I. Introduction

On July 29, 2022, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) ^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change to amend the FINRA Rule 12000 Series (Code of Arbitration Procedure for Customer Disputes) (“Customer Code”) and the FINRA Rule 13000 Series (Code of Arbitration Procedure for Industry Disputes) (“Industry Code”) (together, “Codes”) to modify the current process relating to the expungement of customer dispute information.^[3]

The proposed rule change, as modified by Amendments Nos. 1 and 2, (hereinafter referred to as the “proposed rule change” unless otherwise specified) would amend the Codes to: (1) set forth requirements on expungement requests (a) filed during an investment-related, customer initiated arbitration (“customer arbitration”) by an associated person, or by a party to the customer arbitration on behalf of an associated person (an “on-behalf-of request”), or (b) filed by an associated person separate from a customer arbitration (“straight-in request”); (2) establish a roster of experienced public arbitrators from which a three-person panel ^[4] would be randomly selected to decide straight-in requests (the “Special Arbitrator Roster”); ^[5] (3) establish procedural requirements for expungement hearings; and (4) codify and update FINRA's Notice to Arbitrators and Parties on Expanded Expungement Guidance (“Guidance”) that arbitrators and parties would be required to follow.^[6] In addition, the proposed rule change would amend the Customer Code to specify procedures for requesting expungement of customer dispute information arising from simplified arbitrations.^[7] The proposed rule change would also amend the Codes to establish requirements for notifying state securities regulators and customers of expungement requests and allow participation of state securities regulators in straight-in requests.^[8]

The proposed rule change was published for comment in the Federal Register on August 15, 2022.^[9] On September 27, 2022, FINRA consented to an extension of the time period in which the Commission must approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change to November 11, 2022.^[10] On November 10, 2022, FINRA responded to the comment letters received in response to the Notice and filed an amendment to the proposed rule change (“Amendment No. 1”).^[11] On November 10, 2022, the Commission published a notice of filing of Amendment No. 1 and an order instituting proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1.^[12] On December 8, 2022, FINRA consented to an extension of the time period in which the Commission must approve or disapprove the proposed rule change to April 12, 2023.^[13] On April 3, 2023 FINRA responded to the comment letters received in response to the Order Instituting Proceedings and filed a second amendment to the proposed rule change (“Amendment No. 2”).^[14] The Commission is publishing this notice to solicit comments on Amendment No. 2 from interested persons and is approving the proposed rule change, as modified by Amendments Nos. 1 and 2, on an accelerated basis.

II. Description of the Proposed Rule Change

Background

Information regarding customer disputes involving associated persons is maintained in the Central Registration Depository (“CRD”). In general, the information in the CRD system is reported by registered broker-dealer firms (“firms” or “member firms”),^[15] associated persons, and regulatory authorities in response to questions on the uniform registration forms.^[16] These ( printed page 24283) forms are used to collect registration information, which includes, among other things, administrative, regulatory, and criminal history, and financial and other information about associated persons, such as investment-related, customer-initiated arbitrations, civil litigations, or customer complaints ( i.e., “customer dispute information”).^[17] Among other things, FINRA makes specific information in the CRD system publicly available through BrokerCheck, including customer dispute information for associated persons who are currently or were formerly registered with FINRA.^[18]

FINRA rules allow broker-dealers and their associated persons to seek expungement of certain customer dispute information from the CRD system and BrokerCheck.^[19] In general, an associated person seeks expungement of customer dispute information through the FINRA arbitration process.^[20] The Customer Code, which comprises the series of rules governing customer arbitrations, governs expungement requests filed by firms or associated persons during customer arbitrations.^[21] In contrast, the Industry Code comprises the series of rules governing arbitrations for disputes between or among industry parties, such as between a broker-dealer and an associated person, including straight-in requests.^[22] As a result, whether an expungement request is governed by the Customer Code or Industry Code will generally depend on whether the request is filed during a customer arbitration or is a straight-in request filed separately from a customer arbitration.^[23]

Both the Customer Code and the Industry Code require arbitrators to hold a recorded hearing regarding, and review materials related to, the appropriateness of expungement of customer dispute information.^[24] According to FINRA, its rules and guidance provide that arbitrators may recommend expungement for only three reasons: (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.^[25] In addition, arbitrators are required to indicate which reason is the basis for a recommendation ( i.e., “factual impossibility, mistake, or falsity”) ^[26] and to provide a brief written explanation of the reasons for recommending expungement.^[27]

Regardless of whether expungement of customer dispute information is sought directly through a court or in arbitration, FINRA Rule 2080 requires a broker-dealer firm or associated person seeking expungement to obtain an order of a court of competent jurisdiction directing such expungement or confirming an award containing expungement.^[28] FINRA will expunge customer dispute information only pursuant to a court order.^[29] If a court directs 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.^[30]

Proposed Rule Change

A. Requests for Expungement Under the Customer Code

FINRA Rule 12805 requires that arbitrators meet certain conditions in order to issue an award containing expungement of customer dispute information under the Customer Code.^[31] The rule generally does not, however, address when and how a request for expungement can be made by an associated person or as an on-behalf-of request during a customer arbitration, including the types of expungement requests that can and cannot be made during a customer arbitration, or when arbitrators must make expungement determinations during the customer arbitration.

The proposed rule change would amend FINRA Rule 12805 to set forth requirements addressing the method and timing for, and required contents of, expungement requests filed during a customer arbitration by an associated person or as an on-behalf-of request, including the types of expungement requests that must (or cannot) be made.^[32] Among other restrictions, proposed Rule 12805 would require that an expungement request made during a customer arbitration involve the same customer dispute information that is associated with the customer's statement of claim.^[33] It would further require an associated person who is a named respondent in a customer arbitration to seek expungement of customer dispute information associated with the arbitration claim during the arbitration proceedings or forfeit the ability to seek to expunge the customer dispute information associated with the customer's statement of claim in any ( printed page 24284) subsequent proceeding.^[34] In addition, the proposed rule would authorize the Director of FINRA Dispute Resolution Services (“Director”) to deny the forum to expungement requests that do not meet, among other things, the proposed method, timing, or content requirements.^[35] In addition, the proposed rule change would also provide guidance on when a panel can rule on an expungement request made in the course of a customer arbitration.^[36] Further, the proposed rule change would prohibit an associated person from: (1) intervening in an ongoing customer arbitration to request expungement ^[37] or (2) filing an expungement request as a new claim against a customer separate from a customer arbitration.^[38]

1. Expungement Requests During a Customer Arbitration

a. Expungement Requests by a Respondent Named in a Customer Arbitration

Currently, an associated person who is named as a respondent in a customer arbitration (“named associated person”) is not required to seek expungement of customer dispute information associated with the arbitration claim during the arbitration proceedings. Rather, the associated person can either request expungement at any time during the customer arbitration or separately from the customer arbitration in a straight-in request.^[39] 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 decide the expungement request and include the decision as part of the customer's award.^[40] If the customer arbitration does not close by award after a hearing ( e.g., the case settles), and the associated person continues to pursue the expungement request, the panel from the customer arbitration will hold an expungement-only hearing to decide the expungement request.^[41]

The proposed rule change would amend FINRA Rule 12805 to modify existing requirements and set forth new requirements for when and how a named associated person would file an expungement request during a customer arbitration.^[42] Under proposed Rule 12805(a)(1)(A), if a named associated person wants to seek expungement of customer dispute information associated with the customer's statement of claim, the named associated person would be required to make the expungement request during the customer arbitration.^[43] As discussed below, these requests would be subject to limitations on how and when the requests may be made.^[44] 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 that customer dispute information in any subsequent proceeding.^[45]

Proposed Rule 12203(b) would authorize the Director 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. 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.^[46]

i. Method and Timing of Requesting Expungement in Customer Arbitration

The proposed rule change would limit how and when expungement requests may be made by a named associated person during the customer arbitration. Under the proposed rule change, if a named associated person requests expungement during the customer arbitration, the request would be required to be included in the answer to the statement of claim or in a separate pleading requesting expungement.^[47] If the request is included in the answer, it must be filed within 45 days of receipt of the customer's statement of claim in accordance with existing requirements under the Codes.^[48] If the named associated person requests expungement in a separate pleading, rather than the answer, the request would be required to be filed no later than 60 days before the first scheduled hearing begins.^[49] FINRA believes these proposed deadlines should provide adequate time for: (1) the named associated person to assess the customer's case, the potential merits of an expungement request, and whether to file the request; and (2) the parties to the customer arbitration to prepare their expungement-related arguments, since the expungement issues will overlap with the issues raised by the customer's claim.^[50] To request expungement after the filing deadline, the named associated person would be required to file a motion requesting an extension, which would be decided by the panel.^[51]

ii. Required Contents of an Expungement Request in Customer Arbitration

The proposed rule change would also set forth content requirements for an expungement request made by a named associated person during a customer arbitration. Under the proposed rule change, a request for expungement by a named associated person in a customer arbitration would be required to include the applicable filing fee under the Customer Code.^[52] 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.^[53] Moreover, the proposed rule change would require the named associated person requesting expungement to explain whether expungement of the same customer dispute information was previously requested and, if so, how that request was decided.^[54] 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.^[55]

b. Expungement Requests by a Party Named in a Customer Arbitration on Behalf of an Unnamed Person

According to FINRA, the Codes do not specifically address on-behalf-of requests.^[56] Currently, a party to a customer arbitration may file an on-behalf-of request for expungement during the customer arbitration. If the party 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., the case settles), either the requesting party or the unnamed person could ask the panel to consider and decide the expungement request before it disbands. Under current practice, in this circumstance the panel from the customer arbitration will hold a hearing regarding the appropriateness of expungement pursuant to FINRA Rule 12805.^[57]

Proposed Rule 12805(a)(2) would codify this practice to permit a party to a customer arbitration to file an on-behalf-of request that seeks to expunge customer dispute information associated with the customer's statement of claim during the customer arbitration (provided the request is eligible for arbitration under proposed Rule 12805).^[58] As with expungement requests made by a named associated person, the proposed rule change would set forth requirements governing how and when an on-behalf-of request may be made, and the contents of such request.

i. Method and Timing of Requesting Expungement on Behalf of an Unnamed Person

To help ensure that an associated person that is the subject of an on-behalf-of request is aware of the request, the proposed rule change would require the unnamed person to consent in writing ^[59] to the on-behalf-of request by signing the Form Requesting Expungement on Behalf of an Unnamed Person (“Form”).^[60] By signing the Form, the unnamed person would be: (1) consenting to the on-behalf-of request; ^[61] (2) agreeing to be bound by the panel's decision on the request; ^[62] and (3) acknowledging their understanding 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.^[63]

The party making the request would also be required to file the request (including the Form) no later than 60 days before the first scheduled hearing.^[64] Under the proposed rule change, filing and serving the on-behalf-of request would obligate the requesting party to represent the unnamed person and the unnamed person's interests and to pursue the request for expungement on behalf of the unnamed person during the customer arbitration.^[65]

ii. Required Contents of an On-Behalf-Of Request and Filing Fee

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.^[66] Thus, the party requesting expungement on behalf of an unnamed person 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 previously requested and, if so, how it ( printed page 24286) was decided.^[67] In addition, 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.^[68]

c. Deciding Expungement Requests during Customer Arbitrations

The proposed rule change would change when a panel is required to decide an expungement request (whether made by a named associated person or on behalf of an unnamed one) made during a customer arbitration. Specifically, when the panel would be required to decide an expungement request would depend on whether or not the customer arbitration closes: (1) by award after a hearing or (2) other than by award or by award without a hearing.

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 pursue the issue of expungement during the hearing, the panel may not decide the request and may deem it withdrawn.^[69] Under these circumstances, the associated person may request expungement again at a later date.^[70]

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, even if the requesting party withdraws or fails to pursue the request (in which case the panel would deny the expungement request with prejudice).^[71]

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., the case 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.^[72] 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.^[73]

The proposed rule change would change this process. If 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 request.^[74] Instead, the associated person could only seek expungement through a straight-in-request under proposed Rule 13805 against the member firm at which the person was associated at the time the customer dispute arose, and a panel from the Special Arbitrator Roster would decide the request.^[75]

2. No Intervening in Customer Arbitrations To Request Expungement

The proposed rule change would provide that if an associated person is not a party to a customer arbitration ( i.e., they are an unnamed person), and no party to the customer arbitration requests expungement on their behalf, the unnamed person would be prohibited from intervening in the customer arbitration to request expungement.^[76] 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 under the Industry Code, and a panel from the Special Arbitrator Roster would decide the request.^[77]

3. No Straight-In Requests Against Customers

Currently, although the practice is relatively rare, associated persons sometimes file expungement requests against customers as new claims, separate from a customer arbitration.^[78] FINRA stated that such requests may unduly delay the resolution of a customer's claim and require a customer to participate in the resolution of the request.^[79] The proposed rule change would prevent an associated person from requiring a customer to participate once the customer's claims have been resolved, by prohibiting the associated person from filing a request for expungement of the customer dispute information as a new claim against a customer separate from the investment-related, customer-initiated arbitration.^[80] 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.^[81]

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

As stated above, the Industry Code comprises the series of rules governing arbitrations for disputes between or among industry parties, such as between a member firm and an associated person. 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 against the member firm with whom the associated person was associated at the time the subject of the request arose under proposed Rule 13805.^[82] In addition, an associated person could request expungement of ( printed page 24287) customer dispute information that was 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; ^[83] or (2) the associated person is the subject of a customer arbitration, but is neither named in the arbitration nor is the subject of an on-behalf-of request, and the customer arbitration closes for any reason.^[84] 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.^[85]

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

a. Applicability

The process for initiating a straight-in-request for expungement of customer dispute information under the Industry Code would be governed, in part, by FINRA Rule 13302. This rule provides, in relevant part, that to initiate an arbitration, a claimant must file with the Director a signed and dated Submission Agreement, and a statement of claim specifying the relevant facts and remedies requested through the DR Party Portal (“Portal”).^[86] Under proposed Rule 13805, an associated person requesting expungement of customer dispute information as a straight-in request under the Industry Code would be required to file a statement of claim, in accordance with the procedures contained in FINRA Rule 13302, against the member firm at which the person was associated at the time the customer dispute arose.^[87] Under the proposed rule change, the Director would be authorized to deny the use of the DRS arbitration forum for the request if this connection is not present.^[88]

b. Required Content of Straight-In Requests

The required content of a straight-in request under the Industry Code would be the same as that required for expungement requests filed under the Customer Code.^[89] Thus, the associated person's straight-in request would be required to contain the applicable filing fee; ^[90] 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.^[91] In addition, as discussed below, the proposed rule change would impose limitations on when such requests may be made.^[92]

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

If an associated person files a straight-in request 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.^[93] The proposed rule change would 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.^[94]

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, the proposed rule change would require arbitrators on the Special Arbitrator Roster to be public arbitrators who are eligible for the chairperson roster (“public chairperson”).^[95] In general, public arbitrators are persons who 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.^[96] Arbitrators are eligible for the chairperson roster if they have completed chairperson training provided by FINRA and: (1) have a law degree and are either 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 a self-regulatory organization (“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.^[97] FINRA stated that these requirements would help ensure that the persons conducting the expungement hearing are impartial and experienced in managing and ( printed page 24288) conducting arbitration hearings in the DRS arbitration forum.^[98]

Second, the proposed rule change would require arbitrators on the Special Arbitrator Roster to have evidenced successful completion of, and agreement with, enhanced expungement training provided by FINRA.^[99] FINRA currently provides an Expungement Training module for arbitrators.^[100] This training, however, would be expanded for arbitrators seeking to qualify for the Special Arbitrator Roster.^[101]

Third, the proposed rule change would require arbitrators on the Special Arbitrator Roster 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.^[102] FINRA stated that “if an arbitrator has served on four arbitrations through to award, it would indicate that the arbitrator has gained the knowledge and experience in the DRS arbitration forum to conduct hearings.” ^[103]

b. Composition of the Panel

The proposed rule change would require the Neutral List Selection System (“NLSS”) ^[104] to select randomly the three public chairpersons from the Special Arbitrator Roster to decide a straight-in request filed by an associated person.^[105] The parties would not be permitted to agree to fewer than three arbitrators.^[106] The parties requesting expungement also would not be permitted to strike any arbitrators selected by NLSS nor stipulate to their removal,^[107] but would be permitted to challenge an arbitrator selected for cause.^[108] If an arbitrator is removed, NLSS would randomly select a replacement.^[109] FINRA stated 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.” ^[110]

