FINRA Publishes Notice to Arbitrators and Parties Regarding Expungement Procedures

In September 2017, the Financial Industry Regulatory Authority updated a previously published Notice related to FINRA Rules 12805 and 13805, which “establish procedures that arbitrators must follow before recommending expungement of customer dispute information related to arbitration cases from a broker’s Central Registration Depository (CRD®) record.”  When details are expunged from the CRD system, those details are permanently deleted and cannot be accessed by members of the general public, regulators, or potential broker-dealer employers.  As a result, FINRA regards expungement as an extreme remedy that should only be exercised in circumstances in which one of the three “narrow grounds specified in Rule 2080” are met.  These three grounds are a finding that the claim, allegation or information is factually unfeasible or obviously erroneous, a finding that a registered person did not participate in the alleged investment-related misconduct, or a finding that the claim, allegation, or information is untrue.

The updates to the Notice added instructions regarding expungement requests before an underlying arbitration case has concluded.  According to FINRA, a broker is not permitted to file an expungement request pertaining to customer dispute information until after the underlying customer arbitration involving the information has concluded.  Likewise, a broker is forbidden from filing an expungement request in a distinct, expungement-only case before an underlying customer arbitration ends.  The updates to the Notice also provide that FINRA allows the Director of the Office of Dispute Resolutions to deny use of the FINRA arbitration forum if the Director concludes that the subject matter of the dispute is unsuitable, or that consenting to hear the matter would create a risk to the health and safety of the parties and arbitrators.  The updates conclude by saying that the Director has decided to not allow requests for expungement to be heard before the underlying customer arbitrations conclude in order to keep results consistent and to ensure efficiency.

Rules 12805 and 13805 provide that in order for an arbitration panel to recommend expungement of customer dispute information, the arbitration panel is required to have a recorded hearing session concerning whether expungement is a suitable remedy.  If the arbitration panel is presiding over an expungement request where the underlying claim has been settled, the panel must examine settlement documents and contemplate the number of payments made to the parties and the settlements’ terms and conditions.  The arbitration award must also disclose what the bases for an expungement were and include a written explanation as to why those bases apply to the facts of the relevant case.  Finally, the arbitration panel is required to take into account “forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief.”

In the Notice, FINRA also explained that arbitrators should permit customers and their attorneys to engage in expungement hearings that involve settled cases.  For example, arbitrators should permit the relevant customer and his or her attorneys to attend the expungement hearing.  The arbitrators should also permit the customer to testify at the expungement hearing if he or she wishes to do so.  As for attorneys and pro se customers, FINRA recommends that arbitrators permit them to produce documents and evidence at the expungement hearing, to cross-examine the broker and witnesses retained by the party seeking expungement, and to present opening and closing arguments if the panel permits such arguments.

In the case of expungement-only cases, FINRA recommends that arbitrators require associated persons seeking expungement produce a copy of the associated persons’ Statements of Claim to the customers in the underlying arbitration.  This permits customers to receive notice of the expungement request.  It also allows customers to express to the arbitrators and other parties whether they believe expungement is appropriate, which can factor into the arbitrators’ decision to grant expungement or not.

The Notice also outlines specific circumstances where an arbitration panel should not grant an expungement request.  For example, a broker who has been denied a prior expungement request cannot request expungement in a different arbitration case.  Firms and registered representatives are also forbidden from “conditioning settlement of a customer dispute on… the customer’s agreement to consent to, or not to oppose, the firm’s or representative’s request to expunge such information from CRD.”

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