FINRA is proposing a new rule that will make it more difficult for brokers to have customer complaints expunged from their publicly disclosed records.1 The proposed rule change, which was filed with the SEC on July 29, 2022, would impose new restrictions on expungement requests in proceedings commenced directly by an associated person of a broker-dealer (a "straight-in" proceeding) and requests made during a customer-initiated arbitration either by the associated person named as a respondent in the arbitration or by a respondent firm on behalf of an unnamed associated person.2
This proposed rule is the latest action taken by FINRA to impose increased procedural obstacles to the granting of expungement requests. Under the current system, an expungement recommendation in an arbitration award will be implemented only after it is confirmed by a court of competent jurisdiction. With few exceptions, FINRA will waive its right to appear in a judicial confirmation proceeding only if the arbitration award contains affirmative findings that the claim was either false, clearly erroneous or the associated person seeking expungement was not involved with the conduct at issue.3 Despite the stringent hurdles already in place, FINRA is now proposing adding more requirements based on its view that the current process is not working properly because it has led to expungements taking place beyond the "limited circumstances" that FINRA asserts was envisioned by its rules.4
1. Changes to Straight-in Proceedings
FINRA took direct aim at so-called "aged" proceedings brought by associated persons to clean up older complaints and cases that appear on their records. The new time limitations would require associated persons to commence a proceeding (i) within three years after a customer complaint was reported to FINRA's Central Registration Depository (CRD) system if the complaint did not evolve into an arbitration or litigation or (ii) more than two years after the close of an arbitration or litigation. Based on the sampling data provided by FINRA, these strict new time limitations would eliminate approximately 70% of the straight-in filings.5
FINRA did not stop there, however, and is proposing a slew of additional procedural hurdles to straight-in requests, including the following, among others:
- Permitting an authorized representative of the state securities regulators to attend and participate as a non-party at the hearings;
- Facilitating, i.e., encouraging, customer attendance by not only notifying customers of their right to attend the hearings and be represented but also giving them access to all documents filed in the case; and
- Requiring that expungement requests be decided by three arbitrators randomly selected from FINRA's roster of public arbitrators with expungement training – without any ability by the associated person to strike any of the selected arbitrators.
2. Changes to Expungement Requests Related to Customer-Initiated Arbitrations
FINRA is also proposing changes to expungement requests made as part of customer-initiated arbitrations. Under the proposed rule, an associated person named as a party to the arbitration must request expungement as part of the Answer to the Statement of Claim or in a separate pleading filed no later than sixty days prior to the first hearing date. The request must be heard by the appointed Panel or the associated person forfeits the right to seek expungement in a subsequent proceeding.
If the relevant associated person is not named as a party in the case, the named broker-dealer may file an "on-behalf of" request for the associated person but must file a form with FINRA signed by the unnamed person consenting to the request and agreeing to be bound by the Panel's decision. Although not a party to the case, the associated person seeking expungement must appear at the hearing in person or by video conference.
Moreover, for all expungement requests in arbitrations, FINRA is proposing that notice of the request be provided to state securities regulators.6 This could have a significant chilling effect on expungement requests as associated persons may fear that notice to certain states of a customer complaint could provoke inquiries by the states and imperil their state registrations.
The proposed rule, if enacted, will make the already difficult process of obtaining expungements even more difficult. The timetable for enactment of the proposed rule is not yet clear, and modifications may occur following completion of the comment period. The proposed new requirements – including the time limitations on straight-in requests described above – would apply as of the effective date of the new rule.7 Associated persons burdened with false customer complaints or arbitration claims on their records should consider acting promptly to pursue expungements before the new rules make it harder or prevent them entirely from doing so.
1 Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend the Codes of Arbitration Procedure To Modify the Current Process Relating to the Expungement of Customer Dispute Information, 87 Fed. Reg. 50170 (Aug. 9, 2022).
3 FINRA Rule 2080.
4 87 Fed. Reg. 50170, 50170 ("FINRA is concerned, however, that the current expungement process is not working as intended—as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules.").
5 Filing of a Proposed Rule Change To Amend the Codes of Arbitration Procedure To Modify the Current Process Relating to the Expungement of Customer Dispute Information, File SR-2022-024 (July 29, 2022) at 106 (explaining that, of the 6,476 expungement requests in the sample, only 29% of straight in-requests would have been permitted under the proposed rule change).
6 87 Fed. Reg. 50170, 50171.
7 Filing of a Proposed Rule Change To Amend the Codes of Arbitration Procedure To Modify the Current Process Relating to the Expungement of Customer Dispute Information, File SR-2022-024 (July 29, 2022) at 103 (FN 236).