C. Limitations on Expungement Requests

Currently, the Codes provide minimal constraints on making expungement requests. FINRA Rules 12805 and 13805 do not address when a party would not be permitted to file an expungement request in the DRS arbitration forum.^[111] The Guidance, however, describes 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 should deny the expungement request.^[112]

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.^[113] According to FINRA, 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.^[114]

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.^[115] The proposed rule change would codify and expand upon this limitation 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.^[116] According to FINRA, the proposed rule change would, among other things, 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.^[117]

b. Straight-In Request Prohibited if a Panel or Court of Competent Jurisdiction Previously Found the Associated Person Liable

Under the Codes, arbitration awards are final and binding unless vacated based on the limited grounds set forth in applicable state or federal statutes.^[118] The only avenue for challenging a prior adverse arbitration award is to file a timely motion with an appropriate court to vacate, modify, or correct the award.^[119] Thus, if an associated person is found liable in a customer arbitration, FINRA considers the associated person legally bound by the award and the Director will decline the use of the DRS arbitration forum if the associated person then requests expungement of customer dispute information that is associated with the customer arbitration in which the associated person was found liable. FINRA stated that it considers such expungement requests a collateral attack on the binding arbitration award, which is contrary to the Codes.^[120] Accordingly, the proposed rule change would provide that an associated person shall not file a claim requesting expungement of customer dispute information from the CRD system if the customer dispute information is associated with a customer arbitration or civil litigation in which a panel or court of competent jurisdiction previously found the associated person liable.^[121]

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

As discussed above, under proposed Rule 12805(a)(1)(A) an associated person who is named in a customer arbitration would be required to request expungement of associated customer dispute information 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.^[122] Proposed Rule 13805(a)(2)(A)(vii) would provide a mechanism to enforce the forfeiture established in proposed Rule 12805(a)(1)(A).^[123] Specifically, proposed Rule 13805(a)(2)(A)(viii) would prohibit an associated person who is named, but failed to request expungement of the customer dispute information associated with the customer's statement of claim in a customer arbitration, from subsequently filing a straight-in request seeking to expunge this customer dispute information.^[124]

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

FINRA Rules 12206(a) and 13206(a) require an associated person to submit a claim within six years from the occurrence or event giving rise to the claim. This six-year eligibility rule applies to all arbitration claims, including those requesting expungement of customer dispute information.^[125] As a result, FINRA stated that many straight-in requests are filed many years after the customer arbitration closes or the customer complaint is reported in the CRD system.^[126] 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.^[127] The proposed rule change would allow an associated person to request expungement of customer dispute information associated with a customer arbitration or civil litigation—including any associated customer complaint disclosures—within two years after the customer arbitration or civil litigation closes.^[128] 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.^[129] If a customer arbitration is filed after a panel has issued an award on a request to expunge a customer complaint associated with the newly filed customer arbitration, the proposed rule would provide that the prior expungement award shall not be admissible in the customer arbitration.^[130]

The proposed rule change 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.^[131] Specifically, the proposed rule change would provide that if an expungement request is otherwise eligible under the six-year limitation ( printed page 24290) period of FINRA Rule 13206(a),^[132] 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; ^[133] 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, the effective date.^[134]

3. Director's Authority To Deny the Forum

The proposed rule change would require the Director 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.^[135] The proposed rule change would also provide the Director with 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.^[136] FINRA stated that the proposed rule change would help ensure additional safeguards around the expungement process by expanding the circumstances in which the Director is authorized to deny the DRS arbitration forum.^[137]

D. Procedural 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.^[138] In addition, the Guidance recommends that arbitrators follow certain practices when deciding expungement requests. The proposed rule change would amend the current expungement hearing requirements by incorporating relevant provisions from the Guidance. The proposed amended requirements would apply to all expungement hearings.^[139]

1. Recorded Hearing Sessions

The Codes currently require a panel deciding an expungement request to hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement.^[140] The proposed rule change would provide that the panel would be required to 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. The proposed rule change would also eliminate the reference to the hearing being held by telephone or in person since the participants in the hearing may, under the proposed rule change, also appear by video conference; the proposed rule change would also allow different participants to attend using different methods ( e.g., one by phone, one by video conference).^[141]

2. Requesting Party'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 and eliminate the ability to appear via telephone.^[142] The proposed rule change would also require a party requesting expungement on behalf of an unnamed person or the party's representative to appear in person or by video conference at the hearing.^[143] The panel would determine the method of appearance.^[144] FINRA stated that requiring that attendance be in person or by video conference would help the panel assess the associated person's credibility.^[145]

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.^[146] 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 by other method) at the expungement hearing;
• Allow the representative for the customer or a pro se customer to introduce documents and evidence at the expungement hearing;
• Allow the representative for the customer or a pro 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 a pro 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.^[147]

Specifically, the proposed rule change would state that all customers whose customer dispute information is associated with the expungement request are entitled to attend and participate in all aspects of the prehearing conferences and the expungement hearing.^[148] And the ( printed page 24291) proposed rule change would provide that the customer could choose to attend and participate by telephone, in person or by video conference.^[149]

The proposed rule change would also specify certain parameters of the customer's participation.^[150] First, the proposed rule change would provide that a customer or a customer's representative could introduce evidence during the expungement hearing.^[151] 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.^[152]

Second, the customer and the customer's witnesses would be allowed to testify at the expungement hearing and be questioned by the customer or customer's representative.^[153] If a customer 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.^[154]

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.^[155]

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.^[156]

FINRA stated that customer attendance and participation during an expungement hearing would provide the panel with important information and perspective that it might not otherwise receive. In addition, by providing customers with options for how to attend and participate in hearings FINRA seeks to encourage customer attendance and participation.^[157] However, FINRA also stated that the proposed rule should give the associated person or party requesting expungement on behalf of an unnamed person the opportunity to substantiate arguments in support of the expungement request.^[158]

4. Panel Requests for Additional Documents or Evidence

The proposed rule change would explicitly authorize a 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.^[159] FINRA stated that this proposed rule change would help ensure that arbitrators have the information necessary to make an informed decision on 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.^[160]

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.^[161] The proposed rule change would retain this requirement.^[162]

In addition, the Guidance currently recommends that arbitrators 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.^[163] The proposed rule change would codify the language in the Guidance,^[164] in part, because conditioned settlements violate FINRA Rule 2081 and may be grounds to deny an expungement request.^[165]

6. Unanimous Decision To Issue an Award Containing Expungement Relief

Unlike arbitration cases generally, which may be decided based on a majority decision of the panel, the proposed rule change would require that the arbitrators agree unanimously to issue an award containing expungement relief.^[166] The proposed amendments would also provide that in order to issue an award containing expungement relief, the panel must unanimously find 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.^[167] 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.^[168] FINRA stated that these proposed rule changes would help ensure that expungement is awarded only in limited circumstances in ( printed page 24292) accordance with the narrow standards in its rules.^[169]

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 [FINRA Rule 2080] grounds for expungement applies to the facts of the case.” ^[170] According to FINRA, the Guidance suggests that the panel's explanation should be complete and not solely a recitation of one of the FINRA Rule 2080(b)(1) grounds or language provided in the expungement request.^[171] The proposed rule change would retain the requirement to provide the written explanation, but would remove the word “brief,” and 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.^[172] Thus, FINRA stated that under the proposed rule change, the panel would be required to provide enough detail in the award to explain its rationale for awarding expungement relief.^[173]

8. Evidentiary Weight of Decision Not To Attend or Participate

The proposed rule change would state that a panel shall not give any evidentiary weight to a decision by a customer or an authorized representative of state securities regulators (“authorized representative”) not to attend or participate in an expungement hearing when making a determination of whether expungement is appropriate.^[174] FINRA stated that 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, 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.^[175]

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 proposed rule change would state that 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.^[176]

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

1. Notification to Customers by the Associated Person

According to FINRA, 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.^[177] The proposed rule change would codify this practice in the Industry Code by requiring the associated person to 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.^[178] 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.^[179] The panel would be authorized to decide whether extraordinary circumstances exist that make service on the customers impracticable.^[180]

The proposed rule change also 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.^[181]

FINRA stated that providing notification to customers would help 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 regarding the associated person's request. FINRA also stated that requiring the panel to review all documents that the associated person used to inform the customers about the expungement request as well as any customer responses received would help ensure that the associated person does not attempt to dissuade a customer from attending or participating in the expungement hearing.^[182]

2. Notifications to the Customer by the Director

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.^[183] The Director would also provide the notified customers with access to all documents on the Portal related to the request for expungement prior to their attendance and participation in the expungement hearing.^[184]

3. Notifications to State Securities Regulators

The proposed rule change would require FINRA to notify state securities ( printed page 24293) 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.^[185] FINRA stated that the proposed notification requirement would help ensure that state securities regulators are timely notified of expungement requests.^[186]

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

The proposed rule change would provide a mechanism for an authorized representative of a state securities regulator to provide their position or positions on an expungement request in writing or by attending and participating in the expungement hearing in person or by video conference.^[187] The proposed rule change would limit attendance and participation by an authorized representative to straight-in requests.^[188]

The proposed rule change would also require the Director to provide state securities regulators with access to all documents relevant to: (1) the expungement request filed in the arbitration requesting expungement relief; and (2) 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.^[189] Such access would be required to be provided at the same time as providing notification to state securities regulators of the straight-in request.^[190]

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 proposed rule change would require the Director to notify the authorized representative of the time, date and place of any prehearing conferences and the expungement hearing.^[191] Under proposed Rule 13805(c)(6), 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.^[192] Under the proposed rule change, 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.^[193]

According to FINRA, 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).^[194] As such, an authorized representative would not be entitled to seek discovery from the parties through the DRS arbitration forum, file motions, or seek to postpone a hearing.^[195] In addition, the proposed rule change provides that 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.^[196]

FINRA stated that 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.^[197]

G. Expungement Requests During Simplified Customer Arbitrations

FINRA Rule 12800, governing simplified arbitration,^[198] was designed to make the DRS arbitration process less burdensome for customer arbitrations involving $50,000 or less (exclusive of interest and expenses) by providing such customers with expedited procedures. Simplified arbitrations are decided on the pleadings and other materials submitted by the parties, unless the customer requests a hearing.^[199] Further, a single arbitrator from the public chairperson roster is appointed to consider and decide simplified arbitrations, unless the parties agree in writing otherwise.^[200]

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 Customer 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.^[201]

FINRA Rule 12800 does not expressly address how an expungement request should be filed or considered during a simplified arbitration.^[202] 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.^[203]

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.^[204] 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.^[205]

a. Request by a Named Associated Person During a 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.^[206] 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.^[207] If the named associated person requests expungement in a pleading other than an answer, the request would be required to be filed within 30 days after the date FINRA notifies the parties of the appointment of the arbitrator.^[208] The request would be required to include the same information as a request filed in a non-simplified arbitration.^[209]

The arbitrator would be required to decide an expungement request that is filed by the associated person.^[210] 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.^[211]

b. Request by a Party on Behalf of an Unnamed Person

Under the proposed rule change, 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.^[212] 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 would be required to consent to such filing by signing the Form.^[213]

The arbitrator would be required to decide an on-behalf-of request that is filed by the requesting party.^[214] 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.^[215]

c. No Expungement Request Is Filed

If expungement is not requested during a 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.^[216] The request would be subject to the limitations on whether and when such requests may be filed under the Industry Code.^[217]

2. Deciding Expungement Requests During Simplified Arbitrations

If expungement is requested during 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).^[218] 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.^[219]

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 issue an award.^[220] After the customer's dispute is decided, the arbitrator would hold a separate expungement-only hearing to consider and decide the expungement request and issue a separate, subsequent award.^[221] FINRA stated that the proposed rule change is designed to minimize any delays in resolving the customer arbitration and any delays in potential recovery that a customer may be awarded.^[222]

b. “Option One” Full Hearing

If the customer chooses to have an “Option One” full hearing on their 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.^[223] 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.^[224]

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 ( printed page 24295) request.^[225] The arbitrator would conduct a separate expungement-only hearing to develop the factual record and help the arbitrator make a fully informed decision on the expungement request.^[226]

3. Customer Notification of Expungement Hearings During Simplified Arbitrations

The proposed rule change would require the Director to notify all customers from the simplified arbitration of a separate expungement-only hearing.^[227] FINRA stated that the Director's notice would provide the customers with timely notice of the expungement hearing so that the customers and their representatives may participate.^[228]

H. Non-Substantive Changes

The proposed rule change would also 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 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).

III. Discussion and Commission Findings

After careful review of the proposed rule change, the comment letters, and FINRA's responses to the comments, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder that are applicable to a national securities association.^[229] Specifically, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Exchange Act,^[230] which requires, among other things, that FINRA rules 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 Commission also finds that the proposed rule change is consistent with Section 15A(b)(5) of the Exchange Act,^[231] which requires, among other things, that FINRA rules provide for the equitable allocation of reasonable dues, fees and other charges among members and issuers and other persons using any facility or system that FINRA operates or controls.

A. Requests for Expungement Under the Customer Code

1. Expungement Requests by Respondents Named in Customer Arbitration

The proposed rule change to amend FINRA Rule 12805 would, in part, govern how and when named associated persons may request expungement during a customer arbitration. Among other things, the proposed rule change would require that a named associated person file a request for expungement of the customer dispute information associated with the customer's statement of claim in the customer arbitration or forfeit the ability to request expungement of the same customer dispute information in a subsequent proceeding.^[232]

The proposed rule change would also dictate the method of and deadline for filing an expungement request.^[233] Under the proposed rule change, a named associated person would need to include their request for expungement in their answer to the customer's statement of claim or in a separate pleading requesting expungement.^[234] If the associated person includes their request in the answer, they must file the answer within 45 days of receipt of the statement of claim.^[235] If the named associated person requests expungement in a separate pleading requesting expungement, rather than the answer, they would need to file the pleading no later than 60 days before the first scheduled hearing begins.^[236]

Finally, the proposed rule change would further prescribe the contents of an expungement request.^[237] For example, the proposed rule change would require the named associated person requesting expungement to explain whether expungement of the same customer dispute information was: (1) previously requested and, if so, (2) how it was decided.^[238]

FINRA stated that 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.^[239] FINRA further stated that the potential costs that would be incurred by associated persons, arbitrators and the DRS arbitration forum if named associated persons file expungement requests are appropriate given the potential benefit of having customer input and a complete factual record for the panel to decide an expungement request.^[240] Moreover, FINRA stated that requiring the named associated person requesting expungement to explain whether expungement of the same customer dispute information was previously requested and, if so, how it was decided would further link the request to a specific case and help prevent multiple requests for expungement.^[241]

Finally, FINRA stated the proposed 60-day deadline would provide adequate time for: (1) the named associated person to assess the customer's case, the potential merits of an expungement request, and whether to file the request; and (2) the parties to a customer arbitration to prepare their expungement-related arguments, since the expungement issues will overlap with the issues raised by the customer's claim.^[242]

Four commenters supported, and there was no opposition to, these aspects of the proposed rule change. ^[243] ( printed page 24296) One commenter stated that requiring an associated person to request expungement in a customer dispute matter, if the associated person is a party to the matter, reduces the need for additional hearings, filing fees, attorney fees, and other arbitration costs concerning the same parties and the same evidence.^[244] Three commenters supported the proposed rule change on the basis that it would allow the panel that heard all of the evidence, including the customer's evidence, to be best situated to decide the expungement request.^[245] One of these commenters stated that the requirement would prevent “arbitrator-shopping” ( i.e., purposefully not raising, or withdrawing, an expungement request in an arbitration in order to file a request with a panel more likely to award expungement).^[246]

The Commission believes that the proposed rule change should improve the integrity of the expungement process. Where a customer arbitration closes by award after a hearing, the panel's experience with the parties and the dispute, as well as the panel's review of the documents, testimony, and other evidence in connection with the arbitration, should leave the panel well positioned to make a decision regarding the related expungement request. Moreover, requiring the expungement request to be made within 45 days of receipt of the customer's statement of claim (if included in the answer) or no later than 60 days before the first scheduled hearing begins (if included in a pleading) should allow the requesting party a reasonable amount of time to make an informed decision about whether to request expungement while at the same time providing the parties with reasonable case-preparation time, since the expungement issues will likely overlap with the issues raised by the customer's claim.

