Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act” or “Act”) ^[1] and Rule 19b-4 thereunder,^[2] notice is hereby given that on July 29, 2022, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

FINRA is proposing to amend the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) and the Code of Arbitration Procedure for Industry Disputes (“Industry Code”) (together, “Codes”) to modify the current process relating to the expungement of customer dispute information.

The proposed rule change would amend the Codes to impose requirements on expungement requests (a) filed by an associated person during an investment-related, customer-initiated arbitration (“customer arbitration”), or filed by a party to the customer arbitration on behalf of an associated person (“on-behalf-of request”), or (b) filed by an associated person separate from a customer arbitration (“straight-in request”). Specifically, the proposed rule change would: (1) require that a straight-in request be decided by a three-person panel that is randomly selected from a roster of experienced public arbitrators with enhanced expungement training; ^[3] (2) prohibit parties to a straight-in request from agreeing to fewer than three arbitrators to consider their expungement requests, striking any of the selected arbitrators, stipulating to an arbitrator's removal, or stipulating to the use of pre-selected arbitrators; (3) provide notification to state securities regulators of all expungement requests and a mechanism for state securities regulators to attend and participate in expungement hearings in straight-in requests; (4) impose strict time limits on the filing of straight-in requests; (5) codify and update the best practices in the Notice to Arbitrators and Parties on Expanded Expungement Guidance (“Guidance”) applicable to all expungement hearings, including amendments to establish additional requirements for expungement hearings, to facilitate customer attendance and participation in expungement hearings and to codify the panel's ^[4] ability to request any evidence relevant to the expungement request; ^[5] (6) require the unanimous agreement of the panel to issue an award containing expungement relief; and (7) establish procedural requirements for filing expungement requests, including for on-behalf-of requests. The proposed rule change would also amend the Customer Code to specify procedures for requesting expungement of customer dispute information during simplified arbitrations.

The text of the proposed rule change is available on FINRA's website at http://www.finra.org, at the principal office of FINRA and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. Purpose

I. Background and Discussion

A. Overview

Over the course of many years, FINRA has adopted a number of rules ^[6] governing the use of the arbitration forum administered by FINRA Dispute Resolution Services (“DRS”) to seek expungement of customer dispute information.^[7] These rules seek to balance the interests of securities regulators in having accurate and relevant information to fulfill their regulatory responsibilities; the interests of investors in having access to accurate and meaningful information about associated persons with whom they may entrust their money; the interests of broker-dealer firms in having accurate information for use in making informed employment decisions; and the interests of the brokerage community in having a fair process to address inaccurate customer dispute information.

FINRA is concerned, however, that the current expungement process is not working as intended—as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules. As a result, over the past several years, FINRA has taken numerous, meaningful steps to address the concerns that FINRA and other interested parties have identified with the current expungement process ^[8] and to enhance that process, including by:

• publishingRegulatory Notice 17-42 to seek comment on proposed changes ( printed page 50171) to further enhance the current expungement process; ^[9]

• amending FINRA rules to apply minimum fees to requests for expungement of customer dispute information to address concerns about practices to avoid fees that were intended to be applicable to expungement requests; ^[10] and

• in September 2020, filing with the SEC a rule filing to make several significant enhancements to the current expungement process by establishing special arbitration procedures for expungement requests (“2020 Rule Filing”).^[11]

On May 28, 2021, following discussions with SEC staff, FINRA withdrew the 2020 Rule Filing from the SEC in order to consider whether modifications to the filing were appropriate in response to concerns raised by SEC staff and commenters.^[12] At that time, FINRA indicated its intent to continue pursuing enhancements to the current expungement process, while also continuing discussions with the North American Securities Administrators Association (“NASAA”) and other interested parties regarding a more fundamental redesign of the current expungement process, separate from and in addition to the changes included in the 2020 Rule Filing.^[13]

FINRA believes the proposed amendments discussed below are responsive to the concerns that have been identified with the current expungement process and would help protect the integrity of the Central Registration Depository (“CRD®”), the central licensing and registration system used by the U.S. securities industry and its regulators,^[14] by making substantial improvements to the current expungement process. Key proposed changes include:

➢ For All Requests for Expungement of Customer Dispute Information:

• Requiring that the panel deciding the expungement request issue an award containing expungement relief only if the panel unanimously finds that the information to be expunged is factually impossible, clearly erroneous or false, or that the associated person was not involved in the alleged misconduct.
• Providing state securities regulators with notification of all expungement requests.
• Requiring associated persons to appear at the expungement hearing in person or by video conference.
• Facilitating customer attendance and participation by notifying customers of the time, date and place of any prehearing conferences and the expungement hearing; codifying that customers are entitled to attend and participate in prehearing conferences and the expungement hearing and to be represented, if they choose; and providing customers with access to all relevant documents filed in the arbitration.
• Specifically 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.
• Requiring that the panel provide enough detail in the award to explain its rationale for including expungement relief in the award.
• 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.
• Prohibiting an associated person who withdraws an expungement request from refiling the request at a later date, thereby preventing “arbitrator shopping.”

➢ For Straight-in Requests:  ^[15]

• Imposing strict time limits within which associated persons may request expungement—DRS would deny the DRS arbitration forum if the expungement request is made:

more than three years after the date the customer complaint was initially reported in the CRD system (if the customer complaint does not evolve into a customer-initiated arbitration or civil litigation); or

more than two years after the close of the customer-initiated arbitration or civil litigation associated with the customer dispute information.

• Requiring that straight-in requests 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.
• Permitting an authorized representative of state securities regulators to attend and participate as a non-party in prehearing conferences and the expungement hearing to the same extent as customers could attend and participate.
• Requiring that all straight-in requests be decided by a three-person panel, randomly selected from a roster of experienced public arbitrators with enhanced expungement training and with no significant ties to the industry (“Special Arbitrator Roster”). ( printed page 50172)
• Prohibiting the parties from: (1) agreeing to fewer than three arbitrators to consider their expungement requests; (2) striking any of the selected arbitrators; (3) stipulating to an arbitrator's removal; or (4) stipulating to the use of pre-selected arbitrators.^[16]

➢ For Expungement Requests Considered During a Customer Arbitration:

• Requiring an associated person named in a customer arbitration to request expungement during that customer arbitration or forfeit the opportunity to request expungement in any subsequent proceeding, thereby ensuring that the panel that hears the full merits of a customer arbitration also reviews a related expungement request.
• Conditioning and limiting the ability of a party to a customer arbitration to request expungement during the customer arbitration on behalf of an associated person who is the subject of a customer arbitration, but unnamed, so that the associated person cannot later claim they were not aware of the prior expungement request made on their behalf.

Prior to discussing each of the proposed amendments, FINRA provides below background information regarding the reporting of customer dispute information to the CRD system and its public disclosure through BrokerCheck®,^[17] the current process for requesting expungement through the DRS arbitration forum and concerns regarding the current process.

B. Customer Dispute Information in the CRD System

FINRA is mandated by federal statute to collect and maintain registration information about broker-dealer firms and their associated persons. To satisfy this statutory responsibility, FINRA operates the CRD system, the central licensing and registration system used by FINRA, the SEC, other self-regulatory organizations (“SROs”), state securities regulators and broker-dealer firms.^[18] FINRA operates the CRD system pursuant to policies developed by FINRA and NASAA. FINRA, state securities regulators and the SEC use the CRD system as an important source of regulatory information to help inform registrations, examinations, investigations and disciplinary actions to protect investors and safeguard the markets. In addition, broker-dealer firms use information in the CRD system to help them make informed employment decisions.^[19]

In general, the information in the CRD system is reported by registered broker-dealer firms, associated persons and regulatory authorities in response to questions on the uniform registration forms.^[20] These forms are used to collect registration information, which includes, among other things, administrative, regulatory, criminal history, financial and other information about associated persons, such as investment-related, customer-initiated arbitrations, civil litigations or customer complaints ( i.e., “customer dispute information”). Customer dispute information maintained in the CRD system is reported through Forms U4 and U5.^[21]

Pursuant to rules approved by the SEC and pursuant to its statutory mandate, FINRA makes specific CRD information publicly available through BrokerCheck.^[22] BrokerCheck is a free tool available on FINRA's website to help investors make informed choices about the associated persons and broker-dealer firms with whom they may conduct business.^[23] As part of its statutory obligation, FINRA publishes on BrokerCheck extensive disclosure information, including customer dispute information for associated persons who are currently or were formerly registered with FINRA.^[24]

The collection of registration information in the CRD system and the disclosure of the information through BrokerCheck serves three important purposes: (1) allowing investors to obtain information about an associated person or broker-dealer firm with whom they may do business; (2) providing securities regulators with a critical regulatory tool in overseeing the activities of associated persons and in detecting regulatory problems; and (3) providing broker-dealer firms with information for use in making informed employment decisions. The value of the information is dependent on its completeness and accuracy. The absence of accurate information, as well as the presence of clearly inaccurate information, decreases the reliability and hence the value of the disclosure regime.

Sometimes, associated persons seek to remove, or “expunge,” customer dispute information from the CRD system and, thereby, from BrokerCheck. To do this, FINRA rules require that an associated person must obtain an order from a court of competent jurisdiction (1) directing such expungement or (2) confirming an arbitration award containing expungement relief.^[25] FINRA will expunge customer dispute information from the CRD system only pursuant to a court order.

As discussed in more detail below, FINRA rules specify a narrow set of ( printed page 50173) circumstances in which expungement of customer dispute information from the CRD system is appropriate. An arbitrator considering an expungement request in the DRS arbitration forum must make a finding that the information to be expunged is factually impossible, clearly erroneous or false, or that the associated person was not involved in the alleged misconduct.^[26] When these standards were approved by the SEC, it was contemplated that expungement would be an extraordinary remedy that would be allowed only in these limited circumstances.^[27]

C. Requesting Expungement Through the DRS Arbitration Forum

The process of seeking expungement through the DRS arbitration forum originally developed when associated persons who were not found liable in a customer arbitration asked the panel in that same case to expunge the underlying customer dispute from the CRD system. Use of the DRS arbitration forum for expungement subsequently expanded when associated persons began requesting expungement through straight-in requests. Typically, these straight-in requests for expungement are filed after the customer arbitration settles or where a customer complaint has not evolved into a customer arbitration. Straight-in requests present inherent difficulties and panels deciding straight-in requests issue awards containing expungement relief more often than panels deciding expungement requests made in customer arbitrations.^[28]

For either type of expungement request initiated in the DRS arbitration forum, an independent arbitrator or a panel of independent arbitrators decides whether the party requesting expungement has established one of the Rule 2080(b)(1) grounds for expungement.^[29] Pursuant to FINRA rules, in order to issue an award containing expungement relief, the panel shall first hold a recorded hearing session regarding the appropriateness of expungement of the customer dispute information, and in cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of the settlement.^[30]

FINRA rules also require the panel to specify in the award which of the Rule 2080(b)(1) grounds serves as a basis for the expungement order and provide a brief written explanation of the reasons for its finding that one or more of the Rule 2080(b)(1) grounds applies to the facts of the case.^[31] Thus, to include expungement relief in an award, the panel must find that: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the associated person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.^[32] Arbitration awards are final and binding unless vacated based on one of the limited grounds set forth in applicable state or federal statutes.^[33]

These FINRA rules are supplemented with extensive guidance and training provided to DRS's independent arbitrators. DRS has enhanced its expungement training for arbitrators to emphasize the importance of the information in the CRD system and BrokerCheck, and to underscore the arbitrator's important role in maintaining the relevancy and integrity of the information in those systems. DRS requires arbitrators to take mandatory online training on expungement to be eligible to serve as an arbitrator. The training includes materials that arbitrators should review when considering expungement requests, with a particular focus on the Guidance, first published in 2013 and expanded further periodically thereafter.^[34] The Guidance explains the requirements of FINRA Rules 12805 and 13805 and provides arbitrators with best practices and recommendations to follow when deciding expungement requests.^[35]

As stated above, FINRA will expunge customer dispute information from the CRD system only pursuant to a court order. FINRA Rule 2080, which was developed in close consultation with representatives of NASAA and state securities regulators, provides that associated persons seeking expungement of customer dispute information from the CRD system must obtain an order from a court of competent jurisdiction directing expungement relief or confirming an arbitration award that contains expungement relief.^[36] If a court directs ( printed page 50174) expungement or confirms an arbitration award containing expungement, the customer dispute information is removed from the CRD system, and is no longer made public through BrokerCheck.

D. Concerns With the Current Expungement Process

While commenters have raised concerns generally about associated persons' use of the DRS arbitration forum to seek expungement, their concerns have been particularly focused on straight-in requests. Some of these concerns, however, also apply to expungement requests filed in customer arbitrations that settle, where the panel from the customer arbitration then holds a hearing to consider the expungement request.^[37]

First, straight-in requests often involve aged customer dispute information reported on the associated person's CRD record a number of years prior to the expungement request.^[38] As a result, documents or information relating to the dispute may no longer be available.^[39]

Second, although the Guidance provides that an arbitrator must ensure the customer has notice and an opportunity to participate in the expungement hearing, customers and their representatives typically do not participate in hearings in straight-in requests and, therefore, the panel may receive information only from the associated person requesting expungement.^[40]

Third, the broker-dealer firm named in the straight-in request by the associated person may not have any relevant documents pertaining to the customer dispute because the event occurred while the associated person was employed at a different firm, or the respondent firm may support the expungement request because it has an interest in removing negative information from the associated person's CRD record.^[41]

Fourth, associated persons are also making repeated attempts to seek expungement of the same customer dispute information. For example, some associated persons make requests for expungement (by filing straight-in requests) after withdrawing or deciding not to pursue an expungement request made in the customer arbitration, presumably believing that another panel that has not heard the merits of the customer's claim may be more likely to decide expungement in their favor. FINRA is concerned about this practice of “arbitrator shopping,” particularly when associated persons withdraw an original expungement request after the panel has been made aware of evidence that could result in the denial of the expungement request.

