[Federal Register Volume 88, Number 75 (Wednesday, April 19, 2023)]
[Notices]
[Pages 24282-24320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-08147]



[[Page 24281]]

Vol. 88

Wednesday,

No. 75

April 19, 2023

Part II





 Securities and Exchange Commission





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Self-Regulatory Organizations; Financial Industry Regulatory Authority, 
Inc.; Notice of Filing of Amendment No. 2 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendments Nos. 1 and 2, To Amend the Codes of Arbitration Procedure To 
Modify the Current Process Relating to the Expungement of Customer 
Dispute Information; Notice

  Federal Register / Vol. 88, No. 75 / Wednesday, April 19, 2023 / 
Notices  

[[Page 24282]]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97294; File No. SR-FINRA-2022-024]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 2 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendments Nos. 1 and 2, To Amend the Codes of Arbitration Procedure To 
Modify the Current Process Relating to the Expungement of Customer 
Dispute Information

April 12, 2023.

I. Introduction

    On July 29, 2022, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the FINRA Rule 12000 
Series (Code of Arbitration Procedure for Customer Disputes) 
(``Customer Code'') and the FINRA Rule 13000 Series (Code of 
Arbitration Procedure for Industry Disputes) (``Industry Code'') 
(together, ``Codes'') to modify the current process relating to the 
expungement of customer dispute information.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposed rule change was published for comment in the 
Federal Register on August 15, 2022. See Exchange Act Release No. 
95455 (Aug. 9, 2022), 87 FR 50170 (Aug. 15, 2022) (File No. SR-
FINRA-2022-024) (``Notice'').
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    The proposed rule change, as modified by Amendments Nos. 1 and 2, 
(hereinafter referred to as the ``proposed rule change'' unless 
otherwise specified) would amend the Codes to: (1) set forth 
requirements on expungement requests (a) filed during an investment-
related, customer initiated arbitration (``customer arbitration'') by 
an associated person, or by a party to the customer arbitration on 
behalf of an associated person (an ``on-behalf-of request''), or (b) 
filed by an associated person separate from a customer arbitration 
(``straight-in request''); (2) establish a roster of experienced public 
arbitrators from which a three-person panel \4\ would be randomly 
selected to decide straight-in requests (the ``Special Arbitrator 
Roster''); \5\ (3) establish procedural requirements for expungement 
hearings; and (4) codify and update FINRA's Notice to Arbitrators and 
Parties on Expanded Expungement Guidance (``Guidance'') that 
arbitrators and parties would be required to follow.\6\ In addition, 
the proposed rule change would amend the Customer Code to specify 
procedures for requesting expungement of customer dispute information 
arising from simplified arbitrations.\7\ The proposed rule change would 
also amend the Codes to establish requirements for notifying state 
securities regulators and customers of expungement requests and allow 
participation of state securities regulators in straight-in 
requests.\8\
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    \4\ Under the Codes, the term ``panel'' means the arbitration 
panel, whether it consists of one or more arbitrators. See FINRA 
Rules 12100(u) and 13100(s). Under the Codes, a customer's or 
claimant's damage request determines whether a single arbitrator or 
a three-person panel will consider and decide an arbitration case, 
though in some cases the parties may agree to a different number. 
See FINRA Rules 12401 and 13401; see also Notice at 50171 n.10. 
Unless otherwise specified in the Order, the term ``panel'' will 
mean either a panel or single arbitrator.
    \5\ Among other requirements, public arbitrators are not 
employed in the securities industry and do not devote 20 percent or 
more of their professional work to the securities industry or to 
parties in disputes concerning investment accounts or transactions, 
or employment relationships within the financial industry. See FINRA 
Rules 12100(aa) and 13100(x).
    \6\ See Guidance, available at https://www.finra.org/arbitration-and-mediation/notice-arbitrators-and-parties-expanded-expungement-guidance.
    \7\ See Notice at 50170.
    \8\ See id. at 50171.
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    The proposed rule change was published for comment in the Federal 
Register on August 15, 2022.\9\ On September 27, 2022, FINRA consented 
to an extension of the time period in which the Commission must approve 
the proposed rule change, disapprove the proposed rule change, or 
institute proceedings to determine whether to approve or disapprove the 
proposed rule change to November 11, 2022.\10\ On November 10, 2022, 
FINRA responded to the comment letters received in response to the 
Notice and filed an amendment to the proposed rule change (``Amendment 
No. 1'').\11\ On November 10, 2022, the Commission published a notice 
of filing of Amendment No. 1 and an order instituting proceedings to 
determine whether to approve or disapprove the proposed rule change, as 
modified by Amendment No. 1.\12\ On December 8, 2022, FINRA consented 
to an extension of the time period in which the Commission must approve 
or disapprove the proposed rule change to April 12, 2023.\13\ On April 
3, 2023 FINRA responded to the comment letters received in response to 
the Order Instituting Proceedings and filed a second amendment to the 
proposed rule change (``Amendment No. 2'').\14\ The Commission is 
publishing this notice to solicit comments on Amendment No. 2 from 
interested persons and is approving the proposed rule change, as 
modified by Amendments Nos. 1 and 2, on an accelerated basis.
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    \9\ See Notice supra note 3.
    \10\ See letter from Mignon McLemore, Associate General Counsel, 
Office of General Counsel, FINRA, to Lourdes Gonzalez, Assistant 
Chief Counsel, Division of Trading and Markets, Commission, dated 
September 27, 2022, available at https://www.finra.org/sites/default/files/2022-09/sr-finra-2022-024-extension1.pdf.
    \11\ See letter from Mignon McLemore, Associate General Counsel, 
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary, 
Commission, dated November 10, 2022 (``FINRA November 10 Letter''). 
The FINRA November 10 Letter is available at the Commission's 
website at https://www.sec.gov/comments/sr-finra-2022-024/srfinra2022024-20150592-319706.pdf. Comment letters received on the 
proposed rule change are available at https://www.sec.gov/comments/sr-finra-2022-024/srfinra2022024.htm.
    \12\ See Exchange Act Release No. 96298 (Nov. 10, 2022), 87 FR 
68779 (Nov. 16, 2022) (File No. SR-FINRA-2022-024) (``Order 
Instituting Proceedings'').
    \13\ See letter from Mignon McLemore, Associate General Counsel, 
Office of General Counsel, FINRA, to Lourdes Gonzalez, Assistant 
Chief Counsel, Division of Trading and Markets, Commission, dated 
December 8, 2022, available at https://www.finra.org/sites/default/files/2022-12/sr-finra-2022-024-extension2.pdf.
    \14\ See letter from Mignon McLemore, Associate General Counsel, 
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary, 
Commission, dated April 3, 2023, (``FINRA April 3 Letter'') 
available at https://www.sec.gov/comments/sr-finra-2022-024/srfinra2022024-20163319-333785.pdf. Amendment No. 2 is available at 
https://www.finra.org/sites/default/files/2023-04/sr-finra-2022-024-partial-amendment-2.pdf.
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II. Description of the Proposed Rule Change

Background

    Information regarding customer disputes involving associated 
persons is maintained in the Central Registration Depository (``CRD''). 
In general, the information in the CRD system is reported by registered 
broker-dealer firms (``firms'' or ``member firms''),\15\ associated 
persons, and regulatory authorities in response to questions on the 
uniform registration forms.\16\ These

[[Page 24283]]

forms are used to collect registration information, which includes, 
among other things, administrative, regulatory, and criminal history, 
and financial and other information about associated persons, such as 
investment-related, customer-initiated arbitrations, civil litigations, 
or customer complaints (i.e., ``customer dispute information'').\17\ 
Among other things, FINRA makes specific information in the CRD system 
publicly available through BrokerCheck, including customer dispute 
information for associated persons who are currently or were formerly 
registered with FINRA.\18\
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    \15\ Under the Codes, a ``member'' includes any broker or dealer 
admitted to membership in FINRA, whether or not the membership has 
been terminated, suspended, cancelled, revoked, the member has been 
expelled or barred from FINRA, or the member is otherwise defunct. 
See FINRA Rules 12100(s) and 13100(q); see also Exchange Act Release 
No. 88254 (Feb. 20, 2020), 85 FR 11157 (Feb. 26, 2020) (Order 
Approving File No. SR-FINRA-2019-027).
    \16\ The uniform registration forms are Form BD (Uniform 
Application for Broker-Dealer Registration), Form BDW (Uniform 
Request for Broker-Dealer Withdrawal), Form BR (Uniform Branch 
Office Registration Form), Form U4 (Uniform Application for 
Securities Industry Registration or Transfer), Form U5 (Uniform 
Termination Notice for Securities Industry Registration), and Form 
U6 (Uniform Disciplinary Action Reporting Form). See Notice at 50172 
n.20.
    \17\ See Notice at 50172.
    \18\ BrokerCheck is a free tool available on FINRA's website to 
help investors make informed choices about the associated persons 
and broker-dealer firms with whom they may conduct business. See 
``About BrokerCheck,'' available at http://www.finra.org/investors/about-brokercheck. Broker records are available in BrokerCheck for 
ten years after an associated person leaves the industry, and 
associated persons who are the subject of disciplinary actions and 
certain other events remain on BrokerCheck permanently. See Notice 
at 50172 at n.24.
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    FINRA rules allow broker-dealers and their associated persons to 
seek expungement of certain customer dispute information from the CRD 
system and BrokerCheck.\19\ In general, an associated person seeks 
expungement of customer dispute information through the FINRA 
arbitration process.\20\ The Customer Code, which comprises the series 
of rules governing customer arbitrations, governs expungement requests 
filed by firms or associated persons during customer arbitrations.\21\ 
In contrast, the Industry Code comprises the series of rules governing 
arbitrations for disputes between or among industry parties, such as 
between a broker-dealer and an associated person, including straight-in 
requests.\22\ As a result, whether an expungement request is governed 
by the Customer Code or Industry Code will generally depend on whether 
the request is filed during a customer arbitration or is a straight-in 
request filed separately from a customer arbitration.\23\
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    \19\ See Notice at 50172-73.
    \20\ See id. at 50190. An associated person may also seek 
expungement by going directly to court without first going to 
arbitration. According to FINRA, from January 2016 through December 
2021, associated persons sought expungement of 194 customer dispute 
information disclosures in direct-to-court expungement cases, or 
less than 2 percent of the customer dispute information disclosures 
that were sought to be expunged in FINRA's Dispute Resolution Forum 
(``DRS arbitration forum''). See id. at 50191.
    \21\ See id. at 50175-78; see also FINRA Rule 12000 series.
    \22\ See Notice at 50178-80; see also FINRA Rule 13000 series.
    \23\ See infra notes 69-70 and accompanying text.
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    Both the Customer Code and the Industry Code require arbitrators to 
hold a recorded hearing regarding, and review materials related to, the 
appropriateness of expungement of customer dispute information.\24\ 
According to FINRA, its rules and guidance provide that arbitrators may 
recommend expungement for only three reasons: (1) the claim, 
allegation, or information is factually impossible or clearly 
erroneous; (2) the associated person was not involved in the alleged 
investment-related sales practice violation, forgery, theft, 
misappropriation, or conversion of funds; or (3) the claim, allegation, 
or information is false.\25\ In addition, arbitrators are required to 
indicate which reason is the basis for a recommendation (i.e., 
``factual impossibility, mistake, or falsity'') \26\ and to provide a 
brief written explanation of the reasons for recommending 
expungement.\27\
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    \24\ See FINRA Rules 12805 and 13805; see also Notice at 50173.
    \25\ See Notice at 50173.
    \26\ See FINRA Rules 2080, 12805, and 13805. These requirements 
are supplemented by the Guidance, providing arbitrators with ``best 
practices'' and recommendations to follow when deciding expungement 
requests. See Notice at 50173 n.35 and accompanying text.
    \27\ See FINRA Rules 12805(c) and 13805(c).
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    Regardless of whether expungement of customer dispute information 
is sought directly through a court or in arbitration, FINRA Rule 2080 
requires a broker-dealer firm or associated person seeking expungement 
to obtain an order of a court of competent jurisdiction directing such 
expungement or confirming an award containing expungement.\28\ FINRA 
will expunge customer dispute information only pursuant to a court 
order.\29\ If a court directs expungement or confirms an arbitration 
award containing expungement, the customer dispute information is 
removed from the CRD system, and is no longer made public through 
BrokerCheck.\30\
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    \28\ See Notice at 50172; see also FINRA Rule 2080.
    \29\ See Notice at 50172. FINRA Rule 2080 also requires firms 
and associated persons seeking a court order or confirmation of the 
arbitration award containing expungement to name FINRA as a party 
and serve FINRA with all appropriate documents. FINRA may, however, 
waive the requirement to be named as a party if it determines that 
the award containing expungement is based on affirmative judicial or 
arbitral findings that: (1) the claim, allegation, or information is 
factually impossible or clearly erroneous; (2) the associated person 
was not involved in the alleged investment-related sales practice 
violation, forgery, theft, misappropriation, or conversion of funds; 
or (3) the claim, allegation, or information is false. In addition, 
FINRA has sole discretion ``under extraordinary circumstances'' to 
waive the requirement that it be named in a court proceeding if it 
determines that the request for expungement and accompanying award 
are meritorious and expungement would not have a material adverse 
effect on investor protection, the integrity of the information in 
the CRD system, or regulatory requirements. See FINRA Rule 2080(b).
    \30\ See Notice at 50173-74.
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Proposed Rule Change

