FINRA SEEKS TO LIMIT EXPUNGEMENT REQUESTS WITH PROPOSED RULE

On September 22, 2020, FINRA submitted a proposed rule change to the SEC.   The proposed rule furthers FINRAs assault on the expungement process by imposing stringent requirements on expungement requests filed during a customer arbitration by or on behalf of the associated person (“on-behalf-of request”) or filed by a registered representative separate from a customer arbitration (“straight-in request”).  The proposed rule also (a) establishes a roster of arbitrators with enhanced training and experience, from which a panel of 3 arbitrators would decide straight-in requests; and (b) codifies and updates the Notice to Arbitrators and Parties on Expanded Expungement Guidance.

Here are some of the key takeaways from the proposed rule change:

Denial of FINRA Forum

FINRA proposes to change Rule 12203 (Customer Code) and Rule 13303 (Industry Code) to require the Director of Arbitration “to decline the use of the FINRA arbitration forum if the Director determines the expungement request is ineligible for arbitration under Rule 12805.”

Proposed Rule 12805 will provide substantial limitations on expungement requests as noted below:

Requesting Expungement When FA is Named as a Respondent in an Arbitration

• The associated person must seek expungement in the arbitration or shall be prohibited from seeking expungement at a later date. The associated person must include the expungement request in the answer or other pleading.  The expungement request must include the applicable fee, CRD number of the party requesting expungement, CRD occurrence number that is the subject of the request, the case name and docket number that gave rise to the customer dispute information if applicable, and an explanation of whether expungement was previously sought and, if so, how it was decided.
• The associated person shall be prohibited from seeking expungement if (a) an arbitrator previously considered a request for expungement of the same customer dispute information; or (b) a court previously denied a request to expunge the same customer dispute information.
• If the arbitration settles, the panel cannot consider the expungement request and the associated must initiate a new arbitration against the member firm to obtain expungement.

Requesting Expungement on Behalf of an Unnamed Person

• A broker-dealer shall be prohibited from seeking expungement on behalf of an unnamed person if (a) an arbitrator previously considered a request for expungement of the same customer dispute information; or (b) a court previously denied a request to expunge the same customer dispute information
• The unnamed associated person must sign a form permitting the broker-dealer to seek expungement on her behalf.
• The unnamed is prohibited from intervening in the arbitration if the broker-dealer elects not to seek expungement on behalf of the unnamed person.
• If the arbitration settles, the panel cannot consider the expungement request and the associated must initiate a new arbitration against the member firm to obtain expungement.

Straight-in Expungement Requests

• An associated person is prohibited from filing an expungement claim if (a) an arbitrator or court previously denied a request to expunge the same customer dispute information; (b) the customer complaint or arbitration that gave rise to the customer dispute information is not closed; (c) more than 2 years have passed since the arbitration or litigation that gave rise to the customer dispute information has closed, or more than 6 years have passed since the customer complaint was reported to CRD.
• The customer must be notified of any expungement hearing.
• A panel of 3 public arbitrators with certain qualifications will hear the expungement request.

Expungement Hearing

• The panel must hold a recorded hearing.
• The associated person must appear at the hearing. A party requesting expungement on behalf of an unnamed person must also appear at the hearing.
• The customer has a right to appear at the hearing or otherwise state his position in writing. The customer has the right to testify at the hearing and offer opening and closing arguments.
• The panel must review any settlement agreement and consider the amount of payments and other terms of the settlement agreement. The panel must inquire whether a party conditioned a settlement on the customer’s non-opposition of the expungement request.

Herskovits PLLC has a nationwide practice prosecuting and defending FINRA arbitration claims, including expungement requests.  Feel free to call us for a consultation.  212-897-5410.