Further, the content required for an expungement request under the proposed rule change, including the CRD occurrence number that is the subject of the request, the case name and docket number associated with the customer dispute information, and whether expungement of such information had previously been requested and any resolution thereof, should improve the expungement process by clearly documenting both the request and whether it repeats a previous request. The required content would provide the panel with information sufficient to understand who is requesting expungement and in connection with which customer dispute.^[247] In addition, requiring the party requesting expungement to explain whether expungement of the same customer dispute information was previously requested and, if so, how it was decided will help prevent parties from pursuing second requests for expungement, consistent with the proposed rule change prohibiting repeat requests, which is discussed in more detail below.^[248]

2. Content and Timing of on-Behalf-of Requests in Customer Arbitration

As with expungement requests made by a named associated person, the proposed rule change would, in part, govern how and when an on-behalf-of request may be made during a customer arbitration. For example, proposed Rule 12805(a)(2)(C)(iii) would require the party making the request to file it no later than 60 days before the first scheduled hearing.

In addition, proposed Rule 12805(a)(2)(C)(ii) would require the party filing an on-behalf-of request to submit to the Director the Form signed by the unnamed person and a statement requesting expungement. As discussed above, by signing the Form the unnamed person would be: (1) consenting to the on-behalf-of request, (2) agreeing to be bound by the panel's decision on the on-behalf-of request, and (3) acknowledging their understanding 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.^[249]

Finally, proposed Rules 12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i) would require the party requesting expungement on behalf of an unnamed person 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 previously requested and, if so, how it was decided.^[250]

FINRA believes that requiring associated persons to sign and submit the Form would help address its concern 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.^[251] Specifically, requiring submission of the signed Form would help ensure that an unnamed person is aware of an on-behalf-of request.^[252] In addition, by signing the Form, the associated persons would be acknowledging that, if the customer arbitration closes by award after a hearing and an expungement decision is made, the unnamed person would be barred from filing a request for expungement for the same customer dispute information in a subsequent proceeding.^[253]

In addition, under the proposed rule change, on-behalf-of requests would resemble named associated person requests in timing (the proposed rule would require service on all parties no later than 60 days before the first scheduled hearing), and in content (an on-behalf-of request would be required to include the same elements as a named associated person request).^[254]

The Commission received no comment letters supporting or opposing this proposed rule change.

For reasons similar to those discussed above for expungement requests made by a named associated person in a customer arbitration, the Commission believes that these timing and content requirements should improve the integrity of the expungement process.^[255] In addition, the panel's decision would preclude the unnamed party from ( printed page 24297) seeking expungement of the same customer dispute information in another forum by claiming their interests were inadequately represented in the hearing under the terms of the Form. Moreover, requiring the expungement request to be made no later than 60 days before the first scheduled hearing begins should allow the requesting party a reasonable amount of time to make an informed decision about whether to request expungement while at the same time providing the parties with reasonable case-preparation time, as the expungement issues will overlap with the issues raised by the customer's claim.

Further, the notice provided to the associated person pursuant to the requirement to submit the Form with the associated person's written consent should help ensure that the associated person is made aware of the on-behalf-of request and will likely help prevent inadvertent duplicative filings. The requirement that the associated person agree to be bound by the panel's decision on the request, and be barred from filing a request for expungement for the same customer dispute information, will help prevent the associated person from requesting expungement from a different panel if they are unsatisfied with the decision issued by the first panel. Such safeguards also help conserve resources and prevent inconsistent determinations.

3. Deciding Expungement Requests During Customer Arbitrations

As stated above, the proposed rule change would treat customer claims that close by award after a hearing differently from customer claims that close other than by award ( e.g., the case settles) or that close by award without a hearing. Where the customer's claim closes by award after a hearing, the proposed rule change would require the panel in a customer arbitration to consider and decide a request for expungement made during the proceeding. In addition, if the party requesting expungement withdraws or does not pursue the expungement request, the panel will be required to deny the expungement request with prejudice. FINRA stated that this change should make efficient use of the panel's familiarity with the case-in-chief, and help protect investors by precluding arbitrator-shopping by associated persons or those requesting expungement on their behalf.^[256]

Conversely, where the customer's claim closes other than by award or closes by award without a hearing, the proposed rule change would preclude the panel that heard the customer claim from considering the ongoing expungement request.^[257] In such cases, the efficiency rationale becomes less compelling, and FINRA believes that such expungement requests are best considered as straight-in requests by a panel from the Special Arbitrator Roster, discussed in more detail below.^[258] These proposed rule changes are intended to protect investors by reducing opportunities for arbitrator-shopping and by providing arbitrators with special training and factual-development tools specific to the expungement context.^[259]

Two commenters supported the proposed requirement that the panel in a customer arbitration decide an expungement request where the customer arbitration closes by award after a hearing.^[260] These commenters reasoned that because the panel would have presided over the case-in-chief, assessing input from all involved parties, it is best situated to decide the expungement request.^[261] Three commenters further supported the proposed requirement that, in the event an expungement request is withdrawn or not pursued, the panel would be required to deny the request with prejudice, reasoning that the proposed rule change would prevent arbitrator-shopping by discouraging requesting parties from withdrawing an expungement request in order to seek a potentially more favorable panel.^[262]

Three commenters, however, suggested that associated persons should be able to voluntarily withdraw expungement requests without prejudice.^[263] One of these commenters stated that customers are free to withdraw claims without prejudice,^[264] while another argued that there is no evidence to support the claim that a person that withdraws an expungement request is doing so in the hopes of finding a more favorable panel.^[265] A third commenter stated that there are a number of valid and practical reasons for why a non-party associated person's request for expungement may be withdrawn prior to final hearing ( e.g., time and costs), and thus that it is inappropriate to penalize an associated person for withdrawing their expungement request.^[266]

FINRA declined to amend the proposed rule change in response to comments. FINRA expressed concern that arbitrator-shopping and repeated attempts to seek expungement of the same customer dispute information are inconsistent with the arbitration process and threaten the integrity of the information in the CRD system because they permit parties to request expungement until they get a favorable response.^[267] FINRA highlighted the extent of its concern by pointing out that among the requests to expunge customer dispute information in arbitration from January 2016 through December 2021, FINRA identified 282 disclosures that were the subject of a previously withdrawn or denied requests to expunge.^[268] FINRA further stated, in response to a commenter's statement that an associated person may have valid and practical reasons for withdrawing an expungement request, that it is not in a position to determine or assess, on a case-by-case basis, the legitimacy of an associated person's reason for withdrawing an expungement request during a customer arbitration.^[269]

Two commenters also supported the proposed requirement that expungement requests made during customer arbitrations that close other than by award or close by award without a hearing, be heard by a panel from the Special Arbitrator Roster.^[270] One of these commenters reasoned that the original arbitration panels do not get to hear the full presentation of the evidence on the merits of the underlying ( printed page 24298) customer case and that customers or their representatives have little incentive to attend and participate in an expungement hearing once their case has settled.^[271]

One commenter, however, contended that a named associated person who requests expungement during a customer arbitration that closes other than by award or that closes by award without a hearing should continue to be allowed to request an expungement-only hearing before the same panel from the customer arbitration.^[272] Specifically, this commenter stated that, even in cases that are settled or dismissed, the panel has often had an opportunity to review the pleadings, participate in the disposition of discovery and other prehearing motions, and otherwise familiarize itself with the facts of the case.^[273] Furthermore, according to the commenter, permitting the same panel to decide an expungement hearing may be more efficient because, in many cases, the parties will have already researched and ranked the panel members and the expungement hearing will have been scheduled for the same day as the hearing on the merits.^[274] According to the commenter, already-scheduled expungement hearings would reduce scheduling issues and increase the likelihood of customer participation, as customers will have already set aside the time.^[275]

FINRA considered these comments but declined to amend the proposed rule change.^[276] FINRA stated that, when a customer arbitration closes other than by award or by award without a hearing, the panel may not have heard the presentation of the evidence on the merits of the case. In addition, FINRA stated that customers or their representatives have little incentive to attend and provide their interpretation of the facts in a subsequent expungement hearing once their case has settled.^[277] Because a customer arbitration that closes other than by award, or by award without a hearing, has the potential for an inadequately developed, or nonexistent, record, FINRA contended that the integrity of information in the CRD system would be better maintained by requiring a panel randomly selected from the Special Arbitrator Roster to hear and decide such expungement requests.^[278] Furthermore, FINRA stated that requiring an associated person to file such an expungement request as a straight-in request under the Industry Code would strengthen the expungement process because the Special Arbitrator Roster panel deciding the request would have the experience, qualifications, and training necessary to help ensure the development of a more complete factual record; ^[279] in addition, FINRA stated that the proposed rule change would make it easier for customers to participate in the expungement proceeding, further helping the panel establish a more complete factual record.^[280]

The Commission believes the proposed rule changes are aimed at enhancing FINRA's expungement framework. On the one hand, they require a panel of arbitrators that has decided the merits of a case to leverage their understanding of the case to decide any related expungement requests; the panel would be required to decide the request even if the requesting party withdraws or fails to present a case in support of the request—in which case the panel would deny the expungement request with prejudice. This is both efficient and helps protect investors by preventing those requesting expungement from withdrawing and refiling their request to obtain new arbitrators when unsatisfied with the original panel. On the other hand, when a case closes other than by award or closes by award without a hearing, the efficiency benefits of having the same panel decide the request (while not eliminated) are diminished. Moreover, the risk that the expungement hearing will not benefit from either a fully developed record or the adversarial process increases. For example, a case may settle before the record has had a chance to develop and a customer who has settled their claims may have little incentive to commit more time and resources in a subsequent expungement hearing. Rather than leave it to arbitrators in individual cases to decide whether they have enough information to proceed to hear an expungement request, FINRA has established uniform, separate procedures to help ensure the development of an adequate factual record in connection with every expungement request. The proposed rule changes also aim to help ensure that arbitrators deciding straight-in expungement requests have the training and tools to develop an adequate factual record, particularly in the absence of customer participation. Finally, the proposed rule change allows for the effective administration of the expungement process and provides certainty to the parties about when requests for expungement may be made.

The Commission recognizes that in some cases the arbitrators from a customer arbitration could bring to a related standalone expungement hearing insights gleaned from their engagement with a well-developed factual record. Nevertheless, the proposed rule changes help ensure that every expungement request benefits from an adequate factual record. Moreover, it arms arbitrators on the Special Arbitrator Roster with the expungement-specific training and procedural tools necessary to develop and understand the factual record, regardless of both the state of the record prior to their involvement and the presence or absence of customers at the expungement hearing. Finally, it makes procedural improvements to facilitate customer participation in expungement hearings.

4. No Straight-In Requests Against Customers or Intervening in Customer Arbitrations To Request Expungement

The proposed rule changes would prohibit an associated person from filing a straight-in request against a customer, and would prohibit unnamed persons from intervening in a customer arbitration and requesting expungement. FINRA stated that the proposed rule would help protect investors by preventing associated persons from interrupting, and thus delaying, ( printed page 24299) customer cases, thereby safeguarding customer time and resources.^[281]

One commenter opposed the proposed prohibition against an associated person filing a straight-in request against a customer.^[282] This commenter argued that permitting straight-in requests against customers would solve many of the issues addressed in the proposed rule change, including customer notice and participation.^[283]

Two commenters objected to the proposed prohibition against expungement interventions by unnamed persons in customer arbitrations.^[284] One of these commenters stated that prohibiting an unnamed person from intervening to clear their name results in potentially false allegations remaining in the CRD for upwards of a year ( i.e., until expungement can be awarded in the straight-in request and confirmed by a court).^[285] The other commenter stated that the rules should allow for the most fair, speedy, and inexpensive resolution of the matters and recommended that the proposed rule change allow for a sub-proceeding between the intervening affected associated person and the parties where a separate award on the matter of expungement is issued by the same panel without affecting the resolution of the main award.^[286]

FINRA declined to amend the proposed rule change in response to comments. In the Notice and in response to comments, FINRA stated that in circumstances where an associated person is neither a named party nor the subject of an on-behalf-of request, the associated person's conduct is unlikely to be fully addressed by the parties during the customer arbitration, and permitting the unnamed person's intervention could unnecessarily interrupt or delay resolution of the case.^[287] FINRA further stated that it 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.^[288] FINRA also stated that the requirement that an associated person file a 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.^[289]

The Commission believes that prohibiting straight-in requests against customers, and prohibiting expungement interventions by unnamed persons in customer arbitrations, as proposed, will protect investors by conserving their time, resources, and ability to make their case efficiently and without interruption. The Commission appreciates that this will require the associated person to wait until the customer claim has been resolved to initiate a straight-in expungement proceeding, but believes such a delay is reasonable to help ensure that the related customer arbitration can be resolved as expeditiously as possible. Moreover, the panel selected from the Special Arbitrator Roster deciding the expungement request would have the benefit of any final factual record from the related customer dispute.

5. Limitations Applicable to Straight-in Requests and Expungement Requests During a Customer Arbitration

The proposed rule change would provide 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.^[290]

FINRA stated that the proposed rule changes would prevent an associated person from forum shopping, or seeking to return to the DRS arbitration forum to garner a favorable outcome on their expungement request.^[291] The Commission received no comment letters supporting or opposing this proposed rule change.

The proposed rule changes should help prevent an associated person, or firm seeking expungement on their behalf, from forum-shopping to garner a more favorable outcome on an expungement request. As such, the proposed rule change should help protect the integrity of the information in the CRD system.^[292] In addition, the proposed rule change should promote more efficient use of resources by precluding duplicative claims.

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

1. Filing a Straight-In Request

a. Form of a Straight-In Request

Proposed Rule 13805 would require an associated person to make any request to expunge disclosures of customer dispute information (other than requests made in a customer arbitration itself) as a straight-in request, and would limit the circumstances in which an associated person could request expungement.^[293] Specifically, proposed Rule 13805(a)(1) would require an associated person to make such an expungement request against the member firm with which they were associated at the time the customer dispute arose.^[294] FINRA stated that this requirement would help ensure that there is a connection between the respondent firm and the subject matter of the expungement request and that the panel selected from the Special Arbitrator Roster would be able to request evidence from the member firm with information that is relevant to the expungement request.^[295]

Two commenters recommended that FINRA adopt an alternative for unnamed parties to request expungement other than by straight-in requests.^[296] For example, one of these commenters recommended that FINRA establish a method for unnamed parties who “had no say in whether the [underlying] case should be settled.” ^[297] Similarly, the other commenter expressed concern that an unnamed ( printed page 24300) person may not be aware of a customer arbitration (or have input in the resolution of customer's case) and thus may not be aware they need to make a straight-in request.^[298]

FINRA responded that its existing rules help ensure that associated persons are aware of arbitration disclosures on their Forms U4 and U5.^[299] In addition, if a party to a customer arbitration is unwilling to file an on-behalf-of request or if a party files an on-behalf-of request and the arbitration settles, the proposed rule change would allow the associated person to seek expungement by filing a request to expunge the same customer dispute information as a straight-in request.^[300]

Two commenters supported the proposed rule change regarding straight-in requests, but recommended that FINRA prohibit associated persons from filing a straight-in request to expunge multiple, unrelated requests in one arbitration claim.^[301] According to one of these commenters, the practice of bundling expungement requests permits “gaming the system” by having such claims heard by “expungement-friendly arbitrators.” ^[302] One of these commenters further suggested that FINRA require a nexus between the hearing location and the conduct at issue so that customers and state regulators would have more of an incentive to participate.^[303] These commenters reasoned that these changes would prevent unnecessary complications for the panel considering the expungement request and provide a common set of facts for the panel to consider.^[304]

FINRA responded that the proposed time limits for filing a request ^[305] may curtail the common practice of bundling unrelated and aged expungement requests in one straight-in request; and the requirement under the proposed rule change that an associated person would be required to file a 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 straight-in request. With respect to requiring a locational nexus, FINRA stated that the ability for a customer to attend and participate in an expungement hearing by telephone or by video conference should help address concerns about there being a connection between the hearing location and the allegation at issue.^[306] FINRA further stated that concerns about expungement requests being brought before expungement-friendly arbitrators should be mitigated by several proposed requirements to minimize the potential for associated person or broker-dealer influence in the arbitrator selection process for straight-in requests. For example, the proposed change would require FINRA's list selection algorithm to randomly select a three-person panel from the Special Arbitrator Roster and the parties would not be able to agree to fewer than three arbitrators, strike any arbitrators selected by the list selection algorithm or stipulate to their removal, or be permitted to stipulate to the use of pre-selected arbitrators.^[307] According to FINRA, “these requirements would help ensure that arbitrators on the Special Arbitrator Roster have the qualifications and training to decide straight-in requests and that the arbitrators conducting the expungement hearings are impartial and experienced in managing and conducting arbitration hearings in the DRS arbitration forum.” ^[308]

The Commission believes the requirements set forth in the proposed rule change are designed to promote investor protection because it should enhance the integrity of the CRD system. The firm with which the person requesting expungement was associated at the time the dispute arose should have knowledge of the dispute and access to relevant documentary or other evidence.^[309] Thus, requiring that a straight-in request be filed against the member firm with which the person was associated at the time of the conduct would increase the likelihood that the firm would be in a position to contribute to the development of any record, including at the request of the panel.^[310]

Also, the practice of bundling multiple, unrelated claims should be largely curtailed by the proposed time limits and requirement that claims be filed against the member firm at which the person was associated at the time the customer dispute arose; and that the constraints on parties' ability to influence the composition of the panel should minimize the use of pre-selected, expungement-friendly arbitrators.