A. Requests for Expungement Under the Customer Code

    FINRA Rule 12805 requires that arbitrators meet certain conditions 
in order to issue an award containing expungement of customer dispute 
information under the Customer Code.\31\ The rule generally does not, 
however, address when and how a request for expungement can be made by 
an associated person or as an on-behalf-of request during a customer 
arbitration, including the types of expungement requests that can and 
cannot be made during a customer arbitration, or when arbitrators must 
make expungement determinations during the customer arbitration.
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    \31\ FINRA Rule 12805 provides that a panel must comply with the 
following requirements in order to grant expungement: (1) hold a 
recorded hearing session (by telephone or in person) regarding the 
appropriateness of expungement; (2) in cases involving settlements, 
review settlement documents and consider the amount of payments made 
to any party and any other terms and conditions of a settlement; (3) 
indicate in the arbitration award which of the Rule 2080 grounds for 
expungement serve(s) as the basis for its expungement order and 
provide a brief written explanation of the reason(s) for its finding 
that one or more Rule 2080 grounds for expungement applies to the 
facts of the case; and (4) assess all DRS arbitration forum fees for 
hearing sessions in which the sole topic is the determination of the 
appropriateness of expungement against the parties requesting 
expungement relief. See also FINRA Rule 13805.
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    The proposed rule change would amend FINRA Rule 12805 to set forth 
requirements addressing the method and timing for, and required 
contents of, expungement requests filed during a customer arbitration 
by an associated person or as an on-behalf-of request, including the 
types of expungement requests that must (or cannot) be made.\32\ Among 
other restrictions, proposed Rule 12805 would require that an 
expungement request made during a customer arbitration involve the same 
customer dispute information that is associated with the customer's 
statement of claim.\33\ It would further require an associated person 
who is a named respondent in a customer arbitration to seek expungement 
of customer dispute information associated with the arbitration claim 
during the arbitration proceedings or forfeit the ability to seek to 
expunge the customer dispute information associated with the customer's 
statement of claim in any

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subsequent proceeding.\34\ In addition, the proposed rule would 
authorize the Director of FINRA Dispute Resolution Services 
(``Director'') to deny the forum to expungement requests that do not 
meet, among other things, the proposed method, timing, or content 
requirements.\35\ In addition, the proposed rule change would also 
provide guidance on when a panel can rule on an expungement request 
made in the course of a customer arbitration.\36\ Further, the proposed 
rule change would prohibit an associated person from: (1) intervening 
in an ongoing customer arbitration to request expungement \37\ or (2) 
filing an expungement request as a new claim against a customer 
separate from a customer arbitration.\38\
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    \32\ See Notice at 50174-77 (methods), 50180-81 (limitations), 
50181-82 (timing).
    \33\ See id. at 50174-77.
    \34\ See proposed Rule 12805(a)(1)(A).
    \35\ See Notice at 50182; see also proposed Rules 12203 and 
13203.
    \36\ See Notice at 50177-78.
    \37\ See id. at 50178; see also proposed Rules 
12805(a)(2)(E)(iii) and 12800(d)(2)(D).
    \38\ See Notice at 50178; see also proposed Rule 12805(a)(3). As 
elaborated below, where an associated person is neither named in a 
customer arbitration nor the subject of an on-behalf-of request, the 
associated person would be required to file a request to expunge 
customer dispute information as a straight-in request under proposed 
Rule 13805 against the member firm with whom they were associated at 
the time the subject of the request arose. Similarly, requests to 
expunge customer dispute information that is not associated with a 
customer arbitration--and that as a result are ineligible for 
expungement under proposed Rule 12805--would need to be filed as 
straight-in requests under proposed Rule 13805 against member firms 
under the proposed rule change. See proposed Rule 
12805(a)(2)(E)(iii)b.; see also Section II.A.2. ``No Intervening in 
Customer Arbitrations to Request Expungement.''
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1. Expungement Requests During a Customer Arbitration
a. Expungement Requests by a Respondent Named in a Customer Arbitration
    Currently, an associated person who is named as a respondent in a 
customer arbitration (``named associated person'') is not required to 
seek expungement of customer dispute information associated with the 
arbitration claim during the arbitration proceedings. Rather, the 
associated person can either request expungement at any time during the 
customer arbitration or separately from the customer arbitration in a 
straight-in request.\39\ If a named associated person requests 
expungement during the customer arbitration, does not withdraw the 
request, and the case goes to hearing and closes by award, the panel in 
the customer arbitration will decide the expungement request and 
include the decision as part of the customer's award.\40\ If the 
customer arbitration does not close by award after a hearing (e.g., the 
case settles), and the associated person continues to pursue the 
expungement request, the panel from the customer arbitration will hold 
an expungement-only hearing to decide the expungement request.\41\
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    \39\ See Notice at 50175. There are currently several ways in 
which a named associated person may request expungement during a 
customer arbitration. The request may be included in the answer to 
the statement of claim that must be submitted within 45 days of 
receipt of the statement of claim, and may include other claims and 
remedies requested. See FINRA Rules 12303(a) and (b); see also FINRA 
Rules 13303(a) and (b). The expungement request may also be included 
in other pleadings (e.g., a counterclaim, a cross claim, or a third 
party claim). See FINRA Rule 12100(x). In general, parties must file 
initial statements of claim and all pleadings and other documents 
with the Director. See FINRA Rule 12300(b). The associated person 
may also request at any time during the case (outside of a pleading) 
that the panel consider the person's expungement request during the 
hearing. Under FINRA Rule 12503, such a request is treated like a 
motion, which gives the other parties an opportunity to state 
objections. If there is an objection, the panel must decide the 
motion pursuant to FINRA Rule 12503(d)(5). See also FINRA Rule 
13503(d)(5).
    \40\ FINRA stated that if an arbitration closes by award after a 
hearing, the panel from the customer arbitration would be best 
situated to decide the related issue of expungement. See Notice at 
50175.
    \41\ See id.
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    The proposed rule change would amend FINRA Rule 12805 to modify 
existing requirements and set forth new requirements for when and how a 
named associated person would file an expungement request during a 
customer arbitration.\42\ Under proposed Rule 12805(a)(1)(A), if a 
named associated person wants to seek expungement of customer dispute 
information associated with the customer's statement of claim, the 
named associated person would be required to make the expungement 
request during the customer arbitration.\43\ As discussed below, these 
requests would be subject to limitations on how and when the requests 
may be made.\44\ 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 that 
customer dispute information in any subsequent proceeding.\45\
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    \42\ See proposed Rule 12805.
    \43\ See proposed Rule 12805(a)(1)(A). FINRA stated that 
``[r]equiring the named associated person to request expungement in 
the customer arbitration increases the likelihood that a panel will 
have input from all parties and access to all of the evidence, 
testimony and other documents to make an informed decision on the 
expungement request.'' Notice at 50175.
    \44\ See proposed Rule 12805(a)(1)(B); see also Section II.C., 
``Limitations on Expungement Requests.''
    \45\ See proposed Rule 12805(a)(1)(A).
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    Proposed Rule 12203(b) would authorize the Director to deny the DRS 
arbitration forum to requests made during a customer arbitration to 
expunge customer dispute information that is not associated with the 
customer's statement of claim. The Director would also be authorized to 
deny the forum if a named associated person does not request 
expungement of the customer dispute information associated with the 
customer's statement of claim during the customer arbitration but then 
seeks expungement of the same customer dispute information in a 
subsequent proceeding.\46\
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    \46\ See proposed Rule 12203(c).
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i. Method and Timing of Requesting Expungement in Customer Arbitration
    The proposed rule change would limit how and when expungement 
requests may be made by a named associated person during the customer 
arbitration. Under the proposed rule change, if a named associated 
person requests expungement during the customer arbitration, the 
request would be required to be included in the answer to the statement 
of claim or in a separate pleading requesting expungement.\47\ If the 
request is included in the answer, it must be filed within 45 days of 
receipt of the customer's statement of claim in accordance with 
existing requirements under the Codes.\48\ If the named associated 
person requests expungement in a separate pleading, rather than the 
answer, the request would be required to be filed no later than 60 days 
before the first scheduled hearing begins.\49\ FINRA believes these 
proposed deadlines should provide adequate time for: (1) the named 
associated person to assess the customer's case, the potential merits 
of an expungement request, and whether to file the request; and (2) the 
parties to the customer arbitration to prepare their expungement-
related arguments, since the expungement issues will overlap with the 
issues raised by the customer's claim.\50\ To request expungement after 
the filing deadline, the named associated person would be required to 
file a motion requesting an extension, which would be decided by the 
panel.\51\
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    \47\ See proposed Rule 12805(a)(1)(C)(i). FINRA Rules 12100(x) 
and 13100(v) would be amended to include a ``separate document 
requesting expungement'' as a pleading under the Codes.
    \48\ See FINRA Rule 12303(a).
    \49\ See proposed Rule 12805(a)(1)(C)(i).
    \50\ See Notice at 50176.
    \51\ See id. Pursuant to FINRA Rule 12503, if an associated 
person files a motion seeking an extension of the 60-day deadline, 
the opposing parties may state objections to extending the deadline, 
and the panel would decide the motion.

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[[Page 24285]]

ii. Required Contents of an Expungement Request in Customer Arbitration
    The proposed rule change would also set forth content requirements 
for an expungement request made by a named associated person during a 
customer arbitration. Under the proposed rule change, a request for 
expungement by a named associated person in a customer arbitration 
would be required to include the applicable filing fee under the 
Customer Code.\52\ In addition, a named associated person would be 
required to provide the CRD number of the party requesting expungement, 
each CRD occurrence number that is the subject of the request, and the 
case name and docket number associated with the customer dispute 
information.\53\ Moreover, the proposed rule change would require the 
named associated person requesting expungement to explain whether 
expungement of the same customer dispute information was previously 
requested and, if so, how that request was decided.\54\ Under the 
proposed rule change, if an expungement request fails to include any of 
the proposed requirements for requesting expungement, the request would 
be considered deficient and would not be served unless the deficiency 
is corrected.\55\
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    \52\ See proposed Rule 12805(a)(1)(C)(ii)a.
    \53\ See proposed Rule 12805(a)(1)(C)(ii)b. through d. An 
occurrence is a disclosure event that is reported to the CRD system 
via one or more Disclosure Reporting Pages. See Notice at 50176 
n.58. For example, Form U4 (Uniform Application for Broker-Dealer 
Registration) requires disclosure of information concerning an 
associated person that relates to the occurrence of an event 
reportable under Item 14 of Form U4 (e.g., certain customer 
complaints, arbitrations, and civil litigations) on the appropriate 
Disclosure Reporting Page. FINRA stated that these content 
requirements ``would help ensure that FINRA, the panel, and the 
parties understand who is requesting expungement and which customer 
dispute information is the subject of the request.'' See Notice at 
50176; see also Guidance (stating that ``arbitrators should ask a 
party requesting expungement whether an arbitration panel or a court 
previously denied expungement of the customer dispute information at 
issue and, if there was a prior denial, the expungement request 
should be denied.'' See supra note 6.
    \54\ See proposed Rule 12805(a)(1)(C)(ii)e.
    \55\ See proposed Rules 12307(a)(8) through (11) and 
12805(a)(1)(C)(ii). FINRA stated that ``these proposed requirements 
for named associated persons requesting expungement are necessary 
for the timely consideration and orderly administration of 
expungement requests as well as to maintain the integrity of the CRD 
system.'' Notice at 50176.
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b. Expungement Requests by a Party Named in a Customer Arbitration on 
Behalf of an Unnamed Person
    According to FINRA, the Codes do not specifically address on-
behalf-of requests.\56\ Currently, a party to a customer arbitration 
may file an on-behalf-of request for expungement during the customer 
arbitration. If the party files the request and the customer 
arbitration closes by award after a hearing, the panel will decide the 
expungement request and include the decision in the award. If the 
customer arbitration does not close by award after a hearing (e.g., the 
case settles), either the requesting party or the unnamed person could 
ask the panel to consider and decide the expungement request before it 
disbands. Under current practice, in this circumstance the panel from 
the customer arbitration will hold a hearing regarding the 
appropriateness of expungement pursuant to FINRA Rule 12805.\57\
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    \56\ The proposed rule change would define an ``unnamed person'' 
as ``an associated person, including a formerly associated person, 
who is identified in a Form U4, Form U5, or Form U6, as having been 
the subject of an investment-related, customer-initiated arbitration 
claim that alleged that the associated person or formerly associated 
person was involved in one or more sales practice violations, but 
who is not named as a respondent in the arbitration.'' See proposed 
Rule 12100(ff).
    \57\ See Notice at 50176.
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    Proposed Rule 12805(a)(2) would codify this practice to permit a 
party to a customer arbitration to file an on-behalf-of request that 
seeks to expunge customer dispute information associated with the 
customer's statement of claim during the customer arbitration (provided 
the request is eligible for arbitration under proposed Rule 12805).\58\ 
As with expungement requests made by a named associated person, the 
proposed rule change would set forth requirements governing how and 
when an on-behalf-of request may be made, and the contents of such 
request.
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    \58\ See proposed Rule 12805(a)(2)(B). As with expungement 
requests filed by a named associated person in a customer 
arbitration, proposed Rule 12203(b) would authorize the Director to 
deny the DRS arbitration forum to requests made during a customer 
arbitration to expunge customer dispute information that is not 
associated with the customer's statement of claim. See Notice at 
50175.
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i. Method and Timing of Requesting Expungement on Behalf of an Unnamed 
Person
    To help ensure that an associated person that is the subject of an 
on-behalf-of request is aware of the request, the proposed rule change 
would require the unnamed person to consent in writing \59\ to the on-
behalf-of request by signing the Form Requesting Expungement on Behalf 
of an Unnamed Person (``Form'').\60\ By signing the Form, the unnamed 
person would be: (1) consenting to the on-behalf-of request; \61\ (2) 
agreeing to be bound by the panel's decision on the request; \62\ and 
(3) acknowledging their understanding that if the customer arbitration 
closes by award after a hearing, the unnamed person would be barred 
from filing a request for expungement for the same customer dispute 
information in a subsequent proceeding.\63\
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    \59\ See proposed Rule 12805(a)(2)(A).
    \60\ The unnamed person whose CRD record would be expunged and 
the party requesting expungement on the unnamed person's behalf must 
both sign the Form. See proposed Rule 12805(a)(2)(C)(ii).
    \61\ See Notice at 50176.
    \62\ See proposed Rule 12805(a)(2)(D)(i). Signing the Form would 
also obligate the unnamed person to maintain the confidentiality of 
documents and information from the customer arbitration to which the 
unnamed person is given access and to adhere to any confidentiality 
agreements or orders associated with the customer arbitration. See 
proposed Rule 12805(a)(2)(D)(ii).
    \63\ See Notice at 50177.
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    The party making the request would also be required to file the 
request (including the Form) no later than 60 days before the first 
scheduled hearing.\64\ Under the proposed rule change, filing and 
serving the on-behalf-of request would obligate the requesting party to 
represent the unnamed person and the unnamed person's interests and to 
pursue the request for expungement on behalf of the unnamed person 
during the customer arbitration.\65\
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    \64\ See proposed Rule 12805(a)(2)(C)(iii).
    \65\ See proposed Rule 12805(a)(2)(D)(iii). FINRA stated that 
requiring the parties' consent ``would help ensure that the unnamed 
person is fully aware of the request and that the firm is agreeing 
to represent the unnamed person for the purpose of requesting 
expungement during the customer arbitration.'' See Notice at 50176. 
This would help prevent ``associated persons filing arbitration 
claims seeking expungement of the same customer dispute information 
that was the subject of a previous denial by a panel of an on-
behalf-of request.'' See Notice at 50177.
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ii. Required Contents of an On-Behalf-Of Request and Filing Fee
    Under the proposed rule change, an on-behalf-of request would be 
required to include the same elements as a request for expungement by a 
named associated person during a customer arbitration.\66\ Thus, the 
party requesting expungement on behalf of an unnamed person would be 
required to provide the applicable filing fee; the CRD number of the 
unnamed person; each CRD occurrence number that is the subject of the 
request; the case name and docket number associated with the customer 
dispute information; and an explanation of whether expungement of the 
same customer dispute information was previously requested and, if so, 
how it