FINRA has also observed that persons who are not named as a party in a customer arbitration may attempt to seek expungement (using straight-in requests) after expungement was denied in the customer arbitration to which they were not a party, claiming they were not aware of the expungement request in the customer arbitration.^[42] In addition, FINRA has observed that associated persons are moving to vacate arbitration awards that deny expungement relief and then seeking expungement in a new proceeding.^[43]

As discussed in detail below, the proposed amendments would make significant enhancements to the current expungement process. These enhancements would address the concerns identified by FINRA, the Task Force and other interested parties and provide additional safeguards for ensuring that the information maintained in the CRD system and disclosed through BrokerCheck is accurate and complete.^[44]

II. Proposed Rule Change

Under the proposed rule change, an associated person would only be permitted to seek expungement of customer dispute information in the ( printed page 50175) DRS arbitration forum by complying with the requirements of proposed Rules 12805 (expungement requests in a customer arbitration), 13805 (straight-in requests under the Industry Code) or 12800(d) (expungement requests in a simplified customer arbitration). The discussion below of the proposed rule change is divided into seven areas: (A) requests for expungement under the Customer Code; (B) straight-in requests under the Industry Code and the Special Arbitrator Roster; (C) limitations on expungement requests; (D) requirements relating to all expungement hearings; (E) notifications to customers and to state securities regulators regarding expungement requests; (F) attendance and participation of an authorized representative of state securities regulators in straight-in requests; and (G) expungement requests during simplified customer arbitrations.

A. Requests for Expungement Under the Customer Code

FINRA Rule 12805 sets forth requirements that arbitrators must meet in order to issue an award containing expungement of customer dispute information under the Customer Code.^[45] The rule does not, however, provide guidance for associated persons on how and when they may request expungement during the customer arbitration, or on when arbitrators must make expungement determinations. The proposed rule change would amend FINRA Rule 12805 to set forth requirements for expungement requests filed by an associated person during a customer arbitration.

1. Expungement Requests During the Customer Arbitration

a. By a Respondent Named in a Customer Arbitration

Under current practice, an associated person who is named as a respondent in a customer arbitration (“named associated person”) may request expungement at any time during the customer arbitration or separately from the customer arbitration in a straight-in request.^[46] If a named associated person requests expungement during the customer arbitration, does not withdraw the request and the case goes to hearing and closes by award, the panel in the customer arbitration will also decide the expungement request and include the decision as part of the award. If the customer arbitration does not close by award after a hearing ( e.g., settles) and the associated person continues to pursue the expungement request, the panel from the customer arbitration will hold a hearing regarding the appropriateness of expungement.^[47]

Under the proposed rule change, if a named associated person seeks to expunge customer dispute information associated with the customer's statement of claim, the named associated person must make the expungement request during the customer arbitration.^[48] As discussed below, these requests would be subject to limitations on how and when the requests may be made.^[49] If the associated person does not request expungement of the customer dispute information associated with the customer's statement of claim during the customer arbitration, the associated person would forfeit the opportunity to seek expungement of the same customer dispute information in any subsequent proceeding.^[50] The Director would be authorized to deny the DRS arbitration forum to requests made during a customer arbitration to expunge customer dispute information that is not associated with the customer's statement of claim.^[51] The Director would also be authorized to deny the forum if a named associated person does not request expungement of the customer dispute information associated with the customer's statement of claim during the customer arbitration but then seeks expungement of the same customer dispute information in a subsequent proceeding.^[52]

FINRA is proposing to require that a named associated person request expungement of customer dispute information associated with a customer's statement of claim during the customer arbitration because, if the arbitration closes by award after a hearing, the panel from the customer arbitration will be best situated to decide the related issue of expungement. Requiring the named associated person to request expungement in the customer arbitration increases the likelihood that a panel will have input from all parties and access to all of the evidence, testimony and other documents to make an informed decision on the expungement request.

FINRA recognizes that this requirement could result in some named associated persons filing expungement requests to preserve their ability to make an expungement request, regardless of the potential outcome. FINRA believes, however, that the potential costs that would be incurred by associated persons, arbitrators and the DRS arbitration forum if named associated persons file expungement requests to preserve the ability to request expungement are appropriate given the potential benefit of having customer input and a complete factual record for the panel to decide an expungement request.

i. Method of Requesting Expungement

The proposed rule change would limit how and when expungement requests may be made during the customer arbitration. Under the proposed rule change, if a named associated person requests expungement during the customer arbitration, the request must be included in the answer or a separate pleading requesting expungement.^[53] If the request is included in the answer, it must be filed within 45 days of receipt ( printed page 50176) of the customer's statement of claim in accordance with existing requirements under the Codes.^[54] If the named associated person requests expungement in a separate pleading requesting expungement, rather than the answer, the request must be filed no later than 60 days before the first scheduled hearing begins.^[55] The proposed deadline should provide the named associated person with enough time to assess the customer's case and the potential merits of an expungement request and decide whether to file the request. The 60-day timeframe would also provide the parties to the customer arbitration with reasonable case preparation time, since the expungement issues will overlap with the issues raised by the customer's claim. If a named associated person seeks to request expungement after the 60-day filing deadline, the associated person would be required to file a motion requesting an extension, which would be decided by the panel.^[56]

ii. Required Contents of an Expungement Request

Under the proposed rule change, a request for expungement by a named associated person in a customer arbitration must include the applicable filing fee under the Code.^[57] In addition, a named associated person would be required to provide the CRD number of the party requesting expungement, each CRD occurrence number that is the subject of the request and the case name and docket number associated with the customer dispute information.^[58] These requirements would help ensure that FINRA, the panel, and the parties understand who is requesting expungement and which customer dispute information is the subject of the request.

The proposed rule change would also require the named associated person requesting expungement to explain whether expungement of the same customer dispute information was (i) previously requested and, if so (ii) how it was decided.^[59] This requirement would assist with implementation of the proposed prohibition on parties making second requests for expungement, discussed in more detail below.^[60] This proposed requirement is also consistent with language in the existing Guidance stating that arbitrators should ask a party requesting expungement whether an arbitration panel or a court previously denied expungement of the customer dispute information at issue and, if there was a prior denial, the expungement request should be denied.^[61]

Under the proposed rule change, if an expungement request fails to include any of the proposed requirements for requesting expungement, the request would be considered deficient and would not be served unless the deficiency is corrected.^[62]

FINRA believes these proposed requirements for named associated persons requesting expungement are necessary for the timely consideration and orderly administration of expungement requests as well as to maintain the integrity of the CRD system.

b. Expungement Requests by a Party Named in the Customer Arbitration On Behalf Of an Unnamed Person

The Codes do not specifically address on-behalf-of requests, i.e., expungement requests made by a party named in a customer arbitration on behalf of an unnamed person.^[63] Under current practice, a party to a customer arbitration may file an on-behalf-of request for expungement during the customer arbitration. If the party (typically, a firm) files the request and the customer arbitration closes by award after a hearing, the panel will decide the expungement request and include the decision in the award. If the customer arbitration does not close by award after a hearing ( e.g., settles), either the requesting party or the unnamed person could ask the panel to consider and decide the expungement request before it disbands. In this circumstance, the panel from the customer arbitration will hold a hearing regarding the appropriateness of expungement.^[64]

The proposed rule change would codify the ability of a party to the customer arbitration to file an on-behalf-of request during a customer arbitration.^[65] Under the proposed rule change, a party to a customer arbitration may file an on-behalf-of request that seeks to expunge customer dispute information associated with the customer's statement of claim, provided the request is eligible for arbitration under proposed Rule 12805.^[66] Filing an on-behalf-of request would be permissive, not mandatory.^[67] However, as discussed below, if the named party and the unnamed person agree to such a request, FINRA would require them to sign a form consenting to the on-behalf-of request which would help ensure that the unnamed person is fully aware of the request and that the firm is agreeing to represent the unnamed person for the purpose of requesting expungement during the customer arbitration.

i. Method of Requesting Expungement On Behalf Of an Unnamed Person

The unnamed person would be required to consent to the on-behalf-of request in writing.^[68] In particular, the party filing an on-behalf-of request would be required to submit a signed Form Requesting Expungement on Behalf of an Unnamed Person (“Form”) and a statement requesting expungement with the Director.^[69] The proposed rule change would not require that an on-behalf-of request be included in an answer or a separate pleading requesting expungement (although it could be), since the request seeks relief on behalf of a person who is not a party to the arbitration. However, the party making the request would be required to file the request, which would include the Form, no later than 60 days before the first scheduled hearing.^[70] By filing and serving the expungement request on behalf of the unnamed person, the requesting party would be agreeing to represent the unnamed person and the unnamed person's interests and to pursue the request for expungement on ( printed page 50177) behalf of the unnamed person during the customer arbitration.^[71]

FINRA believes that requiring the submission of the Form would help address the issue of an unnamed person not being made aware of the on-behalf-of request. As discussed above, FINRA is concerned that some associated persons are filing arbitration claims seeking expungement of the same customer dispute information that was the subject of a previous denial by a panel of an on-behalf-of request.^[72] By signing the Form, the unnamed person would be consenting to the on-behalf-of request and agreeing to be bound by the panel's decision on the request.^[73] In addition, the Form would provide that, if the customer arbitration closes by award after a hearing, the unnamed person would be barred from filing a request for expungement for the same customer dispute information in a subsequent proceeding. The unnamed person's signature would serve as acknowledgement of this consequence.

ii. Required Contents of an On-Behalf-Of Expungement Request

Under the proposed rule change, an on-behalf-of request would be required to include the same elements as a request for expungement by a named associated person during a customer arbitration.^[74] Thus, the party requesting expungement on behalf of an unnamed person (typically, the firm) would be required to provide the applicable filing fee; the CRD number of the unnamed person; each CRD occurrence number that is the subject of the request; the case name and docket number associated with the customer dispute information; and an explanation of whether expungement of the same customer dispute information was (i) previously requested and, if so (ii) how it was decided. In addition, as discussed above, the party requesting expungement would be required to include the Form, signed by the unnamed person whose CRD record is the subject of the expungement request and the party filing the request.

c. Deciding Expungement Requests during Customer Arbitrations

The proposed amendments would require that if a named associated person or a party on behalf of an unnamed person has requested expungement during a customer arbitration and the case closes by award after a hearing, the panel from the customer arbitration must decide the expungement request during the customer arbitration in accordance with Rule 12805(c) and issue its decision on the request in the same award.^[75] If the customer arbitration closes other than by award ( e.g., settles) or by award without a hearing, the panel would not consider the expungement request.^[76] Instead, to seek expungement relief, the associated person would need to file a straight-in request to expunge the customer dispute information associated with the customer arbitration as a new claim under proposed Rule 13805 against the member firm at which the associated person was associated at the time the customer dispute arose.^[77] A panel from the Special Arbitrator Roster would decide the straight-in request, as discussed in more detail below.^[78]

i. Panel Decides the Expungement Request if the Customer's Arbitration Closes by Award After a Hearing

Currently, if a named associated person requests expungement, or a party files an on-behalf-of request, and the customer's claim closes by award after a hearing, the panel may consider and decide the expungement request during the customer arbitration and issue its decision in the award. If, however, the party requesting expungement does not raise the issue of expungement during the hearing, the panel may not decide the request and may deem it withdrawn.^[79] In this instance, the associated person may seek to file the request again at a later date.

Under the proposed rule change, if a named associated person requests expungement or a party files an on-behalf-of request during a customer arbitration and the customer's claim closes by award after a hearing, the panel in the customer arbitration would be required to consider and decide the expungement request and issue its decision in the same award.^[80] This would help ensure that the panel from the customer's arbitration—which has received input from all parties, reviewed the pleadings, and considered the evidence on the merits—would decide the expungement request.^[81]

The proposed rule change would require the panel to decide the request even if the requesting party withdraws or fails to pursue the request. In this instance, the panel would deny the expungement request with prejudice.^[82] This would prevent associated persons from withdrawing expungement requests to avoid having their requests decided by the panel that heard the evidence on the customer's arbitration claim, then seeking to re-file the request and receiving a potentially more favorable decision from a different set of arbitrators.

ii. Panel Does Not Decide Expungement if the Customer's Arbitration Closes Other Than by Award or by Award Without a Hearing

Currently, if a named associated person requests expungement or a party files an on-behalf-of request, the customer arbitration does not close by award after a hearing ( e.g., settles) and the requesting party continues to pursue the expungement request, the panel from the customer arbitration will hold a hearing regarding the appropriateness of expungement.^[83] If the named associated person or party requesting expungement does not request that the panel hold a separate hearing to decide the expungement request, the panel may deem the request withdrawn, and the associated person may seek to file the request again at a later date.

The proposed rule change would provide that if, during a customer arbitration, a named associated person requests expungement or a party files an on-behalf-of request and the customer arbitration closes other than by award or by award without a hearing, the panel from the customer arbitration would not be permitted to decide the expungement ( printed page 50178) request.^[84] Instead, the associated person would be required to seek expungement by filing a request to expunge the same customer dispute information as a straight-in request against the member firm at which the person was associated at the time the customer dispute arose under proposed Rule 13805, where a panel that is randomly selected from the Special Arbitrator Roster would decide the request.^[85]

FINRA believes this approach reflects the importance of maintaining the integrity of information in the CRD system. When the customer arbitration closes other than by award or by award without a hearing, the panel selected by the parties in the customer arbitration may not have heard the presentation of the evidence on the merits of the case and, therefore, may not bring to bear any special insights in determining whether to issue an award containing expungement relief. In addition, customers or their representatives have little incentive to attend and participate in an expungement hearing once their case has settled. Requiring that an associated person file the expungement request as a straight-in request under the Industry Code to be heard and decided by a three-person panel that is randomly selected from the Special Arbitrator Roster would strengthen the expungement framework. As discussed in more detail below, while keeping in mind the importance of maintaining the integrity of information in the CRD system, this corps of experienced and specially trained arbitrators would follow the procedures set forth in proposed Rule 13805 to decide whether one or more of three grounds—the same three grounds contained in FINRA Rule 2080(b)(1)—exist in order to issue an award containing expungement relief.

2. No Intervening in Customer Arbitrations To Request Expungement

The proposed amendments would prohibit unnamed persons from intervening in a customer arbitration and requesting expungement.^[86] If the associated person is neither a party to the arbitration nor the subject of an on-behalf-of request by another party to the arbitration, the associated person should not be able to intervene in the customers' arbitration to request expungement. In these circumstances, the associated person's conduct is unlikely to be fully addressed by the parties during the customer arbitration, and FINRA does not believe that the customer should have the presentation of their case interrupted or delayed by an associated person's intervention to request expungement. In addition, there have been instances in customer arbitrations in which the unnamed person learns that the customer's arbitration case is nearing conclusion. The associated person then files a motion to intervene in the case to ask the panel to consider an expungement request. As an unnamed person, the individual is not a party to the case and, therefore, has not made any arguments in support of the expungement request. Further, if the motion is granted, the parties to the case will be required to wait for a decision on the expungement request (which may necessitate another hearing) before their dispute is resolved, causing delay and additional cost to the parties.

