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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:
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.
(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.
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.
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.