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The SEC Approves FINRA’s Expungement Rule Proposal

April 21, 2023

On April 12, 2023, the U.S. Securities and Exchange Commission (“SEC”) approved the Financial Industry Regulatory Authority’s (“FINRA”) revised proposal to establish more difficult procedures for expungement of customer complaints from an Associated Person’s records maintained by the Central Registration Depository (“CRD”).  FINRA has not yet announced the effective date of these new rules, and will do so in a Regulatory Notice.

FINRA originally submitted a proposal to the SEC for approval in September 2020.  However, following concerns raised by the SEC, investor attorneys, and state security regulators that the reforms did not go far enough, FINRA withdrew the proposal in May 2021.  FINRA filed the revised proposal with the SEC in July  2022.  Most notably, the new rule will:

  • Require that all straight-in[1] expungement requests be decided by a three-person panel that is randomly selected by the Neutral List Selection System (“NLSS”) from a special roster of arbitrators.  The parties will not be permitted to agree to fewer than three arbitrators, nor will they be permitted to engage in the usual rank and strike process in appointing a panel.  Additionally, the parties cannot stipulate to any arbitrator’s dismissal  but would be permitted to challenge an arbitrator for cause. If an arbitrator is removed, the NLSS would randomly select a replacement.
  • Require that the panel deciding the expungement request issue an award only if the panel unanimously agrees.
  • Require the panel to provide enough detail in the award to explain its rationale for including expungement relief in the award.
  • Preclude an Associated Person from requesting expungement of customer dispute information if a panel previously considered the merits of, or a court previously denied, a request to expunge the same customer dispute information.
  • Prohibit an Associated Person who withdraws an expungement request from refiling the request at a later time.
  • Set time limitations to straight-in expungement requests:.
    • An Associated Person must file within two (2) years after the close of the customer-initiated arbitration or civil litigation associated with the customer dispute information; or
    • An Associated Person must file within three (3) years after the date the customer complaint was initially reported in the CRD system if the customer complaint does not evolve into a customer-initiated arbitration or civil litigation.
  • Require the straight-in request to be filed against the broker dealer where the Associated Person was registered at the time of the events that gave rise to the customer dispute.
  • Require that FINRA notify state securities regulators within 15 days of receiving straight-in  expungement requests and allow regulators to participate in such requests.
  • Require Associated Persons named in a customer arbitration to request expungement during that customer arbitration or forfeit the opportunity. One exception to this rule is that in a simplified arbitration (i.e., seeking $50,000 in damages or less), the Associated Person is permitted to file a straight-in expungement proceeding.
  • Require that requests for expungement during a customer arbitration be made in the Answer or another pleading at least sixty (60) days prior to the first scheduled hearing, absent an extension granted by the panel.
  • Require that expungement requests in customer arbitrations (whether by a named party or not) be decided only if the case proceeds to a hearing on the merits. If the case settles or is otherwise dismissed prior to the hearing, the Associated Person would be required to file a straight-in request.

We continue to monitor developments and will provide an update when FINRA announces the date these rules will go into effect.  Should you have any questions regarding the expungement process or how the rules may affect you, please contact any member of our Securities Litigation group.

[1] “Straight-in requests” are independent arbitration actions filed by an Associated Person against a former or current member firm or the customer seeking expungement of a complaint from the CRD.

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