[[Page 24286]]

was decided.\67\ In addition, the party requesting expungement would be 
required to include the Form, signed by the unnamed person whose CRD 
record is the subject of the expungement request and the party filing 
the request.\68\
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    \66\ See proposed Rules 12805(a)(1)(C)(ii) and 
12805(a)(2)(C)(i).
    \67\ See proposed Rules 12805(a)(1)(C)(ii) and 
12805(a)(2)(C)(i).
    \68\ See proposed Rule 12805(a)(2)(C)(ii).
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c. Deciding Expungement Requests during Customer Arbitrations
    The proposed rule change would change when a panel is required to 
decide an expungement request (whether made by a named associated 
person or on behalf of an unnamed one) made during a customer 
arbitration. Specifically, when the panel would be required to decide 
an expungement request would depend on whether or not the customer 
arbitration closes: (1) by award after a hearing or (2) other than by 
award or by award without a hearing.
i. Panel Decides the Expungement Request if the Customer's Arbitration 
Closes by Award After a Hearing
    Currently, if a named associated person requests expungement, or a 
party files an on-behalf-of request, and the customer's claim closes by 
award after a hearing, the panel may consider and decide the 
expungement request during the customer arbitration and issue its 
decision in the award. If, however, the party requesting expungement 
does not pursue the issue of expungement during the hearing, the panel 
may not decide the request and may deem it withdrawn.\69\ Under these 
circumstances, the associated person may request expungement again at a 
later date.\70\
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    \69\ See Notice at 50177; see also FINRA Rules 12702 and 13702.
    \70\ See Notice at 50177.
---------------------------------------------------------------------------

    Under the proposed rule change, if a named associated person 
requests expungement or a party files an on-behalf-of request during a 
customer arbitration and the customer's claim closes by award after a 
hearing, the panel in the customer arbitration would be required to 
consider and decide the expungement request and issue its decision in 
the same award, even if the requesting party withdraws or fails to 
pursue the request (in which case the panel would deny the expungement 
request with prejudice).\71\
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    \71\ See proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i). 
FINRA stated that requiring a panel to deny with prejudice such 
requests ``would prevent associated persons from withdrawing 
expungement requests to avoid having their requests decided by the 
panel that heard the evidence on the customer's arbitration claim, 
then seeking to re-file the request and receiving a potentially more 
favorable decision from a different set of arbitrators.'' Notice at 
50177.
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ii. Panel Does Not Decide Expungement if the Customer's Arbitration 
Closes Other Than by Award or by Award Without a Hearing
    Currently, if a named associated person requests expungement, or a 
party files an on-behalf-of request, the customer arbitration does not 
close by award after a hearing (e.g., the case settles), and the 
requesting party continues to pursue the expungement request, the panel 
from the customer arbitration will hold a hearing regarding the 
appropriateness of expungement.\72\ If the named associated person or 
party requesting expungement does not request that the panel hold a 
separate hearing to decide the expungement request, the panel may deem 
the request withdrawn, and the associated person may seek to file the 
request again at a later date.\73\
---------------------------------------------------------------------------

    \72\ See FINRA Rule 12805; see also Notice at 50177.
    \73\ See Notice at 50177.
---------------------------------------------------------------------------

    The proposed rule change would change this process. If the customer 
arbitration closes other than by award or by award without a hearing, 
the panel from the customer arbitration would not be permitted to 
decide the expungement request.\74\ Instead, the associated person 
could only seek expungement through a straight-in-request under 
proposed Rule 13805 against the member firm at which the person was 
associated at the time the customer dispute arose, and a panel from the 
Special Arbitrator Roster would decide the request.\75\
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    \74\ See proposed Rules 12805(a)(1)(D)(ii)a. and 
12805(a)(2)(E)(ii)a.
    \75\ See proposed Rules 12805(a)(1)(D)(ii)b. and 
12805(a)(2)(E)(ii)b. See also Section II.B., ``Straight-in Requests 
under the Industry Code and the Special Arbitrator Roster.''
---------------------------------------------------------------------------

2. No Intervening in Customer Arbitrations To Request Expungement
    The proposed rule change would provide that if an associated person 
is not a party to a customer arbitration (i.e., they are an unnamed 
person), and no party to the customer arbitration requests expungement 
on their behalf, the unnamed person would be prohibited from 
intervening in the customer arbitration to request expungement.\76\ 
Instead, the unnamed person would be able to file the request as a new 
claim against the member firm at which the person was associated at the 
time the customer dispute arose under proposed Rule 13805 under the 
Industry Code, and a panel from the Special Arbitrator Roster would 
decide the request.\77\
---------------------------------------------------------------------------

    \76\ See proposed Rules 12805(a)(2)(E)(iii) and 12800(d)(2)(D).
    \77\ See proposed Rule 12805(a)(2)(E)(iii)b.
---------------------------------------------------------------------------

3. No Straight-In Requests Against Customers
    Currently, although the practice is relatively rare, associated 
persons sometimes file expungement requests against customers as new 
claims, separate from a customer arbitration.\78\ FINRA stated that 
such requests may unduly delay the resolution of a customer's claim and 
require a customer to participate in the resolution of the request.\79\ 
The proposed rule change would prevent an associated person from 
requiring a customer to participate once the customer's claims have 
been resolved, by prohibiting the associated person from filing a 
request for expungement of the customer dispute information as a new 
claim against a customer separate from the investment-related, 
customer-initiated arbitration.\80\ Customers would have the option to 
attend and participate in expungement hearings in straight-in requests, 
and the proposed rule change would include provisions to facilitate 
such attendance and participation.\81\
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    \78\ See Notice at 50178. From January 2016 through December 
2021, FINRA identified 6,476 straight-in requests to expunge 
customer dispute information, 116 of which were requests filed 
against a customer. See id. at 50178 n.89.
    \79\ See id. at 50178.
    \80\ See proposed Rule 12805(a)(3). FINRA stated that customers 
should not be compelled to attend or participate in a separate 
proceeding to decide an expungement request after the customer has 
resolved their arbitration claim or civil litigation. See Notice at 
50178.
    \81\ See Notice at 50178.
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B. Straight-In Requests Under the Industry Code and the Special 
Arbitrator Roster

    As stated above, the Industry Code comprises the series of rules 
governing arbitrations for disputes between or among industry parties, 
such as between a member firm and an associated person. Under the 
proposed rule change, all requests to expunge customer dispute 
information that is not associated with a customer arbitration would be 
required to be filed as a straight-in request against the member firm 
with whom the associated person was associated at the time the subject 
of the request arose under proposed Rule 13805.\82\ In addition, an 
associated person could request expungement of

[[Page 24287]]

customer dispute information that was associated with a customer 
arbitration under proposed Rule 13805 if: (1) the associated person is 
named in the arbitration or is the subject of an on-behalf-of request 
and the customer arbitration closes other than by award or by award 
without a hearing; \83\ or (2) the associated person is the subject of 
a customer arbitration, but is neither named in the arbitration nor is 
the subject of an on-behalf-of request, and the customer arbitration 
closes for any reason.\84\ If an associated person requests expungement 
under proposed Rule 13805, a three-person panel randomly selected from 
the Special Arbitrator Roster in accordance with proposed Rule 13806 
would decide the expungement request.\85\
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    \82\ See proposed Rules 12805(a)(1)(A) and 13805(a)(1). As 
discussed above, under proposed Rule 12805, an associated person may 
request expungement in a customer arbitration of a customer 
complaint or civil litigation associated with a customer's statement 
of claim. See supra note 43 and accompanying text.
    \83\ See proposed Rules 12805(a)(2)(D)(ii) and 
12805(a)(2)(E)(ii).
    \84\ See proposed Rule 13805(a)(1).
    \85\ See Notice at 50178.
---------------------------------------------------------------------------

1. Filing a Straight-In Request Under the Industry Code
a. Applicability
    The process for initiating a straight-in-request for expungement of 
customer dispute information under the Industry Code would be governed, 
in part, by FINRA Rule 13302. This rule provides, in relevant part, 
that to initiate an arbitration, a claimant must file with the Director 
a signed and dated Submission Agreement, and a statement of claim 
specifying the relevant facts and remedies requested through the DR 
Party Portal (``Portal'').\86\ Under proposed Rule 13805, an associated 
person requesting expungement of customer dispute information as a 
straight-in request under the Industry Code would be required to file a 
statement of claim, in accordance with the procedures contained in 
FINRA Rule 13302, against the member firm at which the person was 
associated at the time the customer dispute arose.\87\ Under the 
proposed rule change, the Director would be authorized to deny the use 
of the DRS arbitration forum for the request if this connection is not 
present.\88\
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    \86\ FINRA's DR Portal, among other things, permits arbitration 
case participants to file an arbitration claim, view case documents, 
submit documents to FINRA and send documents to other Portal case 
participants, and schedule hearing dates. See FINRA Dispute 
Resolution Services, DR Portal, available at www.finra.org/arbitration-mediation/dr-portal.
    \87\ See proposed Rule 13805(a)(1).
    \88\ See proposed Rule 13203(b).
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b. Required Content of Straight-In Requests
    The required content of a straight-in request under the Industry 
Code would be the same as that required for expungement requests filed 
under the Customer Code.\89\ Thus, the associated person's straight-in 
request would be required to contain the applicable filing fee; \90\ 
the CRD number of the party requesting expungement; each CRD occurrence 
number that is the subject of the request; the case name and docket 
number associated with the customer dispute information, if applicable; 
and an explanation of whether expungement of the same customer dispute 
information was previously requested and, if so, how it was 
decided.\91\ In addition, as discussed below, the proposed rule change 
would impose limitations on when such requests may be made.\92\
---------------------------------------------------------------------------

    \89\ See proposed Rule 13805(a)(3); see also Section 
II.A.1.a.ii, ``Required Contents of an Expungement Request in 
Customer Arbitration.''
    \90\ FINRA stated that it ``would not assess a second filing fee 
when an associated person files a straight-in request if the 
associated person, or the requesting party in the case of an on-
behalf-of request, had previously paid the filing fee to request 
expungement of the same customer dispute information during a 
customer arbitration.'' Notice at 50179 n.95.
    \91\ See proposed Rule 13805(a)(3). If an expungement request 
under the Industry Code fails to include any of the proposed 
requirements for requesting expungement, the request would be 
considered deficient and would not be served unless the deficiency 
is corrected. See proposed Rule 13307(a).
    \92\ See Section II.C., ``Limitations on Expungement Requests.'' 
As discussed in more detail below, the straight-in request would be 
ineligible for arbitration under the Industry Code if: (1) a panel 
held a hearing to consider the merits of the associated person's 
request for expungement of the same customer dispute information; 
(2) a court of competent jurisdiction previously denied the 
associated person's request to expunge the same customer dispute 
information; (3) the customer arbitration or civil litigation or 
customer complaint associated with the customer dispute information 
is not closed; (4)(a) a panel or court of competent jurisdiction 
previously found the associated person liable in a customer 
arbitration or civil litigation associated with the same customer 
dispute information, or (b) the customer dispute information 
involves the same conduct that is the basis of a final regulatory 
action taken by a securities regulator or SRO; (5) more than two 
years have elapsed since the customer arbitration or civil 
litigation associated with the customer dispute information has 
closed; (6) there was no customer arbitration or civil litigation 
associated with the customer dispute information and more than three 
years have elapsed since the date that the customer complaint was 
initially reported to the CRD system; or (7) a named associated 
person is seeking expungement even though they did not request 
expungement in the associated customer arbitration under proposed 
Rule 12805(a)(1)(A). See proposed Rule 13805(a)(2).
---------------------------------------------------------------------------

2. Panel From the Special Arbitrator Roster Decides Requests Filed 
Under the Industry Code
    If an associated person files a straight-in request in accordance 
with proposed Rule 13805, a three-person panel randomly selected from 
the Special Arbitrator Roster pursuant to proposed Rule 13806 would be 
required to hold an expungement hearing, decide the expungement 
request, and issue an award.\93\ The proposed rule change would provide 
that if the associated person withdraws or does not pursue the request, 
the panel would be required to deny the expungement request with 
prejudice.\94\
---------------------------------------------------------------------------