Finally, associated persons should be aware of arbitration disclosures on their Forms U4 and U5.^[311] To the extent they are not, the proposed time limits (discussed below) provide associated persons a reasonable amount of time to become aware and seek expungement by filing a request to expunge the same customer dispute information as a straight-in request.^[312] Thus, seeking expungement via a straight-in request, with the procedural safeguards discussed herein, should not unduly burden an associated person seeking expungement.

b. Content of a Straight-In Request

In addition, as with named associated person requests, the proposed rule change also would establish content requirements for straight-in expungement requests.^[313] The required content of a straight-in request would be the same as those required for expungement requests filed under proposed Rule 12805.^[314] Specifically, an associated person would be required to include the following in a straight-in request: the applicable filing fee; 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.^[315]

The Commission received no comment letters supporting or opposing this proposed rule change.

The proposed form and content requirements are reasonable for straight-in requests. In particular, requiring an associated person to file their expungement request against the ( printed page 24301) member firm with which they were associated at the time the customer dispute arose should provide the panel deciding the expungement request with another source of documents potentially pertinent to its consideration of the request. As such, it could help a panel establish a more complete factual record upon which to base an award. In addition, as discussed in more detail above, the content required for an expungement request under the proposed rule change, including the CRD occurrence number that is the subject of the request, the case name and docket number associated with the customer dispute information, and whether expungement of such information had previously been requested and any resolution thereof, should improve the expungement process by clearly documenting both the request and whether it repeats a previous request. The required content would provide the panel with information sufficient to know who is requesting expungement and the customer dispute with which it is connected. In addition, requiring the party requesting expungement to explain whether expungement of the same customer dispute information was previously requested and, if so, how it was decided will help prevent parties from pursuing second requests for expungement, consistent with the proposed prohibition against repeat requests.^[316]

2. Deciding Straight-In Expungement Requests

The proposed rule change would establish a new framework for arbitrators hearing straight-in expungement requests. The proposed rule change would require a three-person panel ^[317] to hold an expungement hearing, decide the expungement request, and issue an award in response to a straight-in request filed in accordance with proposed Rule 13805.^[318] As with expungement requests decided in customer arbitration, the panel would be required to deny an expungement request with prejudice in cases in which an associated person withdraws or does not pursue the request. FINRA stated that requiring a panel to deny a request that is withdrawn or not pursued would protect investors by preventing associated persons from withdrawing and refiling expungement requests until they obtain a panel whose composition they believe is more likely to deliver a favorable recommendation.^[319]

The Commission received no comment letters supporting or opposing this proposed rule change. However, as discussed above, the Commission received, and FINRA responded to, comments supporting and opposing similar procedures for deciding expungement requests during customer arbitration.^[320]

The Commission believes that requiring a panel selected from the Special Arbitrator Roster to decide a straight-in expungement request and deny a claim that is withdrawn or not pursued, would help to prevent an associated person from undermining the enhanced expungement framework with this form of arbitrator-shopping.^[321]

3. The Special Arbitrator Roster

The proposed rule change would establish a Special Arbitrator Roster from which a three-person panel would be drawn to decide all straight-in expungement requests.^[322] Proposed Rule 13806(b) would limit the Special Arbitrator Roster to arbitrators with specified experience and training. Specifically, the proposed rule change would limit the roster to public arbitrators who are eligible for the chairperson roster, have completed FINRA's enhanced expungement training, and have served as an arbitrator through award on at least four customer-initiated arbitrations administered by FINRA or by another SRO in which a hearing was held.^[323] In proposing the rule, FINRA stated that these requirements would help ensure that arbitrators on the Special Arbitrator Roster: have the experience, qualifications, and training to conduct a fair and impartial expungement hearing; appreciate the unique, distinct role they play as expungement hearing arbitrators; and understand the limited circumstances in which expungement should be awarded.^[324]

Once the Special Arbitrator Roster has been established, the proposed rule change would require that three members of that roster be selected at random to decide each expungement request filed under proposed Rule 13805.^[325] In addition, the first arbitrator selected would be the chair of the panel,^[326] the parties would not be permitted to agree to fewer than three arbitrators,^[327] and the parties would not be permitted to strike any arbitrators or to stipulate to their removal, but would be permitted to challenge an arbitrator selected for cause.^[328] In proposing the rule, FINRA stated that this process would minimize the potential for influence in the arbitrator selection process by the associated person and member firm, whose interests may be aligned.^[329]

Four commenters supported the proposed rule change's establishment of a Special Arbitrator Roster, the selection of a panel from this roster for expungement requests under the Industry Code, and the restrictions on parties' ability to influence the panel's composition.^[330] Three of these four commenters supported the proposed rule change on the basis that the three-person panel would minimize the impact of unopposed expungement requests, facilitate expanded fact-finding during the expungement request, and that the prohibition on ranking and striking, or agreeing to arbitrators would reduce both the prevalence of arbitrator-shopping and repeat-player incentives for arbitrators ( i.e., from choosing arbitrators who are historically more likely to award expungements).^[331] The fourth commenter further stated that the proposed rule change would increase efficiency and decrease costs for all parties to the expungement matter, since the parties will no longer need to spend hours researching and ranking arbitrators to find the individuals most experienced at handling these issues.^[332] In addition, one commenter also stated that the enhanced training to be received by the Special Arbitrator Roster would give associated persons fewer causes for removal of an arbitrator for cause.^[333]

Five commenters, however, objected to the proposed rule change's limitations on ranking and striking ( printed page 24302) arbitrators.^[334] One of these commenters stated that ranking and striking is “enjoyed by all other participants in FINRA arbitration proceedings” ^[335] while another commenter similarly stated that customers have the ability to rank and strike arbitrators.^[336] A third commenter argued that because different arbitrators approach issues differently, there is a benefit to starting with a large pool of potential panelists and then letting the parties “winnow the pool.” ^[337]

FINRA stated that currently, based on its experience with straight-in requests filed in the DRS arbitration forum, associated persons typically file straight-in request for expungement against the broker-dealer firm at which the associated person is currently employed.^[338] In such instances, the proceeding is less likely to be adversarial in nature than if the associated person files an expungement request against a customer.^[339] For example, FINRA stated that a respondent firm may support the request for expungement because it has an interest in removing negative information from the associated person's CRD record.^[340] Accordingly, FINRA stated that it would not be appropriate to continue to use the current process for selecting arbitrators—striking and combining ranked lists—to select arbitrators to decide straight-in requests.^[341] FINRA reasoned that in arbitrations that occur 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.^[342] Therefore, the adversarial nature of the proceedings serves to minimize the impact of each party's influence in arbitrator selection.^[343] An adversarial proceeding is less likely to occur in straight-in requests.^[344] Thus, the proposed rule change would prevent associated persons and member firms from collaboratively seeking to influence the outcome of the expungement request through arbitrator selection.^[345]

FINRA also recognized the potential for the proposed rule change to limit the associated person's 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.^[346] However, FINRA stated that the higher standards that the arbitrators would be required to meet to serve on the Special Arbitrator Roster should mitigate the impact of the absence of party input on the selection of arbitrators.^[347] In addition, associated persons and member firms would still be permitted to challenge any arbitrator for cause.^[348]

Given the potential lack of adverse parties in straight-in expungement requests, FINRA reasonably determined that the random selection of a set number of arbitrators is appropriate. Random arbitrator selection, along with other aspects of the proposed rule change ( e.g., the requirement that a panel decide an expungement request that is filed by an associated person, and the prohibition on an associated person withdrawing and re-filing their expungement request), should help eliminate arbitrator-shopping and serve to protect investors and the integrity of information in the CRD system. In addition, parties would continue to be able to challenge and remove arbitrators for cause.

Several commenters also recommended that FINRA expand the pool of arbitrators eligible to serve on the Special Arbitrator Roster, in particular to allow for non-public arbitrators, stating that such a change would bring securities industry expertise to deciding expungement requests.^[349] One commenter suggested that industry participants who have worked as a general securities principal for a least five consecutive years, in the prior seven-year period, be eligible for inclusion on the Special Arbitrator Roster.^[350] This commenter also suggested that at least one person on each three-person panel be required to have securities industry experience either as a general securities principal or as an attorney who has the requisite five years' experience in state or federal securities regulation or as a securities regulator.^[351] Another commenter likewise recommended including the ability to have an industry arbitrator on any expungement panel where more than one arbitrator was required.^[352] A third commenter argued that requiring one public arbitrator, one non-public arbitrator, and a chairperson that can either be public or non-public, would help create a diverse knowledge base and would help the panel make better, more informed decisions.^[353]

Another commenter suggested not limiting the Special Arbitrator Roster to chair-qualified public arbitrators.^[354] This commenter stated that experience in understanding and appreciating the regulatory value of a customer complaint should be the most important qualification, thus concluding that the Special Arbitrator Roster should be expanded to include current and former state, federal and SRO securities regulators. This commenter further suggested that the most experienced arbitrators should not be on the Special Arbitrator Roster as they have exhibited bias in favor of granting expungements in the past.^[355]

FINRA declined to amend the proposed rule change in response to these comments. FINRA stated that it “believes that having experienced public arbitrators, without significant ties to the financial industry, deciding straight-in requests would help achieve the goal of balancing the competing interests in the expungement process of providing a fair process and ensuring that information about associated persons that is available to investors is accurate.” ^[356] Such arbitrators would be provided training that is neutral and ( printed page 24303) informative and the training would be made publicly available on FINRA's website. Moreover, FINRA stated that the enhanced training that arbitrators on the Special Arbitrator Roster would be required to take (as well as the other eligibility requirements) would help ensure that arbitrators on the Special Arbitrator Roster have the qualifications and training to appropriately decide straight-in requests and that the persons conducting the expungement hearings are impartial and experienced in managing and conducting arbitration hearings in the DRS arbitration forum.^[357]

The Commission believes that FINRA reasonably determined which arbitrators would be eligible to serve on the Special Arbitrator Roster. Specifically, limiting eligibility to public arbitrators reasonably balances the competing interests in the expungement process of providing a fair process and ensuring the integrity of the information in the CRD system. This approach should also enhance the public's perception that the expungement process and rules are fair, which, in turn, should enhance the perception of the integrity of the information on the CRD system. In addition, the proposed eligibility requirements should help ensure that experienced arbitrators are deciding expungement requests in light of the public interest in the integrity of the information in the CRD system.

4. State Attendance and Participation in Straight-In Expungement Requests

The proposed rule change would provide a mechanism for an authorized representative of a state securities regulator to present the state securities regulator's position on an expungement request in writing or by attending and participating in the expungement hearing in person or by video conference.^[358] The proposed rule change would limit the authorized representative's ability to attend and participate to only straight-in requests, where the panel may otherwise only hear evidence from the party requesting expungement.^[359] To facilitate attendance and participation, the Director would notify the applicable state securities regulator (in a manner determined by the Director in collaboration with state securities regulators) and provide applicable information and documents related to the associated customer arbitration.^[360] In addition, under the proposed rule change, the panel would not be permitted to allow the attendance or participation of the authorized representative to materially delay the scheduling of an expungement hearing.^[361]

While an authorized representative of a state securities regulator would not be a party to 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.^[362] 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.^[363]

In the Notice, FINRA stated that 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.^[364] Moreover, FINRA believes that state participation in straight-in requests is important in light of the importance of the CRD to state registration and oversight responsibilities.^[365]

Seven commenters supported the proposed rule change's inclusion of state securities regulators in the expungement process.^[366] These commenters supported including a representative of a state securities regulator in straight-in expungement requests on the basis that such participation would serve to counterbalance a potentially unopposed expungement request since customers are less likely to participate in straight-in requests,^[367] and would therefore help protect the integrity of the information in the CRD system needed for the performance of state regulatory obligations.^[368] One commenter stated that while it appreciates the opportunity to appear for arbitration proceedings hearing expungement requests, state participation in such proceedings would be limited by resources and state-specific procedural hurdles that could inhibit the ability to appear.^[369]

Five commenters expressed concern about permitting state securities regulator participation in straight-in expungement hearings.^[370] One of these commenters suggested that notification to state securities regulators should instead occur at the point FINRA seeks to obtain an order from a court of competent jurisdiction confirming an award containing expungement.^[371] Another commenter objected to a non-party participating in an expungement proceeding without being subject to the forum's jurisdiction because: (1) a panel could not sanction a non-party for perjury, and (2) “increasing the barriers” to expungement would decrease the proceeding's efficiency.^[372] A third commenter argued that participation of state securities regulators would increase costs.^[373]

FINRA responded that state securities regulators are already notified about, and can participate in, proceedings at the state court confirmation level. FINRA Rule 2080 requires that FINRA be named as a party in such proceedings, unless this requirement is waived by FINRA. Upon receipt of a complaint naming FINRA or a request for a waiver from the requirement to name FINRA as an additional party, FINRA will notify NASAA of the complaint or waiver request. NASAA, in turn, will notify the appropriate state securities regulator.^[374] FINRA stated that under the proposed rule change FINRA would notify state securities regulators within 15 days of receiving a request for expungement, giving them time to review and decide whether to participate in a straight-in request, including in any prehearing conference.^[375]

FINRA also responded that the arbitrators who would decide straight-in ( printed page 24304) requests would have the experience, qualifications and training necessary to conduct a fair and impartial expungement hearing in accordance with the proposed rules and that the proposed rule change would provide an associated person requesting expungement the opportunity to cross-examine any witness called by a state securities regulator's authorized representative. FINRA stated that these mechanisms should be sufficient to help ensure that a non-party's testimony or documentary information presented is appropriately scrutinized.^[376] FINRA responded further by stating that concerns about state participation increasing costs to file an expungement request may be overstated, as under the proposed rule change the authorized representative would not be a party to the request, and thus, would not be permitted to take actions that could delay the proceeding or add to the parties' costs.^[377]

FINRA acknowledged that in person attendance and participation by an authorized state representative may be limited given state resource constraints. FINRA pointed out that the proposed rule change provides low-cost options to help facilitate state participation; specifically, that it would permit the authorized representative to attend and participate via video conference or submit a state's position in writing.^[378]

The Commission believes that permitting attendance and participation by state securities regulators in straight-in expungement proceedings, which have a higher likelihood of proceeding unopposed, and providing state regulators low-cost options to do so, will enhance the straight-in expungement process. Specifically, including state securities regulators and providing them with access to documents relevant to the expungement request provides them the opportunity to fulfill their own regulatory obligations, while at the same time increasing the likelihood that the panel in an expungement proceeding will hear evidence from multiple viewpoints, thus allowing the panel to make more informed decisions. At the same time, the conditions applicable to state securities regulator participation are designed so that they do not delay the resolution of an expungement request and allow the claimants the opportunity to challenge any information presented in the forum by the state's representative. As such, the proposed rule change appropriately balances the interests of state regulators in the expungement process, as well as their need to allocate and preserve resources, with the importance of maintaining an efficient and cost effective process for associated persons requesting expungement.