Accordingly, under the proposed rule change, unnamed persons would be prohibited from intervening in a customer arbitration and requesting expungement. Instead, the unnamed person would be able to file the request as a new claim against the member firm at which the person was associated at the time the customer dispute arose under proposed Rule 13805, where a panel from the Special Arbitrator Roster would decide the request.^[87]

3. No Straight-In Requests Against Customers

The proposed amendments would also prohibit an associated person from filing a straight-in request against a customer.^[88] Currently, straight-in requests are rarely filed against a customer.^[89] FINRA does not believe that customers should be compelled to attend or participate in a separate proceeding to decide an expungement request after the customer has resolved their arbitration claim or civil litigation. Accordingly, the proposed amendments would prohibit an associated person from filing a straight-in request against a customer. As discussed below, however, under the proposed rule change, customers would have the option to attend and participate in expungement hearings in straight-in requests, and the proposed rule change would include provisions to facilitate such attendance and participation.

B. Straight-In Requests Under the Industry Code and the Special Arbitrator Roster

Under the proposed rule change, all requests to expunge customer dispute information that is not associated with a customer arbitration would be required to be filed as a straight-in request under proposed Rule 13805.^[90] In addition, an associated person could request expungement of customer dispute information associated with a customer arbitration under proposed Rule 13805 if: (1) the associated person is named in the arbitration or is the subject of an on-behalf-of request and the customer arbitration closes other than by award or by award without a hearing; or (2) the associated person is the subject of a customer arbitration, but is neither named in the arbitration nor the subject of an on-behalf-of request, and the customer arbitration closes for any reason. If an associated person requests expungement under proposed Rule 13805, a three-person panel randomly selected from the Special Arbitrator Roster in accordance with proposed Rule 13806 would decide the expungement request.^[91]

1. Filing a Straight-In Request Under the Industry Code

a. Applicability

Under the proposed rule change, an associated person requesting expungement of customer dispute information as a straight-in request under the Industry Code must file a statement of claim in accordance with FINRA Rule 13302 against the member firm at which the person was associated at the time the customer dispute arose, unless the request is ineligible for arbitration under proposed Rule 13805(a)(2).^[92] The only way to request expungement of customer dispute information under the Industry Code ( printed page 50179) would be to file the request under proposed Rule 13805.

The requirement that the associated person file the straight-in request against the member firm at which the person was associated at the time the customer dispute arose would help ensure that there is a connection between the respondent firm and the subject matter of the expungement request. For example, the firm at which the person requesting expungement was associated at the time the dispute arose should have knowledge of the dispute and access to documents or other evidence relating to the dispute. In addition, the proposed requirement would help ensure that the panel from the Special Arbitrator Roster would be able to request evidence from the member firm with information that is relevant to the expungement request. If the requisite connection is not present, the Director would be authorized to deny the use of the DRS arbitration forum for the request.^[93]

b. Required Contents of Straight-In Requests

The required contents of a straight-in request would be the same as those required for expungement requests filed under proposed Rule 12805.^[94] Thus, the associated person's straight-in request would be required to contain the applicable filing fee; ^[95] the CRD number of the party requesting expungement; each CRD occurrence number that is the subject of the request; the case name and docket number associated with the customer dispute information, if applicable; and an explanation of whether expungement of the same customer dispute information was previously requested and, if so, how it was decided.^[96] In addition, as discussed below, the proposed rule change would impose limitations on when such requests may be made.^[97]

2. Panel From the Special Arbitrator Roster Decides Requests Filed Under the Industry Code

If a straight-in request is filed in accordance with proposed Rule 13805, a three-person panel randomly selected from the Special Arbitrator Roster pursuant to proposed Rule 13806 would be required to hold an expungement hearing, decide the expungement request and issue an award.^[98] The proposed amendments would also provide that if the associated person withdraws or does not pursue the request, the panel would be required to deny the expungement request with prejudice.^[99] This requirement would foreclose the ability of associated persons to withdraw expungement requests to avoid having their requests decided by a panel that they believe does not favor their request, and then seek to re-file the request with the hope of obtaining a potentially more favorable decision from a different panel.

a. Eligibility Requirements for the Special Arbitrator Roster

The proposed rule change would include several requirements to help ensure that arbitrators on the Special Arbitrator Roster have the qualifications and training to decide straight-in requests.

First, arbitrators on the Special Arbitrator Roster would be public arbitrators who are eligible for the chairperson roster.^[100] Public arbitrators are not employed in the securities industry and do not devote 20 percent or more of their professional work to the securities industry or to parties in disputes concerning investment accounts or transactions or employment relationships within the financial industry.^[101] Arbitrators are eligible for the chairperson roster if they have completed chairperson training provided by FINRA and: (1) have a law degree and are a member of a bar of at least one jurisdiction and have served as an arbitrator through award on at least one arbitration administered by an SRO in which hearings were held; or (2) have served as an arbitrator through award on at least three arbitrations administered by an SRO in which hearings were held.^[102] These requirements would help ensure that the persons conducting the expungement hearing are impartial and experienced in managing and conducting arbitration hearings in the DRS arbitration forum.^[103]

Second, the public chairpersons must have evidenced successful completion of, and agreement with, enhanced expungement training provided by FINRA.^[104] FINRA currently provides an Expungement Training module for arbitrators.^[105] This training, however, would be expanded for arbitrators seeking to qualify for the Special Arbitrator Roster. This would allow FINRA to further emphasize with the arbitrators on the Special Arbitrator Roster the unique, distinct role they play in determining whether to issue an award containing expungement relief, and that expungement should be issued in limited circumstances and only if the arbitrators unanimously find that the information to be expunged is factually impossible, clearly erroneous or false, or that the associated person was not involved in the alleged misconduct.

Third, arbitrators on the Special Arbitrator Roster would also be required to have served as an arbitrator through award on at least four customer arbitrations administered by FINRA or by another SRO in which a hearing was held.^[106] FINRA believes that if an arbitrator has served on four arbitrations through to award, it would indicate that the arbitrator has gained the knowledge ( printed page 50180) and experience in the DRS arbitration forum to conduct hearings.^[107]

b. Composition of the Panel

To minimize the potential for influence in the arbitrator selection process by the associated person and member firm, whose interests may be aligned, and to help ensure the development of a more complete factual record, the proposed rule change would require NLSS to select randomly the three public chairpersons from the Special Arbitrator Roster to decide a straight-in request filed by an associated person.^[108] The parties would not be permitted to agree to fewer than three arbitrators. The parties also would not be permitted to strike any arbitrators selected by NLSS nor stipulate to their removal,^[109] but would be permitted to challenge an arbitrator selected for cause.^[110] If an arbitrator is removed, NLSS would randomly select a replacement.^[111]

The current process for selecting arbitrators—striking and combining ranked lists—would not be appropriate to use to select arbitrators to decide straight-in requests.^[112] In arbitrations outside of the expungement context, the parties are typically adverse, which means that during arbitrator selection, each side may rank arbitrators on the lists whom they believe may be favorable to their case. The adversarial nature of the proceedings serves to minimize the impact of each party's influence in arbitrator selection. In contrast, a straight-in request filed by an associated person against a firm is less likely to be adversarial in nature. FINRA believes that the proposed rule change would prevent the associated person and member firm from collaboratively seeking to influence the outcome of the expungement request through arbitrator selection.

FINRA recognizes that the proposed arbitrator selection process for straight-in requests would also limit the associated person and member firm's input on arbitrator selection for reasons that may be unrelated to whether the arbitrator would potentially be sympathetic to the expungement request, such as their perception of the arbitrator's competence or efficiency. However, the arbitrators on the Special Arbitrator Roster would have the experience, qualifications and training necessary to conduct a fair and impartial expungement hearing in accordance with the proposed rules, and to make their determination based on a complete factual record developed during the expungement hearing. FINRA believes that the higher standards that the arbitrators must meet to serve on the Special Arbitrator Roster should mitigate the impact of the absence of party input on the selection of arbitrators. In addition, associated persons and member firms would still be permitted to challenge any arbitrator for cause.^[113]

C. Limitations on Expungement Requests

Currently, Rules 12805 and 13805 do not address when a party would not be permitted to file an expungement request in the DRS arbitration forum.^[114] The Guidance, however, describes several circumstances in which an expungement request should be ineligible for arbitration. The proposed rule change would incorporate the limitations contained in the Guidance and add time limits to when an associated person may file a straight-in request.

1. Limitations Applicable to Both Straight-In Requests and Expungement Requests During a Customer Arbitration

The Guidance provides that if a panel or a court has issued an award or decision denying an associated person's expungement request, the associated person may not request expungement of the same customer dispute information in another arbitration proceeding. In particular, the Guidance states that arbitrators should ask a party requesting expungement whether an arbitration panel or a court previously denied expungement of the customer dispute information at issue and, if there has been a prior denial, the arbitration panel must deny the expungement request.^[115]

The proposed rule change would codify the Guidance by providing that an associated person may not file a request for expungement of customer dispute information if (1) a panel held a hearing to consider the merits of the associated person's expungement request for the same customer dispute information or (2) a court of competent jurisdiction previously denied the associated person's request to expunge the same customer dispute information.^[116] These proposed amendments would prevent an associated person from forum shopping, or seeking to return to the DRS arbitration forum to garner a favorable outcome on his or her expungement request.^[117]

2. Limitations Applicable to Straight-In Requests Only

As discussed below, under the proposed amendments, four additional limitations would apply to straight-in requests.

a. No Straight-In Request if the Customer Arbitration, Civil Litigation or Customer Complaint Has Not Closed

The Guidance provides that an associated person may not file a separate request for expungement of customer dispute information arising from a customer arbitration until the customer arbitration has concluded. The proposed rule change would codify and expand upon this limitation in the Guidance by providing that an associated person may not file a straight-in request under proposed Rule 13805 if the customer arbitration, civil litigation or customer complaint associated with the customer dispute information has not closed.^[118]

The proposed rule change would prevent an associated person from filing a straight-in request while a customer arbitration or civil litigation associated with the customer dispute information that is the subject of the straight-in request is pending. It would also prevent potentially inconsistent expungement decisions on related customer dispute information. The proposed rule change would also help ensure that the panel which will decide the straight-in request is able to consider the final factual record from the customer arbitration or civil litigation. ( printed page 50181)

b. Straight-In Request Prohibited if Named Associated Person Did Not Request Expungement in Customer Arbitration

Under the proposed change, an associated person who is named in a customer arbitration must request expungement during the arbitration or forfeit the ability to seek to expunge the customer dispute information associated with the customer's statement of claim in any subsequent proceeding.^[119] Accordingly, the proposed rule change would prohibit these associated persons from filing a straight-in request under the Industry Code seeking to expunge the customer dispute information associated with the customer's statement of claim.^[120]

c. Time Limits Applicable to Disclosures Arising After the Effective Date of the Proposed Rule Change

FINRA is aware that many straight-in requests are filed many years after the customer arbitration closes or the customer complaint is reported in the CRD system.^[121] To encourage prompt filing of expungement requests, the proposed amendments would establish time limits for expungement requests that are specifically tied to the closure of customer arbitrations and civil litigations, or the reporting of customer complaints in the CRD system, as applicable.^[122] The proposed time limits should help encourage customer attendance and participation in expungement proceedings and help ensure that straight-in requests are brought before relevant evidence and testimony becomes stale or unavailable.^[123] The proposed time limits may also curtail the common practice of bundling multiple unrelated and aged expungement requests in one straight-in request.^[124]

(i) Two Years From the Close of a Customer Arbitration or Civil Litigation

Under the proposed rule change, an associated person would be permitted to file a straight-in request within two years of the close of a customer arbitration or a civil litigation associated with the customer dispute information.^[125] The proposed amendments would allow an associated person to request expungement of customer dispute information associated with the customer arbitration or civil litigation—including any associated customer complaint disclosures—within two years after the customer arbitration or civil litigation closes.^[126]

A two-year limitation period would allow the associated person sufficient time to determine whether to seek expungement by filing a straight-in request and provide a reasonable amount of time for the associated person to gather the documents, information and other resources required to file the expungement request. In addition, a two-year period would help ensure that the expungement hearing is held close enough in time to the customer arbitration or civil litigation, when information regarding the customer arbitration or civil litigation is available and in a timeframe that could increase the likelihood for the customer to attend and participate if the customer chooses to do so. The two-year time limit may also curtail the common practice of bundling multiple unrelated and aged expungement requests in one straight-in request.

(ii) Three Years From the Date a Customer Complaint Is Reported to the CRD System

Under the proposed rule change, an associated person would be prohibited from filing a straight-in request to expunge a customer complaint where more than three years have elapsed since the customer complaint was initially reported to the CRD system and there was no customer arbitration or civil litigation associated with the customer dispute information.^[127] This means that if no customer arbitration or civil litigation associated with the customer complaint is filed, the associated person would have three years from the date the customer complaint was initially reported in the CRD system to file the expungement request.^[128]

The three-year time limitation would help ensure that the expungement hearing is held close in time to the events that gave rise to the customer dispute and increase the likelihood of customer attendance and participation. Three years should also provide sufficient time for firms to complete their investigation of the complaint, for associated persons to develop a sense of whether the complaint may evolve into an arbitration or civil litigation, and for the associated person to gather the necessary resources and determine whether to seek expungement. The three-year time limitation may also curtail requests to expunge customer complaints that are filed many years after first being reported to the CRD system and the bundling of multiple unrelated and aged disclosures in a single expungement request.

As discussed above, the Codes provide that no claim shall be eligible for submission to arbitration where six years have elapsed from the occurrence or event giving rise to the claim.^[129] As a result of this six-year eligibility rule, a customer arbitration may be filed after an associated person has filed and received an award in connection with a customer complaint associated with the customer arbitration. To avoid unfairly impacting a customer arbitration filed after a panel has issued an award on a request to expunge a customer complaint associated with the customer arbitration, the proposed rule change would provide that a prior expungement award shall not be admissible in the customer arbitration.^[130]

d. Time Limits Applicable to Disclosures Arising on or Prior to the Effective Date of the Proposed Rule Change

The proposed amendments would also establish time limits for requests to expunge customer dispute information arising from customer arbitrations and civil litigations that close, and for customer complaints that were initially reported to the CRD system, on or prior to the effective date of the proposed rule change.

