On September 22, 2020, FINRA sent a package of proposed rule changes regarding expungement to the SEC for approval. These proposed changes represent a major overhaul that has been in development for years, dating back to the proposal set forth in Regulatory Notice 17-42 in late 2017 and FINRA’s first issuance of its Expanded Guidance on Expungement in late 2013. This proposal comes on the heels of a recent rule change mandating minimum expungement fees that became effective for cases filed on or after September 14, 2020.
Most notably, the new rules would create time limits on when expungement can be requested and create a special arbitrator roster that would be randomly assigned to decide most expungement requests. They would also require an associated person named as a party in a non-simplified customer arbitration to request expungement during that arbitration or else forfeit the right to do so. The major aspects of FINRA’s 557-page proposal are detailed below.
The SEC can request public comment and make modifications to the proposal before making a final decision. If approved, the rules will likely become effective around Spring or early Summer 2021.
Where Expungement May be Requested
- Associated Persons (“APs”) named as a party in a non-simplified customer arbitration would be required to request expungement during that arbitration or not at all.1
- Expungement requests would have to be made in the Answer or another pleading at least 30 days prior to the first scheduled hearing, absent an extension granted by the panel.
- APs not named as a party would retain the option of requesting expungement in the original proceeding (with the named party making the request on the AP’s behalf) or filing a new straight-in expungement proceeding after the original proceeding concludes.
- Where a named party is requesting expungement on behalf of an unnamed AP, the named party and the AP would be required to sign a “Form Requesting Expungement on Behalf of an Unnamed Person,” intended to ensure that the unnamed AP is fully aware of the request and that the named party is agreeing to represent the unnamed AP for the purpose of requesting expungement.
How Expungement May be Decided
- If an arbitration closes by award after a hearing, the panel would be required to decide any pending expungement request in the award, even if the requesting party attempts to withdraw the request or fails to present evidence in support of the request.
- If a non-simplified arbitration closes by any method other than by award after a hearing (e.g., settlement, dismissal, award with no hearing), the panel would not be permitted to decide any pending expungement request. Instead, the AP would be required to file a new straight-in request.
Time Limits Applicable to Straight-In Requests
- APs filing a straight-in request would be required to do so within 2 years of the underlying litigation closing.
- If the disclosure did not involve litigation (e.g., informal complaint only), the AP would be required to file within 6 years of the complaint being reported to the Central Registration Depository (“CRD”).
- For customer dispute information reported to the CRD system before the effective date of the rule change, APs would have 2 years from the effective date of the new rule to seek expungement of existing litigation disclosures and 6 years from the effective date of the new rule to seeking expungement of complaint disclosures. But, all expungement requests would still be “[s]ubject to the six-year eligibility requirement.”
Special Arbitrator Roster for Straight-In Requests
- Parties in a straight-in request would not be allowed to rank arbitrators, or stipulate to the use of specific arbitrators. Instead, the Neutral List Selection System (“NLSS”) would randomly select three names from the Special Arbitrator Roster. The first arbitrator selected would serve as chairperson.
- To be included in the Special Arbitrator Roster, arbitrators would be required to be chair-eligible public arbitrators who have: (1) completed enhanced expungement training provided by FINRA and (2) served as an arbitrator in at least four customer arbitrations administered by FINRA or by another self-regulatory organization in which an award was issued following a final hearing.
- Parties would not be permitted to agree to fewer than three arbitrators to decide straight-in requests.
- Parties would still be permitted to challenge arbitrators for cause. If an arbitrator is removed, NLSS would randomly select a replacement.
Codification of Expanded Guidance
- Four procedures that have been part of FINRA’s Expanded Guidance on Expungement would be codified.
- APs cannot request expungement twice, and must confirm that they have not done so.
- APs cannot file a straight-in expungement request until the underlying case (or complaint) concludes.
- Arbitrators may request evidence they believe is relevant to the expungement request.
- Customers and their counsel are allowed to participate in the expungement hearing, including providing testimony, evidence, witness examination, and opening and closing arguments.
- APs would be required to provide the SOC to the customer, including proof of service, and any responses received from the customer must be filed with the panel.
- APs would be required to provide the customer’s current address to FINRA. FINRA would be responsible to notify the customer of the time, date and place of the expungement hearing.
New Procedural Requirements
- APs filing straight-in requests would be required to name the member firm at which the AP was associated at the time the dispute arose as the respondent.
- The panel would decide whether the expungement hearing will be in-person, telephonic, or virtual.
- If an AP withdraws a straight-in request after a panel is appointed, the case would be closed with prejudice.
- The AP would be required to attend the expungement hearing.
- Within 30 days of receiving an expungement request, FINRA would be required to notify state securities regulators of the request.
1 FINRA is proposing separate procedures for simplified arbitrations that do not include this requirement. For the full details regarding changes to simplified cases, see FINRA’s release at pp. 58-65.