Proposed FINRA Expungement Rules

FINRA filed proposed rule modifications with the SEC on July 29, 2022, that would significantly alter the process by which registered financial professionals and broker dealer firms can expunge publicly available records concerning their conduct. By federal statute, FINRA is required to preserve information concerning financial professionals and broker dealer firms registered under FINRA rules. This information is maintained in a Central Registration Depository (“CRD”) and includes records related to customer complaints and customer arbitration disputes. CRD is the source of publicly available information on BrokerCheck, a tool that allows investors to review a broker’s employment history, prior regulatory actions, complaints and arbitrations. If an associated person or registered professional or firm can establish that information associated with a customer complaint or customer dispute arbitration is inaccurate, false or erroneous, they can seek expungement from CRD by (1) initiating an arbitration or (2) requesting expungement in an existing customer arbitration. A party granted an award of expungement must then obtain a court order confirming the award before FINRA will expunge the disputed records.

To address concerns raised by industry participants, FINRA has proposed rule changes to the Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes that impose more stringent requirements for expungement. These important changes include:

For All Expungement Requests

  • Requiring that requests for expungement may only be granted by a unanimous finding of the arbitration panel that the information is factually impossible, clearly erroneous, false or that the associated person was not involved;
  • Providing state securities regulators with notice of all expungement requests;
  • Requiring the appearance of associated persons in person or by video;
  • Increased customer attendance and participation through notification to customers of the time, date and place of any prehearing conferences and the expungement hearing;
  • Authorizing the panel to request any documentary, testimonial or other evidence that it deems relevant from the broker-dealer firm or associated person seeking expungement;
  • Precluding an associated person from requesting expungement of customer dispute information if a panel previously considered the merits of, or a court previously denied, a request to expunge the same customer dispute information.
  • Preventing “arbitrator shopping” by prohibiting an associated person who withdraws an expungement request from re-submitting a request at a later date;

For Straight-In Expungement Requests

  • For requests initiated by an associated person (also known as “straight-in requests”), the proposed FINRA modifications impose strict time limits for expungement requests that would deny:

(i)  A request for expungement not filed within three years after the customer complaint was reported to the CRD system; or

(ii) A request for expungement not filed within two years of the close of the customer initiated arbitration or civil litigation.

  • Straight-in requests must be filed under the Industry Code against the broker-dealer firm at which the associated person was associated at the time of the events giving rise to the customer dispute;
  • An authorized representative of state securities regulators may attend and participate as a non-party in a straight-in expungement request;
  • Parties to an expungement proceeding may no longer (1) agree to less than three arbitrators to hear an expungement request; (2) strike any selected arbitrators; (3) stipulate to the removal of an arbitrator; or (4) stipulate to using pre-selected arbitrators;
  • A customer would receive notice of an expungement request, documents relevant to the request and may participate in the expungement process, including pre-hearing conferences;
  • An associated person would be required to provide the current address of the customer for service of the request; if an associated person fails to provide a current address of the customer, the expungement request would be deemed deficient.

For Expungement Requests Made on Behalf of the Associated Person

  • Where an expungement request is made on behalf of a person who is not a named party in an arbitration, written consent is required from the unnamed person to ensure that the unnamed person is fully aware of the expungement request;
  • If an associated person or party on behalf an associated person requests expungement and a customer’s arbitration claim is adjudicated, the panel would be required to decide the expungement request and issue its decision in the same award. This rule would apply even where the requesting party withdraws or declines to pursue the request, in which case the panel would deny the request with prejudice;
  • The party requesting expungement is required to appear at the hearing, either in person or through video.

The Duane Morris Securities Arbitration attorneys  will continue to monitor the developments of the proposed modifications for the expungement process and provide further updates on this subject.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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