Specifically, the proposed amendments would provide that if an expungement request is otherwise eligible under the six-year limitation period of FINRA Rule 13206(a), an associated person would be permitted to file a straight-in request under the Industry Code if: (1) the request for expungement is made within two years of the effective date of proposed rule change, and the disclosure to be expunged is associated with a customer arbitration or civil litigation that closed on or prior to the effective date; ^[131] or (2) the request for expungement is made within three years of the effective date of the proposed rule change, and the disclosure to be expunged is associated with a customer complaint initially reported to the CRD system on or prior to its effective date.^[132]

3. Director's Authority To Deny the Forum

The Codes provide the Director with authority to decline the use of the DRS arbitration forum if the Director determines that “given the purposes of FINRA and the intent of the Code, the subject matter of the dispute is inappropriate, or that accepting the matter would pose a risk to the health or safety of arbitrators, staff, or parties or their representatives.” ^[133]

To ensure additional safeguards around the expungement process, the proposed rule change would provide the Director with express authority to decline the use of the DRS arbitration forum if an associated person files an expungement request that the Director determines is ineligible for arbitration under proposed Rules 12805 and 13805.^[134] For example, the Director would decline the use of the DRS arbitration forum if an expungement request is ineligible under the proposed time limitations. The Director would also decline the use of the DRS arbitration forum if a panel has previously considered the merits of, or a court has previously decided, an expungement request associated with the same customer dispute information. The Director would also decline the use of the DRS arbitration forum if an associated person was named as a respondent in a customer arbitration but did not request expungement; if an associated person requested expungement but withdrew or did not pursue the expungement request; or if a party to a customer arbitration requested expungement on behalf of an unnamed person but the party withdrew or did not pursue an expungement request on behalf of the unnamed person.

The proposed rule change would also provide the Director with express authority to decline the use of the DRS arbitration forum if the Director determines that the expungement request was not filed under, or considered in the DRS arbitration forum in accordance with, proposed Rules 12805 or 13805.^[135] For example, the Director may decline the use of the DRS arbitration forum if the Director determines that a panel is proposing to issue an award containing expungement of customer dispute information other than pursuant to proposed Rules 12805, 12800(d) and (e) or 13805, as applicable. The Director may also decline the use of the DRS arbitration forum if an associated person seeks expungement of customer dispute information other than pursuant to proposed Rules 12805, 12800(d) and (e) or 13805, as applicable.

D. Requirements Relating to All Expungement Hearings

FINRA Rules 12805 and 13805 currently provide a list of requirements panels must follow in order to issue an award containing expungement relief.^[136] In addition, the Guidance provides best practices that arbitrators should follow when deciding expungement requests. To further guide the arbitrators' decision-making, the proposed rule change would expand the expungement hearing requirements currently in FINRA Rules 12805 and 13805 and incorporate relevant provisions from the Guidance. The proposed requirements would apply to all expungement hearings.^[137]

1. Recorded Hearing Sessions

The Codes require a panel that is deciding an expungement request to hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement.^[138] The proposed rule change would provide that the panel must hold one or more separate recorded hearing sessions regarding the expungement request, clarifying that the panel would not be limited in the number of hearing sessions it should hold to decide the expungement request.^[139] The proposed amendments would also remove the specific reference to the hearing being held by telephone or in person because, as discussed below, the participants in the hearing may appear by different methods.

2. Associated Person's Appearance

The proposed rule change would require the associated person whose information in the CRD system is the subject of the expungement request to appear in person or by video conference at the expungement hearing.^[140] A party requesting expungement on behalf of an unnamed person or the party's representative would also be required to appear in person or by video conference at the hearing. The panel would determine the method of appearance.

As the associated person is seeking the permanent removal of information from the CRD system, FINRA believes the associated person should be required to appear in person or by video conference at the expungement hearing and be available to respond to questions. Requiring that the associated person's appearance be in person or by video conference would help the panel assess the associated person's credibility, which may be particularly important if the request is unopposed.

3. Customer's Attendance and Participation During the Expungement Hearing

The Guidance states that it is important to allow customers and their representatives to participate in the expungement hearing if they wish to do so.^[141] Specifically, the Guidance provides that arbitrators should:

• Allow the customer and their representative to appear at the expungement hearing;
• Allow the customer to testify (telephonically, in person, or other method) at the expungement hearing;
• Allow the representative for the customer or apro se customer to introduce documents and evidence at the expungement hearing;
• Allow the representative for the customer or apro se customer to cross-examine the associated person or other witnesses called by the party seeking expungement; and
• Allow the representative for the customer or apro se customer to present opening and closing arguments if the panel allows any party to present such arguments.

The proposed rule change would codify these provisions of the Guidance. The proposed rule change would make clear that all customers whose customer arbitrations, civil litigations or customer complaints are a subject of the expungement request are entitled to representation and may attend and participate in the expungement hearing.^[142] These customers would also be entitled to attend and participate in any prehearing conferences held for straight-in requests.^[143] Because expungement requests may otherwise be unopposed, FINRA believes that the customers should be allowed to attend and participate in the entirety of the expungement hearing and any prehearing conferences.

The proposed rule change would provide that the customer could choose to attend and participate by telephone, in person or by video conference.^[144] Customer attendance and participation during an expungement hearing provides the panel with important information and perspective that it might not otherwise receive. By providing customers with options for how to attend and participate in hearings, FINRA seeks to encourage customer attendance and participation by making it easier for customers to do so.

The proposed rule change would also specify ways in which the customer must be allowed to attend and participate in the expungement hearing. First, the proposed rule change would provide that customers or customers' representatives must be allowed to introduce evidence during the expungement hearing.^[145] If the customer or customer's representative introduces any evidence at the expungement hearing, a party could state objections to the introduction of the evidence during the expungement hearing.^[146]

Second, the customers and the customers' witnesses would be allowed to testify at the expungement hearing and be questioned by the customer or customer's representative.^[147] If customers or their witnesses testify, the associated person or a party requesting expungement on behalf of an unnamed person would be allowed to conduct cross-examination.^[148]

Third, the customer or customer's representative would be permitted to state objections to evidence and cross-examine the associated person or party requesting expungement on behalf of an unnamed person and any other witnesses called during the expungement hearing.^[149]

Fourth, the customer or customer's representative would be permitted to present opening and closing arguments if the panel permits any party to present such arguments.^[150]

FINRA believes the proposal strikes the right balance of allowing the customer to attend and participate in the hearing and giving the associated person or party requesting expungement on behalf of an unnamed person the opportunity to substantiate arguments in support of the expungement request.

4. Panel Requests for Additional Documents or Evidence

Arbitrators on the panel do not conduct their own research when hearing an arbitration case; instead, they review the materials provided by the parties. If they need more information, they can request it from the parties. In deciding an expungement request, particularly in cases that settle before an evidentiary hearing or in cases where the customer does not attend or participate in the expungement hearing, the panel's role as fact finder is critical. Given this significant role, the panel must ensure that it has all of the information necessary to make a fully informed decision on the expungement request on the basis of a complete factual record.

Thus, the proposed rule change would codify the ability of the panel to request from the associated person, the party requesting expungement on behalf of an unnamed person and the member firm at which the person was associated at the time the customer dispute arose, as applicable, any documentary, testimonial or other evidence that the panel deems relevant to the expungement request.^[151] This would allow the panel, for example, to require the associated person to produce documents that the panel deems relevant at the prehearing conference, to testify in response to questions by the panel at the hearing or to provide transcripts of previously obtained witness testimony.

5. Review of Settlement Documents

Current FINRA Rules 12805(b) and 13805(b) provide that, in the event a customer dispute is resolved by settlement, the panel considering the expungement request must review the settlement documents and consider the amount of payments made to any party and any other terms and conditions of the settlement.^[152] The proposed rule ( printed page 50184) change would retain this requirement.^[153]

In addition, the Guidance encourages arbitrators to inquire and fully consider whether a party conditioned a settlement of a customer dispute upon an agreement not to oppose the request for expungement in cases in which the customer does not attend or participate in the expungement hearing or the requesting party states that a customer has indicated that the customer will not oppose the expungement request. Because conditioned settlements violate FINRA Rule 2081 and may be grounds to deny an expungement request, the proposed rule change would codify the language in the Guidance.^[154]

6. Unanimous Decision To Issue an Award Containing Expungement Relief

Current FINRA Rules 12805 and 13805 require that, in order to issue an award containing expungement of customer dispute information, the panel must indicate in the arbitration award which of the FINRA Rule 2080 grounds for expungement serves as the basis for its expungement order. Consistent with arbitration cases generally, the panel may award expungement based on a majority decision of the arbitrators.^[155]

The proposed rule change would require that the arbitrators agree unanimously to issue an award containing expungement relief.^[156] Although the vast majority of expungement decisions are already unanimous,^[157] FINRA believes that this change would help protect the integrity of the information in the CRD system and help ensure that the expungement process operates as intended—as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules.^[158]

To further protect the integrity of the information in the CRD system, the proposed amendments would also provide that in order to issue an award containing expungement relief, the unanimous finding must be that one or more of the grounds for expungement enumerated in the proposed rule has been established: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the associated person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.^[159] To help ensure there is no confusion as to which standard the arbitrators must apply, the proposed rule change would also state that the panel shall not issue, and the Director shall not serve, an award containing expungement relief based on any other grounds.^[160]

The Codes, which include FINRA Rules 12805 and 13805, govern the processes by which all arbitration cases are administered in the DRS arbitration forum.^[161] Accordingly, the three grounds referenced in proposed Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i) on which a panel must unanimously make a finding to issue an award containing expungement relief would be the exclusive grounds upon which a panel could award expungement in the DRS arbitration forum.^[162]

7. Contents of the Expungement Award

The panel is currently required to provide a “brief” written explanation of the reasons for its finding that one or more of the grounds for expungement applies to the facts of the case.^[163] The proposed rule change would retain the requirement to provide the written explanation, but would remove the word “brief” such that the panel would be required to provide enough detail in the award to explain its rationale for awarding expungement relief.^[164] As the Guidance suggests, the panel's explanation must be complete and not solely a recitation of one of the FINRA Rule 2080(b)(1) grounds or language provided in the expungement request. For the same reason, the proposed rule change would incorporate language from the Guidance that the panel's explanation should identify any specific documentary, testimonial or other evidence on which the panel relied in awarding expungement relief.^[165]

8. Evidentiary Weight of Decision of Customer or Authorized Representative Not To Attend or Participate

The proposed amendments would also instruct the panel that the decision of a customer or an authorized representative of state securities regulators (“authorized representative”) not to attend or participate in the expungement hearing shall not be material to the determination of whether expungement is appropriate.^[166] FINRA is aware that some panels have indicated in expungement awards that a customer did not appear at the ( printed page 50185) expungement hearing. A customer or an authorized representative may not attend, participate in or appear at an expungement hearing for a variety of reasons that may be unrelated to the merits of the expungement request. Accordingly, FINRA believes that a customer's or an authorized representative's decision not to attend or participate should not be given any evidentiary weight by the panel when making the expungement determination.

9. Forum Fees

The proposed rule change would retain the current requirements in FINRA Rules 12805(d) and 13805(d) that address how DRS arbitration forum fees are assessed in expungement hearings. Specifically, the panel must assess against the parties requesting expungement all DRS arbitration forum fees for each hearing session in which the sole topic is the determination of the appropriateness of expungement.^[167]

E. Notifications to Customers and to State Securities Regulators Regarding Expungement Requests

1. Notification to Customers by the Associated Person

The Guidance suggests that when a straight-in request is filed against a firm, arbitrators order the associated person to provide a copy of the statement of claim to the customers involved in the customer dispute that gave rise to the customer dispute information maintained in the CRD system. This helps ensure that the customers know about the expungement request and have an opportunity to attend and participate in the expungement hearing or provide a position in writing on the associated person's request. The proposed rule change would codify this practice in the Industry Code by requiring that the associated person serve all customers whose customer arbitrations, civil litigations or customer complaints are a subject of the expungement request with a copy of the statement of claim requesting expungement and any answer.^[168] The associated person would be required to serve a copy of the statement of claim and a copy of any answer within 10 days of filing.^[169] The panel would be authorized to decide whether extraordinary circumstances exist that make service on the customers impracticable.^[170]

Given the associated person's personal interest in obtaining expungement, FINRA believes that the panel should review all documents that the associated person used to inform the customers about the expungement request as well as any customer responses received. Accordingly, the proposed rule change would require the associated person to file with the panel proof of service for the statement of claim and any answers, copies of all documents provided by the associated person to the customers, and copies of all communications sent by the associated person to the customers and any responses received from the customers.^[171] The proposed requirement would also help ensure that the associated person does not attempt to dissuade a customer from attending or participating in the expungement hearing.

2. Notifications to the Customer by the Director

Customer attendance and participation in expungement hearings helps the panel fully develop a record on which to decide the expungement request. Accordingly, the proposed rule change would require the Director to notify all customers whose customer arbitrations, civil litigations or customer complaints are a subject of the expungement request, of the time, date and place of any prehearing conferences and the expungement hearing.^[172]

The Director would include language in the notice to encourage the customer to attend and participate in the expungement hearing. The associated person would be required to provide a current address for the customer,^[173] or the expungement request would be considered deficient and would not be served.^[174] The Director's notice to the customer would serve as a reminder of the expungement request and would provide the customer with timely notice of any prehearing conferences and expungement hearings so that customers may plan and prepare to attend and participate if they choose.

The Director would also provide the notified customers with access to all documents that are relevant to (a) the expungement request that are filed in the straight-in request and (b) any prior customer arbitration brought by the customer that is a subject of the expungement request.^[175] This would provide the customer with access to the key documents surrounding the request for expungement prior to their attendance and participation in the expungement hearing.

3. Notifications to State Securities Regulators

The proposed rule change would require FINRA to notify state securities regulators, in the manner determined by the Director in collaboration with state securities regulators, of an expungement request within 15 days of receiving an expungement request.^[176] The proposed notification requirement would help ensure that state securities regulators are timely notified of expungement requests.

F. Attendance and Participation of an Authorized Representative of State Securities Regulators in Straight-In Requests

The current expungement process does not include a mechanism to facilitate state securities regulator involvement in expungement hearings in the DRS arbitration forum. The proposed rule change would provide a mechanism for an authorized representative to provide the state securities regulators' position or positions on an expungement request in writing or by attending and participating in the expungement hearing in person or by video conference.^[177] This attendance and participation by an authorized representative of the state securities regulators would be limited to straight- ( printed page 50186) in requests, where the panel may otherwise only hear evidence from the party requesting expungement.