Two commenters recommended that FINRA extend the option for a state regulator's representative to participate in other expungement requests, including those in customer arbitration,^[379] and simplified arbitration.^[380] These commenters considered state participation in other contexts as providing a similar counterbalance as in a straight-in request because expungement requests in both customer arbitrations, whether standard or simplified, are similarly often unopposed because customers do not participate in that aspect of the proceeding.^[381]

FINRA declined to amend the proposed rule change in response to these comments. FINRA stated that attendance or participation in a customer arbitration could substantially disrupt the customer's case and would likely be less impactful, as the panel from the customer arbitration hears the customer's evidence on the merits.^[382] Furthermore, in simplified arbitration the expungement-only hearing would likely be scheduled shortly after the customer's dispute is decided or closes, increasing the likelihood of customer attendance and participation. Thus, FINRA does not believe that it is necessary for state securities regulators to also attend and participate in expungement-only hearings in simplified arbitrations.^[383]

The Commission believes that it is reasonable for FINRA to limit state securities regulator participation to straight-in requests where there is a higher likelihood of proceeding without meaningful opposition and state participation may provide the greatest benefit. In customer arbitration, the panel will have the benefit of a balanced presentation of the merits of the case that should allow it to make an informed decision on the expungement request. Moreover, in simplified arbitration it is more likely that a customer will participate, providing their version of events, in an expungement hearing when it occurs soon after the panel makes an award based on the merits of the claim. Finally, FINRA stated it will continue to evaluate whether there are other ways to further strengthen the current expungement process, including whether to allow state securities regulators to attend and participate in separate expungement-only hearings in simplified arbitrations.^[384]

5. Alternatives to Deciding Expungement Requests Through Arbitration

While expressing support for the proposed rule change, three commenters contended that expungement determinations are more appropriately a regulatory decision not properly adjudicated by FINRA's arbitration process.^[385] One of these commenters argued that the degree to which such records are preserved in CRD and BrokerCheck for all stakeholders should not turn on the varying abilities of any party—state securities regulator, authorized representative or customer—to appear to make an argument. According to the commenter, doing so would continue to lead to inconsistent results that have no relationship to the importance of this information.^[386]

FINRA did not amend the proposed rule change in response to these comments. FINRA stated that it believes it is important to pursue a two-track approach to improving the expungement process. In the near term, FINRA stated the integrity of the information in the CRD system should be better protected by adopting the “substantial improvements” to the current expungement process that can be achieved with the proposed rule change.^[387] Concurrently, FINRA stated that it would continue working with NASAA and other interested parties to consider a redesign of the current expungement process.^[388]

The proposed rule change is designed to strengthen the current expungement framework and to protect investors and the public interest. The proposed rule change's establishment of a special roster of specially qualified and trained arbitrators to decide certain expungement requests should help mitigate the potentially non-adversarial nature of straight-in expungement requests. In particular, the Commission believes that having three specially qualified and trained arbitrators available to ask questions and ( printed page 24305) empowered to request evidence, along with the proposed rule change's inclusion of state securities regulators in straight-in requests where there may otherwise be no opposing viewpoint, should help ensure that a complete factual record is created upon which the arbitrators can base a decision in such expungement hearings. The proposed rule change also updates the Codes to incorporate provisions from FINRA Guidance that, among other things, facilitate customer attendance and participation in expungement hearings, permit panels to request additional documents or evidence relevant to an expungement request, and codify the grounds for awarding expungement.^[389] In addition, the Commission believes that continuing dialogue among FINRA, state regulators, industry participants, consumer advocates, and other stakeholders in the expungement process will lead to future improvements as the expungement process continues to evolve.

6. Limitations Applicable to Straight-In Requests Only

The proposed rule change also would codify and expand upon other aspects of the Guidance applicable to straight-in requests, in particular those related to eligibility to file the request. For example, the proposed rule change would: prohibit an associated person from filing a straight-in request if the customer arbitration, civil litigation, or customer complaint that gave rise to the customer dispute information has not closed; establish time limits for expungement requests that are specifically tied to the close of customer arbitrations and civil litigations, or the reporting of customer complaints in the CRD system; and, prevent an associated person from filing an expungement request if (1) a panel or court of competent jurisdiction previously found the associated person liable in a customer arbitration or civil litigation associated with the same customer dispute information or (2) the customer dispute information involves the same conduct that is the basis of a final regulatory action ^[390] taken by a securities regulator or SRO.^[391]

a. No Expungement Request Until Underlying Case Closes

The proposed rule change would codify and expand upon the Guidance by providing that an associated person may not file a straight-in request if the customer arbitration, civil litigation, or customer complaint that gave rise to the customer dispute information has not closed, a limitation that is designed to prevent an associated person from obtaining a decision on an expungement request while the related customer dispute is ongoing.^[392] FINRA stated this change would prevent potentially inconsistent expungement decisions on related customer dispute information and help ensure that the panel that would decide the straight-in request is able to consider the final factual record from the customer arbitration or civil litigation.^[393] The Commission received no comment letters supporting or opposing this proposed rule change.

The proposed rule change would help maintain the integrity of the information in the CRD system by helping to prevent inconsistent expungement decisions on related customer dispute information. The proposed rule change would also help ensure that the panel deciding the straight-in request is able to consider the final factual record from the customer arbitration or civil litigation.

b. Time Limits for Expungement Requests

Currently, FINRA Rules 12206(a) and 13206(a) require an associated person to submit an arbitration claim, including requests for expungement of customer dispute information, within six years from the occurrence or event giving rise to the claim.^[394] The proposed rule change would eliminate this six-year eligibility rule and instead establish shorter time limits for expungement requests that are specifically tied to the close of customer arbitrations and civil litigations, or the reporting of customer complaints in the CRD system, as applicable.^[395] FINRA stated that the time periods provided for in the proposed rule changes for each situation would provide a sufficient amount of time for associated persons and their firms to, among other things, gather the documents, information, and other resources required to file the expungement request.^[396]

With respect to customer arbitrations and civil litigations, FINRA stated that it believes the two-year period would help ensure that expungement hearings are held close enough in time to the customer arbitration or civil litigation such that information regarding the dispute is available and in a timeframe that could increase the likelihood of customer participation where a customer so chooses. The shorter timeframe, FINRA believes, should help encourage customer attendance and participation in expungement proceedings and help ensure that straight-in requests are brought before relevant evidence and testimony ( printed page 24306) becomes stale or unavailable.^[397] Accordingly, FINRA believes the proposed time limit would help provide panels with more complete factual records on which to base their expungement decisions, while at the same time allowing the associated person adequate time to determine whether to seek expungement.^[398]

With respect to customer complaints where there was no customer arbitration or civil litigation associated with the customer dispute information, FINRA stated that it believes that the three-year period 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. The three-year time limitation 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. FINRA also believes that the three-year time limitation may 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.^[399]

Six commenters supported the proposed time limitations.^[400] Two of these commenters stated that the time limitations will make it more likely that customers will participate ^[401] and one of these commenters stated that the timeframes provide enough time for associated persons to determine whether to file an expungement request and gather the relevant information to support their request.^[402] Another commenter stated that the time limitations would increase the efficiency of the expungement process and decrease the cost to member firms because when expungement requests are filed “four or five or even ten years” after the event giving rise to the request, a party's ability to respond to discovery requests and produce relevant information becomes much more difficult and time consuming.^[403]

Seven commenters objected to the time period limitations.^[404] One commenter stated that time limits for filing an expungement request should mirror those provided to customers (a six-year period of eligibility with expansion for good cause).^[405] This commenter argued that providing the associated person the opportunity to file for expungement within a six-year time frame—regardless of whether there was a customer-filed arbitration—recognizes that representatives may not have been meaningfully involved in the underlying arbitration for a variety of reasons ( e.g., separation from the firm).^[406] Two other commenters stated that the amount of time that passes has no bearing on the merits of the expungement request.^[407] Another commenter stated that time limits may preclude expungement requests because associated persons are not aware of the expungement process and suggested grandfathering in associated persons with existing disclosures or sending notifications to such persons.^[408] Two other commenters stated that associated persons may lack the resources to seek expungement within the proposed two-year time limit.^[409] One of these commenters added that associated persons may not consider expungement important at the time only to change their minds later on in their careers; however, the commenter recommended that if FINRA moved forward with the two-year time limit, it should ensure all associated persons affected by a given arbitration claim are given proper notice of the case's closure, as well as a description of any applicable time limits for making an expungement request.^[410] Finally, one commenter that otherwise supported the proposed rule change argued that less time was necessary and urged FINRA to adopt a shorter, one-year time period for all straight-in expungement requests.^[411]

FINRA considered these comments but declined to amend the proposed rule change. FINRA responded that it believes that the proposed time limitations appropriately address its concern that a number of expungement requests are currently filed many years after a customer arbitration closes or the reporting of a customer complaint in the CRD system.^[412] FINRA stated that requiring associated persons to file straight-in requests within three years of the filing of the customer complaint, rather than six, would help ensure that expungement hearings are held close in time to the events that led to the customer dispute information disclosure.^[413] FINRA stated that, in turn, this may: (1) increase the likelihood of customer participation; (2) ensure that straight-in requests are filed before relevant evidence and testimony becomes stale or unavailable; and (3) generally help to develop a more complete factual record on which to decide an expungement request.^[414]

FINRA also stated that allowing two years from the close of the customer arbitration or civil litigation to bring an ( printed page 24307) expungement request would provide a reasonable amount of time for associated persons and firms to gather the necessary documents, information and other necessary resources required to file the expungement request and help ensure that the expungement hearing is held close enough in time to the customer arbitration. In addition, the two-year time limitation would reduce the potential for such information to become stale and increase the likelihood of customer participation.^[415] Moreover, FINRA stated that it believes the three-year time period for expungement requests in connection with customer complaints would: (1) allow firms to complete their investigation of the customer complaint and close it in the CRD system; (2) allow associated persons to develop a sense of whether the complaint may evolve into an arbitration or civil litigation; and (3) allow associated persons to determine whether to proceed with a request to expunge the complaint.^[416]

FINRA acknowledged that there could be instances when associated persons may not be aware that a customer arbitration has closed, and that the two-year time limit for requesting expungement of customer dispute information has begun to run.^[417] To facilitate an associated person's awareness of the proposed time limits, FINRA stated that if the proposed rule change is approved, it would issue a Regulatory Notice providing notice to associated persons of when the time period will commence for seeking expungement of customer dispute information already on their records. FINRA also stated it would update the cover letter that is provided by DRS to respondents once a statement of claim has been filed to explain that: (1) an associated person is prohibited 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; (2) an associated person is 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, unless such request is barred under the Industry Code; and (3) associated persons may remain apprised of the status of the customer arbitration, including case closure, by contacting the parties to the arbitration or DRS.^[418] FINRA further stated that the updated cover letter would also encourage member firms to provide updates about the status of the customer arbitration to associated persons who are not named parties to the customer arbitration, including case closure.^[419] Finally, FINRA stated it would publish guidance on its website about the changes to the Codes that would include information about how associated persons can remain apprised of the status of a customer arbitration, including through contacting DRS.^[420]

FINRA's time limitations seek to balance two competing interests: (1) promoting customer participation and the availability of evidence and (2) providing sufficient time for an associated person to determine whether to seek expungement and, in the case of customer complaints, for firms to investigate and close a complaint and for the complaint to evolve, or not, into arbitration or civil litigation. The Commission believes that the proposed rule change strikes a reasonable balance between these competing interests. Holding expungement hearings closer in time to the event that gave rise to the customer dispute information should promote the availability of evidence and customer participation, which would help contribute to more informed expungement determinations and therefore to investor protection and the integrity of information in the CRD system.^[421]

c. Preclusion of Certain Expungement Requests

The proposed rule change, as modified by Amendments No. 1 and No. 2, would also preclude an associated person from filing an expungement request if: (1) a panel or court of competent jurisdiction previously found the associated person liable in a customer arbitration or civil litigation associated with the same customer dispute information or (2) the customer dispute information involves the same conduct that is the basis of a final regulatory action ^[422] taken by a securities regulator or SRO.^[423]

FINRA included the proposed preclusion of expungement requests where the associated person was previously found liable in a customer arbitration or civil litigation associated with the same customer dispute information as an amendment to its proposed rule change in response, in part, to a commenter's recommendation.^[424] FINRA reasoned that these expungement requests are in effect a collateral attack on the binding arbitration award and that a collateral attack is not contemplated under FINRA rules and is contrary to the Codes.^[425] FINRA stated that the only avenue for challenging a prior adverse arbitration award is to file a timely motion with an appropriate court to vacate, modify, or correct the award.^[426]

Two commenters supported the amendment.^[427] These commenters agreed that an arbitral or judicial finding that a claim is valid should preclude the ability to have such information expunged.^[428] A third commenter supported the amendment, but suggested the reason for the amendment would apply equally in other contexts, and recommended that associated persons should be prevented from seeking expungement of customer dispute information that forms the basis for a finding of liability in all of the contexts in which such information forms part of a regulatory record, such as state regulatory proceedings, proceedings brought by the Commission, or self-regulatory proceedings.^[429]

After further consideration of the issue, FINRA proposed a modification to the proposed rule change in Amendment No. 2 to provide that an associated person shall not file a claim requesting expungement of customer dispute information from the CRD system against a member firm at which the person was associated at the time the customer dispute arose if the customer dispute information involves ( printed page 24308) the same conduct that is the basis of a final regulatory action taken by a securities regulator or SRO. If an associated person requests expungement of such customer dispute information, the Director would deny the forum to the expungement request.^[430] FINRA stated that prohibiting an associated person from filing such expungement requests would promote greater efficiency in the DRS arbitration forum because it would preclude requests that otherwise would be unsuccessful.^[431]

Permitting expungement following a finding of liability in an arbitration or civil litigation associated with the same customer dispute information or a final regulatory action based on the same conduct sought to be expunged would be inconsistent with the specified grounds that can form the basis for an expungement award under the proposed rule change ( i.e., factual impossibility, mistake, or falsity). Permitting an expungement claim in these circumstances would, in addition to constituting a collateral attack on the results of the underlying dispute, contribute to inefficiencies in the expungement process by allowing for claims to proceed that could not succeed.