    \93\ See proposed Rule 13805(a)(4).
    \94\ See id. According to FINRA, ``[t]his requirement would 
foreclose the ability of associated persons to withdraw expungement 
requests to avoid having their requests decided by a panel that they 
believe does not favor their request, and then seek to re-file the 
request with the hope of obtaining a potentially more favorable 
decision from a different panel.'' Notice at 50179.
---------------------------------------------------------------------------

a. Eligibility Requirements for the Special Arbitrator Roster
    The proposed rule change would include several requirements to help 
ensure that arbitrators on the Special Arbitrator Roster have the 
qualifications and training to decide straight-in requests.
    First, the proposed rule change would require arbitrators on the 
Special Arbitrator Roster to be public arbitrators who are eligible for 
the chairperson roster (``public chairperson'').\95\ In general, public 
arbitrators are persons who are not employed in the securities industry 
and do not devote 20 percent or more of their professional work to the 
securities industry or to parties in disputes concerning investment 
accounts or transactions, or employment relationships within the 
financial industry.\96\ Arbitrators are eligible for the chairperson 
roster if they have completed chairperson training provided by FINRA 
and: (1) have a law degree and are either a member of a bar of at least 
one jurisdiction and have served as an arbitrator through award on at 
least one arbitration administered by a self-regulatory organization 
(``SRO'') in which hearings were held; or (2) have served as an 
arbitrator through award on at least three arbitrations administered by 
an SRO in which hearings were held.\97\ FINRA stated that these 
requirements would help ensure that the persons conducting the 
expungement hearing are impartial and experienced in managing and

[[Page 24288]]

conducting arbitration hearings in the DRS arbitration forum.\98\
---------------------------------------------------------------------------

    \95\ See proposed Rule 13806(b).
    \96\ See Notice at 50170 n.3; see also FINRA Rules 12100(aa) and 
13100(x).
    \97\ See FINRA Rules 12400(c) and 13400(c). FINRA stated that 
for purposes of this proposed rule change, ``public arbitrators who 
are eligible for the chairperson roster would include those 
arbitrators who have met the chairperson eligibility requirements of 
FINRA Rules 12400(c) or 13400(c), regardless of whether they have 
already served as a chair on an arbitration case.'' Notice at 50179 
n.102.
    \98\ See Notice at 50179.
---------------------------------------------------------------------------

    Second, the proposed rule change would require arbitrators on the 
Special Arbitrator Roster to have evidenced successful completion of, 
and agreement with, enhanced expungement training provided by 
FINRA.\99\ FINRA currently provides an Expungement Training module for 
arbitrators.\100\ This training, however, would be expanded for 
arbitrators seeking to qualify for the Special Arbitrator Roster.\101\
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    \99\ See proposed Rule 13806(b)(2)(A).
    \100\ See Notice at 50179.
    \101\ See id.
---------------------------------------------------------------------------

    Third, the proposed rule change would require arbitrators on the 
Special Arbitrator Roster to have served as an arbitrator through award 
on at least four customer arbitrations administered by FINRA or by 
another SRO in which a hearing was held.\102\ FINRA stated that ``if an 
arbitrator has served on four arbitrations through to award, it would 
indicate that the arbitrator has gained the knowledge and experience in 
the DRS arbitration forum to conduct hearings.'' \103\
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    \102\ See proposed Rule 13806(b)(2)(B). This requirement would 
not be satisfied by serving on arbitrations administered under the 
special proceeding option of the simplified arbitration rules. Id.; 
see also FINRA Rule 12800(c)(3)(B).
    \103\ Notice at 50179-80.
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b. Composition of the Panel
    The proposed rule change would require the Neutral List Selection 
System (``NLSS'') \104\ to select randomly the three public 
chairpersons from the Special Arbitrator Roster to decide a straight-in 
request filed by an associated person.\105\ The parties would not be 
permitted to agree to fewer than three arbitrators.\106\ The parties 
requesting expungement also would not be permitted to strike any 
arbitrators selected by NLSS nor stipulate to their removal,\107\ but 
would be permitted to challenge an arbitrator selected for cause.\108\ 
If an arbitrator is removed, NLSS would randomly select a 
replacement.\109\ FINRA stated that the proposed rule change would 
``prevent the associated person and member firm from collaboratively 
seeking to influence the outcome of the expungement request through 
arbitrator selection.'' \110\
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    \104\ NLSS is a computer algorithm used to generate lists of 
arbitrators on a random basis from DRS's rosters of arbitrators for 
the selected hearing location.
    \105\ See proposed Rule 13806(b)(1). The first arbitrator 
selected would be the chair of the panel. See proposed Rule 
13806(b)(3).
    \106\ See proposed Rule 13806(b)(5).
    \107\ See proposed Rule 13806(b)(4), as modified by Amendment 
No. 2. The parties also would not be permitted to stipulate to the 
use of pre-selected arbitrators (i.e., arbitrators that the parties 
find on their own to use in their cases). See proposed Rule 
13806(b)(1).
    \108\ See proposed Rule 13806(b)(4). The Director may remove an 
arbitrator for conflict of interest or bias (i.e., ``cause'') upon 
request of a party. The Director will grant a party's request to 
remove an arbitrator if it is reasonable to infer, based on 
information known at the time of the request, that the arbitrator is 
biased, lacks impartiality, or has a direct or indirect interest in 
the outcome of the arbitration. The interest or bias must be 
definite and capable of reasonable demonstration, rather than remote 
or speculative. See FINRA Rule 13410.
    \109\ See proposed Rule 13806(b)(4).
    \110\ Notice at 50180. FINRA stated that ``outside of the 
expungement context, the parties to an arbitration are typically 
adverse, which means that during arbitrator selection, each side may 
rank arbitrators on the lists whom they believe may be favorable to 
their case. The adversarial nature of the proceedings serves to 
minimize the impact of each party's influence in arbitrator 
selection. In contrast, a straight-in request filed by an associated 
person against a firm is less likely to be adversarial in nature.'' 
Id.
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C. Limitations on Expungement Requests

    Currently, the Codes provide minimal constraints on making 
expungement requests. FINRA Rules 12805 and 13805 do not address when a 
party would not be permitted to file an expungement request in the DRS 
arbitration forum.\111\ The Guidance, however, describes circumstances 
in which an expungement request should be ineligible for arbitration. 
The proposed rule change would incorporate the limitations contained in 
the Guidance and add time limits to when an associated person may file 
a straight-in request.
---------------------------------------------------------------------------

    \111\ But see infra note 127 (describing time limits that apply 
to all arbitration claims, including expungement requests).
---------------------------------------------------------------------------

1. Limitations Applicable to Both Straight-In Requests and Expungement 
Requests During a Customer Arbitration
    The Guidance provides that if a panel or a court has issued an 
award or decision denying an associated person's expungement request, 
the associated person may not request expungement of the same customer 
dispute information in another arbitration proceeding. In particular, 
the Guidance states that arbitrators should ask a party requesting 
expungement whether an arbitration panel or a court previously denied 
expungement of the customer dispute information at issue and, if there 
has been a prior denial, the arbitration panel should deny the 
expungement request.\112\
---------------------------------------------------------------------------

    \112\ See supra note 6; see also Notice at 50180.
---------------------------------------------------------------------------

    The proposed rule change would codify the Guidance by providing 
that an associated person may not file a request for expungement of 
customer dispute information if: (1) a panel held a hearing to consider 
the merits of the associated person's expungement request for the same 
customer dispute information; or (2) a court of competent jurisdiction 
previously denied the associated person's request to expunge the same 
customer dispute information.\113\ According to FINRA, these proposed 
amendments would prevent an associated person from forum shopping, or 
seeking to return to the DRS arbitration forum to garner a favorable 
outcome on his or her expungement request.\114\
---------------------------------------------------------------------------

    \113\ See proposed Rules 12805(a)(1)(B)(i) and (ii) and 
13805(a)(2)(A)(i) and (ii). The proposed rule change would require 
that the requesting party provide information about previous 
expungement requests and how such requests were decided. See 
proposed Rules 12805(a)(1)(C)(ii)e. and 13805(a)(3)(E).
    \114\ FINRA stated that if a panel holds a hearing that 
addresses the merits of an associated person's request for 
expungement, the Director would be authorized to deny the DRS 
arbitration forum to any subsequent request by the associated person 
or another party on behalf of the associated person to expunge the 
same customer dispute information. See proposed Rules 12203(b) and 
13203(b). See Notice at 50180 n.117.
---------------------------------------------------------------------------

2. Limitations Applicable to Straight-In Requests Only
    As discussed below, under the proposed amendments, four additional 
limitations would apply to straight-in requests.
a. No Straight-In Request if the Customer Arbitration, Civil Litigation 
or Customer Complaint Has Not Closed
    The Guidance provides that an associated person may not file a 
separate request for expungement of customer dispute information 
arising from a customer arbitration until the customer arbitration has 
concluded.\115\ The proposed rule change would codify and expand upon 
this limitation by providing that an associated person may not file a 
straight-in request under proposed Rule 13805 if the customer 
arbitration, civil litigation or customer complaint associated with the 
customer dispute information has not closed.\116\ According to FINRA, 
the proposed rule change would, among other things, prevent an 
associated person from filing a straight-in request while a customer 
arbitration or civil litigation associated with the customer dispute 
information that is the subject of the straight-in request is 
pending.\117\
---------------------------------------------------------------------------

    \115\ See Notice at 50180; see also supra note 6.
    \116\ See proposed Rule 13805(a)(2)(A)(iii).
    \117\ See Notice at 50180.

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[[Page 24289]]

b. Straight-In Request Prohibited if a Panel or Court of Competent 
Jurisdiction Previously Found the Associated Person Liable
    Under the Codes, arbitration awards are final and binding unless 
vacated based on the limited grounds set forth in applicable state or 
federal statutes.\118\ The only avenue for challenging a prior adverse 
arbitration award is to file a timely motion with an appropriate court 
to vacate, modify, or correct the award.\119\ Thus, if an associated 
person is found liable in a customer arbitration, FINRA considers the 
associated person legally bound by the award and the Director will 
decline the use of the DRS arbitration forum if the associated person 
then requests expungement of customer dispute information that is 
associated with the customer arbitration in which the associated person 
was found liable. FINRA stated that it considers such expungement 
requests a collateral attack on the binding arbitration award, which is 
contrary to the Codes.\120\ Accordingly, the proposed rule change would 
provide that an associated person shall not file a claim requesting 
expungement of customer dispute information from the CRD system if the 
customer dispute information is associated with a customer arbitration 
or civil litigation in which a panel or court of competent jurisdiction 
previously found the associated person liable.\121\
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    \118\ See id. at 50173.
    \119\ See id. at 50173 n.33.
    \120\ See FINRA November 10 Letter at 28; FINRA Rules 12904(b) 
and 13904(b).
    \121\ See proposed Rule 13805(a)(2)(A)(iv). Amendment No. 2 
would modify the proposed rule change to provide that an associated 
person shall not file a claim requesting expungement of customer 
dispute information from the CRD system against a member firm at 
which the person was associated at the time the customer dispute 
arose if the customer dispute information involves the same conduct 
that is the basis of a final regulatory action taken by a securities 
regulator or SRO. If an associated person requests expungement of 
such customer dispute information, the Director will deny the DRS 
arbitration forum to the expungement request. See FINRA April 3 
Letter at 14; see also infra note 430 and accompanying text. 
However, if an associated person is successful at appealing a final 
regulatory action, the associated person may file a claim requesting 
expungement of the customer dispute information involving the same 
conduct that is the basis of the final regulatory action, provided 
that the request is not otherwise ineligible for arbitration (e.g., 
that the request is time barred). See FINRA April 3 Letter at 14.
---------------------------------------------------------------------------

c. Straight-In Request Prohibited if Named Associated Person Did Not 
Request Expungement in Customer Arbitration
    As discussed above, under proposed Rule 12805(a)(1)(A) an 
associated person who is named in a customer arbitration would be 
required to request expungement of associated customer dispute 
information during the arbitration or forfeit the ability to seek to 
expunge the customer dispute information associated with the customer's 
statement of claim in any subsequent proceeding.\122\ Proposed Rule 
13805(a)(2)(A)(vii) would provide a mechanism to enforce the forfeiture 
established in proposed Rule 12805(a)(1)(A).\123\ Specifically, 
proposed Rule 13805(a)(2)(A)(viii) would prohibit an associated person 
who is named, but failed to request expungement of the customer dispute 
information associated with the customer's statement of claim in a 
customer arbitration, from subsequently filing a straight-in request 
seeking to expunge this customer dispute information.\124\
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    \122\ See proposed Rule 12805(a)(1)(A); see also Section 
II.A.1.a., ``Expungement Requests by a Respondent Named in a 
Customer Arbitration.''
    \123\ See Notice at 50175.
    \124\ See proposed Rule 13805(a)(2)(A)(viii).
---------------------------------------------------------------------------