At the same time as providing notification to state securities regulators of a straight-in request, the Director would provide state securities regulators with access to all documents relevant to (a) the expungement request filed in the arbitration requesting expungement relief and (b) any other customer arbitration brought under the Customer Code that is associated with the customer dispute information that is a subject of the expungement request.^[178] Providing state securities regulators with these documents would help facilitate a determination of whether to attend and participate in the expungement hearing.

If the Director receives notification from an authorized representative no later than 30 days after the last answer is due that the authorized representative intends to attend and participate in the expungement hearing, the Director shall notify the authorized representative of the time, date and place of any prehearing conferences and the expungement hearing.^[179] At the expungement hearing, the authorized representative would be permitted to: (1) introduce documentary, testimonial, or other evidence; (2) cross-examine witnesses; and (3) present opening and closing arguments if the panel allows any party to present such arguments.^[180] The other persons appearing at the expungement hearing could state objections to the authorized representative's evidence and cross-examine the authorized representative's witnesses.^[181]

The authorized representative would not be considered a party to the proceeding and their attendance and participation would be limited to what is authorized by proposed Rule 13805(c)(6).^[182] In addition, the panel would not be permitted to allow the attendance or participation of the authorized representative to materially delay the scheduling of the expungement hearing.^[183]

Allowing an authorized representative to attend and participate in straight-in requests may provide meaningful opposition to the expungement request, which might otherwise be unopposed, and thus help create a more complete factual record for the panel to rely upon to decide the expungement request. NASAA and state securities regulators have a shared interest with FINRA in protecting the integrity of the information contained in the CRD system, as it is a crucial tool in their registration and oversight responsibilities. According to NASAA, “[s]tate securities regulators are often legally obligated to maintain the information in the CRD system as a state record. Much of the information in the CRD system is filed with state securities regulators as part of the registration and qualification process, or filed by state securities regulators themselves. The Uniform Securities Acts, which form the basis of most state securities statutes, generally provide that securities regulators must retain all information filed as part of a registration application or as an amendment to the information filed as part of the application.” ^[184] Thus, NASAA has indicated that expungement of customer dispute information potentially implicates the public records obligations of state governments.^[185]

The proposal would not allow an authorized representative to attend or participate in a customer arbitration where expungement has been requested; such attendance or participation could substantially disrupt the customer's case and would be less impactful, as the panel hears the customer's evidence on the merits.

FINRA believes that the proposed rule change strikes the appropriate balance between respecting states' interest in the information in the CRD system and maintaining the integrity of the arbitration process.

G. Expungement Requests During Simplified Customer Arbitrations

Customer arbitrations involving $50,000 or less, called simplified arbitrations, are governed by FINRA Rule 12800. FINRA Rule 12800 provides customers with expedited procedures to make the DRS arbitration forum economically feasible for these smaller claims. Simplified arbitrations are decided on the pleadings and other materials submitted by the parties, unless the customer requests a hearing.^[186] Further, a single arbitrator from the public chairperson roster is appointed to consider and decide simplified arbitrations, unless the parties agree in writing otherwise.^[187]

The customer who files a simplified arbitration determines how the claim will be decided. In particular, the customer has the option of having the case decided in one of three ways: (1) without a hearing (referred to as “on the papers”), where the arbitrator decides the case on the pleadings or other materials; (2) in an “Option One” full hearing, in which prehearings and hearings on the merits take place pursuant to the regular provisions of the Code; or (3) in an “Option Two” special proceeding, whereby the parties present their case in a hearing to the arbitrator in a compressed timeframe, so that the hearings last no longer than one day.^[188]

Currently, named associated persons and parties requesting expungement on behalf of unnamed persons request expungement during simplified arbitrations. FINRA Rule 12800 does not, however, expressly address how an expungement request should be filed or considered during a simplified arbitration. The proposed rule change would codify an associated person's ability to request expungement when named as a respondent in a simplified arbitration, and for other parties to request expungement on behalf of an unnamed person. The proposed rule change would also establish procedures for requesting and considering expungement requests in simplified arbitrations that are consistent with the expedited nature of these proceedings.^[189]

1. Requesting Expungement

The proposed rule change would permit a named associated person to request expungement, or a party to file an on-behalf-of request, during a simplified arbitration. As discussed in more detail below, unlike in a non-simplified arbitration, if expungement is not requested during the simplified arbitration, the associated person would be permitted to request it as a straight-in request filed under the Industry Code.^[190]

a. By a Named Associated Person During the Simplified Arbitration

Under the proposed rule change, an associated person named as a respondent in a simplified arbitration could request expungement during the arbitration of the customer dispute information associated with the customer's statement of claim, provided the request is eligible for arbitration.^[191]

If a named associated person requests expungement during a simplified arbitration, the proposed rule change would require the request to be filed in an answer or a separate pleading requesting expungement.^[192] If the named associated person requests expungement in a pleading other than an answer, the request must be filed within 30 days after the date FINRA notifies the parties of the appointment of the arbitrator.^[193] Given the expedited nature of the simplified arbitration process, tying the request to these milestones would ensure that parties receive timely notice of the expungement request so that they may prepare their cases accordingly. The request would be required to include the same information as a request filed in a non-simplified arbitration.^[194]

To limit arbitrator shopping, the arbitrator would be required to decide an expungement request once it is filed by the associated person.^[195] If an associated person withdraws or does not pursue the request after filing, the arbitrator would be required to deny the request with prejudice so that it could not be re-filed.^[196]

b. By a Party on Behalf of an Unnamed Person

Under the proposed amendments, the requirements for a party to file an on-behalf-of request during a simplified arbitration would be the same as the requirements for a named associated person filing an expungement request during a simplified arbitration. A named party would only be able to file an on-behalf-of request during a simplified arbitration with the consent of the unnamed person.^[197] As with on-behalf-of requests filed in customer arbitrations under proposed Rule 12805(a)(2), the unnamed person who would benefit from the expungement request must consent to such filing by signing the Form.^[198]

To limit arbitrator shopping, the arbitrator would be required to decide an on-behalf-of request once it is filed by the requesting party.^[199] If the requesting party withdraws or does not pursue the on-behalf-of request after filing, the arbitrator would be required to deny the request with prejudice so that it could not be re-filed.^[200]

c. When No Expungement Request Is Filed in a Simplified Arbitration

If expungement is not requested during the simplified arbitration under proposed Rule 12800(d), the associated person would be able to file a straight-in request under proposed Rule 13805 and have the request decided by a three-person panel randomly selected from the Special Arbitrator Roster.^[201] The request would be subject to the limitations on whether and when such requests may be filed under the Industry Code.^[202]

Due to the expedited nature of simplified arbitrations, FINRA believes that fairness dictates that the associated person have the option to seek expungement separately under the Industry Code and have the expungement request decided by a panel randomly selected from the Special Arbitrator Roster. In simplified arbitrations, there may be less discovery, and the customer can dictate the extent of the evidence presented to the arbitrator. The customer may, for example, determine to have the arbitration decided on the papers. Because there may be less information available for the arbitrator to evaluate an expungement request during a simplified arbitration—even when the simplified arbitration results in an award—the associated person would retain the ability to choose to file the request as a straight-in request under the Industry Code.^[203]

2. Deciding Expungement Requests During Simplified Arbitrations

If a named associated person or party on behalf of an unnamed person requests expungement during a simplified arbitration, the arbitrator would be required to decide the expungement request, regardless of how the simplified arbitration closes ( e.g., even if the arbitration settles).^[204] As discussed in more detail below, arbitrators deciding expungement requests in simplified arbitrations would be experienced public arbitrators who would be required to evidence successful completion of, and agreement with, the enhanced expungement training provided by DRS prior to considering and deciding the expungement request.

Under the proposed rule change, how and when the expungement request is decided would depend on which option the customer selects to decide the simplified arbitration.

a. No Hearing or Option Two Special Proceeding

If the customer opts not to have a hearing or chooses an Option Two special proceeding, the arbitrator would decide the customer's dispute first and ( printed page 50188) issue an award.^[205] After the customer's dispute is decided, the arbitrator must hold a separate expungement-only hearing to consider and decide the expungement request and issue a separate, subsequent award.^[206]

The arbitrator would decide the customer's dispute first and issue an award to minimize any delays in resolving the customer arbitration and any delays in potential recovery that a customer may be awarded. Further, because the customer arbitration may not be as fully developed when an “on the papers” or special proceeding is requested, the arbitrator would conduct a separate expungement-only hearing to develop the factual record and make a fully informed decision on the expungement request, and could request any documentary, testimonial or other evidence it deems relevant to the expungement request.

b. Option One Hearing

If the customer chooses to have a full “Option One” hearing on his or her claim and it closes by award, the arbitrator would be required to consider and decide the expungement request during the customer arbitration and include the decision on the expungement request in the same award as the decision on the customer arbitration.^[207] This process would be the same as deciding an expungement request during a non-simplified customer arbitration that closes by award after a hearing, where the customer's claim and expungement request are addressed during the customer arbitration.

If the customer arbitration closes other than by award or by award without a hearing, the arbitrator would be required to hold a separate expungement-only hearing to consider and decide the expungement request and issue a separate award containing the decision on the expungement request.^[208] The arbitrator would conduct a separate expungement-only hearing to develop the factual record and make a fully informed decision on the expungement request.

FINRA does not believe that it is necessary for a panel from the Special Arbitrator Roster to decide an expungement request if a simplified customer arbitration is decided on the papers, in an Option Two special proceeding, or if the simplified customer arbitration closes other than by award or by award without a hearing. FINRA believes that the public chairpersons who decide simplified arbitrations would be fully capable of making appropriate expungement decisions on the basis of their experience.^[209] In addition, the public chairperson would be required to evidence successful completion of, and agreement with, the enhanced expungement training provided by DRS prior to considering and deciding the expungement request and, therefore, would have the same enhanced expungement training as the arbitrators on the Special Arbitrator Roster.

If the Commission approves the proposed rule change, FINRA notes, however, that it will continue to monitor expungement requests and decisions in simplified arbitrations to determine if such requests should be decided by the Special Arbitrator Roster.

3. Customer Notification of Expungement Hearings During Simplified Arbitrations

The Director would notify all customers from the simplified arbitration of the separate expungement-only hearing.^[210] The Director's notice would serve as a reminder of the expungement request and would provide the customers with timely notice of the expungement hearing so that the customers and their representatives may plan and prepare to attend and participate if they choose.

H. Non-Substantive Changes

FINRA is also proposing to amend the Codes to make non-substantive, technical changes to the rules impacted by the proposed rule change. For example, the proposed rule change would require the renumbering of paragraphs and the updating of cross-references in the rules impacted by the proposed rule change. In addition, the title of Part VIII of the Customer Code would be amended to add a reference to “Expungement Proceedings.” Similarly, the title of Part VIII of the Industry Code would be amended to add a reference to “Expungement Proceedings” and “Promissory Note Proceedings.” FINRA believes the proposed changes to the titles would more accurately reflect the contents of Part VIII of the Customer and Industry Codes. FINRA is also proposing to re-number current FINRA Rule 13806 (Promissory Note Proceedings) as new FINRA Rule 13807, without substantive change to the current rule language and to amend FINRA Rule 13214 to change the cross references from Rules 13806(d)(1) and 13806(f) to Rules 13807(d)(1) and 13807(f), respectively. Finally, FINRA would also amend FINRA Rule 13600 to change the cross reference from Rule 13806(e)(1) to Rule 13807(e)(1).

If the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice following Commission approval.

2. Statutory Basis

FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,^[211] which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest.

The proposed rule change seeks to balance the interests of securities regulators in having accurate and relevant information to fulfill their regulatory responsibilities; the interests of investors in having access to accurate and meaningful information about associated persons with whom they may entrust their money; the interests of member firms in having accurate information for use in making informed employment decisions; and the interests of the brokerage community in having a fair process to address inaccurate customer dispute information. The proposed rule change will help ensure that the expungement process works as intended—as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules.

The current expungement framework has limitations that can make deciding straight-in requests more challenging, particularly if the customer or customer's representative does not attend and participate in the hearing. By having three specially trained and randomly selected arbitrators available to ask questions, request evidence and generally to serve as fact-finders in the absence of customer input, the proposed rule change will help ensure that a more complete factual record is created to support the arbitrators' expungement decision. In addition, the proposed rule change will specifically authorize all panels that consider expungement requests to request any documentary, ( printed page 50189) testimonial or other evidence that they deem relevant to the expungement request from a member firm or associated person.

To further support the development of a more complete factual record, the proposed rule change will require that the associated person appear at the expungement hearing in person or by video conference. The proposed rule change will also codify the Guidance as rules that arbitrators and parties must follow and facilitate the attendance and participation of customers in all expungement hearings, and by state securities regulators, through an authorized representative, in expungement hearings in straight-in requests. If they attend and participate, customer and authorized representative attendance and participation will provide arbitrators with additional insight to make more informed decisions on expungement requests. In the absence of such input, however, the proposal will clarify that a customer or authorized representative's decision not to attend or participate in the expungement hearing is not evidence that is material to the determination of whether expungement is appropriate.

The proposed rule change will also maintain the integrity of the information in the CRD system by imposing strict time limits on the filing of straight-in requests. The DRS arbitration forum will be denied if the expungement request is made more than two years after the close of the customer arbitration or civil litigation associated with the customer dispute information or three years after the date the customer complaint was initially reported in the CRD system. These changes will ensure that expungement requests are timely filed and will curtail the bundling of multiple aged, and often unrelated, disclosures in a single arbitration.

The proposed rule change will also protect investors and the public interest by requiring arbitrators to unanimously agree to issue an award containing expungement relief, to make their finding for expungement relief based on one or more of three grounds specified in the proposed rule change, to identify the specific grounds on which that relief is based and to provide a more detailed explanation in the award of those grounds.

In addition, the proposed rule change will foreclose a practice that has emerged in the existing expungement process where parties seek expungement after a prior denial by a court or arbitration panel of a request to expunge the same customer dispute information, or where parties withdraw or do not pursue an expungement request and then make another request for expungement of the same customer dispute information before a potentially more favorable fact finder. The proposed rule change imposes procedures and requirements around when and how a party may request expungement, and expressly provides that omission of certain of the requirements will make the expungement request deficient. Further, the proposed rule change provides the Director with express authority to deny the DRS arbitration forum if an expungement request is ineligible for arbitration under the proposed rules or if a request to expunge customer dispute information is not filed under, or considered in accordance with, the requirements of the proposed rules. Thus, FINRA believes the proposed rule change will add tighter controls, additional safeguards and more transparency to the expungement process.

