News & Insights

Finra Proposes Overhaul Of Expungement Process

FINRA has proposed a new set of rule changes to overhaul the expungement process. The proposed changes have been sent to the SEC for approval. When discussing the proposed amendments, FINRA advised the proposal targeted “straight-in expungements” and are an attempt to modify the system so these expungements “operate as intended” and “work as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules.”

The most notable aspects of the new proposed rule change will include the following:

1.     Require that a straight-in request be decided by a three-person panel that is randomly selected from a roster of experienced public arbitrators with enhanced expungement training;

2.     Prohibit parties to a straight-in request from agreeing to fewer than three (3) arbitrators to consider their expungement requests, striking any of the selected arbitrators, stipulating to an arbitrator’s removal., or stipulating to the use of pre-selected arbitrators;

3.     Provide notification to state securities regulators or all expungement request and a mechanism for state securities regulators to attend and participate in expungement hearings in straight-in requests;

4.     Impose strict time limits on the filing of straight-in requests, including:

  • Must file within two (2) years after the close of the customer-initiated arbitration or civil litigation associated with the customer dispute information;
  • Must file within three (3) years after the date the customer complaint was initial reported in the CRD system if the customer complaint does not evolve into a customer-initiated arbitration or civil litigation; or
  • For customer dispute information reported to the CRD system before the effective date of the rule change, associated persons would have two (2) years from the effective date of the new rule to seek expungement of existing litigation disclosure and three (3) years from the effective date of the new rule to seek expungement of compliant disclosures.

5.     Require the unanimous agreement of the panel to issue an award containing expungement relief; and

6.     Establish procedural requirements for filing expungement requests, including for on-behalf-of requests.

  • For Expungement Requests Considered during a Customer Arbitration:·        

          (i)        By a Named Respondent:

If a named associated person seeks to expunge customer dispute information associated with the customer’s statement of claim, the named associated person must make the expungement request during the customer arbitration. 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 the same dispute information in any subsequent proceeding.

          (ii)       On-Behalf-Of Requests:

A party to a customer arbitration may file an on-behalf-of request that seeks to expunge a customer dispute information associated with the customer’s statement of claim, provided the request is eligible for arbitration under Rule 12805. FINRA would now require them to sign a form consenting to the on-behalf-of request to ensure the unnamed person is fully aware of the request and confirming the firm is agreeing to represent the unnamed person for the purposes of requesting the expungement during the customer arbitration.

  • Requests for expungement during a customer arbitration must 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);
  • Expungement requests (in customer arbitrations) will only be decided if the case proceeds to a hearing on the merits. If a case settles or is dismissed prior to final hearing, the Associated Person seeking expungement will be required to file a straight-in request.

FINRA will announce the effective date of the proposed rule changes pending final approval of the SEC Commission. If approved, we anticipate these changes will drastically alter the ability for parties to seek expungements going forward. Not only will these proposed amendments impose strict deadlines on firms and registered representatives, it will also likely prove to be more challenging to obtain expungements and impose additional costs on all involved.