d. Time Limits Applicable to Disclosures Arising After the Effective 
Date of the Proposed Rule Change
    FINRA Rules 12206(a) and 13206(a) require an associated person to 
submit a claim within six years from the occurrence or event giving 
rise to the claim. This six-year eligibility rule applies to all 
arbitration claims, including those requesting expungement of customer 
dispute information.\125\ As a result, FINRA stated that many straight-
in requests are filed many years after the customer arbitration closes 
or the customer complaint is reported in the CRD system.\126\ To 
encourage prompt filing of expungement requests, the proposed 
amendments would establish time limits for expungement requests that 
are specifically tied to the closure of customer arbitrations and civil 
litigations, or the reporting of customer complaints in the CRD system, 
as applicable.\127\ The proposed rule change would allow an associated 
person to request expungement of customer dispute information 
associated with a customer arbitration or civil litigation--including 
any associated customer complaint disclosures--within two years after 
the customer arbitration or civil litigation closes.\128\ If no 
customer arbitration or civil litigation associated with the customer 
complaint is filed, the associated person would have three years from 
the date the customer complaint was initially reported in the CRD 
system to file the expungement request.\129\ If a customer arbitration 
is filed after a panel has issued an award on a request to expunge a 
customer complaint associated with the newly filed customer 
arbitration, the proposed rule would provide that the prior expungement 
award shall not be admissible in the customer arbitration.\130\
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    \125\ See Notice at 50174 n.38.
    \126\ See id. at 50181.
    \127\ See proposed Rules 13805(a)(2)(A)(vi) and (vii). FINRA 
Rules 12206 and 13206 provide that no claim shall be eligible for 
submission to arbitration where six years have elapsed from the 
occurrence or event giving rise to the claim. Under these Rules, the 
panel has discretion to determine if the claim, including an 
expungement request, is eligible for arbitration. See supra note 
125. As discussed below, under the proposed rule change, requests to 
expunge customer dispute information that arose up to six years 
prior to the effective date of the proposed rule change would 
continue to be eligible for expungement but would need to be filed 
within two or three years, as applicable. See proposed Rule 
13805(a)(2)(B).
    \128\ See proposed Rule 13805(a)(2)(A)(vi). FINRA stated that 
with respect to requests to expunge customer dispute information 
associated with a customer arbitration, an associated person would 
be permitted to file a straight-in request under this two-year time 
limitation only if expungement of the customer dispute information 
was not required to be decided during the customer arbitration. See 
Notice at 50181 n.126. FINRA stated that a two-year limitation 
period would allow the associated person sufficient time to 
determine whether to seek expungement by filing a straight-in 
request and provide a sufficient amount of time for the associated 
person to gather the documents, information and other resources 
required to file the expungement request. In addition, a two-year 
period would help ensure that the expungement hearing is held close 
enough in time to the customer arbitration or civil litigation, when 
information regarding the customer arbitration or civil litigation 
is available and in a timeframe that could increase the likelihood 
for the customer to attend and participate if the customer chooses 
to do so. See Notice at 50181.
    \129\ See Notice at 50181. FINRA stated that the three-year time 
limitation would help ensure that the expungement hearing is held 
close in time to the events that gave rise to the customer dispute 
and increase the likelihood of customer attendance and 
participation. Three years should also provide sufficient time for 
firms to complete their investigation of the complaint, for 
associated persons to develop a sense of whether the complaint may 
evolve into an arbitration or civil litigation, and for the 
associated person to gather the necessary resources and determine 
whether to seek expungement. See id.
    \130\ See proposed Rules 12604(c) and 13604(c). FINRA stated 
that the proposed rule change would avoid unfairly impacting the 
customer arbitration. See also Notice at 50181.
---------------------------------------------------------------------------

    The proposed rule change would also establish time limits for 
requests to expunge customer dispute information arising from customer 
arbitrations and civil litigations that close, and for customer 
complaints that were initially reported to the CRD system, on or prior 
to the effective date of the proposed rule change.\131\ Specifically, 
the proposed rule change would provide that if an expungement request 
is otherwise eligible under the six-year limitation

[[Page 24290]]

period of FINRA Rule 13206(a),\132\ an associated person would be 
permitted to file a straight-in request under the Industry Code if: (1) 
the request for expungement is made within two years of the effective 
date of proposed rule change, and the disclosure to be expunged is 
associated with a customer arbitration or civil litigation that closed 
on or prior to the effective date; \133\ or (2) the request for 
expungement is made within three years of the effective date of the 
proposed rule change, and the disclosure to be expunged is associated 
with a customer complaint initially reported to the CRD system on, or 
prior to, the effective date.\134\
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    \131\ See Notice at 50182.
    \132\ The Codes provide that no claim shall be eligible for 
submission to arbitration where six years have elapsed from the 
occurrence or event giving rise to the claim. See FINRA Rules 
12206(a) and 13206(a).
    \133\ See proposed Rule 13805(a)(2)(B)(i).
    \134\ See proposed Rule 13805(a)(2)(B)(ii).
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3. Director's Authority To Deny the Forum
    The proposed rule change would require the Director to decline the 
use of the DRS arbitration forum if an associated person files an 
expungement request that the Director determines is ineligible for 
arbitration under proposed Rules 12805 and 13805.\135\ The proposed 
rule change would also provide the Director with authority to decline 
the use of the DRS arbitration forum if the Director determines that 
the expungement request was not filed under, or considered in the DRS 
arbitration forum in accordance with, proposed Rules 12805 or 
13805.\136\ FINRA stated that the proposed rule change would help 
ensure additional safeguards around the expungement process by 
expanding the circumstances in which the Director is authorized to deny 
the DRS arbitration forum.\137\
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    \135\ See proposed Rules 12203(b) and 13203(b). For example, 
FINRA stated that under the proposed rule change the Director would 
decline the use of the DRS arbitration forum if: (1) an expungement 
request is ineligible under the proposed time limitations; (2) a 
panel has previously considered the merits of, or a court has 
previously decided, an expungement request associated with the same 
customer dispute information; (3) an associated person was named as 
a respondent in a customer arbitration but did not request 
expungement; (4) an associated person requested expungement but 
withdrew or did not pursue the expungement request; or (5) a party 
to a customer arbitration requested expungement on behalf of an 
unnamed person but the party withdrew or did not pursue an 
expungement request on behalf of the unnamed person. See Notice at 
50182.
    \136\ See proposed Rules 12203(c) and 13203(c). For example, 
FINRA stated that the Director may decline the use of the DRS 
arbitration forum if the Director determines that: (1) a panel is 
proposing to issue an award containing expungement of customer 
dispute information other than pursuant to proposed Rules 12805, 
12800(d) and (e) or 13805, as applicable; or (2) an associated 
person seeks expungement of customer dispute information other than 
pursuant to proposed Rules 12805, 12800(d) and (e) or 13805, as 
applicable. See Notice at 50182.
    \137\ See Notice at 50182.
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D. Procedural Requirements Relating to All Expungement Hearings

    FINRA Rules 12805 and 13805 currently provide a list of 
requirements panels must follow in order to issue an award containing 
expungement relief.\138\ In addition, the Guidance recommends that 
arbitrators follow certain practices when deciding expungement 
requests. The proposed rule change would amend the current expungement 
hearing requirements by incorporating relevant provisions from the 
Guidance. The proposed amended requirements would apply to all 
expungement hearings.\139\
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    \138\ See supra note 31.
    \139\ See proposed Rules 12805(c) and 13805(c). The proposed 
requirements for expungement hearings would apply to expungement 
hearings held during a customer arbitration under proposed Rule 
12805, a simplified customer arbitration under proposed Rule 12800 
(see Section II.G., ``Expungement Requests During Simplified 
Customer Arbitrations'') and a straight-in request under proposed 
Rule 13805, unless otherwise specified. See Notice at 50182 n.137.
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1. Recorded Hearing Sessions
    The Codes currently require a panel deciding an expungement request 
to hold a recorded hearing session (by telephone or in person) 
regarding the appropriateness of expungement.\140\ The proposed rule 
change would provide that the panel would be required to hold one or 
more separate recorded hearing sessions regarding the expungement 
request, clarifying that the panel would not be limited in the number 
of hearing sessions it should hold to decide the expungement request. 
The proposed rule change would also eliminate the reference to the 
hearing being held by telephone or in person since the participants in 
the hearing may, under the proposed rule change, also appear by video 
conference; the proposed rule change would also allow different 
participants to attend using different methods (e.g., one by phone, one 
by video conference).\141\
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    \140\ See FINRA Rules 12805(a) and 13805(a).
    \141\ See proposed Rules 12805(c)(1) and 13805(c)(1).
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2. Requesting Party's Appearance
    The proposed rule change would require the associated person whose 
information in the CRD system is the subject of the expungement request 
to appear in person or by video conference at the expungement hearing 
and eliminate the ability to appear via telephone.\142\ The proposed 
rule change would also require a party requesting expungement on behalf 
of an unnamed person or the party's representative to appear in person 
or by video conference at the hearing.\143\ The panel would determine 
the method of appearance.\144\ FINRA stated that requiring that 
attendance be in person or by video conference would help the panel 
assess the associated person's credibility.\145\
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    \142\ See proposed Rules 12805(c)(2) and 13805(c)(2).
    \143\ See id.
    \144\ See id.
    \145\ See Notice at 50182.
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3. Customer's Attendance and Participation During the Expungement 
Hearing
    The Guidance states that it is important to allow customers and 
their representatives to participate in the expungement hearing if they 
wish to do so.\146\ Specifically, the Guidance provides that 
arbitrators should:
---------------------------------------------------------------------------

    \146\ The Guidance states that arbitrators should permit 
customers and their counsel to participate in the expungement 
hearing. See supra note 6.
---------------------------------------------------------------------------

     Allow the customer and their representative to appear at 
the expungement hearing;
     Allow the customer to testify (telephonically, in person, 
or by other method) at the expungement hearing;
     Allow the representative for the customer or a pro se 
customer to introduce documents and evidence at the expungement 
hearing;
     Allow the representative for the customer or a pro se 
customer to cross-examine the associated person or other witnesses 
called by the party seeking expungement; and
     Allow the representative for the customer or a pro se 
customer to present opening and closing arguments if the panel allows 
any party to present such arguments.
    The proposed rule change would codify these provisions of the 
Guidance.\147\
---------------------------------------------------------------------------

    \147\ See Notice at 50182-83.
---------------------------------------------------------------------------

    Specifically, the proposed rule change would state that all 
customers whose customer dispute information is associated with the 
expungement request are entitled to attend and participate in all 
aspects of the prehearing conferences and the expungement hearing.\148\ 
And the

[[Page 24291]]

proposed rule change would provide that the customer could choose to 
attend and participate by telephone, in person or by video 
conference.\149\
---------------------------------------------------------------------------

    \148\ See proposed Rules 12805(c)(3)(A) and 13805(c)(3)(A). A 
prehearing conference is any hearing session, including an Initial 
Prehearing Conference, that takes place before the hearing on the 
merits begins. See FINRA Rules 12100(y) and 13100(w); see also FINRA 
Rules 12500 and 13500. Under the proposed rule change, all customers 
whose customer dispute information is associated with the straight-
in request would be entitled to representation at prehearing 
conferences. See proposed Rule 13805(c)(4).
    \149\ See proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B).
---------------------------------------------------------------------------

    The proposed rule change would also specify certain parameters of 
the customer's participation.\150\ First, the proposed rule change 
would provide that a customer or a customer's representative could 
introduce evidence during the expungement hearing.\151\ If the customer 
or customer's representative introduces any evidence at the expungement 
hearing, a party could state objections to the introduction of the 
evidence during the expungement hearing.\152\
---------------------------------------------------------------------------

    \150\ See Notice at 50183.
    \151\ See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).
    \152\ See id.
---------------------------------------------------------------------------

    Second, the customer and the customer's witnesses would be allowed 
to testify at the expungement hearing and be questioned by the customer 
or customer's representative.\153\ If a customer or their witnesses 
testify, the associated person or a party requesting expungement on 
behalf of an unnamed person would be allowed to conduct cross-
examination.\154\
---------------------------------------------------------------------------

    \153\ See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B).
    \154\ See id.
---------------------------------------------------------------------------

    Third, the customer or customer's representative would be permitted 
to state objections to evidence and cross-examine the associated person 
or party requesting expungement on behalf of an unnamed person and any 
other witnesses called during the expungement hearing.\155\
---------------------------------------------------------------------------

    \155\ See proposed Rules 12805(c)(5)(C) and 13805(c)(5)(C).
---------------------------------------------------------------------------

    Fourth, the customer or customer's representative would be 
permitted to present opening and closing arguments if the panel permits 
any party to present such arguments.\156\
---------------------------------------------------------------------------

    \156\ See proposed Rules 12805(c)(5)(D) and 13805(c)(5)(D).
---------------------------------------------------------------------------

    FINRA stated that customer attendance and participation during an 
expungement hearing would provide the panel with important information 
and perspective that it might not otherwise receive. In addition, by 
providing customers with options for how to attend and participate in 
hearings FINRA seeks to encourage customer attendance and 
participation.\157\ However, FINRA also stated that the proposed rule 
should give the associated person or party requesting expungement on 
behalf of an unnamed person the opportunity to substantiate arguments 
in support of the expungement request.\158\
---------------------------------------------------------------------------

    \157\ See Notice at 50183.
    \158\ Id.
---------------------------------------------------------------------------

4. Panel Requests for Additional Documents or Evidence
    The proposed rule change would explicitly authorize a panel to 
request from the associated person, the party requesting expungement on 
behalf of an unnamed person, and the member firm at which the person 
was associated at the time the customer dispute arose, as applicable, 
any documentary, testimonial or other evidence that the panel deems 
relevant to the expungement request.\159\ FINRA stated that this 
proposed rule change would help ensure that arbitrators have the 
information necessary to make an informed decision on an expungement 
request, particularly in cases that settle before an evidentiary 
hearing or in cases where the customer does not attend or participate 
in the expungement hearing.\160\
---------------------------------------------------------------------------

    \159\ See proposed Rules 12805(c)(6) and 13805(c)(7).
    \160\ See Notice at 50183.
---------------------------------------------------------------------------

5. Review of Settlement Documents
    Current FINRA Rules 12805(b) and 13805(b) provide that, in the 
event a customer dispute is resolved by settlement, the panel 
considering the expungement request must review the settlement 
documents and consider the amount of payments made to any party and any 
other terms and conditions of the settlement.\161\ The proposed rule 
change would retain this requirement.\162\
---------------------------------------------------------------------------