In addition, the process of requesting expungement during a simplified arbitration will be codified to help ensure that customers are aware they can attend and participate in the expungement hearing and how an expungement request will affect (and not affect) their arbitration claims. By expressly incorporating the practice of requesting expungement during simplified proceedings, the proposed amendments add consistency and transparency to the rules and provide more guidance to the arbitrators and the parties requesting expungement.

For these reasons, the proposed rule change represents a significant step towards addressing concerns with the current expungement framework. FINRA believes that these changes will help to maintain the accuracy and integrity of the information in the CRD system and BrokerCheck, while also protecting associated persons from the publication of inaccurate information about them.

B. Self-Regulatory Organization's Statement on Burden on Competition

FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

Economic Impact Assessment

FINRA has undertaken an economic impact assessment to analyze the regulatory need for the proposed rule change, its potential economic impacts, including anticipated costs, benefits and distributional and competitive effects, relative to the current baseline, and the alternatives FINRA considered in assessing how best to meet FINRA's regulatory objectives.

1. Regulatory Need

The proposed rule change would address concerns relating to the expungement process that are not consistent with the regulatory intent to permit expungement in limited circumstances in accordance with the narrow standards in FINRA rules. The concerns include the timing of expungement requests, the resulting impact on customer attendance and participation in expungement hearings, and the ultimate impact on expungement decisions made when customers do not attend or participate and the panel receives information only from the associated person requesting expungement. The concerns also include the selection of arbitrators to hear straight-in requests when the associated person files a statement of claim against a member firm whose interest in expungement might be aligned with the associated person, and requests to expunge the same customer dispute information in multiple proceedings. The proposed rule change would also codify and expand upon the provisions of the Guidance to help ensure that arbitrators and parties are adhering to these procedures for all expungement requests.

2. Economic Baseline

The economic baseline for the proposed rule change includes the current provisions under the Codes that address the process for parties to seek expungement relief. The economic baseline includes the recent amendments to the Codes to apply minimum fees to expungement requests.^[212] In addition, because arbitrators are generally believed to be adhering to the best practices and recommendations that are a part of the Guidance, the economic baseline also includes the Guidance.^[213] The proposed rule change is expected to affect associated persons and other parties to expungement requests including member firms, customers, state securities regulators, and arbitrators. The proposed rule change is also expected to affect users of customer dispute information contained in the CRD system and displayed through BrokerCheck.^[214]

The customer dispute information contained in the CRD system is submitted by registered securities firms in response to questions on the uniform registration forms.^[215] The customer dispute information must be reported regardless of the merit of the allegations. FINRA makes specific CRD information disclosed by firms publicly available through BrokerCheck.^[216]

The information in BrokerCheck can be valuable to current and prospective customers to learn about the conduct of associated persons.^[217] Current and prospective customers may not select or remain engaged with an associated person or a member firm that employs an associated person with a record of customer disputes. Similarly, member firms and other companies in the financial services industry may use the information when making employment decisions. In this manner, the customer dispute information contained in the CRD system (and displayed through BrokerCheck) may positively or negatively affect the business and professional opportunities of associated persons. Where the information is reliable, it also provides for customer protections and information useful for member firms.^[218]

A negative impact on the business and professional opportunities of associated persons may be appropriate and consistent with investor protection, such as when the customer dispute information has merit. A negative impact may be inappropriate, however, if, for example, the customer dispute information is factually impossible, clearly erroneous or false, or the associated person was not involved in the alleged misconduct. Regardless of the merit, associated persons have an incentive to remove customer dispute information from the CRD system and its public display through BrokerCheck.

An associated person, or a party on-behalf-of an unnamed person, typically begins the process to remove customer dispute information from the CRD system by filing an expungement request in the DRS arbitration forum. During the sample period (January 2016 through December 2021), FINRA is able to identify requests to expunge 11,619 customer dispute information disclosures in the DRS arbitration forum.^[219] More than one customer dispute information disclosure may be sought to be expunged in a single arbitration, and multiple expungement requests may relate to the same arbitration, civil litigation, or complaint if the dispute relates to more than one associated person.

The 11,619 customer dispute information disclosures consist of 5,143 disclosures (44 percent) that were sought to be expunged during a customer arbitration, and 6,476 disclosures (56 percent) that were sought to be expunged in a straight-in request.^[220] The 5,143 disclosures sought to be expunged during a customer arbitration include 4,714 sought to be expunged during a non-simplified customer arbitration and 429 sought to be expunged during a simplified customer arbitration. The associated person was a named party for 2,322 of the 5,143 disclosures (45 percent), and an unnamed party for 2,821 of the 5,143 disclosures (55 percent). The 6,476 customer dispute information disclosures sought to be expunged in a straight-in request include 116 disclosures where the associated person named the customer as a respondent.

Associated persons often file a straight-in request long after the close of the customer arbitration or civil litigation or the initial reporting of the customer complaint to the CRD system. For example, approximately three-fifths of customer dispute information disclosures that were sought to be expunged in straight-in requests were filed more than six years after the close of a customer arbitration or the initial reporting of the customer complaint.^[221]

As of December 2021, 10,156 of the 11,619 customer dispute information disclosures were sought to be expunged in an arbitration that closed.^[222] The 10,156 disclosures consist of 4,346 disclosures (43 percent) sought to be expunged during a customer arbitration and 5,810 disclosures (57 percent) sought to be expunged in a straight-in request. A panel made a decision in arbitrations relating to 6,997 of the 10,156 disclosures in arbitrations that closed and made no decision in arbitrations relating to the remaining 3,159 disclosures. A single arbitrator made a decision in arbitrations relating to 5,311 of the 6,997 disclosures, and a (two- or) three-person panel made a decision in arbitrations relating to the remaining 1,686 disclosures. For the customer arbitrations, the decision by a panel may relate to the arbitration, an expungement request, or both. For the straight-in requests, the decision would relate to the expungement request only. In arbitrations where no decision on the merits of the customer case or an expungement request was made, the requests were either not eligible, withdrawn, or otherwise not pursued by the associated person or party that filed the request.

Overall, 5,443 of the customer dispute information disclosures sought to be expunged resulted in a panel issuing an award containing expungement relief. The 5,443 disclosures reflect 54 percent of the 10,156 disclosures sought to be expunged in arbitrations that closed, and 78 percent of the 6,997 disclosures sought to be expunged in arbitrations where a panel made a decision.^[223] The percentage of expungement requests that are awarded is higher when the panel receives information only from the associated person or other party requesting expungement. The panel is likely to receive information only from the party requesting expungement when (1) the customer arbitration is resolved without a hearing on the merits ( e.g., settles), or (2) an associated person files a straight-in request against a member firm. In both circumstances, the customer has little incentive to attend or participate in an expungement hearing and, in the experience of FINRA staff, generally does not.

Among the 6,997 disclosures sought to be expunged in arbitrations where a panel made a decision, 1,632 disclosures were sought to be expunged during a non-simplified or simplified customer arbitration, and 5,365 disclosures were sought to be expunged in a straight-in request. A panel awarded expungement for 943 of the 1,632 disclosures (58 percent) sought to be expunged during a customer arbitration. This includes 267 of the 632 disclosures (42 percent) sought to be expunged during a customer arbitration that resolved after a hearing on the merits, and 676 of the 1,000 disclosures (68 percent) sought to be expunged during a customer arbitration not resolved after a hearing on the merits. A panel awarded expungement for 4,500 of the 5,365 disclosures sought to be expunged in a straight-in request (84 percent).

In general, whether an associated person obtains an award containing expungement relief does not appear to be significantly impacted by the number of arbitrators deciding the request. For example, among the 1,632 disclosures sought to be expunged during a non-simplified or simplified customer arbitration, a similar percentage of requests were awarded by a one-person panel (279 of 490 disclosures, or 57 percent) as were awarded by a three-person panel (664 of 1,142 disclosures, or 58 percent). In addition, among the 5,365 disclosures sought to be expunged in straight-in requests, a similar percentage of requests were awarded by a one-person panel (4,035 of 4,821 disclosures, or 84 percent) as were awarded by a three-person panel (465 of 544 disclosures, or 85 percent).

Requests to expunge older customer dispute information also are awarded at a similar rate to requests to expunge more recent customer dispute information. FINRA measures the age of customer dispute information from either the close of the customer arbitration or civil litigation, or, if no customer arbitration or civil litigation, from the initial reporting of the customer complaint to the CRD system ( i.e., time limit start date). Among the 5,365 customer dispute information disclosures sought to be expunged in straight-in requests, a similar percentage resulted in an award that were filed less than six years from the time limit start date (1,673 of 1,984 disclosures, or 84 percent) as were filed more than six years from the time limit start date (2,827 of 3,381 disclosures, or 84 percent).

Factors other than, or in combination with, the number of arbitrators deciding the expungement request or the timing of the expungement request, however, may affect whether an associated person receives an award containing expungement relief. These factors include the merits of the request, the attendance and participation by customers or the availability of documents or information relating to the dispute, and the potential influence of associated persons and member firms on the selection of the panel who decides the request.

As stated above, FINRA will expunge customer dispute information from the CRD system only pursuant to a court order. If the panel awards expungement, then the firm or associated person must confirm the arbitration award in a court of competent jurisdiction and serve the confirmed award on FINRA.^[224] As of December 2021, FINRA had removed 4,717 customer dispute information disclosures from the CRD system from the possible 5,443 disclosures (87 percent) for which a panel issued an award containing expungement relief. Firms or associated persons may have not yet sought or obtained a court order for the remaining disputes. There also may be instances where expungement was sought and awarded by a panel, but a court order was never obtained.

During the sample period, approximately one-third of the 4,717 customer dispute information disclosures (1,447, or 31 percent) that were expunged were submitted to the CRD system. The 1,447 customer dispute information disclosures reflect five percent of the total number of customer dispute information disclosures submitted to the CRD system during the sample period (approximately 31,900). The remaining 3,270 customer dispute information disclosures were submitted to the CRD system prior to the sample period. The number of customer dispute information disclosures expunged during the sample period that were submitted to the CRD system prior to 2016 suggests that associated persons may yet still expunge customer dispute information disclosures submitted to the CRD system during the sample period. The five percent of expunged customer dispute information disclosures should therefore be considered a lower bound for the share of customer dispute information disclosures submitted during the sample period that may ultimately be expunged.

An associated person may seek a court order directing expungement of customer dispute information without first seeking expungement through arbitration (“direct-to-court expungement cases”). During the sample period, associated persons sought expungement of 194 customer dispute information disclosures in direct-to-court expungement cases, or less than 2 percent of the customer dispute information disclosures that were sought to be expunged in the DRS arbitration forum. As of December 2021, court proceedings had concluded for 173 of those disclosures and proceedings remained ongoing for 21 disclosures. One hundred seven of the 173 disclosures (62 percent) were ordered expunged by a court and 66 disclosures (38 percent) were not ordered to be expunged.

3. Economic Impact

A. Overview

The proposed rule change would codify the best practices described in the Guidance.^[225] Codifying the best practices in the Guidance should clarify among parties how the practices should be applied, including what is permitted during the expungement hearing and the responsibilities of the parties and the panel when expungement is requested.^[226] In addition, parties may incur fewer costs from the codification of the practices, including the costs from actions or decisions ( e.g., requesting expungement of customer dispute information that was previously denied in another arbitration or court) that would be denied by an arbitration panel pursuant to the Guidance. Based on FINRA staff observations, arbitrators are generally believed to be adhering to these best practices and, therefore, codifying them should not result in new material economic impacts. To the extent that some arbitrators currently do not adhere to these best practices, codifying them should increase the consistency of the forum and may impact associated persons, customers, and member firms.

The proposed rule change would also introduce other changes to the Codes that expand upon or that are not a part of the Guidance. The proposed rule change would restrict when an associated person is permitted to request expungement in the DRS arbitration forum. In general, the proposed rule change would also require a panel from a customer arbitration who decides the underlying customer dispute or a panel from the Special Arbitrator Roster to decide an ( printed page 50192) expungement request. Three-person arbitration panels would also be required to unanimously agree to issuing an award containing expungement relief. Finally, the proposed rule change would address the participation by associated persons, customers, and state securities regulators in expungement hearings. These changes may result in new material economic benefits and costs to associated persons, customers, and member firms. FINRA discusses these impacts below and quantifies them when doing so is feasible and informative.

B. Expungement Requests During Customer Arbitrations

The proposed rule change would set forth requirements for expungement requests made during customer arbitrations. The proposed rule change would establish different requirements for non-simplified customer arbitrations and simplified customer arbitrations, and for associated persons named or unnamed to a (non-simplified or simplified) customer arbitration.

i. Expungement Requests by Named Associated Persons During Non-Simplified Customer Arbitrations

The proposed rule change would require an associated person named in a non-simplified customer arbitration to request expungement during the customer arbitration of the customer dispute information in the CRD system that is associated with the customer's statement of claim.^[227] During the sample period, associated persons named in a non-simplified customer arbitration sought to expunge 1,622 of the 4,346 disclosures that associated persons sought to expunge in a customer arbitration that closed. Otherwise, the associated person would forfeit the opportunity to seek expungement of the same customer dispute information in any subsequent proceeding. The panel from a non-simplified customer arbitration would decide the request if the arbitration closes by award after a hearing.^[228]

The proposed rule change would help ensure that, if possible, the panel that decides a non-simplified customer arbitration, with input from all parties and access to all evidence, testimony and documents, would also decide an expungement request relating to the same underlying dispute. These arbitrators or panels would be best situated to decide the related issue of expungement, and thereby help ensure that expungement awards and the customer dispute information contained in the CRD system reflect the conduct of associated persons.