C. Expungement Requests During Simplified Arbitrations

1. Filing and Considering Requests During Simplified Arbitration

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,^[432] and would establish procedures for requesting and considering expungement requests in simplified arbitrations that are consistent with the expedited nature of these proceedings.^[433]

The proposed rule change would require an arbitrator in a simplified arbitration to decide an expungement request that is filed by an associated person or as an on-behalf-of request.^[434] In addition, as in the proposed rule change governing regular customer arbitration, under the proposed rule change if the requesting party 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.^[435] FINRA stated that these proposed rule changes would help eliminate arbitrator-shopping by requiring the panel in which the request is made to decide the request.^[436] FINRA also stated that, unlike the proposed amendments to a regular customer arbitration, FINRA was not proposing that a panel from the Special Arbitrator Roster decide an expungement request made during a simplified customer arbitration where the arbitration closes other than by award or closes by award without a hearing, because the public chairpersons who decide simplified arbitrations would be fully capable of making appropriate expungement decisions on the basis of their experience and would have the same enhanced expungement training as the arbitrators on the Special Arbitrator Roster.^[437]

In addition, unlike in a regular customer arbitration, if expungement is not requested during a simplified arbitration, the proposed rule change would permit the associated person to file a straight-in expungement request for the same customer dispute information under the Industry Code and have the request decided by a three-person panel randomly selected from the Special Arbitrator Roster.^[438]

One commenter requested that a named associated person should be required to request expungement during the arbitration of the customer's claim, as proposed for non-simplified cases.^[439] The commenter stated that arbitrators in simplified arbitrations are experienced public arbitrators who have the same enhanced expungement training as the arbitrators on the Special Arbitrator Roster and would therefore be able to make an informed decision on the merits of an expungement request.^[440] The commenter also stated that requiring a named party to request expungement during the arbitration of the customer's claim in simplified arbitration would encourage customer participation because the expungement request would be closer in time to the complained-about conduct and therefore easier for the customer to recall the facts.^[441]

FINRA declined to amend the proposed rule change, referencing the expedited nature of simplified arbitrations.^[442] FINRA stated that because there may be less discovery in simplified arbitration and the customer can dictate the extent of the evidence presented to the arbitrator, there may be less information available for the arbitrator to evaluate an expungement request.^[443] Accordingly, FINRA stated that it is appropriate that an associated person should retain the ability to choose to file the request as a straight-in request under the Industry Code.^[444] FINRA also stated, however, that it will continue to monitor expungement requests and decisions in simplified arbitrations to determine if additional changes are warranted, including whether a panel from the Special Arbitrator Roster should be required to decide an expungement request in simplified arbitrations.^[445]

Requiring an arbitrator to decide an expungement request that is filed in a simplified arbitration, regardless of the outcome of that arbitration, along with requiring an arbitrator to a reject such a request with prejudice if it is withdrawn, will help protect the integrity of the information in the CRD system by limiting an associated person's ability to request expungement for the same claim (even if it has been denied in the past) until they find a panel willing to award it. By allowing an associated person to determine ( printed page 24309) whether to request expungement in a simplified arbitration or to instead file the request as a straight-in request under the Industry Code, the proposed rule change appropriately puts the decision to seek expungement in the hands of the party most impacted by the outcome. Because claims in simplified arbitration generally are decided by one arbitrator based on the documents that are submitted by the parties, with limited discovery, and without a hearing, there may be less information available for the arbitrator to evaluate an expungement request during a simplified arbitration. Therefore, the Commission believes that associated persons should be given the choice of how they want to proceed with their request for expungement, while at the same time balancing customer and regulator interests in the process. The Commission notes, however, that FINRA has stated it will monitor this issue and propose changes as warranted.

2. Deciding Requests in Simplified Arbitration

As stated above, if expungement is requested during a simplified arbitration, the proposed rule change would require the arbitrator to decide the expungement request regardless of how the simplified arbitration case closes, including by settlement, in one of two ways, depending on the how the customer chooses to have their claim decided.^[446]

If the customer chooses to have their claim decided either (1) “on the papers” ( i.e., without a hearing) or (2) in an “Option Two” special proceeding, the arbitrator would decide the customer's dispute first and then issue an award before deciding the expungement request.^[447] After the customer's dispute is decided, the arbitrator would hold a separate expungement-only hearing to consider and decide the expungement request and issue a separate award.^[448] FINRA reasoned that this requirement would minimize any delays in resolving the customer arbitration and in determining any potential recovery that a customer may be awarded.^[449] FINRA further stated that the separate expungement-only hearing would be necessary to enable the arbitrator to request any documentary, testimonial, or other evidence it deems relevant to the expungement request to make a fully informed decision.^[450]

Alternatively, if the customer chooses to have their claim decided by an “Option One” full hearing and it closes by award, the proposed rule change would require the arbitrator to consider and decide the expungement request during the customer arbitration and include the decision in the award.^[451] This process would be the same as deciding an expungement request during a regular customer arbitration that closes by award after a hearing, where the customer's claim and expungement request are addressed during the customer arbitration.^[452]

If a simplified arbitration closes other than by award or closes by award without a hearing, however, the proposed rule change would require the arbitrator 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.^[453] Under the proposed rule change, the Director would notify all customers from the simplified arbitration of the separate expungement-only hearing, if applicable.^[454] FINRA believes that a separate expungement hearing would be necessary in these circumstances for the arbitrator to develop a complete factual record in order to make a fully informed decision on the expungement request.^[455] FINRA also believes that the Director's notice would further this objective by providing a timely reminder to customers of the expungement hearing so that they may plan and prepare to attend and participate if they choose.^[456] Moreover, FINRA stated that it would continue to monitor expungement requests and decisions in simplified arbitrations to determine if additional changes are warranted.^[457]

Three commenters voiced support for the proposed rule change, specifically identifying the bifurcation of the expungement hearing and simplified arbitration where the customer's claim is decided “on the papers” or in an “Option Two” hearing.^[458] One of these commenters reasoned that by requiring a separate hearing on the expungement request following a final decision on the customer's claim, the proposed rule change would allow for a just resolution of the request because the arbitrator would have all of the facts and special insights necessary to decide whether to award expungement, while ensuring the resolution of the investor's claim is not delayed.^[459] Another commenter similarly stated that deciding the customer dispute before the request for expungement would minimize delays in customer recovery but allow the arbitrator to make a more fully developed record before deciding the expungement request.^[460]

Another commenter suggested that FINRA create a simplified process for expungement with similar fees and an “on the papers” option before a single arbitrator for requests for expungement associated with customer complaints and customer arbitrations under $50,000.^[461] In response, FINRA declined to amend the proposed rule change, stating that an important part of ensuring the expungement process works as intended is for arbitrators to hold recorded expungement hearings during which they can hear testimony and assess the credibility of the associated person requesting expungement and any witnesses.^[462]

The proposed rule change's procedure for determining the order in which a panel would decide an expungement request in a simplified arbitration based on the type of proceeding chosen by the customer is reasonable. For example, where a customer opts to have their claim decided without a hearing ( i.e., “on the papers”) or chooses an “Option Two” special proceeding, the arbitrator would hold a separate expungement-only hearing to consider and decide the expungement request after it decides the customer's dispute. The Commission believes that this process benefits both customers and associated persons. The customer would avoid any delay in resolving their claim that consideration of an expungement request would cause; and the associated person would have a separate hearing to help ensure that the arbitrator has sufficient evidence upon which to rule on their expungement request. Alternatively, where the customer chooses to have their claim decided after a full hearing ( printed page 24310) ( i.e., an “Option One” proceeding), it is reasonable to allow the panel to rule on an expungement request because the request would not unduly burden the customer or an associated person requesting expungement in the hearing. By choosing “Option One”, a customer has agreed to participate in a more involved and time-consuming process than having their claim decided “on the papers.” Likewise, the customer has assumed the risk that the resolution of their claim could be delayed by an associated person's expungement request. In addition, the associated person gets an opportunity during the hearing to help the panel fully develop a record on which to decide the expungement request.

D. Procedural Requirements Relating to All Expungement Hearings

The proposed rule changes would include certain procedural provisions that would apply to all expungement hearings. As described above, these would include procedural requirements relating to: (1) hearing format; (2) associated person's appearance; (3) customer attendance and participation; (4) panel requests for additional documents or evidence; (5) review of settlement documents; (6) requirement for a unanimous decision to issue an award containing expungement relief; (7) contents of an expungement award; (8) grounds for awarding expungement; (9) evidentiary weight of a decision by customers or authorized representatives not to attend or participate; and, (10) forum fees.^[463] In addition, the proposed rule change would expand the authority of the Director to deny the use of the DRS arbitration forum.^[464]

1. Hearing Format

Current FINRA rules 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.^[465] The proposed rule change would also permit the panel to hold a recorded hearing session by video conference. The proposed rule change would also clarify that a panel would not be limited in the number of hearing sessions it could hold to decide an expungement request.^[466] No commenter supported or objected to these proposed changes.

This is an appropriate approach. Permitting parties to hold a recorded hearing session by video conference enhances party participation by making it more convenient and allowing others to read facial expressions of those testifying. In addition, by not limiting the number of hearing sessions a panel could schedule to hear an expungement request, the proposed rule change would help ensure that parties would not be limited in presenting their arguments.^[467]

2. Appearance by Associated Person or Party Requesting Expungement

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.^[468] Likewise, 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.^[469] The panel would determine the method of appearance.^[470] FINRA stated that it 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 the associated person's appearance to 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.^[471]

No commenter supported or objected to these proposed changes. One commenter stated that “FINRA should be mindful that not all persons have the same kind of access to technology and bandwidth. As such, the panel should also have discretion to decide the appropriateness of the manner and form of the requesting . . . [associated person's] participation given the circumstances.” ^[472] FINRA responded that the proposed rule change provides the panel with that discretion. However, FINRA stated that the method of appearance would be required to be in person or by video conference because FINRA believes the panel may be better able to assess the associated person's credibility through these methods of appearance.^[473]

Given the importance of protecting the integrity of the information in the CRD system, FINRA reasonably determined to require that a party requesting expungement appear at the expungement hearing either in person or by video conference. Such a requirement will allow the panel to better assess the testimony of such persons, but also provides flexibility to accommodate instances in which it may not be reasonable or necessary to require an in-person hearing. Leaving the manner of appearance within the panel's discretion is appropriate, as the panel will be free to require an in-person appearance where, from the panel's perspective, the record requires or will be improved by such an appearance.

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

The proposed rule change would codify certain provisions of the Guidance to: (1) allow the customer and their representative to appear at the expungement hearing; ^[474] (2) allow the customer to testify (telephonically, in person, or by other method) at the expungement hearing; ^[475] (3) allow the representative for the customer or a pro se customer to introduce documents and evidence at the expungement hearing; ^[476] (4) allow the representative for the customer or a pro se customer to cross-examine the associated person or other witnesses called by the party seeking expungement; ^[477] and (5) allow the representative for the customer or a pro se customer to present opening and closing arguments if the panel allows any party to present such arguments.^[478]

FINRA stated that it believes that customer participation during an expungement hearing provides the panel with important information and perspective that it might not otherwise receive. Through the proposed rule change, FINRA seeks to make it easier for customers to participate and, thereby, to encourage them to do so.^[479] FINRA further stated that the proposed rule change strikes the right balance ( printed page 24311) between allowing the customer to participate fully in the hearing and, on the other hand, giving the requesting party the opportunity to substantiate arguments in support of the expungement request.^[480] This opportunity includes the ability of the requesting party to cross-examine a customer who chooses to testify and to object to evidence introduced by a customer.^[481]

Commenters both supporting and opposing the proposed rule change recommended modifications to these provisions.^[482] One commenter who opposed the proposed rule change objected to the participation of non-parties (such as customers in a straight-in proceeding) without such parties submitting to FINRA jurisdiction because non-parties who commit perjury cannot be sanctioned or reprimanded.^[483] Another commenter supported the proposed rule change but recommended that the proposed rule change be amended to make clear that customers would have the opportunity and ability to participate “in all aspects” of the hearing, such that customers could attend the entire hearing, introduce arguments, and make their points at any time they deem appropriate.^[484]

In response to the first commenter, FINRA stated that arbitrators on the Special Arbitrator Roster would have the experience necessary to assess the credibility of those attending and participating in the hearing, as well as any documentary information. In addition, FINRA pointed out that the proposed rule change would give an associated person requesting expungement the opportunity to cross-examine a non-party customer if the person chooses to testify or any witness called by the customer or authorized representative.^[485] FINRA believes these mechanisms should be sufficient to ensure that a non-party's testimony or documentary information presented is appropriately scrutinized.^[486]

FINRA responded to the other comment by making one of the proposed modifications in Amendment No. 1 to provide that customers would have the opportunity and ability to participate in all aspects of the hearing.^[487] Three commenters supported this amendment, stating that the amendment would enable arbitration panels to have a more detailed and balanced view of the relevant facts and events underlying the expungement request.^[488] Another commenter recommended limiting a customer's ability to participate in a hearing, stating that while allowing customer participation “can provide value,” for logistics reasons, the customer should not be able to request discovery.^[489]

In response, FINRA stated that customer attendance and participation in expungement hearings helps the panel fully develop a record on which to decide the expungement request.^[490] FINRA further responded that as a non-party to the straight-in request, the customer would not be permitted under the proposed rule change to seek discovery from the parties through the DRS arbitration forum, so the proposed rule change is consistent with the commenter's view in this regard.^[491]

Customer participation during an expungement hearing should provide a panel with important information and perspective that it might not otherwise receive. The Commission also understands that customers may have little personal interest in participating in a hearing once their claim has been resolved. The proposed rule changes would implement enhancements to facilitate customer participation in those cases where customers wish to participate. The Commission further believes that the procedural safeguards will appropriately balance the ability of a customer to participate in a hearing and provide relevant information with the interest of an associated person in testing any such information through objection or cross-examination. This ability to object or cross-examine should also help address concerns that non-parties are not themselves subject to FINRA's jurisdiction.

4. Panel Requests for Additional Documents or Evidence

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.^[492] FINRA stated that 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.^[493] FINRA further stated that, 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.^[494]

One commenter expressed support for the proposed rule change and suggested that FINRA amend the proposed rule change to consider the failure to produce requested documents to be grounds for denial of the expungement request with prejudice.^[495] FINRA declined to amend the proposed rule change in response to this comment.^[496] FINRA stated that its rules already provide arbitrators with authority to determine whether sanctions should be imposed for failure to comply with any provision of the Code, or any order of a panel or single arbitrator authorized to act on behalf of the panel.^[497] FINRA specifically pointed out that: (1) a panel may assess monetary penalties payable to one or more parties; preclude a party from presenting evidence; make an adverse inference against a party; assess postponement and forum fees; and assess attorneys' fees, costs and expenses; ^[498] (2) a panel may dismiss a claim, defense, or arbitration with prejudice as a sanction for material and intentional failure to comply with an order of the panel if prior warnings or sanctions have proven ineffective; ^[499] (3) a member or an associated person could be subject to disciplinary action for failure to produce requested documents; ^[500] and (4) such failure may ( printed page 24312) be deemed conduct inconsistent with just and equitable principles of trade and a violation of FINRA Rule 2010.^[501]

The proposed rule change should help ensure that a panel receives the documents or information that it requests, and further that a panel is already empowered to dismiss a claim with prejudice for failure to comply with an order of the panel. Further, the arbitrator's critical role as fact-finder in deciding expungement requests requires that arbitrators have the ability to request evidence relevant to their decisions. By providing arbitrators with this power, the proposed rule change will help panels establish more fully developed records upon which to base awards.

5. Review of Settlement Documents

The proposed rule change would retain current FINRA Rules 12805(b)'s and 13805(b)'s requirement for a panel considering an expungement request to review any related settlement documents and consider the amount of payments made to any party, and any other terms and conditions of the settlement.^[502] In addition, in cases in which a customer does not participate in the expungement hearing, or a requesting party states that a customer has indicated that they will not oppose the expungement request, the proposed rule change would codify the suggestion, currently in the Guidance, that the panel should inquire and fully consider whether a party impermissibly conditioned a settlement of the arbitration upon the customer's agreement not to oppose the request for expungement.^[503] No commenter supported or objected to these proposed changes. The proposed rule change should provide arbitrator oversight of past settlement agreements which should help ensure (through deterrence) that future settlements are not impermissibly conditioned on a customer's agreement not to oppose the request for expungement.

6. Unanimous Decision To Issue an Award Containing Expungement Relief

Under current FINRA rules, consistent with arbitration cases generally, a panel may award expungement based on a majority decision of the arbitrators.^[504] The proposed rule change would require that the arbitrators agree unanimously to issue an award containing expungement relief.^[505] FINRA stated that, although the vast majority of expungement decisions are already unanimous,^[506] 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.^[507]

Five commenters supported the proposed unanimity requirement.^[508] Two of these commenters reasoned that the unanimity requirement would further safeguard the integrity of the information in the CRD system.^[509] Three commenters also supported the unanimity requirement as ensuring that expungement is an “extraordinary” ^[510] or “exceptional” ^[511] remedy.