    \161\ FINRA stated that the panel must review settlement 
documents that are related to the customer dispute information 
associated with the expungement request, regardless of whether the 
associated person was a party to the settlement. Id. at 50183 n.152.
    \162\ See proposed Rules 12805(c)(7) and 13805(c)(8). FINRA Rule 
2081 provides that no member firm or associated person shall 
condition or seek to condition settlement of a dispute with a 
customer on, or to otherwise compensate the customer for, the 
customer's agreement to consent to, or not to oppose, the member's 
or associated person's request to expunge such customer dispute 
information from the CRD system. See also Prohibited Conditions 
Relating to Expungement of Customer Dispute Information FAQ, https://www.finra.org/arbitration-mediation/faq/prohibited-conditions-relating-expungement-customer-dispute-information.
---------------------------------------------------------------------------

    In addition, the Guidance currently recommends that arbitrators 
inquire and fully consider whether a party conditioned a settlement of 
a customer dispute upon an agreement not to oppose the request for 
expungement in cases in which the customer does not attend or 
participate in the expungement hearing or the requesting party states 
that a customer has indicated that the customer will not oppose the 
expungement request.\163\ The proposed rule change would codify the 
language in the Guidance,\164\ in part, because conditioned settlements 
violate FINRA Rule 2081 and may be grounds to deny an expungement 
request.\165\
---------------------------------------------------------------------------

    \163\ See Notice at 50184.
    \164\ See proposed Rules 12805(c)(7) and 13805(c)(8).
    \165\ See Notice at 50184.
---------------------------------------------------------------------------

6. Unanimous Decision To Issue an Award Containing Expungement Relief
    Unlike arbitration cases generally, which may be decided based on a 
majority decision of the panel, the proposed rule change would require 
that the arbitrators agree unanimously to issue an award containing 
expungement relief.\166\ The proposed amendments would also provide 
that in order to issue an award containing expungement relief, the 
panel must unanimously find that one or more of the grounds for 
expungement enumerated in the proposed rule has been established: (1) 
the claim, allegation or information is factually impossible or clearly 
erroneous; (2) the associated person was not involved in the alleged 
investment-related sales practice violation, forgery, theft, 
misappropriation or conversion of funds; or (3) the claim, allegation 
or information is false.\167\ The proposed rule change would also state 
that the panel shall not issue, and the Director shall not serve, an 
award containing expungement relief based on any other grounds.\168\ 
FINRA stated that these proposed rule changes would help ensure that 
expungement is awarded only in limited circumstances in

[[Page 24292]]

accordance with the narrow standards in its rules.\169\
---------------------------------------------------------------------------

    \166\ See proposed Rules 12805(c)(8)(A) and 13805(c)(9)(A). 
FINRA stated that when deciding a customer's claims, a majority 
decision of the arbitrators would continue to be sufficient. Notice 
at 50184 n.156.
    \167\ See proposed Rules 12805(c)(8)(A)(i) and 
13805(c)(9)(A)(i). FINRA stated that current FINRA Rules 12805 and 
13805 require that, in order to issue an award containing 
expungement of customer dispute information, the panel must indicate 
in the arbitration award which of the FINRA Rule 2080 grounds for 
expungement serves as the basis for its expungement order. See 
Notice at 50184; see also FINRA Rule 2080 (Obtaining an Order of 
Expungement of Customer Dispute Information from the Central 
Registration Depository (CRD) System). FINRA Rule 2080 is not part 
of the Codes, and the proposed rule change would not amend FINRA 
Rule 2080. FINRA explained that the proposed rule change would 
codify the grounds identified in FINRA Rule 2080(b)(1) as the 
exclusive grounds upon which an arbitration panel may issue an award 
containing expungement of customer dispute information from the CRD 
system. See Notice at 50184 at n.162.
    \168\ See proposed Rules 12805(c)(8)(A)(ii) and 
13805(c)(9)(A)(ii).
    \169\ See Notice at 50184; see also supra note 25 and 
accompanying text.
---------------------------------------------------------------------------

7. Contents of the Expungement Award
    The panel is currently required ``to provide a `brief' written 
explanation of the reasons for its finding that one or more of the 
[FINRA Rule 2080] grounds for expungement applies to the facts of the 
case.'' \170\ According to FINRA, the Guidance suggests that the 
panel's explanation should be complete and not solely a recitation of 
one of the FINRA Rule 2080(b)(1) grounds or language provided in the 
expungement request.\171\ The proposed rule change would retain the 
requirement to provide the written explanation, but would remove the 
word ``brief,'' and would incorporate language from the Guidance that 
the panel's explanation should identify any specific documentary, 
testimonial or other evidence on which the panel relied in awarding 
expungement relief.\172\ Thus, FINRA stated that under the proposed 
rule change, the panel would be required to provide enough detail in 
the award to explain its rationale for awarding expungement 
relief.\173\
---------------------------------------------------------------------------

    \170\ See Notice at 50184; see also FINRA Rules 12805(c) and 
13805(c).
    \171\ See Notice at 50184.
    \172\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B).
    \173\ See Notice at 50184.
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8. Evidentiary Weight of Decision Not To Attend or Participate
    The proposed rule change would state that a panel shall not give 
any evidentiary weight to a decision by a customer or an authorized 
representative of state securities regulators (``authorized 
representative'') not to attend or participate in an expungement 
hearing when making a determination of whether expungement is 
appropriate.\174\ FINRA stated that a customer or an authorized 
representative may not attend, participate in or appear at an 
expungement hearing for a variety of reasons that may be unrelated to 
the merits of the expungement request. Accordingly, a customer's or an 
authorized representative's decision not to attend or participate 
should not be given any evidentiary weight by the panel when making the 
expungement determination.\175\
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    \174\ See proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C); see 
also Amendment No. 1; see also Section II.F., ``Attendance and 
Participation of an Authorized Representative of State Securities 
Regulators in Straight-in Requests'' (discussing the attendance and 
participation in straight-in requests of an authorized 
representative of state securities regulators).
    \175\ See Notice at 50185; see also FINRA November 10 Letter at 
10-11.
---------------------------------------------------------------------------

9. Forum Fees
    The proposed rule change would retain the current requirements in 
FINRA Rules 12805(d) and 13805(d) that address how DRS arbitration 
forum fees are assessed in expungement hearings. Specifically, the 
proposed rule change would state that the panel must assess against the 
parties requesting expungement all DRS arbitration forum fees for each 
hearing session in which the sole topic is the determination of the 
appropriateness of expungement.\176\
---------------------------------------------------------------------------

    \176\ See proposed Rules 12805(c)(9) and 13805(c)(10).
---------------------------------------------------------------------------

E. Notifications to Customers and to State Securities Regulators 
Regarding Expungement Requests

1. Notification to Customers by the Associated Person
    According to FINRA, the Guidance suggests that when a straight-in 
request is filed against a firm, arbitrators order the associated 
person to provide a copy of the statement of claim to the customers 
involved in the customer dispute that gave rise to the customer dispute 
information maintained in the CRD system.\177\ The proposed rule change 
would codify this practice in the Industry Code by requiring the 
associated person to serve all customers whose customer arbitrations, 
civil litigations or customer complaints are a subject of the 
expungement request with a copy of the statement of claim requesting 
expungement and any answer.\178\ The associated person would be 
required to serve a copy of the statement of claim and a copy of any 
answer within 10 days of filing.\179\ The panel would be authorized to 
decide whether extraordinary circumstances exist that make service on 
the customers impracticable.\180\
---------------------------------------------------------------------------

    \177\ See Notice at 50185; see also supra note 6.
    \178\ See proposed Rule 13805(b)(1)(A)(i) and (ii). This 
proposed requirement would apply to straight-in requests filed under 
the Industry Code; notice to customers would not be necessary for 
requests filed under proposed Rule 12805 of the Customer Code as the 
customer would be a named party. See Notice at 50185 n.168.
    \179\ See proposed Rules 13805(b)(1)(A)(i) and (ii).
    \180\ See id.
---------------------------------------------------------------------------

    The proposed rule change also would require the associated person 
to file with the panel proof of service for the statement of claim and 
any answers, copies of all documents provided by the associated person 
to the customers, and copies of all communications sent by the 
associated person to the customers and any responses received from the 
customers.\181\
---------------------------------------------------------------------------

    \181\ See proposed Rule 13805(b)(1)(A)(iv).
---------------------------------------------------------------------------

    FINRA stated that providing notification to customers would help 
ensure that the customers know about the expungement request and have 
an opportunity to attend and participate in the expungement hearing or 
provide a position in writing regarding the associated person's 
request. FINRA also stated that requiring the panel to review all 
documents that the associated person used to inform the customers about 
the expungement request as well as any customer responses received 
would help ensure that the associated person does not attempt to 
dissuade a customer from attending or participating in the expungement 
hearing.\182\
---------------------------------------------------------------------------

    \182\ See Notice at 50185.
---------------------------------------------------------------------------

2. Notifications to the Customer by the Director
    The proposed rule change would require the Director to notify all 
customers whose customer arbitrations, civil litigations or customer 
complaints are a subject of the expungement request, of the time, date 
and place of any prehearing conferences and the expungement 
hearing.\183\ The Director would also provide the notified customers 
with access to all documents on the Portal related to the request for 
expungement prior to their attendance and participation in the 
expungement hearing.\184\
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    \183\ See proposed Rule 13805(b)(1)(B)(i). This requirement 
would apply to straight-in requests filed under the Industry Code; 
notice to customers would not be necessary for requests filed under 
proposed Rule 12805 of the Customer Code as the customer would be a 
named party. See also Section II.G.3., ``Customer Notification of 
Expungement Hearings during Simplified Arbitrations'' (discussing 
customer notification of expungement hearings in connection with 
simplified arbitrations). FINRA stated that the Director would be 
required to include language in the notice encouraging the customer 
to attend and participate in the expungement hearing. See Notice at 
50185.
    \184\ See proposed Rule 13805(b)(1)(B)(ii); see also Notice at 
50185. FINRA would provide customers with access to the documents 
through the Portal. The Portal has two parts: the DR Neutral Portal 
is for arbitrators and mediators serving on the Dispute Resolution 
roster, and the DR Party Portal is for arbitration and mediation 
case participants. Once registered on the Portal, parties may use 
the portal to, among other things, file an arbitration claim, view 
case documents, submit documents to FINRA and send documents to 
other portal case participants, and schedule hearing dates. See 
supra note 86. FINRA stated that these proposed rule changes would 
help encourage customer attendance and participation in the 
expungement hearing, which would help the panel fully develop a 
record on which to decide the expungement request. See Notice at 
50185.
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3. Notifications to State Securities Regulators
    The proposed rule change would require FINRA to notify state 
securities

[[Page 24293]]

regulators, in the manner determined by the Director in collaboration 
with state securities regulators, of an expungement request within 15 
days of receiving an expungement request.\185\ FINRA stated that the 
proposed notification requirement would help ensure that state 
securities regulators are timely notified of expungement requests.\186\
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    \185\ See proposed Rules 12800(f)(1), 12805(b) and 
13805(b)(2)(A). FINRA stated that it would make this notification in 
connection with expungement requests under the Customer and Industry 
Codes. Such notification could be achieved by notifying NASAA of the 
expungement requests. See Notice at 50185 n.176.
    \186\ See Notice at 50185.
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F. Attendance and Participation of an Authorized Representative of 
State Securities Regulators in Straight-In Requests

    The proposed rule change would provide a mechanism for an 
authorized representative of a state securities regulator to provide 
their position or positions on an expungement request in writing or by 
attending and participating in the expungement hearing in person or by 
video conference.\187\ The proposed rule change would limit attendance 
and participation by an authorized representative to straight-in 
requests.\188\
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    \187\ See proposed Rule 13805(c)(6)(A).
    \188\ See Notice at 50185-86; see also proposed Rule 1305(c)(6). 
The proposed rule change would not allow an authorized 
representative to attend or participate in a customer arbitration 
where expungement has been requested; FINRA believes that such 
attendance or participation could substantially disrupt the 
customer's case and would be less impactful, as the panel hears the 
customer's evidence on the merits. See id. at 50186.
---------------------------------------------------------------------------

    The proposed rule change would also require the Director to provide 
state securities regulators with access to all documents relevant to: 
(1) the expungement request filed in the arbitration requesting 
expungement relief; and (2) any other customer arbitration brought 
under the Customer Code that is associated with the customer dispute 
information that is a subject of the expungement request.\189\ Such 
access would be required to be provided at the same time as providing 
notification to state securities regulators of the straight-in 
request.\190\
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    \189\ See proposed Rule 13805(b)(2)(B).
    \190\ See id.; see also Notice at 50186. The state securities 
regulators' access to the documents would be subject to 
confidentiality restrictions. See proposed Rule 13805(b)(2)(B).
---------------------------------------------------------------------------

    If the Director receives notification from an authorized 
representative no later than 30 days after the last answer is due that 
the authorized representative intends to attend and participate in the 
expungement hearing, the proposed rule change would require the 
Director to notify the authorized representative of the time, date and 
place of any prehearing conferences and the expungement hearing.\191\ 
Under proposed Rule 13805(c)(6), at the expungement hearing, the 
authorized representative would be permitted to: (1) introduce 
documentary, testimonial, or other evidence; (2) cross-examine 
witnesses; and (3) present opening and closing arguments if the panel 
allows any party to present such arguments.\192\ Under the proposed 
rule change, the other persons appearing at the expungement hearing 
could state objections to the authorized representative's evidence and 
cross-examine the authorized representative's witnesses.\193\
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    \191\ See proposed Rule 13805(b)(3).
    \192\ See proposed Rule 13805(c)(6)(B).
    \193\ See proposed Rule 13805(c)(6)(C).
---------------------------------------------------------------------------

    According to FINRA, the authorized representative would not be 
considered a party to the proceeding and their attendance and 
participation would be limited to what is authorized by proposed Rule 
13805(c)(6).\194\ As such, an authorized representative would not be 
entitled to seek discovery from the parties through the DRS arbitration 
forum, file motions, or seek to postpone a hearing.\195\ In addition, 
the proposed rule change provides that the panel would not be permitted 
to allow the attendance or participation of the authorized 
representative to materially delay the scheduling of the expungement 
hearing.\196\
---------------------------------------------------------------------------

