On April 12, 2023 the Securities and Exchange Commission approved FINRA’s proposed rule modifications for expungement of publicly available records concerning customer arbitration disputes and customer complaints. As discussed in our prior Securities Arbitration Alert, FINRA introduced proposed changes to the Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes on July 29, 2022 in response to concerns raised by various industry organizations and participants. The approved changes impose more stringent requirements and procedures for expungement requests. Some significant modifications to the current rules include:
- Stricter time limits under which an associated person may initiate an arbitration for the sole purpose of seeking expungement (also known as a “straight-in” expungement request);
- a requirement that expungement relief may only be granted pursuant to a unanimous finding of an arbitration panel that the information at issue is factually impossible, clearly erroneous, false, or that the associated person was not involved;
- a prohibition of expungement requests concerning customer dispute information where the same information was previously considered on the merits by a panel or denied by a court of competent jurisdiction;
- increased customer participation through enhanced notice requirements and rules that grant customers broader entitlement to participate in expungement proceedings;
- a requirement that a panel of not less than three arbitrators hear straight-in expungement proceedings;
- a prohibition on striking arbitrators, stipulating to remove arbitrators, or choosing arbitrators by prior agreement in straight-in expungement proceedings; and
- a bar on the resubmission of withdrawn expungement requests to prevent “arbitrator shopping”[1].
The SEC published FINRA’s proposed rule modifications on August 15, 2022 to solicit public comment. FINRA addressed comments from industry participants by publishing Amendment 1, which explained that a customer was entitled to attend and participate in all aspects of an expungement hearing; stated that non-participation by a customer or their representative cannot be given any evidentiary weight; and prohibited an associated person from seeking expungement of customer information if that information is related to an arbitration or civil litigation in which a panel or court had found the associated person liable. After subsequent publication of the proposed modifications and Amendment 1 by the SEC on November 16, 2022, FINRA issued Amendment 2 on April 3, 2023 to provide further clarifications in response to additional public comments. Amendment 2 expands the prohibition of proceedings in which an associated person seeks to expunge dispute information where liability stemming from that information was found by an arbitration panel or court. Under this revision, findings of liability by a securities regulator or self-regulatory organization will also bar an associated person’s expungement request. Amendment 2 further clarifies that all parties to a straight-in request, not just an associated person, are prohibited from striking or stipulating to the removal of an arbitrator.
Currently, no effective date for the modified FINRA rules has been announced. The SEC’s April 12, 2023 publication states that the approval announcement is intended to solicit comments as to Amendment 2, and approval of Amendment Nos. 1 and 2 is to be completed on an accelerated basis. Given the reduced time limits and increased requirements that will govern future expungement arbitrations, registered financial professionals and broker dealer firms may want to consider initiating an expungement request before the new FINRA rules are finalized.
[1] A more detailed analysis of FINRA’s proposed modifications is discussed in our March 13, 2023 Securities Arbitration Alert: https://blogs.duanemorris.com/securitiesarbitration/2023/03/13/proposed-finra-expungement-rules/