FINRA’s Proposed Amendments to the Expungement Process

FINRA expungement has been, and continues to be, a topic of intense discussion. We’ve discussed expungement in regard to customer complaints, as well as intra-industry issues, in just the past year.

This continuation on the theme concerns a FINRA request for comments that would make some changes to the customer complaint expungement process.

Regulatory Notice 17-42 outlines the changes that FINRA is considering. It allows for members, and other interested parties, to provide comments until February 5, 2018. FINRA is working with the SEC and NASAA on additional expungement issues that are likely to become other requests for comment later in the year.

As previously discussed, expungement is the process that an associated person may use to remove allegations of wrong-doing made by a customer, and has been entered in their Central Registration Depository (“CRD”).

The same three reasons that allow for expungement will remain in place, and they are outlined in Rule 2080. They are:

1) The claim, allegation or information is factually impossible or clearly erroneous;

2) The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; and

3) The claim, allegation or information is false.

Under the proposed rule changes, for all expungement requests, the associated person who is seeking expungement must appear at the expungement hearing. They can appear in person or via video conference, although no telephone appearances will be accepted – they need to be visually seen by the panel. The three-person panel must reach a unanimous written decision that the request does or does not meet one of the three criteria for expungement, and to give a written justification for their decision.

The three main distinctions that FINRA wants to make are: those customer cases that are arbitrated to conclusion, those that are settled prior to the conclusion of the arbitration, and those that do not reach the level of arbitration.

The following are the proposed rule amendments.

For those requests made during the underlying customer case:

  • Limit each associated person who is named as a party to one opportunity to request expungement, and that opportunity must be exercised during the Underlying Customer Case;
  • Create limitations on requests for expungement of customer dispute information, including a one-year limitation period after the Underlying Customer Case closes, for an associated person to file an expungement request that was not decided during the Underlying Customer Case;
  • Codify a party’s ability to request expungement on behalf of an associated person not named as a respondent in the Underlying Customer Case (hereinafter referred to as an unnamed person) during the Underlying Customer Case, and establish procedures for such requests;
  • Require associated persons who file expungement requests outside of the Underlying Customer Case to file the request under the Industry Code against the firm at which he or she was associated at the time of the events giving rise to the customer dispute;
  • Remove the option to file an expungement request outside of the Underlying Customer Case against a customer; and
  • Specify a minimum filing fee of $1,425 for expungement requests.

Expungement Arbitrator Roster

  • Establish a roster of public chairpersons with additional qualifications to decide expungement requests (Expungement Arbitrator Roster) filed against a firm under the Industry Code.

Expungement Requests in Simplified Arbitration Cases

  • Require that an associated person or an unnamed person wait until the conclusion of a customer’s simplified arbitration case to file an expungement request, which must be filed against the firm, not the customer, and would be heard by a panel selected from the Expungement Arbitrator Roster.

Expungement Requests relating to Customer Complaints that Do Not Result in an Arbitration Claim

  • Require that the associated person seek expungement of the customer dispute information relating to a customer complaint within one year of the member firm initially reporting the customer complaint to CRD.

The Regulatory Notice gives a fuller and more in-depth explanation of the proposed rules with examples and rationales for each of the amendments. We recommend that if you are considering requesting expungement (or commenting on the proposals), you carefully read the Notice 17-46.

If you have any questions, please click here to contact us, or call us at 619.298.2880.

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