Financial Institutions

In response to its proposed overhaul of the customer complaint expungement process from July 2022, FINRA received 45 comment letters from a variety of sources. According to FINRA, 12 commenters (including investor advocate groups PIABA and NASAA) expressed “general support” for the proposal while also expressing some concerns and suggesting modifications. FINRA stated that the other commenters opposed the proposal or simply expressed concerns or suggested modifications without supporting or opposing the overall proposal. 

FINRA responded to these comments on November 10, 2022, declining to take any action with respect to the large majority of concerns raised by the commenters. However, FINRA filed an amendment with the SEC to make three modifications to the proposed rules in light of issues raised by investor advocates.

First, the amendment would add language to the FINRA Rules stating that an associated person cannot request expungement of a matter if that associated person had previously been found liable for that same matter by a panel or court of competent jurisdiction. While not currently codified, FINRA has upon occasion denied the forum under these circumstances.     

Second, the amendment would add language to the Rules clarifying that customers whose complaints are the subject of an expungement request are entitled to participate in “all aspects” of the expungement hearing, including prehearing conferences.

Third, the amendment would add an instruction to arbitrators to give “absolutely no evidentiary value” to the fact that a customer did not attend or participate in an expungement hearing.

While the first two amendments are largely procedural and unlikely to be controversial, the third amendment raises concerns because it seeks to codify a directive to arbitrators as to the evidentiary weight to apply to a customer’s failure to participate, a realm typically reserved for arbitrator judgment and discretion.  

The SEC has the option to request additional comments on the revised proposal.  However, we do not expect the amendment to significantly delay the process.  Assuming the SEC approves, FINRA is still likely to announce the effective date of the new rules in early 2023. 

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