On April 12, 2023, the SEC approved FINRA’s proposed expungement overhaul, a process that started in earnest in December 2017. See Release No. 34-97294; File No. SR-FINRA-2022-024. The latest rule changes, which FINRA submitted to the SEC in July 2022 and amended twice, will substantially alter the expungement landscape and make it more challenging for Associated Persons (“APs”) to expunge customer complaints from their records.   

The SEC release approves the proposed rule changes as modified by both the first amendment submitted on November 10, 2022 and the second amendment submitted on April 3, 2023. Under the second amendment, APs are precluded from seeking expungement of customer dispute information involving the same conduct that is the basis of a final regulatory action taken by a securities regulator or self-regulatory organization.

Some of the more notable new expungement rules include:

  • Imposing strict time limits on the filing of expungement requests;
  • Establishing new methods for seeking expungement during a customer arbitration, including requiring APs named in customer arbitrations to request expungement during that customer arbitration or forfeiting the opportunity to do so;
  • Requiring that all straight-in requests be decided by a three-person panel that is randomly selected from a special roster of arbitrators. Rankings, strikes or stipulations will no longer be permitted in these cases;
  • Codifying and updating FINRA’s Notice to Arbitrators and Parties on Expanded Expungement Guidance, which focuses on customer notice and participation in hearings; and
  • Establishing requirements for notifying state securities regulators and customers of expungement requests and allowing participation of state securities regulators in straight- in requests.

There is no question that these rules create new hurdles for APs seeking expungement of customer complaint or arbitration disclosures on their CRD. APs who wish to seek expungement, especially those with older complaints, should pursue those requests as soon as possible to avoid being precluded from doing so. After the effective date, individuals will have two (2) years from the effective date to seek expungement of existing litigation disclosures and three (3) years to seek expungement of existing complaint disclosures, so long as those matters are still eligible for arbitration. However, such matters would proceed under the new rules, which will present additional challenges. For example, the new rules eliminate an AP’s ability to participate in the arbitrator selection process. Moreover, in addition to the current practice allowing for customer participation in expungements, APs will also face the possibility of state securities regulators participating in the expungement process, including the hearing.

Although some stakeholders such as certain state regulators and investor advocates believe these rule changes do not go far enough in reducing the number of complaints being expunged from APs’ CRDs, FINRA believes the rule changes protect the integrity of the information in the CRD system and reinforce that expungement is appropriate only in extraordinary circumstances. While these rules will provide more guidance and clarity for the expungement process, they also create a more burdensome and costly experience for all parties involved.

Although FINRA has not yet published a Regulatory Notice informing the public when the new rules will become effective, we are closely monitoring the situation and expect a Regulatory Notice to follow shortly in which FINRA will provide sufficient notice to allow firms and APs to prepare for the new rules.

Jump to Page