally be raised in an Answer or other pleading filed within 30 days after FINRA notifies the parties of the appointment of an arbitrator. Rule 12800(d)(1)(b)(i).

As with other on-behalf requests, an unnamed broker who would benefit from an expungement request must consent to such filing by the named firm by signing the same Form referenced in Rule 12805(a)(2)(D).

If a customer selects a no-hearing simplified customer arbitration, or an "Option Two" special proceeding under Rule 12800(c)(3)(B), the arbitrator will decide the customer claim first, and then hold a separate expungement-only hearing per Rule 12805(c) and issue a separate expungement award.

If a customer selects a full hearing under Rule 12800(c)(3)(A), and the case is tried, the arbitrator will decide both the customer claim and expungement request in the same award. If the case is settled, the arbitrator will hold a separate expungement-only hearing per Rule 12805(c) and issue an award.

FINRA will provide notice to the state regulators (Rule 12800(f)(1)) and the subject customer (Rule 12800(f)(2)) of any expungement request made in a simplified arbitration.

Updates to Procedure for Straight-In Expungement Requests

Straight-in requests for expungement pursuant to Rule 13805 will be used where (1) an expungement request is properly made in a non-simplified customer arbitration but the case settles; (2) a broker is not named in the customer arbitration and the Respondent firm decides not to make a request on their behalf; or (3) the reportable event is not associated with a customer-initiated arbitration.

Must Name Proper Respondent: A broker may initiate a straight-in request by filing a Statement of Claim that names as Respondent the firm that the broker was associated with during the time the customer dispute arose, with a signed submission agreement. If the broker names the wrong firm as Respondent, FINRA may find the claim ineligible for arbitration pursuant to new Rule 13203(b).

Limitations: Rule 13805(a)(2) prohibits a broker from filing a straight-in request under these circumstances:

• an arbitration panel previously held a hearing on the same request or a court previously denied expungement of the same customer dispute information;
• the customer arbitration is still pending;
• the broker was found liable to the customer (based on the same occurrence) in either arbitration or court;
• the same underlying conduct by the broker was the basis of a final regulatory action;
• more than two years have elapsed since the underlying customer arbitration or court case was closed;
• in cases where no customer arbitration or court case was filed, more than three years have elapsed since the date the customer complaint was reported to the CRD system; or
• the broker was named in a customer arbitration but failed to request expungement in that matter.

Panel from Special Arbitrator Roster: New Rule 13806 will require three-person panels to be drawn (randomly by FINRA's Neutral List Selection System) from a roster of public arbitrators with enhanced expungement training. Parties will not be permitted to strike selected arbitrators, nor stipulate to other arbitrators. However, Rule 13806(b)(4) will permit parties to raise challenges for cause, per Rule 13410, where an arbitrator is biased, lacks impartiality, or has a direct or indirect interest in the outcome of the arbitration.

New Hearing and Award Requirements

Updates to Rules 12805(c) and 13805(c) will incorporate new requirements for expungement hearings.

Recorded Hearing Sessions: The panel must hold one or more recorded hearing sessions by telephone or in person, and the broker (and the firm if it made the request on behalf of the broker) must appear either in person or by video conference.

Customer Notice and Attendance: Rule 13805(b)(1) requires a broker filing a straight-in request to serve the Statement of Claim and Answer upon the subject customer within 10 days of their respective filings. Proof of that service along with copies of all communications to/from the customer must be filed.

The subject customer and their attorney may attend and participate in all aspects of the prehearing conferences and the expungement hearing in person, by video or by telephone. Alternatively, customers may provide their position on the expungement request to the panel in writing.

Customers may testify (subject to cross examination), call witnesses, cross examine witnesses, introduce evidence, and object to the broker's evidence. Finally, if opening and/or closing arguments are received, the panel must allow the customer to also present those arguments at the hearing.

Panel Requests for Additional Documents or Evidence: Panels may request any documents, testimony or other evidence that it deems relevant to an expungement request. Where a customer arbitration or court matter was settled, the panel must review the settlement documents and consider the amount of the settlement payments and whether a written or oral condition of the settlement was for the customer not to oppose the request for expungement.

Regulator Notice and Attendance: Rule 13805(b)(2) requires the FINRA Director to provide notice to the appropriate state regulators within 15 days of receiving a straight-in request. Regulators must provide notice of whether or not they intend to participate at the hearing, where they may introduce evidence, cross examine witnesses, object to evidence, and present opening and closing arguments per Rule 13805(c)(6).

Unanimous Awards: Rules 12805(c)(8) and 13805(c)(9) require a unanimous decision by the three-person expungement panel to grant the expungement request. The panel must find that either (1) the claims and allegations were factually impossible or clearly erroneous; (2) that the broker was not involved in the alleged sales practice violation, forgery, theft or misappropriation/conversion; or (3) that the claim or allegation was false.

The Award must state which finding serves as the basis for the decision to grant the expungement request, along with a brief explanation of the reasons supporting the finding, and identify any documents or testimony the Panel relied upon in its decision.

Conclusion

FINRA has not yet announced an effective date for these changes, so if a registered representative would like to seek expungement under the current procedures, they should file their request before these changes take effect.

The text of the rule changes and amendments may be accessed here: https://www.finra.org/rules-guidance/rule-filings/sr-finra-2022-024

The proposed changes were published for comment in the SEC's Exchange Act Release No. 34-95455 (August 9, 2022), which may be accessed here: https://www.sec.gov/rules/sro/finra/2022/34-95455.pdf

The SEC's recent approval is in Exchange Act Release No. 34-97294 (April 12, 2023), which may be accessed here: https://www.sec.gov/rules/sro/finra/2023/34-97294.pdf.

Originally published by 26 April, 2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.