The proposed rule change would impose time limits on when an expungement request can be filed during a non-simplified customer arbitration.^[229] The proposed time limits may increase the ability of customers to address the expungement request during the customer arbitration. The proposed time limits, however, may cause a named associated person to lose the ability to assess the additional information that arises during a customer arbitration within sixty days of the hearing on the merits. In this case, the associated person must either incur the costs of filing a request for expungement based on potentially more limited information about whether the request will be successful or lose their ability to seek expungement in the DRS arbitration forum. Consequently, associated persons may incur costs to preserve their ability to request expungement in the DRS arbitration forum.^[230]

ii. Expungement Requests During a Non-Simplified Customer Arbitration That Closes Other Than by Award or by Award Without a Hearing

As described above, during the sample period, associated persons named in a non-simplified customer arbitration sought to expunge 1,622 of the 4,346 disclosures that associated persons sought to expunge in a customer arbitration that closed. The 1,622 disclosures include 1,285 disclosures that were sought to be expunged in a non-simplified customer arbitration that closed other than by award or by award without a hearing. Associated persons who request expungement during a non-simplified customer arbitration (either as a named party or as an unnamed party that consents to an on-behalf-of request) that closes other than by award or by award without a hearing (and would not have their expungement request decided as part of the customer arbitration) would incur additional costs to file and resolve a straight-in request ( e.g., legal fees).^[231] Associated persons would also incur a delay in receiving a decision on the request. The member firm with which the associated person was associated at the time the customer dispute arose would also incur the legal and forum fees corresponding to the straight-in request.^[232]

The costs to file and resolve a straight-in request following the conclusion of the customer arbitration would be imposed by the proposed rule change if the requests would have otherwise been decided as part of the non-simplified customer arbitration. The costs would not be imposed by the proposed rule change, however, if associated persons would have filed a straight-in request after the close of the non-simplified customer arbitration regardless of the proposed restrictions.

The additional costs for an associated person to file and resolve a straight-in request after the close of a non-simplified customer arbitration (that closes other than by award or by award without a hearing) may reduce the likelihood that parties settle a customer arbitration or the amount for which parties settle. For example, associated persons may factor the cost to resolve a separate straight-in request into the decision to settle or arbitrate. In addition, even if the parties settle the dispute, associated persons may consider the cost to file and resolve a separate straight-in request when determining the amount at which they are willing to settle. The customers to an arbitration which does not settle may incur additional costs to instead arbitrate the claim.^[233]

iii. Expungement Requests by Unnamed Persons in Non-Simplified Customer Arbitrations and by Named and Unnamed Persons in Simplified Customer Arbitrations

The proposed rule change would not require an unnamed person in a non-simplified customer arbitration, an associated person named in a simplified customer arbitration, or an unnamed person in a simplified customer arbitration to request expungement of the customer dispute information during the arbitration.^[234] Instead, like today, these associated persons may wait until after the conclusion of the arbitration to request expungement as a straight-in request.^[235] During the sample period, unnamed persons in non-simplified customer arbitrations, associated persons named in simplified customer arbitrations, and unnamed persons in simplified customer arbitrations sought to expunge 2,724 of the 4,346 disclosures that associated persons sought to expunge in a customer arbitration that closed.

The option to wait until after the customer arbitration has concluded to request expungement is not a new benefit created by the proposed rule change, but is instead currently permitted under the Codes. FINRA believes that an unnamed person in a non-simplified customer arbitration, an associated person named to a simplified customer arbitration, or an unnamed person in a simplified customer arbitration should have the option to seek expungement as a straight-in request and have their request decided by a panel from the Special Arbitrator Roster.

Associated persons (or parties on behalf of unnamed persons) who are not required and choose not to request expungement during a customer arbitration may incur additional costs to file and resolve a straight-in request. The member firms with which the associated persons were associated at the time the customer dispute arose would also incur additional costs. Any incremental costs from not filing an expungement request during a customer arbitration, however, are not imposed by the proposed rule change. Instead, they are borne at the discretion of the parties who make the determination of when to request expungement, and are similar to the costs they incur under the Codes today.

The proposed time limits to request expungement during a customer arbitration may impose costs on associated persons (or parties on behalf of unnamed persons) who are not required but choose to request expungement.^[236] Associated persons who are not able to have their expungement request decided during a customer arbitration ( e.g., because the case settles) and instead file a straight-in request as a result of the proposed time limits would incur a delay in receiving a decision on the expungement request. Similar to today, associated persons would incur the legal and forum fees associated with the request, and the member firms with which the associated persons were associated at the time the customer dispute arose would also incur legal and forum fees associated with the straight-in request.

C. Time Limits for Filing Straight-In Requests

For customer dispute information reported to the CRD system after the effective date of the proposed rule change, the proposed rule change would require an associated person to file a straight-in request within two years of a customer arbitration or civil litigation closing, or, if there is no customer arbitration or civil litigation, within three years from the initial reporting of the customer complaint to the CRD system.^[237]

The proposed time limits may better facilitate customer attendance and participation in the proceedings and the likelihood that the panel from the Special Arbitrator Roster receives testimony and other evidence relevant to deciding an expungement request. In addition, the time limits would help ensure that the expungement hearing is held close in time to the customer arbitration or civil litigation, or the events that led to the customer dispute information disclosure, and foreclose the option of an associated person to choose the timing of a straight-in request to potentially reduce the likelihood of customer attendance and participation. Similar to the other amendments proposed herein, an increase in customer attendance and participation may provide a panel from the Special Arbitrator Roster with additional information to decide an expungement request and help ensure the accuracy of the customer dispute information contained in the CRD system and displayed through BrokerCheck.

The proposed time limits, however, may constrain an associated person from filing a straight-in request. Associated persons who would otherwise delay the filing of a straight-in request may incur additional costs to file a straight-in request within the required time limits. Similar to the costs which may result from the proposed time limits to request expungement during a customer arbitration, associated persons who become constrained to file a straight-in request within the proposed time limits may incur indirect costs (as described above).

The proposed time limits to file a straight-in request may also constrain an associated person from seeking expungement of multiple customer dispute information disclosures in the same straight-in request ( i.e., in the same arbitration). Associated persons who may become constrained include those waiting for additional customers to make complaints or for a customer arbitration or civil litigation to close. The disclosures associated persons may want to include in the same straight-in request may relate to the provision of similar investment advice or services or market events resulting in multiple customer losses.

Associated persons who become constrained from seeking to expunge multiple customer dispute information disclosures in the same straight-in request because of the proposed time limits and who still seek expungement of all customer dispute information disclosures would be required to file the requests in more than one arbitration. These associated persons would incur additional legal and forum fees for each additional arbitration. The member firm ( printed page 50194) at which the individual was associated at the time the customer disputes arose would also incur additional legal and forum fees for each additional arbitration. Associated persons who seek to expunge customer dispute information disclosures from a longer time period may be more likely to become constrained and incur these additional costs than associated persons who seek to expunge customer dispute information disclosures from a shorter time period.

Associated persons who are waiting until the close of a customer arbitration or civil litigation to seek to expunge multiple customer dispute information disclosures in the same arbitration may consider the anticipated costs to file an additional straight-in request when offering a settlement amount to customers. Associated persons could offer a higher settlement amount reflective of these anticipated costs, and customers may similarly seek to negotiate a higher settlement amount.^[238]

Finally, the three-year time limit may increase the likelihood that an associated person seeks expungement of a customer complaint only for the customer then to file a related claim in arbitration. If the associated person were to seek expungement of a customer dispute information disclosure associated with the subsequent customer arbitration, either during the customer arbitration or as a straight-in request, then the associated person would incur the additional costs of the second request. If the associated person seeks expungement as a straight-in request, then the member firm with which the associated person was associated at the time the customer dispute arose would also incur costs associated with the request.

D. Time Limits for Filing Straight-In Requests—Quantitative Description

As discussed as part of the Economic Baseline, 6,476 customer dispute information disclosures were sought to be expunged in straight-in requests during the sample period. The following estimates demonstrate that for the majority of these straight-in requests, the request would not have been permitted under the proposed time limits and associated persons would not have been able to include more than one customer dispute information disclosure in the same straight-in request. The estimates, however, do not account for the potential change in the behavior of associated persons—associated persons would have incentive under the proposed amendments to file the straight-in requests within the proposed time limits or otherwise lose the ability to file a request in the forum.^[239]

Among the 6,476 customer dispute information disclosures that associated persons sought to expunge in straight-in requests, 2,135 of the disclosures related to a previous (non-simplified or simplified) customer arbitration (of the same underlying dispute). Six-hundred ten of the disclosures (29 percent) were sought to be expunged in straight-in requests filed within the two-year time limit and would have been permitted under the proposed rule change. The remaining 4,341 of the 6,476 disclosures did not relate to a previous (non-simplified or simplified) customer arbitration (of the same underlying dispute). Seven-hundred ninety-eight of the disclosures (18 percent) were sought to be expunged in straight-in requests within three years from the initial reporting of the disclosure to the CRD system and would have been permitted under the proposed rule change.

As discussed above, the expungement of more than one customer dispute information disclosure can be sought in a single arbitration, and the proposed time limits may limit the ability of an associated person to seek expungement of multiple customer dispute information disclosures in the same straight-in request. The 6,476 customer dispute information disclosures sought to be expunged in straight-in requests were made in 3,177 arbitrations. Associated persons included more than one customer dispute information disclosure in 1,384 of the 3,177 straight-in requests (44 percent). In total, associated persons sought the expungement of 4,683 customer dispute information disclosures (72 percent of the 6,476 customer dispute disclosures) in the 1,384 straight-in requests.

Under the proposed time limits, associated persons would not have been able to include all of the customer dispute information disclosures in at least 614 of the 1,384 straight-in requests (44 percent). In 556 of the 614 straight-in requests (91 percent), the associated person included at least one customer dispute information disclosure that was six years or longer from its respective time limit start date. Also, in 374 of the 614 straight-in requests (61 percent), the associated person would not have been able to include in the same straight-in request one or more customer dispute information disclosures that related to a customer arbitration.

E. Arbitrators or Panels Deciding Expungement Requests

The proposed rule change would require that the panel from a non-simplified customer arbitration decide expungement requests during the arbitration if the arbitration closes by award after a hearing.^[240] In addition, the proposed rule change would require the arbitrator from a simplified customer arbitration to decide an expungement request if it is requested—at a full hearing, in a separate expungement-only hearing after the simplified arbitration closes if the arbitration is decided “on the papers,” or in a special proceeding.^[241] The proposed rule change would also require that a randomly selected three-person arbitration panel from the Special Arbitrator Roster decide straight-in requests.^[242] Finally, the proposed rule change would require that a three-person arbitration panel unanimously agree to issue an award containing expungement relief.^[243]

The proposed rule change may place a panel in a better position to determine whether to award expungement of customer dispute information, and thereby help ensure the accuracy of the customer dispute information contained in the CRD system. In general, the panel that decides a request would either hear the full merits of the customer arbitration or have additional training and qualifications when they may receive information only from the party requesting expungement. Panels from the Special Arbitrator Roster would also be able to request any evidence that they deem relevant from the associated person and member firm at which the associated person was associated at the time the customer dispute arose.

As discussed above, straight-in requests where customers typically do not attend or participate in the expungement hearing often lack appreciable opposition. A panel from the Special Arbitrator Roster, with three arbitrators to ask questions, request evidence, and serve generally as fact finders in the absence of customer input, may help ensure that a complete factual record is created to support a ( printed page 50195) decision and the decision reflects the merits of the request.

The proposed rule change would also reduce the potential influence of associated persons and member firms on the selection of the panel that decides a straight-in request. First, parties to the straight-in request would not be permitted to strike or rank any arbitrators randomly selected to create a panel from the Special Arbitrator Roster, thereby limiting the ability of an associated person and member firm with which the associated person was associated at the time the customer dispute arose to together select arbitrators who are more likely to award expungement. To the extent that the associated person and the member firm's interests are aligned and both seek to increase the likelihood that an award containing expungement relief is issued, they would together be expected to select arbitrators who may be more likely to award expungement.^[244]

Second, an associated person would not be permitted to withdraw a request and seek expungement of the same customer dispute information in a subsequent arbitration.^[245] Associated persons may exercise this option if they believe that they have a higher probability of obtaining an expungement award with a different arbitrator or panel in another arbitration, and in particular if the associated person files a straight-in request against the member firm with which the individual was associated at the time the customer dispute arose.

Among the expungement requests during the sample period, FINRA has identified 282 attempts to expunge a previously withdrawn or denied request to expunge.^[246] Both the initial request and the subsequent request were made during the sample period. Additional subsequent expungement requests may have been filed during the sample period if the initial expungement request was made prior to the sample period ( i.e., before January 2016). These 282 attempts can therefore be considered a lower bound for the number of these requests during the sample period.

Under the proposed rule change, the grounds under which a panel may award expungement would not change.^[247] The proposed rule change, however, would likely increase the number of expungement requests decided by a three-person panel and would require that the panel decide unanimously whether to issue an award containing expungement relief. FINRA expects that the unanimity requirement would tend to reduce the number of awards containing expungement relief with less or less certain merit.

F. Arbitrators or Panels Deciding Expungement Requests—Quantitative Description

As discussed as part of the Economic Baseline, 10,156 of the 11,619 customer dispute information disclosures sought to be expunged during the sample period were filed in an arbitration that closed. Among the 10,156 disclosures, 9,030 (89 percent) would have required a panel from the Special Arbitrator Roster. The 9,030 disclosures include 5,088 disclosures sought to be expunged during a non-simplified customer arbitration that closed by award without a hearing or other than by award, and 3,942 sought to be expunged in a straight-in request that did not relate to a previous (non-simplified or simplified) customer arbitration.

A panel from a (non-simplified or simplified) customer arbitration would have been required to make a decision on the requests to expunge 1,025 of the 10,156 customer dispute information disclosures (10 percent). The 1,025 disclosures include 499 disclosures that were requested to be expunged during a non-simplified customer arbitration that closed by award after a hearing, 400 requested to be expunged during a simplified customer arbitration, and 126 requested to be expunged in a straight-in request to expunge customer dispute information arising from a previous non-simplified customer arbitration that closed by award after a hearing.

Finally, a panel from the Special Arbitrator Roster, or an arbitrator from a simplified customer arbitration, would have been required to make the decision with respect to the remaining 101 disclosures that associated persons sought to expunge in a straight-in request and that related to customer dispute information arising from a previous simplified customer arbitration. The panel that would have decided the request is dependent on whether an associated person, or a party on-behalf-of an associated person, would have requested expungement during the simplified arbitration.

A three-person panel made expungement decisions in 1,051 customer or industry arbitrations. The panel decision was unanimous in 1,030 of the 1,051 arbitrations (98 percent), but not unanimous in 21 arbitrations (2 percent). In 11 of the 21 arbitrations, or one percent of the 1,051 arbitrations, one of the three arbitrators opposed an expungement decision awarding expungement. These 11 awards would not have been permitted under the proposed rule change. Since unanimous agreement is not currently required, however, current data on unanimous agreement may not reflect the extent to which unanimity would occur once it is required. The extent to which decisions may differ under the proposed rule change is therefore not known.

