On December 6, 2017, FINRA issued Regulatory Notice 17-42, which is perhaps FINRA’s most far-reaching and expansive proposed codification of the expungement process for customer dispute information since 2012. This Notice proposes numerous substantive, procedural and economic changes to the expungement process that, if codified, will increase the burden for associated persons and FINRA member firms. In sum, the proposed amendments aim to provide an increased opportunity for customer participation in expungement decisions, make information regarding the underlying customer case or complaint more readily available, make expungement decisions more timely relevant to the underlying customer case or complaint and establish an Expungement Arbitrator Roster to decide expungement requests when expungement has not been decided as part of the underlying customer case.
Below is a summary and analysis of the most notable proposed changes, which ostensibly do not alter current FINRA rules and updated expungement guidance. The comment period expires February 5, 2018.
Proposed Bars to Requesting Expungement Relief
- Under the proposal, an associated person would be barred from requesting expungement relief if: 1) a panel in the underlying case already issued a decision on expungement for the same customer dispute information; 2) a court already denied the expungement request; 3) the underlying customer case has not concluded; 4) more than one year has passed since the underlying customer case has concluded; and 5) more than one year has passed since the member firm initially reported the customer complaint on CRD.
Analysis: While FINRA’s current expanded expungement guidance forecloses repeated expungement requests and parallel proceedings, this proposal would codify such guidance. However, the one year limitation period would significantly impact associated persons by foreclosing the expungement process for older customer complaint disclosures. Going forward, associated persons and member firms would be compelled to make decisions concerning expungement close in time to the reporting of the customer dispute.
Additional Proposed Standard for Recommending Expungement
- In addition to a panel having to find a valid basis for expungement under one of the three grounds pursuant to FINRA Rule 2080(b)(1) (factually impossible or clearly erroneous; not involved; or false), the proposal would also require the panel also find that the customer dispute information has no investor protection or regulatory value.
- Expungement awards would have to be unanimous (as opposed to majority under current rules)
Analysis: FINRA seeks to impose additional standards for expungement to lower the volume of overall expungement filings and encourage only meritorious claims. FINRA believes that expanding the findings that arbitrators must make before granting expungement would help maintain the accuracy of data that appears in CRD. However, if customer dispute information satisfies one of the three existing criteria for expungement under FINRA Rule 2080(b)(1), it seems axiomatic that the reporting of that information would not have any investor protection or regulatory value (i.e., a false complaint would not have any regulatory value).
Proposed Changes to Expungement Arbitrator Rosters and Panel Selection
- The proposal would establish a roster of public chairpersons with additional qualifications to decide expungement requests
- FINRA would randomly select three public chairpersons from the Expungement Arbitrator Roster (parties would no longer rank/select arbitrators)
- FINRA’s Expungement Arbitrator Roster would consists of practicing attorneys who have received advanced expungement training and have at least five years of experience in either litigation, securities regulation, administrative law, service as a securities regulator or service as a judge
Analysis: While a roster of practicing attorneys with specified experience and additional expungement training would improve arbitrator qualifications, FINRA’s random selection of arbitrators is a significant change and removes the parties’ traditional role of providing input and retaining a measure of control over the expungement process.
Proposed Changes to Expungement Hearing
- Expungement hearings would be held either in-person or through video conference, at the panel’s discretion
- Associated persons must participate in hearing
- FINRA notifies underlying customers of expungement and invites/encourages them to participate in the hearing; customer participation may be telephone
Analysis: FINRA views expungement as an extraordinary measure and believes the associated person should be available in person or by video conference to present his/her case and respond to questions from the panel. These proposed changes effectively mandate an in-person expungement hearing, greatly increasing the costs to the associated person in both time and travel expenses.
Proposed Changes to Requesting Expungement Relief During the Underlying Customer Case (when Associated Person Named as a Party)
- Associated person who is named as a party would be required to request expungement in the underlying customer case (and would be prohibited from seeking expungement by filing a subsequent action)
- Associated person permitted to file expungement request at least 60 days prior to first scheduled hearing, such as in the answer or in any pleading (or else would have to file Motion for expungement after that time)
- Associated person required to pay filing fee of at least $1,425 (or the applicable higher filing fee); FINRA would assess member surcharge and process fee against each member firm as part of the expungement request
- When underlying customer case closes by award, panel required to consider and decide expungement request during underlying customer case (expungement decision must be unanimous, even though award of customer complaint only requires majority)
- When underlying customer case closes other than by award (i.e., settlement, withdrawal), the associated person must file a new claim for expungement against the firm at which he/she was associated at the time of the dispute, with a three-person panel selected from the Expungement Arbitrator Roster.
Analysis: These proposals are designed to increase the burden and costs imposed on associated persons and member firms by requiring additional fees and separate expungement proceedings in some circumstances and precluding the filing of new cases in other circumstances. The unanimity requirement poses an additional hurdle to expungement.
Proposed Changes to Requesting Expungement Relief During the Underlying Customer Case (when Associated Person Not Named as a Party)
- Proposed amendments would codify the ability of a party in the underlying customer case to request expungement on behalf of the unnamed person with written approval of unnamed person
- Unnamed person not permitted to intervene in underlying customer case absent firm approval for expungement purposes
- Process for party requesting expungement relief on behalf of unnamed party would include filing with FINRA at least 60 days prior to the hearing: 1) a form requesting expungement signed by the unnamed person; and 2) a statement requesting expungement relief
- Where case closes by other than award (i.e., settlement, withdrawal), FINRA would notify the unnamed person that the case is closed and that unnamed person would have one year to file a separate action for expungement relief, naming the firm at which he/she was associated with at the time complaint events arose (provided expungement request is not barred)
Analysis: These proposals formalize the circumstances under which an unnamed person may participate in an underlying customer case in which he/she is not a named party and provides additional steps that the unnamed person must take to request expungement. Because most customer cases settle, the unnamed person would now be required to file a new action requesting expungement relief naming the member firm, with the attendant fees for both the unnamed person and member firms, instead of just retaining the panel in the underlying customer case. This increases both the costs to the associated person and member firm, and extends the time period for expungement in a new action.
Proposed Changes to Expungement Requests in Simplified Arbitrations ($50,000 or less)
- Associated person required to file a new expungement claim against the firm at which he/she associated with at time of customer dispute only after conclusion of simplified arbitration
- Associated person and firms required to pay new fees (detailed above)
- Expungement heard by panel of three arbitrations from Expungement Arbitrator Roster (instead of a single arbitrator as in a simplified case)
Analysis: While the streamlined process and special rules for simplified arbitration are designed to limit the costs and duration of arbitration, these proposals for simplified arbitrations would instead increase the costs imposed on associated persons and member firms by requiring separate expungement proceedings. Additionally, although FINRA’s goal through many of these proposals is to facilitate a quicker resolution, these proposals will instead delay the expungement process for associated persons.
Conclusion
Overall, these proposals contain numerous substantive, procedural and economic changes to the expungement process that if codified, will increase the burden for associated persons and FINRA member firms. The effect of these changes, if adopted, will likely to be to discourage expungement filings and diminish their likelihood of success. However, increased arbitrator qualifications for expungement matters may lead to more confidence in the expungement process and greater certainty of outcome. While the one-year time limitation serves as a procedural limitation and forecloses expungement for older customer complaints, it may benefit associated persons involved in new customer disputes because the underlying documents and information to support an expungement requests will be more readily available for expungement purposes.