Six commenters, on the other hand, opposed the unanimity requirement.^[512] One of these commenters argued that the requirement of the written rationale would encourage unanimity of the decision without mandating it and would further ensure the remedy is extraordinary, thus maintaining the necessary balance between investor protection and regulatory value with fairness to advisors.^[513] Two of these commenters argued that no single arbitrator should hold veto power over an expungement decision because it would lead to more inaccurate and misleading data in the CRD system,^[514] while a fourth argued that requiring unanimous agreement does not value the opinions of all arbitrators.^[515]

FINRA declined to amend the proposed rule change and responded that requiring a unanimous decision of the arbitrators would help protect the integrity of the information in the CRD system and help ensure that the expungement process operates as intended.^[516]

Requiring a unanimous decision will help enhance the integrity of the information in the CRD system by helping ensure expungement will only be awarded when there is no disagreement among the arbitrators that the factual record supports it. The importance of the CRD system extends to all aspects of regulation of broker-dealers and registered representatives. Among other things, the information about firms and registered representatives available on CRD facilitates regulators, such as FINRA and the other SROs, state regulators, as well as the Commission, in meeting their regulatory obligations. In addition, certain information in the CRD system is available to the public through BrokerCheck; this information helps investors make better-informed choices about the registered representatives and broker-dealer firms with whom they may conduct business. For these reasons, the importance of the integrity of information in the CRD system militates against awarding expungement in circumstances where there may be disagreement about the merits of a claim.

One commenter recommended that the panel's unanimous decisions to expunge records should only be reached when the evidence presented in support of expungement meets a clear and convincing standard of proof.^[517] This commenter reasoned that such an evidentiary standard would be consistent with the extraordinary nature of expungement.^[518]

FINRA declined to amend the proposed rule change in response to this recommendation. FINRA stated that to further clarify the limited circumstances under which arbitrators must decide expungement requests, the proposed rule change would expressly list in the Codes the narrow grounds in FINRA Rule 2080(b)(1) for deciding these requests.^[519] FINRA stated that it believes that the explicit incorporation of these grounds into the Codes and the requirement for a unanimous decision by arbitrators from the Special Arbitrator Roster would achieve the goal of balancing the competing interests in the expungement process of providing a fair process and protecting the integrity of the information in the CRD system. ^[520] ( printed page 24313) Finally, FINRA stated it will continue to evaluate whether there are other ways to further strengthen the expungement process, including whether to require that a panel find that the evidence presented in support of an expungement request meets a clear and convincing standard of proof in order to issue an award containing expungement relief.^[521]

The importance of the integrity of information in the CRD system militates against awarding expungement in circumstances where there may be disagreement about the merits of a claim. Thus, as stated above, requiring a unanimous decision will enhance the integrity of the information in the CRD system by helping ensure expungement will only be awarded when there is no disagreement among the arbitrators that the factual record supports it. Furthermore, by requiring a three-person panel of specially trained, specially qualified arbitrators to unanimously decide an expungement request based on three specified grounds ^[522] (in addition to the proposed reforms to the process for selecting arbitrators and the enhanced training and qualification), the proposed rule change is reasonably designed to help ensure that arbitrators only award expungement when there is evidentiary support of their decisions. Therefore, FINRA's decision regarding the evidentiary standard is reasonable in light of the implementation of a unanimous decision requirement, and other proposed safeguards.

7. Awards

Current FINRA Rules 12805(c) and 13805(c) require that the panel 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. The proposed rule change would retain the requirements of current Rules 12805(c) and 13805(c) but would remove the word “brief.” As a result, the panel would be required to provide enough detail in the award to explain its rationale for awarding expungement relief.^[523] In addition, the proposed rule change would incorporate language from the Guidance by requiring that the panel's explanation identify any specific documentary, testimonial or other evidence on which the panel relied in awarding expungement relief.^[524]

One commenter suggested that FINRA “strengthen” this aspect of the proposed rule change by requiring arbitrators to provide a thorough explanation of how a request meets expungement's extraordinary standard, including an explanation of how the arbitrators determined that the requesting party's uncontested assertions accurately reflected the truth of the matter.^[525]

FINRA declined to amend the proposed rule change and responded that the panel's explanation would be required to not be solely a recitation of one of the grounds for awarding expungement relief or language provided in the expungement request and that the proposed rule change would require the panel to identify any specific documentary, testimonial, or other evidence on which the panel relied in awarding expungement relief.^[526] In addition, FINRA stated that it would specify in its enhanced expungement training for arbitrators the importance of explaining their rationale for awarding expungement relief.^[527]

Requiring a written rationale that specifically identifies the basis for an expungement award and the documents or other evidence that supports such an award should be sufficient both to help ensure that a panel has considered the available evidence and its bearing on the available bases for an expungement award and should help ensure that a panel has correctly identified a permissible ground for expungement. Further, the written rationale requirement should provide interested parties with enough information to understand the reasons for an expungement award.

8. Grounds for Recommending Expungement

As stated above, both currently and under the proposed rule change, an associated person may seek expungement of customer dispute information by obtaining a court expungement order by either: (1) going through the arbitration process and obtaining an award recommending expungement (and then obtaining a court order confirming the arbitration award); or (2) going directly to court (without first going through arbitration). Regardless of whether expungement of customer dispute information is sought directly through a court or by first going through arbitration, FINRA Rule 2080 requires an associated person seeking expungement to obtain a court order directing such expungement or confirming an award containing such expungement.^[528] Moreover, under FINRA Rule 2080(b) members or associated persons petitioning a court for expungement relief, or seeking judicial confirmation of an arbitration award containing expungement relief, must name FINRA as an additional party and serve FINRA with all appropriate documents unless this requirement is waived by FINRA pursuant to either Rule 2080(b)(1) or 2080(b)(2). Specifically, FINRA Rule 2080(b)(1) provides that FINRA may waive the requirement to name FINRA as a party in situations where “expungement relief is based on affirmative judicial or arbitral findings” of factual impossibility, mistake, or falsity.^[529]

In addition to FINRA's ability to waive the obligation to name FINRA as a party under FINRA Rule 2080(b)(1), FINRA may also waive the requirement to name FINRA as a party to a court proceeding seeking confirmation of an arbitration award pursuant to FINRA Rule 2080(b)(2).^[530] FINRA Rule 2080(b)(2) provides that FINRA may waive this requirement in situations in which “the expungement relief is based on judicial or arbitral findings other than those described above”—that is, situations in which an arbitrator has not found factual impossibility, mistake, or falsity but, nevertheless, has recommended expungement based on findings not named in Rule 2080. In such situations, “FINRA, in its sole discretion and under extraordinary circumstances, also may waive the obligation to name FINRA as a party if [FINRA] determines that: (A) the expungement relief and accompanying findings on which it is based are meritorious; and (B) the expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.” ^[531] In other words, if an arbitrator recommends expungement on grounds other than factual impossibility, mistake, or falsity, FINRA may, in “extraordinary circumstances” nevertheless decide to waive the obligation to name FINRA as a party if FINRA finds: (1) that the alternative grounds supplied by the arbitrator and the arbitrator's recommendation are ( printed page 24314) meritorious and (2) that the expungement would have no material adverse effect on investor protection, the integrity of the information in the CRD system, or regulatory requirements.^[532]

It is FINRA's view that, currently, in order to issue an award containing expungement relief, a panel must affirmatively find that one of the three grounds contained in FINRA Rule 2080(b)(1) has been met.^[533] More specifically, current FINRA Rules 12805 and 13805 require that, in order to issue an award containing expungement of customer dispute information, a panel must indicate in the arbitration award which of the FINRA Rule 2080 grounds for expungement serves as the basis for its expungement order. In other words, according to FINRA, to include expungement relief in an award, FINRA Rules 12805 and 13805 currently require a panel to 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.^[534]

The proposed rule change would replace FINRA Rules 12805's and 13805's reference to FINRA Rule 2080 with an enumeration of the specific grounds identified in FINRA Rule 2080(b)(1) ( i.e., factual impossibility, mistake, or falsity). FINRA stated that the proposed rule change thus would codify, in the Codes, the grounds identified in FINRA Rule 2080(b)(1) as the exclusive grounds upon which an arbitration panel may issue an award containing expungement of customer dispute information from the CRD system.^[535]

In FINRA's view, both FINRA and the Commission historically have treated the grounds in Rule 2080(b)(1) as the exclusive grounds upon which expungement may be awarded.^[536] Consistent with this view, the proposed rule change, in addition to codifying the FINRA Rule 2080(b)(1) grounds as the exclusive grounds upon which a panel may base an expungement award, would also state that a panel shall not issue, and the Director shall not serve, an award containing expungement relief based on grounds other than those in proposed Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i).^[537] Three commenters supported these proposed changes to FINRA Rules 12805 and 13805.^[538] Two of these commenters stated that the required grounds for issuing an expungement award would help ensure that expungement is an extraordinary remedy.^[539] The third commenter reasoned that the proposed rule change should drive outcomes that are more consistent with the limited circumstances under which expungement can be granted and favors consistency in the expungement process.^[540]

One commenter objected to this provision of the proposed rule change, positing that FINRA should not limit the grounds for when arbitrators can recommend expungement to those contained in current Rule 2080(b)(1), incorporated into proposed Rule 12805 and 13805, but should also allow arbitrators to recommend expungement on the grounds contained in Rule 2080(b)(2) by also incorporating those grounds into the proposed rule change.^[541] The commenter stated that the current grounds for granting expungement under FINRA rules are not limited to the three grounds listed in Rule 2080(b)(1) ( i.e., factual impossibility, mistake, or falsity), but also include the grounds listed in Rule 2080(b)(2) ( i.e., (1) the expungement and accompanying findings on which it is based are meritorious and (2) expungement would have no material adverse effect on investor protection, the integrity of the information in the CRD system, or regulatory requirements).^[542] Accordingly, and notwithstanding prior FINRA guidance purporting to limit the grounds upon which a panel may grant expungement to those contained Rule 2080(b)(1), in the commenter's view arbitrators may also award expungement based on Rule 2080(b)(2).^[543] The commenter disagreed with FINRA's position that subsection (b)(2) only provides factors for FINRA to consider in deciding whether to waive the obligation to name FINRA as a party in a court petition for expungement relief. Instead, the commenter stated that Rules 2080(b)(1) and 2080(b)(2) operate in the same manner and that Rule 2080(b)(2) provides additional grounds on which a panel may base an expungement award.^[544] In support of its recommendation, the commenter argued that failing to permit expungement on the grounds contained in Rule 2080(b)(2) would result in meritorious expungement requests being rejected, leading to inaccurate and misleading information remaining in the CRD system.^[545] The commenter further stated that FINRA has not justified limiting the grounds upon which expungement may be awarded to those contained in the proposed rule change ( i.e., the grounds in Rule 2080(b)(1)).^[546] The commenter added that the proposed rule change is inconsistent with the Exchange Act because FINRA: (1) circumvented the proper rulemaking process by failing to provide adequate notice that it was proposing a significant rule change to limit the expungement grounds to Rule 2080(b)(1) or an opportunity for comment; ^[547] and (2) failed to provide any cost-benefit analysis, or other justification, to support limiting the grounds for expungement to those under Rule 2080(b)(1).^[548]

FINRA disagreed with the commenter, stating that Rules 12805 and 13805 and their rulemaking history and related guidance establish that arbitrators in the forum are currently limited to the grounds enumerated in FINRA Rule 2080(b)(1)(A)-(C) when awarding expungement.^[549] According to FINRA, the plain language of current FINRA Rules 12805 and 13805 is consistent with FINRA's position that, currently, FINRA Rule 2080(b)(1) lists the exclusive grounds upon which a panel may award expungement.^[550] Specifically, FINRA stated that current FINRA Rules 12805 and 13805 describe what “the panel must” do in order to grant expungement of customer dispute information, and only FINRA Rule 2080(b)(1) describes grounds upon which arbitrators may grant expungement in the forum.^[551] By contrast, Rule 2080(b)(2) provides a general standard for FINRA to consider in making its own regulatory determination in extraordinary circumstances when the court or arbitrator makes findings “other than those described in [2080](b)(1)].” ^[552] According to FINRA, as a result, the language in current FINRA Rules 12805 and 13805 requiring the panel to “[i]ndicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order” is properly understood as referring only to the grounds listed in paragraph (b)(1), as those are the only specific grounds listed in FINRA Rule 2080 that a panel could affirmatively find in making an expungement determination.^[553]

FINRA further stated that by approving FINRA Rule 2080 and FINRA Rules 12805 and 13805, the Commission demonstrated its expectation that a panel should indicate in the arbitration award which of the grounds for expungement in Rule 2080(b)(1)(A)-(C) serves as the basis for the expungement order.^[554] According to FINRA, the Commission thus “explicitly approved the FINRA Rule 2080(b)(1) limitation.” ^[555]

FINRA also disagreed with the commenter that not permitting expungement on Rule 2080(b)(2) grounds would lead to inaccurate and misleading information in the CRD system.^[556] On the contrary, FINRA stated that it believes that allowing arbitrators in the forum to issue awards containing expungement relief by applying an “equitable” standard would not sufficiently protect the integrity of the information in the CRD system, as, in FINRA's view, any removal of information from the CRD system should be based on specific, enumerated standards, such as those provided in FINRA Rule 2080(b)(1).^[557] If FINRA were to change course and expand the grounds for expungement to allow for (b)(2) grounds, as advocated by the commenter, FINRA believes it would inappropriately broaden the grounds for expungement to allow for removal of dispute information beyond the extraordinary circumstances in which expungement is appropriate.^[558] In particular, whereas (b)(1) identifies specific grounds for expungement, the (b)(2) grounds are entirely open ended, as they refer only to grounds “other than those described” in (b)(1).^[559]

In response to the commenter's assertion that FINRA has not justified the proposed rule changes, FINRA reiterated its view, stated in the Notice, that the proposed rule changes would further protect the integrity of the information in the CRD system.^[560] FINRA stated the proposed rule changes would reinforce that expungement is appropriate only in extraordinary circumstances by specifying in the Codes the narrow grounds that arbitrators must find in issuing an award containing expungement relief.^[561] FINRA stated that amending Rules 12805 and 13805 to codify the three narrow grounds in Rule 2080(b)(1) as the only grounds on which arbitrators may determine to award expungement relief best aligns with FINRA's position that its expungement framework should allow for the removal of customer dispute information from the CRD system only in extraordinary circumstances in accordance with FINRA's rules.^[562] These three narrow grounds, in FINRA's view, fairly address the circumstances in which an associated person would appropriately seek expungement of customer dispute information in the DRS arbitration forum.^[563] In addition, FINRA stated that allowing expungement only in these extraordinary circumstances would continue to balance the competing interests of providing regulators with broad access to information about customer disputes to fulfill their regulatory obligations, providing a fair process that recognizes an associated person's interest in protecting their reputation, and ensuring investors have access to accurate information about associated persons with whom they may decide to do business.^[564] Furthermore, FINRA stated that is 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.^[565]

Finally, FINRA also disagreed with the commenter's assertion that FINRA has not provided adequate notice or opportunity for public comment of its intent to amend FINRA Rules 12805 and 13805 to codify the exclusive grounds upon which an arbitration panel may issue an award containing expungement of customer dispute information from the CRD system.^[566] FINRA stated that by proposing the proposed rules it has solicited comment on the proposed rule change, which FINRA stated clearly articulates the amendment and the basis for it.^[567] In addition, FINRA stated that it had also previously solicited comment in Regulatory Notice 17-42.^[568] According to FINRA, adequate notice and opportunity for comment in this instance is demonstrated by publication of the proposed rules explaining the reasons for the proposed rule change, the commenter's comment letters in response to the proposed rules, and FINRA's consideration of and responses to comments.^[569]

The Commission's order approving Rules 12805 and 13805 stated that “in order to grant expungement of customer dispute information under Rule [2080], the panel must . . . indicate in the arbitration award which of the grounds ( printed page 24316) for expungement in Rule [2080](b)(1)(A)-(C) serves as the basis for the expungement order.” ^[570] The proposed rule change would codify FINRA's intended exclusive grounds for expungement. Codifying in FINRA Rules 12805 and 13805 the grounds enumerated in Rule 2080(b)(1) as the only grounds on which an arbitrator may recommend expungement would give arbitrators a clear mandate. It would resolve any potential uncertainty regarding the applicability of FINRA Rule 2080(b)(2) as an appropriate ground upon which arbitrators may issue awards containing expungement relief. Moreover, consistent with FINRA guidance, it would help ensure that arbitrators recommend expungement only as an extraordinary remedy in the extraordinary circumstances of factual impossibility, mistake, or falsity.