G. Attendance and Participation in Expungement Hearings

As discussed above, the proposed rule change may facilitate customer attendance and participation by restricting when a named associated person, or a party on-behalf-of an unnamed person, may request expungement. Other proposed amendments may facilitate the attendance and participation of customers or authorized representatives of states securities regulators in expungement hearings. Attendance and participation by customers or ( printed page 50196) authorized representatives may increase the likelihood that a panel reviews a more complete factual record when deciding a request, and ultimately help ensure the accuracy of the customer dispute information contained in the CRD system.

The proposed rule change would provide customers the option to attend and participate in an expungement hearing using whichever method is convenient for them ( i.e., by telephone, by video conference or in person).^[248] The proposed rule change would also codify elements of the Guidance that require associated persons to notify a customer of a straight-in request,^[249] and for the panel to permit the customer to testify, cross-examine the associated person and other witnesses, present evidence at the hearing and make opening and closing arguments.^[250]

An authorized representative of state securities regulators would similarly be permitted to attend and participate in prehearing conferences and expungement hearings in straight-in requests.^[251] If an authorized representative presents additional information at the expungement hearing, including information that may not otherwise be available, the panel may receive a more complete factual record on which to base their decision. The magnitude of these effects would increase with the likelihood the authorized representative attends, participates and presents new evidence, such as when concerns arise regarding the merits of an expungement request.

Customers and authorized representatives of state securities regulators may incur costs to attend and participate in the expungement hearings. These costs, however, would be optional and at their own discretion. Associated persons may factor in the potential for customer and state securities regulator attendance and participation in a straight-in request when deciding whether to settle a non-simplified customer arbitration.^[252]

The proposed rule change would require an associated person (or the party requesting expungement on behalf of an unnamed person) to appear by video conference or in-person at an expungement hearing.^[253] This requirement would help the panel assess the associated person's credibility and allow them to ask questions of an associated person and observe their responses. An associated person would also be permitted to cross-examine and seek information from customers who testify.^[254] This may provide associated persons with the opportunity to substantiate their arguments in support of their expungement request.

Associated persons may incur costs to appear at an expungement hearing. The costs include the time and expense to appear, and other direct and indirect costs ( e.g., opportunity costs) associated with the associated person's appearance. The costs would depend on the method of appearance ( i.e., by video conference or in-person), which, under the proposed rule change, would be determined by the panel. Associated persons who appear in-person would incur the time and expense to travel to and from the hearing location. Associated persons who live further away from the hearing location, or are less able to travel, would incur greater costs to appear in-person. Associated persons who instead appear by video conference would not incur travel costs. These associated persons, however, may perceive that they are less able to provide effective testimony. These perceived costs may be mitigated by the ability of parties to file a motion seeking to appear in-person.

H. Impact on Business and Professional Opportunities

As a result of the proposed rule change, associated persons may determine that the additional costs to seek expungement relief are higher than the anticipated benefits. In addition, although the proposed rule change is intended to help ensure arbitrators award expungement when appropriate as it relates to the merits of the request, the likelihood that an associated person receives an award containing expungement relief may decrease because of the likely increase in the number of three-person panels deciding expungement requests and the requirement that such decisions be unanimous. This may lead associated persons not to seek expungement, including in some instances when expungement is likely to be awarded.

Associated persons who are not able to seek expungement of customer dispute information from the CRD system, or are delayed in doing so, may experience a loss of business and professional opportunities. The loss of business and professional opportunities by one associated person, however, may be the gain of another. Associated persons who may benefit in this regard include those who still determine that the additional costs to seek expungement relief under the proposed rule change is less than the anticipated benefits and continue to seek expungement of customer dispute information, and other associated persons who do not have similar disclosures.

An associated person may seek expungement of customer dispute information in a direct-to-court expungement case. The proposed rule change may result in associated persons seeking expungement in more direct-to-court expungement cases. For some associated persons, the anticipated costs to first go through arbitration under the proposed rule change may be greater than the similar costs to seek expungement in a direct-to-court expungement case. Associated persons who would otherwise first go through arbitration because of the proposed rule change may incur additional costs relative to today to seek expungement relief.

The number of associated persons who would instead seek expungement in a direct-to-court expungement case is dependent not only on the additional costs under the proposed rule change, but the costs an associated person would expect to incur in court to initiate an expungement proceeding. This information is generally not ( printed page 50197) publicly available, and accordingly the potential effect of the proposed rule change on direct-to-court expungement cases is not measured and is uncertain.

I. Other Economic Effects

Finally, the proposed rule change may have other marginal economic effects. First, the prohibition of a subsequent expungement request would decrease the potential inefficient allocation of resources resulting from a subsequent request that would have resulted in the same decision ( i.e., denial) as the first. The resources of the forum allocated to the additional expungement request could instead be used for other claims or requests that were not previously adjudicated or for other purposes.^[255]

Second, the proposed rule change may increase the efficiency of the forum by requiring that a party provide certain information when filing an expungement request. The information includes identification of the customer dispute information that is the subject of the request, and whether expungement of the same customer dispute information was previously requested and, if so, how it was decided. This would increase the efficiency of the forum by enabling FINRA to identify and track a request through the expungement process, and by alerting arbitrators and FINRA to another expungement request of the same customer dispute information. The efficiency of the forum would also increase by requiring an unnamed person to consent to an on-behalf-of expungement request in writing. This would help ensure that an unnamed person is aware of the request and prevent another expungement request by the unnamed person of the same customer dispute information.

In addition, the proposed rule change may affect the value of the customer dispute information to describe the conduct of associated persons. The change in the value of the information depends on the merit of the disclosures that would have otherwise been expunged. The merit of these disclosures also depends on many factors which are difficult to predict. These factors include the incentive of parties to file an expungement request under the proposed rule change, the decisions by the panel to issue an award containing expungement relief dependent on the information that becomes available, and the merit of the customer dispute information that would have otherwise been sought to be expunged. The effect of the proposed rule change on the extent to which the customer dispute information available in the CRD system accurately describes the conduct of associated persons is, therefore, uncertain.

4. Alternatives Considered

Alternatives to the proposed rule change include amendments that were proposed in Regulatory Notice 17-42 and the 2020 Rule Filing.^[256] For example, an alternative to the proposed rule change, which was proposed in the 2020 Rule Filing, could be to limit when a party can file an expungement request during a non-simplified customer arbitration to 30 days before the first scheduled hearing session. Thirty days may reduce the likelihood that an associated person files an expungement request based on more limited information about whether the request would be successful. Thirty days, however, may not provide associated persons adequate time to address any filing deficiencies before the request is served on the other parties. In addition, customers would have less time to consider the request before the first scheduled hearing session.

Another alternative to the proposed rule change could be to include different time limits for an associated person to file a straight-in request. In the Notice, FINRA proposed a one-year time limit for associated persons to file a straight-in request after the close of a customer arbitration or, if no arbitration or civil litigation, after the initial reporting of the customer complaint to the CRD system.^[257] In the 2020 Rule Filing, FINRA proposed a two-year time limit for associated persons to file a straight-in request after the close of a customer case, or, if no arbitration or civil litigation, a six-year time limit for associated persons to file a straight-in request after the initial reporting of the customer complaint.^[258]

In general, shorter (longer) time limits may further facilitate (impede) customer attendance and participation in the proceedings and the likelihood that the panel from the Special Arbitrator Roster receives evidence and testimony from the customer to consider when deciding an expungement request. Shorter (longer) time limits, however, may further (less) constrain an associated person from filing a straight-in request or including more than one expungement request in the same straight-in request.

For example, the percentage of associated persons who would not have been able to include all customer dispute information disclosures in the same straight-in request would be lower if the proposed rule change imposed a six-year rather than three-year time limit on requesting expungement of customer complaints.^[259] As discussed above, FINRA believes that the proposed time limits would facilitate customer attendance and participation while providing associated persons sufficient opportunity to file a straight-in request.

Other alternatives relate to the panel's decision to issue an award containing expungement relief. In the 2020 Rule Filing, FINRA proposed allowing a majority decision by a three-person panel, not a unanimous decision (as proposed herein), to issue an award containing expungement relief.^[260] A majority decision would be consistent with what is required for other three-person panel decisions in customer and industry arbitrations. FINRA determined, however, that a unanimous decision by a three-person panel would better help protect the integrity of the information in the CRD system.

In the Notice, FINRA proposed that a panel find that the customer dispute information has “no investor protection or regulatory value” in order to issue an award containing expungement relief.^[261] This alternative may increase the difficulty for an associated person to receive an expungement award, and may cause associated persons not to seek expungement where expungement is likely (or unlikely) to be awarded. In addition, some commenters to the Notice raised concerns that the standard ( printed page 50198) may, if codified, create confusion among arbitrators and the potential for inconsistent application among different arbitrators and panels. After considering the concerns, FINRA determined not to propose that the panel must find “no investor protection or regulatory value” to issue an award containing expungement relief.

Finally, other alternatives relate to the appearance of parties at expungement hearings. The proposed rule change could have allowed an associated person to appear at an expungement hearing by telephone, as an alternative to appearance in person or by video conference. Although associated persons may incur fewer costs to appear by telephone, FINRA believes appearance by telephone may reduce the ability of arbitrators to assess the credibility of associated persons when deciding an expungement request.

The proposed rule change could have provided a mechanism for an authorized representative of state securities regulators to attend and participate in expungement hearings when expungement is requested during a customer arbitration (simplified or non-simplified). FINRA determined not to propose allowing an authorized representative to attend or participate in a customer arbitration in which expungement is requested because such attendance and participation could delay or disrupt the customer's case and would be less impactful. Unlike many straight-in requests, customer cases are opposed and the panel would have the benefit of hearing the customer's evidence on the merits.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

In December 2017, FINRA published Regulatory Notice 17-42, requesting comment on proposed amendments to the current expungement process.^[262] FINRA received 70 comments in response to the Notice. FINRA responded to these comments in the 2020 Rule Filing, which it filed with the Commission on September 22, 2020.^[263]

The 2020 Rule Filing proposed several significant enhancements to the current expungement process, including:

• establishing time limits within which associated persons may file straight-in requests;
• providing state securities regulators with notification of expungement requests at the time of filing of the requests;
• requiring that all straight-in requests be decided by a three-person panel, randomly selected from a roster of experienced public arbitrators with enhanced expungement training;
• prohibiting parties to straight-in requests from (1) agreeing to fewer than three arbitrators to review their expungement requests, (2) striking any of the selected arbitrators, (3) stipulating to an arbitrator's removal or (4) stipulating to the use of pre-selected arbitrators;
• requiring an associated person named in a customer arbitration to request expungement during the customer arbitration;
• preventing an associated person from getting “two bites at the apple” by conditioning and limiting the ability of a party to a customer arbitration to file an on-behalf-of request and precluding an associated person from requesting expungement of customer dispute information if a panel or a court previously denied a request to expunge the same customer dispute information;
• prohibiting an associated person who withdraws an expungement request from refiling the same request at a later date;
• facilitating customer attendance and participation in straight-in requests by notifying customers of the time, date and place of any prehearing conferences and the expungement hearing, and making clear that customers are entitled to appear with representation at prehearing conferences and the expungement hearing;
• providing customers who seek to attend and participate in straight-in requests with access to all relevant documents filed in the arbitration;
• specifically 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;
• requiring that the associated person requesting expungement appear personally at the expungement hearing; and
• requiring that the panel deciding the expungement request provide enough detail in the award to explain its rationale for including expungement relief in the award.

The Commission ultimately received 19 comments from 13 commenters in connection with the 2020 Rule Filing. The SEC received eight comment letters in response to the initial 2020 Rule Filing.^[264] On December 18, 2020, FINRA responded to the comments and filed Partial Amendment No. 1.^[265] On December 28, 2020, the SEC published a notice and order in the Federal Register to solicit comments on the 2020 Rule Filing and to institute proceedings to determine whether to approve or disapprove the proposed rule change as modified by Partial Amendment No. 1.^[266] The SEC received nine comment letters in response to the Order.^[267] On April 9, 2021 FINRA filed ( printed page 50199) its response to the comments on the Order and Partial Amendment No. 2.^[268] On May 18, 2021, FINRA filed a third response to comments.^[269]

In general, the commenters on the 2020 Rule Filing suggested that the proposed changes to the expungement process would be beneficial. However, most of the commenters recommended alternative approaches or modifications to further protect the information in the CRD system and address the fact that many straight-in requests are unopposed. The commenters' recommendations generally focused on replacing the current expungement process with an administrative process; allowing state securities regulators to participate in expungement hearings in the DRS arbitration forum; embedding an independent advocate into the expungement process in the DRS arbitration forum; requiring that associated persons meet a higher standard to obtain an expungement award; requiring a unanimous decision of the arbitrators to award expungement; providing financial incentives to encourage customer participation in expungement proceedings; shortening the time limits within which associated persons may request expungement; and requiring that the associated person appear at the expungement hearing in person. Some commenters, in contrast, suggested that the proposed time limits were arbitrarily short; that the arbitrators should be required to provide an explanation when denying expungement; or that the arbitrators should not be limited to awarding expungement on the grounds set forth in FINRA Rule 2080(b)(1).

On May 28, 2021, following discussions with SEC staff, FINRA withdrew the 2020 Rule Filing and Partial Amendments Nos. 1 and 2 in order to consider whether modifications to the proposal would be appropriate in response to concerns raised by the commenters and SEC staff.^[270]

While the proposed rule change retains many of the significant enhancements proposed in the 2020 Rule Filing, the proposed rule change makes several key additional changes that would materially mitigate a number of the concerns with the current expungement process identified above and by commenters on the 2020 Rule Filing. These additional enhancements include: (1) providing a mechanism for state securities regulators to attend and participate in expungement hearings in straight-in requests; ^[271] (2) requiring that arbitrators unanimously agree to issue an award containing expungement relief based on one or more grounds specified in the rule; ^[272] (3) shortening the time period for requesting expungement of a customer complaint from six years to three years after the date a customer complaint is initially reported in the CRD system; ^[273] and (4) requiring an associated person who is seeking expungement to appear at the expungement hearing in person or by video conference to further enhance the ability of the arbitrator or panel to assess the credibility of the associated person.^[274] Each of the proposed changes is discussed in detail above under Item II.A.1.II.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:

(A) by order approve or disapprove such proposed rule change, or

(B) institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: ( printed page 50200)

Electronic Comments

• Use the Commission's internet comment form (http://www.sec.gov/​rules/​sro.shtml); or
• Send an email torule-comments@sec.gov. Please include File Number SR-FINRA-2022-024 on the subject line.

Paper Comments

• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2022-024. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website ( http://www.sec.gov/​rules/​sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-FINRA-2022-024 and should be submitted on or before September 6, 2022.