The proposed rule change would also help protect the integrity of information in the CRD system by helping ensure that expungement remains an extraordinary remedy limited to narrow, enumerated circumstances. The Commission also believes that FINRA's decision to limit the grounds for expungement to those enumerated in Rule 2080(b)(1) is appropriate. Because Rule 2080(b)(2) describes a general standard for FINRA to consider in determining whether or not to waive an associated person's obligation to name FINRA as a party when seeking judicial confirmation of an expungement award, including Rule 2080(b)(2)'s standard would make the type of information that could be expunged broader and less foreseeable and thus risk undermining the integrity of the information in the CRD system.^[571]

Further, in contrast to the commenter's statement, FINRA provided justification to support limiting the grounds for awarding expungement to those under Rule 2080(b)(1). In its filing, FINRA details the economic impact analyzing “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 [its] regulatory objectives.” ^[572] FINRA's analysis covers the potential economic impact of the entire proposed rule change, including proposed Rules 12805(c)(8)(A) and 13805(c)(9)(A).^[573] Thus, FINRA's economic analysis addressed its codification, in the Codes, of the grounds identified in FINRA Rule 2080(b)(1) as the exclusive grounds upon which an arbitration panel may issue an award containing expungement of customer dispute information from the CRD system.

Furthermore, as stated above, BrokerCheck helps investors make more informed choices about the associated persons and broker-dealer firms with whom they may conduct business. Since the information on BrokerCheck is populated by information from CRD, the integrity of the information investors use to make their investment decisions is dependent on the integrity of the information in the CRD system. An expungement process limited to clear, enumerated standards helps ensure that factually impossible, mistaken, or false information can be removed from the CRD system, while also decreasing the likelihood that arbitrators award expungement on unforeseen or unsound grounds to the detriment of the quality of information in the CRD system. In light of this, the Commission believes that FINRA has appropriately balanced the investor protection benefits of the proposed rule change against the potential harm to associated persons, and that FINRA has reasonably considered the impacts of the proposed rule change as outlined in its economic impact analysis and its response to comments.

Finally, Section 19(b) of the Act,^[574] and Rule 19b-4 thereunder,^[575] set forth the requirements for notice and comment for an SRO proposed rule change. That process was followed for this proposed rule change. The Notice articulated FINRA's proposed rule change, as well as its bases for it. In response, the Commission received forty-five comment letters including from commenters expressing concern about the proposed codification of Rule 2080(b)(1)'s grounds for expungement. On November 10, 2022, FINRA responded to those commenters and filed Amendment No. 1, modifying the original proposed rule change. In the Order Instituting Proceedings, the Commission noticed Amendment No. 1 and requested comment on the proposed rule change, as modified. In response, the Commission received seven comment letters including from commenters expressing concern about the proposed codification of Rule 2080(b)(1)'s grounds for expungement.

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

Originally, the proposed rule change would have included an instruction for arbitration panels that the decision of a customer or an authorized representative of state securities regulators not to attend or participate in the expungement hearing would not be material to the determination of whether expungement is appropriate.^[576] One commenter suggested that FINRA amend the proposed rule change to state clearly that arbitrators must give no weight to such decisions.^[577] FINRA agreed 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, and accordingly amended the proposed rule change to clarify this position.^[578]

As amended, the proposed rule change states that a panel shall not give any evidentiary weight to a decision by a customer or an authorized representative not to attend or participate in an expungement hearing when making a determination of whether expungement is appropriate.^[579] FINRA stated that it is aware that some panels have indicated in expungement awards that a customer did not appear at the expungement hearing.^[580] But, FINRA stated that it believes that 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 and thus it should not be considered by the panel when deciding a request for ( printed page 24317) expungement.^[581] Three commenters supported the amendment.^[582] The Commission received no comment letters opposing the amendment.

The Commission agrees that customers or authorized representatives of a state securities regulator may decide not to appear for a variety of reasons unrelated to the merits of an expungement request and that FINRA reasonably determined that such a decision by a customer or an authorized representative should not be given weight by the panel assessing the request.

10. Forum Fees

The proposed rule change would retain the current requirement that the panel must assess against the parties requesting expungement all forum fees for each hearing in which the sole topic is the determination of the appropriateness of expungement.^[583]

One commenter characterized the existing minimum member surcharge and process fees that would be assessed to firms if an associated person files a straight-in request, following an arbitration that closes other than by award or closes by award without a hearing, as “duplicative” and suggested that these fees be eliminated.^[584] According to this commenter, in a customer arbitration that closes other than by award or by award without a hearing, the member firm would have already paid the member surcharge and processing fee for using the forum.^[585] The member would then have to pay again if named in a subsequent straight-in request.^[586] Another commenter stated similarly that where firms have already paid the fee in the original matter, associated persons should not then be required to pay another full fee for expungement requests.^[587]

In response, FINRA stated that the member surcharge and process fees that a member firm would be assessed if an associated person files a straight-in request are not duplicate fees.^[588] FINRA stated it is appropriate to assess these fees for straight-in requests because such requests initiate separate arbitrations seeking different relief—namely, expungement.^[589] FINRA also stated that if the associated person, or the requesting party in the case of an on-behalf-of request, files a straight-in request after having previously paid the filing fee to request expungement of the same customer dispute information during a customer arbitration that settles or is dismissed, FINRA would not assess a second filing fee when the associated person files the straight-in request.^[590] Moreover, FINRA explained that, in instances in which DRS's fees may be challenging to pay due to financial hardship, the Director has the authority to defer payment of all or part of an associated person's filing fee on a showing of financial hardship.^[591]

FINRA may reasonably assess member surcharge and process fees for straight-in requests. Straight-in requests are separate arbitrations before a separate panel of specially trained arbitrators. Proceedings have costs and it is appropriate that FINRA would require the parties generating those costs to pay them.^[592]

11. Director's Authority To Deny the Forum

The proposed rule change would require the Director 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.^[593] The proposed rule change would also provide the Director with 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.^[594] FINRA stated that the proposed rule change would help ensure additional safeguards around the expungement process by expanding the circumstances in which the Director is authorized to deny the DRS arbitration forum.^[595]

No commenter supported or objected to these proposed changes. The Commission believes that providing the Director with the authority to deny the use of the DRS arbitration forum should enhance the integrity of the expungement process and the CRD system.

E. Notifications to Customers and States Regarding Expungement Requests

1. Associated Persons Notify Customers

The proposed rule change would codify a practice from the Guidance to require the associated person who files a straight-in request to serve all customers whose customer arbitrations, civil litigations, and customer complaints are a subject of the expungement request with a copy of the statement of claim requesting expungement and any answer.^[596] The panel would be authorized to decide whether extraordinary circumstances exist that make service on the customers impracticable.^[597] The proposed rule change would further 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.^[598] FINRA stated that these proposed rule changes would help ensure that a customer knows about the expungement request and has an opportunity to attend and participate in the expungement hearing.^[599]

Three commenters supported this aspect of the proposed rule change.^[600] Two commenters reasoned that the notification requirement would ( printed page 24318) encourage customer participation and reduce unopposed expungement hearings.^[601] For the same reasons, one of these commenters further supported the requirement that the associated person file proof of service and copies of all communications with the panel.^[602]

The proposed customer notification provision will help ensure that customers are aware of expungement requests and have an opportunity to participate. Further, requiring filing of proof of service and any communications will help ensure that customers are notified in accordance with the proposed rule change and that customers are not inappropriately dissuaded from participating in an expungement proceeding. Under these proposed rule changes, customers should be more likely to participate in a hearing to decide an expungement request, which helps ensure that the panel has a more fully formed set of evidence upon which to base its decision. With this additional information, the panel should be more likely to award expungement only when appropriate, thereby helping protect the integrity of the information in the CRD system.

2. Director Notifies Customers

To facilitate customer notification of an expungement request, proposed Rule 13805(b)(1)(B)(i) would require an associated person to include in any request to expunge customer dispute information a current address for the relevant customer.^[603] To help ensure an associated person complies with this proposed obligation, proposed Rule 13307(a)(7) would provide that an expungement request that does not include such address is “deficient,” and the Director may not serve any expungement request that does not include such address, the effect being that such request would not move forward.^[604]

Proposed Rule 13805(b)(1)(B)(i) would require the Director to notify all customers whose customer arbitrations, civil litigations, or customer complaints are the subject of an expungement request of the time, date, and place of any prehearing conferences and the expungement hearing. FINRA stated that this proposed notification requirement would facilitate customer participation in the expungement process by providing the customer the time to plan and prepare for the hearing.^[605] The proposed rule change would also require the Director to: (1) include language in the notice encouraging the customer to attend and participate; and (2) provide the notified customers with access to all documents on the Portal relevant to the expungement request that are filed in: (a) the arbitration requesting expungement relief and (b) a customer-initiated arbitration brought by the customer under the Customer Code that is a subject of the expungement request.^[606]

Three commenters recommended amendments to these provisions.^[607] One of these commenters argued that for logistics reasons, customers should only be notified once for the pre-hearing conference and should not be notified again for the expungement hearing.^[608] Another commenter recommended that the proposed rule change be amended to provide that FINRA “will `deliver' the relevant documents to customers upon request,” rather than providing customers with “access.” ^[609] The third commenter recommended that FINRA amend the rule to allow firms to provide the customer's last known address instead of the current address, stating that an error in the listed current address in the petition for expungement, after the appropriate diligence and attempts to correct the error, should not preclude the filing and granting of the expungement request.^[610]

With respect to the notification requirements, FINRA stated that customer attendance and participation in expungement hearings helps the panel fully develop a record on which to decide the expungement request.^[611] FINRA further stated that the associated person seeking expungement should provide the customer's current address, so that the Director will have the most recent contact information to timely notify the customer of the expungement request, prehearing conferences, and expungement hearings.^[612] FINRA accordingly declined to amend the proposed rule change in response to these comments.^[613]

FINRA likewise declined to amend the proposed rule change in response to one commenter's suggestion that FINRA “will deliver” materials on request, rather than providing access.^[614] FINRA responded that these changes were unnecessary because the Portal currently helps ensure that customers receive necessary notifications regarding their arbitration and mediation cases.^[615] FINRA stated that it provides case participants with access to documents through the Portal. FINRA explained that once registered on the Portal, a customer may, among other things, view documents and submit documents to FINRA and, for those customers who are unable to access the Portal, DRS would provide paper documents upon request.^[616]

The proposed rule change related to customer notification would help ensure that customers are notified of expungement requests and able to access related necessary documents. The requirement that an associated person include a current address for the relevant customer would help ensure that customers are notified of expungement requests in a timely manner. Moreover, DRS will provide paper documents to customers that may not have the ability to access the Portal upon request. Notified customers would be more likely to participate in a hearing to decide an expungement request, which would help ensure that the panel has a more fully formed set of evidence upon which to base its decision. With this additional information, the panel is more likely to appropriately decide whether to award expungement, thereby helping protect the integrity of the information in the CRD system.

3. FINRA Notifies State Securities Regulators

The proposed rule change would require FINRA to notify state securities regulators, in the manner to be determined by the Director in collaboration with state securities regulators, of an expungement request within 15 days of receiving an expungement request.^[617] FINRA stated that the proposed notification requirement would help ensure that ( printed page 24319) state securities regulators are timely notified of expungement requests.^[618]

No commenter supported or objected to these proposed changes. Two commenters, however, recommended that FINRA take further action.^[619] One commenter suggested that FINRA consider notifying state securities regulators about separate, expungement-only hearings following a simplified arbitration.^[620] The other commenter suggested that FINRA provide notification to state securities regulators regarding expungement requests “at the time when they have the ability to become involved—at the state court confirmation level.” ^[621]

In response, FINRA stated that FINRA Rule 2080 requires an associated person seeking to confirm an arbitration award containing expungement relief to name FINRA as an additional party unless this requirement is waived by FINRA.^[622] In addition, it is FINRA's practice to notify state regulators when it receives a complaint naming FINRA, or a request for a waiver.^[623] Furthermore, FINRA stated that it is not necessary for state securities regulators to participate in separate expungement-only hearings in simplified arbitrations because the panel already would have sufficient information upon which to develop a complete factual record in order to make a fully-informed decision on the expungement request.^[624] For example, expungement-only hearings in simplified arbitrations would occur after the arbitrator has heard the merits of the customer's case in an adversarial process.^[625] Similarly, FINRA stated that it expects an expungement-only hearing to be scheduled shortly after the customer's dispute is decided or closes, increasing the likelihood of customer attendance and participation.^[626] Accordingly, FINRA did not amend the proposed rule change in response to these comments.^[627]

The Commission believes that notification to state securities regulators within 15 days of receiving an expungement request should provide adequate notice and, for straight-in requests, allow the state securities regulator to determine whether to participate in the expungement proceeding. As stated above, permitting attendance and participation by state securities regulators in straight-in expungement proceedings should enhance the straight-in expungement process. Specifically, inclusion of state securities regulators provides them the opportunity to fulfill their own regulatory obligations, while at the same time increasing the likelihood that the panel in an expungement proceeding that may not involve a customer will hear evidence from multiple viewpoints. With this additional information, the panel is more likely to award expungement only when appropriate, thereby helping protect the integrity of the information in the CRD system. The Commission also believes that panels deciding separate expungement-only hearings in simplified arbitrations should have sufficient information from the underlying claim to develop a complete factual record in order to make a fully-informed decision on the expungement request. In this way, the rule as proposed would help protect the integrity of the information in the CRD system. Finally, FINRA has stated that it will continue to monitor the expungement process to evaluate whether additional rule changes may be necessary to further strengthen the expungement process, including whether to allow state securities regulators to attend and participate in separate expungement-only hearings in simplified arbitrations.^[628]

IV. Solicitation of Comments on Amendment No. 2

Interested persons are invited to submit written data, views, and arguments concerning whether Amendment No. 2 is consistent with the Act. Comments may be submitted by any of the following methods:

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.

V. Accelerated Approval of Proposed Rule Change, as Modified by Amendments Nos. 1 and 2

The Commission finds good cause to approve the proposed rule change, as modified by Amendments Nos. 1 and 2, prior to the thirtieth day after the date of publication of notice of the filing of Amendment No. 2 in the Federal Register .^[629] In Amendment No. 2, FINRA modified the proposed rule change to provide that an associated person would be precluded from filing a straight-in request if the customer dispute information involves the same conduct that was the basis of a final regulatory action taken by a securities regulator or SRO. The basis for extending this prohibition is the same as the basis for the original proposed rule change prohibiting an associated person from filing a straight-in request if the customer dispute information is associated with a finding of liability in an arbitration or civil litigation—permitting an expungement claim in these circumstances would constitute a collateral attack on the results of the underlying resolved dispute.

After consideration of the comments FINRA received on the proposed rule change, the Commission believes that Amendment No. 2 represents a ( printed page 24320) reasonable extension of, and is substantially similar to, the original prohibition of an associated person filing a straight-in request where the customer dispute information formed the basis for a past finding of liability and is appropriate and responsive to commenter's concerns. Accordingly, the Commission finds good cause, pursuant to Section 19(b)(2) of the Act,^[630] to approve the proposed rule change, as modified by Amendments Nos. 1 and 2, on an accelerated basis.

VI. Conclusion

For the reasons set forth above, the Commission finds that the proposed rule change, as modified by Amendments Nos. 1 and 2, is consistent with the provisions of Exchange Act Section 15A(b)(6),^[631] 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 Commission also finds that the proposed rule change is consistent with Section 15A(b)(5) of the Exchange Act,^[632] which requires, among other things, that FINRA rules provide for the equitable allocation of reasonable dues, fees and other charges among members and issuers and other persons using any facility or system that FINRA operates or controls.

It is therefore ordered pursuant to Section 19(b)(2) of the Exchange Act ^[633] that the proposed rule change (SR-FINRA-2022-024), as modified by Amendments Nos. 1 and 2, be, and hereby is, approved on an accelerated basis.

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 10:00 a.m. and 3:00 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 May 10, 2023.