    \194\ See Notice at 50186.
    \195\ See id. at 50186 n.182.
    \196\ See proposed Rule 13805(c)(6)(A).
---------------------------------------------------------------------------

    FINRA stated that allowing an authorized representative to attend 
and participate in straight-in requests may provide meaningful 
opposition to the expungement request, which might otherwise be 
unopposed, and thus help create a more complete factual record for the 
panel to rely upon to decide the expungement request.\197\
---------------------------------------------------------------------------

    \197\ See Notice at 50186. FINRA also stated that NASAA and 
state securities regulators have a shared interest with FINRA in 
protecting the integrity of the information contained in the CRD 
system, as it is a crucial tool in their registration and oversight 
responsibilities. See id.
---------------------------------------------------------------------------

G. Expungement Requests During Simplified Customer Arbitrations

    FINRA Rule 12800, governing simplified arbitration,\198\ was 
designed to make the DRS arbitration process less burdensome for 
customer arbitrations involving $50,000 or less (exclusive of interest 
and expenses) by providing such customers with expedited procedures. 
Simplified arbitrations are decided on the pleadings and other 
materials submitted by the parties, unless the customer requests a 
hearing.\199\ Further, a single arbitrator from the public chairperson 
roster is appointed to consider and decide simplified arbitrations, 
unless the parties agree in writing otherwise.\200\
---------------------------------------------------------------------------

    \198\ See supra note 7 and accompanying text.
    \199\ See FINRA Rule 12800(a).
    \200\ See FINRA Rule 12800(b). The parties could agree to have a 
three-person panel decide the simplified case. For ease of 
reference, when discussing expungement requests in simplified 
arbitrations under the proposed rule change, this order uses the 
term ``arbitrator,'' unless otherwise specified, to mean either a 
panel or single arbitrator.
---------------------------------------------------------------------------

    The customer who files a simplified arbitration determines how the 
claim will be decided. In particular, the customer has the option of 
having the case decided in one of three ways: (1) without a hearing 
(referred to as ``on the papers''), where the arbitrator decides the 
case on the pleadings or other materials; (2) in an ``Option One'' full 
hearing, in which prehearings and hearings on the merits take place 
pursuant to the regular provisions of the Customer Code; or (3) in an 
``Option Two'' special proceeding, whereby the parties present their 
case in a hearing to the arbitrator in a compressed timeframe, so that 
the hearings last no longer than one day.\201\
---------------------------------------------------------------------------

    \201\ See FINRA Rule 12800(c).
---------------------------------------------------------------------------

    FINRA Rule 12800 does not expressly address how an expungement 
request should be filed or considered during a simplified 
arbitration.\202\ The proposed rule change would codify an associated 
person's ability to request expungement when named as a respondent in a 
simplified arbitration, and for other parties to request expungement on 
behalf of an unnamed person. The proposed rule change would also 
establish procedures for requesting and considering expungement 
requests in simplified arbitrations that are consistent with the 
expedited nature of these proceedings.\203\
---------------------------------------------------------------------------

    \202\ See Notice at 50186.
    \203\ See Notice at 50186, proposed Rules 12800(d) and (e).
---------------------------------------------------------------------------

1. Requesting Expungement
    The proposed rule change would permit a named associated person to 
request expungement, or a party to file an on-behalf-of request, during 
a simplified arbitration.\204\ Unlike in a non-simplified arbitration, 
if expungement is not requested during the simplified arbitration, the 
associated person would be permitted to request it as a straight-in 
request filed under the Industry Code.\205\
---------------------------------------------------------------------------

    \204\ See proposed Rules 12800(d)(1) and (2).
    \205\ See proposed Rule 12800(e)(2). See Section II.G.1.c., ``No 
Expungement Request is Filed.''

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[[Page 24294]]

a. Request by a Named Associated Person During a Simplified Arbitration
    Under the proposed rule change, an associated person named as a 
respondent in a simplified arbitration could request expungement during 
the arbitration of the customer dispute information associated with the 
customer's statement of claim, provided the request is eligible for 
arbitration.\206\ If a named associated person requests expungement 
during a simplified arbitration, the proposed rule change would require 
the request to be filed in an answer or a separate pleading requesting 
expungement.\207\ If the named associated person requests expungement 
in a pleading other than an answer, the request would be required to be 
filed within 30 days after the date FINRA notifies the parties of the 
appointment of the arbitrator.\208\ The request would be required to 
include the same information as a request filed in a non-simplified 
arbitration.\209\
---------------------------------------------------------------------------

    \206\ See proposed Rule 12800(d)(1)(A). The limitations that 
apply to expungement requests filed by a named associated person 
under proposed Rule 12805(a)(1)(B) would apply to requests made in 
simplified arbitration. See Notice at 50187 n.191. See Section 
II.C., ``Limitations on Expungement Requests.''
    \207\ See proposed Rule 12800(d)(1)(B)(i). Pursuant to FINRA 
Rule 12303(a), a respondent's answer must be submitted within 45 
days of receipt of the statement of claim. See Notice at 50187 
n.192; see supra note 48 and accompanying text.
    \208\ See proposed Rule 12800(d)(1)(B)(i). FINRA stated that 
when it notifies the parties that an arbitrator has been appointed, 
it informs the parties that they have 30 days from the date of 
notification to submit additional documents or other information 
before the case is submitted to the arbitrator. See Notice at 50187 
n.193.
    \209\ See proposed Rules 12800(d)(1)(B)(i) and 
12805(a)(1)(C)(ii). More specifically, the associated person's 
expungement request would be required to contain the applicable 
filing fee; the CRD number of the party requesting expungement; each 
CRD occurrence number that is the subject of the request; the case 
name and docket number associated with the customer dispute 
information; and an explanation of whether expungement of the same 
customer dispute information was previously requested and, if so, 
how it was decided.
---------------------------------------------------------------------------

    The arbitrator would be required to decide an expungement request 
that is filed by the associated person.\210\ If an associated person 
withdraws or does not pursue the request after filing, the arbitrator 
would be required to deny the request with prejudice so that it could 
not be re-filed.\211\
---------------------------------------------------------------------------

    \210\ See proposed Rules 12800(d)(1)(B)(ii) and 12800(e)(1).
    \211\ See proposed Rule 12800(d)(1)(C). FINRA stated this 
provision would limit arbitrator-shopping. See Notice at 50187.
---------------------------------------------------------------------------

b. Request by a Party on Behalf of an Unnamed Person
    Under the proposed rule change, the requirements for a party to 
file an on-behalf-of request during a simplified arbitration would be 
the same as the requirements for a named associated person filing an 
expungement request during a simplified arbitration. A named party 
would only be able to file an on-behalf-of request during a simplified 
arbitration with the consent of the unnamed person.\212\ As with on-
behalf-of requests filed in customer arbitrations under proposed Rule 
12805(a)(2), the unnamed person who would benefit from the expungement 
request would be required to consent to such filing by signing the 
Form.\213\
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    \212\ See proposed Rule 12800(d)(2)(A).
    \213\ See proposed Rule 12800(d)(2). The request must also meet 
the same requirements as an on-behalf-of request filed under 
proposed Rule 12805(a)(2). See proposed Rules 12805(a)(1)(C)(ii), 
12805(a)(2)(C)(ii) and 12805(a)(2)(D); see also Section II.A.1.b., 
``Expungement Requests By a Party Named in a Customer Arbitration on 
Behalf of an Unnamed Person.''
---------------------------------------------------------------------------

    The arbitrator would be required to decide an on-behalf-of request 
that is filed by the requesting party.\214\ If the requesting party 
withdraws or does not pursue the on-behalf-of request after filing, the 
arbitrator would be required to deny the request with prejudice so that 
it could not be re-filed.\215\
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    \214\ See proposed Rules 12800(d)(2)(B)(ii) and 12800(e)(1).
    \215\ See proposed Rule 12800(d)(2)(C).
---------------------------------------------------------------------------

c. No Expungement Request Is Filed
    If expungement is not requested during a simplified arbitration 
under proposed Rule 12800(d), the associated person would be able to 
file a straight-in request under proposed Rule 13805 and have the 
request decided by a three-person panel randomly selected from the 
Special Arbitrator Roster.\216\ The request would be subject to the 
limitations on whether and when such requests may be filed under the 
Industry Code.\217\
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    \216\ See proposed Rules 12800(e)(2), 13805(a)(1) and 13806. 
FINRA stated that because there may be less information available 
for the arbitrator to evaluate an expungement request during a 
simplified arbitration--even when the simplified arbitration results 
in an award--the associated person would retain the ability to 
choose to file the request as a straight-in request under the 
Industry Code. This would allow the associated person to obtain and 
present evidence from the member firm at which they were associated 
at the time the customer dispute arose without interfering with the 
simplified customer arbitration process. See Notice at 50187 n.203 
and accompanying text.
    \217\ See proposed Rule 12800(e)(2); see also Section II.C., 
``Limitations on Expungement Requests.''
---------------------------------------------------------------------------

2. Deciding Expungement Requests During Simplified Arbitrations
    If expungement is requested during simplified arbitration, the 
arbitrator would be required to decide the expungement request, 
regardless of how the simplified arbitration closes (e.g., even if the 
arbitration settles).\218\ Under the proposed rule change, how and when 
the expungement request is decided would depend on which option the 
customer selects to decide the simplified arbitration.\219\
---------------------------------------------------------------------------

    \218\ See proposed Rule 12800(e)(1). Simplified arbitration is a 
more streamlined arbitration process. See Notice at 50186. In part, 
a single arbitrator from the public chairperson roster is appointed 
to consider and decide simplified arbitrations, unless the parties 
agree in writing otherwise. Id.
    \219\ See proposed Rule 12800(e).
---------------------------------------------------------------------------

a. No Hearing or ``Option Two'' Special Proceeding
    If the customer opts not to have a hearing or chooses an ``Option 
Two'' special proceeding, the arbitrator would decide the customer's 
dispute first and issue an award.\220\ After the customer's dispute is 
decided, the arbitrator would hold a separate expungement-only hearing 
to consider and decide the expungement request and issue a separate, 
subsequent award.\221\ FINRA stated that the proposed rule change is 
designed to minimize any delays in resolving the customer arbitration 
and any delays in potential recovery that a customer may be 
awarded.\222\
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    \220\ See proposed Rule 12800(e)(1)(A).
    \221\ See id. The arbitrator must conduct the expungement 
hearing pursuant to proposed Rule 12805(c). The expungement award 
must meet the requirements of proposed Rule 12805(c)(8), and the DRS 
arbitration forum fees would be assessed pursuant to proposed Rule 
12805(c)(9). See Notice at 50188 n.206.
    \222\ See Notice at 50188.
---------------------------------------------------------------------------

b. ``Option One'' Full Hearing
    If the customer chooses to have an ``Option One'' full hearing on 
their claim and it closes by award, the arbitrator would be required to 
consider and decide the expungement request during the customer 
arbitration and include the decision on the expungement request in the 
same award as the decision on the customer arbitration.\223\ This 
process would be the same as deciding an expungement request during a 
non-simplified customer arbitration that closes by award after a 
hearing, where the customer's claim and expungement request are 
addressed during the customer arbitration.\224\
---------------------------------------------------------------------------

    \223\ See proposed Rule 12800(e)(1)(B)(i).
    \224\ See Notice at 50188.
---------------------------------------------------------------------------

    If the customer arbitration closes other than by award or by award 
without a hearing, the arbitrator would be required to hold a separate 
expungement-only hearing to consider and decide the expungement request 
and issue a separate award containing the decision on the expungement

[[Page 24295]]

request.\225\ The arbitrator would conduct a separate expungement-only 
hearing to develop the factual record and help the arbitrator make a 
fully informed decision on the expungement request.\226\
---------------------------------------------------------------------------

    \225\ See proposed Rule 12800(e)(1)(B)(ii).
    \226\ See Notice at 50188.
---------------------------------------------------------------------------

3. Customer Notification of Expungement Hearings During Simplified 
Arbitrations
    The proposed rule change would require the Director to notify all 
customers from the simplified arbitration of a separate expungement-
only hearing.\227\ FINRA stated that the Director's notice would 
provide the customers with timely notice of the expungement hearing so 
that the customers and their representatives may participate.\228\
---------------------------------------------------------------------------

    \227\ See proposed Rule 12800(f)(2).
    \228\ See Notice at 50188.
---------------------------------------------------------------------------

H. Non-Substantive Changes

    The proposed rule change would also amend the Codes to make non-
substantive, technical changes to the rules impacted by the proposed 
rule change. For example, the proposed rule change would require the 
renumbering of paragraphs and the updating of cross-references in the 
rules impacted by the proposed rule change. In addition, the title of 
Part VIII of the Customer Code would be amended to add a reference to 
``Expungement Proceedings.'' Similarly, the title of Part VIII of the 
Industry Code would be amended to add a reference to ``Expungement 
Proceedings'' and ``Promissory Note Proceedings.'' FINRA is also 
proposing to re-number current FINRA Rule 13806 (Promissory Note 
Proceedings) as new FINRA Rule 13807, without substantive change to the 
current rule language and to amend FINRA Rule 13214 to change the cross 
references from Rules 13806(d)(1) and 13806(f) to Rules 13807(d)(1) and 
13807(f), respectively. Finally, FINRA would also amend FINRA Rule 
13600 to change the cross reference from Rule 13806(e)(1) to Rule 
13807(e)(1).

III. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment 
letters, and FINRA's responses to the comments, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Exchange Act and the rules and regulations thereunder that are 
applicable to a national securities association.\229\ Specifically, the 
Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Exchange Act,\230\ which requires, among other 
things, that FINRA rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. The Commission also finds that the proposed rule 
change is consistent with Section 15A(b)(5) of the Exchange Act,\231\ 
which requires, among other things, that FINRA rules provide for the 
equitable allocation of reasonable dues, fees and other charges among 
members and issuers and other persons using any facility or system that 
FINRA operates or controls.
---------------------------------------------------------------------------

    \229\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \230\ 15 U.S.C. 78o-3(b)(6).
    \231\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

A. Requests for Expungement Under the Customer Code

1. Expungement Requests by Respondents Named in Customer Arbitration
    The proposed rule change to amend FINRA Rule 12805 would, in part, 
govern how and when named associated persons may request expungement 
during a customer arbitration. Among other things, the proposed rule 
change would require that a named associated person file a request for 
expungement of the customer dispute information associated with the 
customer's statement of claim in the customer arbitration or forfeit 
the ability to request expungement of the same customer dispute 
information in a subsequent proceeding.\232\
---------------------------------------------------------------------------

    \232\ See proposed Rule 12805(a)(1)(A).
---------------------------------------------------------------------------

    The proposed rule change would also dictate the method of and 
deadline for filing an expungement request.\233\ Under the proposed 
rule change, a named associated person would need to include their 
request for expungement in their answer to the customer's statement of 
claim or in a separate pleading requesting expungement.\234\ If the 
associated person includes their request in the answer, they must file 
the answer within 45 days of receipt of the statement of claim.\235\ If 
the named associated person requests expungement in a separate pleading 
requesting expungement, rather than the answer, they would need to file 
the pleading no later than 60 days before the first scheduled hearing 
begins.\236\
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    \233\ See proposed Rule 12805(a)(1)(C)(i).
    \234\ See id.
    \235\ See FINRA Rule 12303(a).
    \236\ See proposed Rule 12805(a)(1)(C)(i); see also supra notes 
49-50 and accompanying text. See also Section II.A.1.a.i., ``Method 
and Timing of Requesting Expungement in Customer Arbitration.''
---------------------------------------------------------------------------

    Finally, the proposed rule change would further prescribe the 
contents of an expungement request.\237\ For example, the proposed rule 
change would require the named associated person requesting expungement 
to explain whether expungement of the same customer dispute information 
was: (1) previously requested and, if so, (2) how it was decided.\238\
---------------------------------------------------------------------------

    \237\ See proposed Rule 12805(a)(1)(C)(ii).
    \238\ See proposed Rule 12805(a)(1)(C)(ii)e.
---------------------------------------------------------------------------

    FINRA stated that requiring the named associated person to request 
expungement in the customer arbitration increases the likelihood that a 
panel will have input from all parties and access to all of the 
evidence, testimony and other documents to make an informed decision on 
the expungement request.\239\ FINRA further stated that the potential 
costs that would be incurred by associated persons, arbitrators and the 
DRS arbitration forum if named associated persons file expungement 
requests are appropriate given the potential benefit of having customer 
input and a complete factual record for the panel to decide an 
expungement request.\240\ Moreover, FINRA stated that requiring the 
named associated person requesting expungement to explain whether 
expungement of the same customer dispute information was previously 
requested and, if so, how it was decided would further link the request 
to a specific case and help prevent multiple requests for 
expungement.\241\
---------------------------------------------------------------------------

    \239\ See Section II.A.1.a., ``Expungement Requests by a 
Respondent Named in a Customer Arbitration.''
    \240\ See Notice at 50175.
    \241\ See id. at 50176.
---------------------------------------------------------------------------

    Finally, FINRA stated the proposed 60-day deadline would provide 
adequate time for: (1) the named associated person to assess the 
customer's case, the potential merits of an expungement request, and 
whether to file the request; and (2) the parties to a customer 
arbitration to prepare their expungement-related arguments, since the 
expungement issues will overlap with the issues raised by the 
customer's claim.\242\
---------------------------------------------------------------------------

    \242\ Id.
---------------------------------------------------------------------------

    Four commenters supported, and there was no opposition to, these 
aspects of the proposed rule change.\243\

[[Page 24296]]

One commenter stated that requiring an associated person to request 
expungement in a customer dispute matter, if the associated person is a 
party to the matter, reduces the need for additional hearings, filing 
fees, attorney fees, and other arbitration costs concerning the same 
parties and the same evidence.\244\ Three commenters supported the 
proposed rule change on the basis that it would allow the panel that 
heard all of the evidence, including the customer's evidence, to be 
best situated to decide the expungement request.\245\ One of these 
commenters stated that the requirement would prevent ``arbitrator-
shopping'' (i.e., purposefully not raising, or withdrawing, an 
expungement request in an arbitration in order to file a request with a 
panel more likely to award expungement).\246\
---------------------------------------------------------------------------

    \243\ See letters from Seth A. Miller, General Counsel, 
President, Advocacy & Administration, Cambridge Investment Research, 
Inc., to the Commission, dated September 6, 2022 (``Cambridge'') at 
1-2; Melanie Senter Lubin, NASAA President and Maryland Securities 
Commissioner, North American Securities Administrators Association, 
Inc., to the Commission, dated September 6, 2022 (``NASAA September 
6 Letter'') at 2-3; Scott Eichhorn, et. al., Acting Director, 
University of Miami Investor Rights Clinic, to the Commission, dated 
September 6, 2022 (``Miami'') at 2-3; William A. Jacobson, Esq., 
Clinical Professor, Cornell Law School, and Director, Cornell 
Securities Law Clinic, et. al., to the Commission, dated September 
6, 2022 (``Cornell'') at 2.
    \244\ See Cambridge at 2.
    \245\ See NASAA September 6 Letter at 2-3; Miami at 2-3; Cornell 
at 2.
    \246\ See Cornell at 2.
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change should 
improve the integrity of the expungement process. Where a customer 
arbitration closes by award after a hearing, the panel's experience 
with the parties and the dispute, as well as the panel's review of the 
documents, testimony, and other evidence in connection with the 
arbitration, should leave the panel well positioned to make a decision 
regarding the related expungement request. Moreover, requiring the 
expungement request to be made within 45 days of receipt of the 
customer's statement of claim (if included in the answer) or no later 
than 60 days before the first scheduled hearing begins (if included in 
a pleading) should allow the requesting party a reasonable amount of 
time to make an informed decision about whether to request expungement 
while at the same time providing the parties with reasonable case-
preparation time, since the expungement issues will likely overlap with 
the issues raised by the customer's claim.
    Further, the content required for an expungement request under the 
proposed rule change, including the CRD occurrence number that is the 
subject of the request, the case name and docket number associated with 
the customer dispute information, and whether expungement of such 
information had previously been requested and any resolution thereof, 
should improve the expungement process by clearly documenting both the 
request and whether it repeats a previous request. The required content 
would provide the panel with information sufficient to understand who 
is requesting expungement and in connection with which customer 
dispute.\247\ In addition, requiring the party requesting expungement 
to explain whether expungement of the same customer dispute information 
was previously requested and, if so, how it was decided will help 
prevent parties from pursuing second requests for expungement, 
consistent with the proposed rule change prohibiting repeat requests, 
which is discussed in more detail below.\248\
---------------------------------------------------------------------------

    \247\ See Notice at 50176.
    \248\ See Section III.A.5., ``Limitations Applicable to 
Straight-in Requests and Expungement Requests during a Customer 
Arbitration.''
---------------------------------------------------------------------------

2. Content and Timing of on-Behalf-of Requests in Customer Arbitration
    As with expungement requests made by a named associated person, the 
proposed rule change would, in part, govern how and when an on-behalf-
of request may be made during a customer arbitration. For example, 
proposed Rule 12805(a)(2)(C)(iii) would require the party making the 
request to file it no later than 60 days before the first scheduled 
hearing.
    In addition, proposed Rule 12805(a)(2)(C)(ii) would require the 
party filing an on-behalf-of request to submit to the Director the Form 
signed by the unnamed person and a statement requesting expungement. As 
discussed above, by signing the Form the unnamed person would be: (1) 
consenting to the on-behalf-of request, (2) agreeing to be bound by the 
panel's decision on the on-behalf-of request, and (3) acknowledging 
their understanding that if the customer arbitration closes by award 
after a hearing, the unnamed person would be barred from filing a 
request for expungement for the same customer dispute information in a 
subsequent proceeding.\249\
---------------------------------------------------------------------------

    \249\ See Notice at 50177; see also Section II.A.1.b., 
``Expungement Requests by a Party Named in a Customer Arbitration on 
Behalf of an Unnamed Person.''
---------------------------------------------------------------------------

    Finally, proposed Rules 12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i) 
would require the party requesting expungement on behalf of an unnamed 
person to provide: the applicable filing fee; the CRD number of the 
unnamed person; each CRD occurrence number that is the subject of the 
request; the case name and docket number associated with the customer 
dispute information; and an explanation of whether expungement of the 
same customer dispute information was previously requested and, if so, 
how it was decided.\250\
---------------------------------------------------------------------------

    \250\ See Notice at 50177.
---------------------------------------------------------------------------

    FINRA believes that requiring associated persons to sign and submit 
the Form would help address its concern that some associated persons 
are filing arbitration claims seeking expungement of the same customer 
dispute information that was the subject of a previous denial by a 
panel of an on-behalf-of request.\251\ Specifically, requiring 
submission of the signed Form would help ensure that an unnamed person 
is aware of an on-behalf-of request.\252\ In addition, by signing the 
Form, the associated persons would be acknowledging that, if the 
customer arbitration closes by award after a hearing and an expungement 
decision is made, the unnamed person would be barred from filing a 
request for expungement for the same customer dispute information in a 
subsequent proceeding.\253\
---------------------------------------------------------------------------

    \251\ See id.
    \252\ See id.
    \253\ See id.
---------------------------------------------------------------------------

    In addition, under the proposed rule change, on-behalf-of requests 
would resemble named associated person requests in timing (the proposed 
rule would require service on all parties no later than 60 days before 
the first scheduled hearing), and in content (an on-behalf-of request 
would be required to include the same elements as a named associated 
person request).\254\
---------------------------------------------------------------------------

    \254\ See id. at 50176-77; see also Section III.A.1., 
``Expungement Requests by Respondents Named in Customer 
Arbitration.'' The proposed rule change would not require that an 
on-behalf-of request be included in an answer or pleading requesting 
expungement (although it could be) as such requests are made on 
behalf of non-parties. See Notice at 50176.
---------------------------------------------------------------------------

    The Commission received no comment letters supporting or opposing 
this proposed rule change.
    For reasons similar to those discussed above for expungement 
requests made by a named associated person in a customer arbitration, 
the Commission believes that these timing and content requirements 
should improve the integrity of the expungement process.\255\ In 
addition, the panel's decision would preclude the unnamed party from

[[Page 24297]]

seeking expungement of the same customer dispute information in another 
forum by claiming their interests were inadequately represented in the 
hearing under the terms of the Form. Moreover, requiring the 
expungement request to be made no later than 60 days before the first 
scheduled hearing begins should allow the requesting party a reasonable 
amount of time to make an informed decision about whether to request 
expungement while at the same time providing the parties with 
reasonable case-preparation time, as the expungement issues will 
overlap with the issues raised by the customer's claim.
---------------------------------------------------------------------------

    \255\ See Section III.A.1., ``Expungement Requests by 
Respondents Named in Customer Arbitration.''
---------------------------------------------------------------------------

    Further, the notice provided to the associated person pursuant to 
the requirement to submit the Form with the associated person's written 
consent should help ensure that the associated person is made aware of 
the on-behalf-of request and will likely help prevent inadvertent 
duplicative filings. The requirement that the associated person agree 
to be bound by the panel's decision on the request, and be barred from 
filing a request for expungement for the same customer dispute 
information, will help prevent the associated person from requesting 
expungement from a different panel if they are unsatisfied with the 
decision issued by the first panel. Such safeguards also help conserve 
resources and prevent inconsistent determinations.
3. Deciding Expungement Requests During Customer Arbitrations
    As stated above, the proposed rule change would treat customer 
claims that close by award after a hearing differently from customer 
claims that close other than by award (e.g., the case settles) or that 
close by award without a hearing. Where the customer's claim closes by 
award after a hearing, the proposed rule change would require the panel 
in a customer arbitration to consider and decide a request for 
expungement made during the proceeding. In addition, if the party 
requesting expungement withdraws or does not pursue the expungement 
request, the panel will be required to deny the expungement request 
with prejudice. FINRA stated that this change should make efficient use 
of the panel's familiarity with the case-in-chief, and help protect 
investors by precluding arbitrator-shopping by associated persons or 
those requesting expungement on their behalf.\256\
---------------------------------------------------------------------------

    \256\ See Notice at 50177. FINRA expressed concern that, absent 
this change, associated persons (or other requesters) might seek to 
withdraw and refile their expungement requests to avoid having the 
requests decided by the panel who heard evidence on the customer's 
arbitration claim (receiving a new list of arbitrators and a 
potentially more favorable decision). See id.
---------------------------------------------------------------------------

    Conversely, where the customer's claim closes other than by award 
or closes by award without a hearing, the proposed rule change would 
preclude the panel that heard the customer claim from considering the 
ongoing expungement request.\257\ In such cases, the efficiency 
rationale becomes less compelling, and FINRA believes that such 
expungement requests are best considered as straight-in requests by a 
panel from the Special Arbitrator Roster, discussed in more detail 
below.\258\ These proposed rule changes are intended to protect 
investors by reducing opportunities for arbitrator-shopping and by 
providing arbitrators with special training and factual-development 
tools specific to the expungement context.\259\
---------------------------------------------------------------------------

    \257\ See id. at 50177-78.
    \258\ See Section III.B., ``Straight-in Requests under the 
Industry Code and the Special Arbitrator Roster.''
    \259\ See Notice at 50178 and 50194.
---------------------------------------------------------------------------

    Two commenters supported the proposed requirement that the panel in 
a customer arbitration decide an expungement request where the customer 
arbitration closes by award after a hearing.\260\ These commenters 
reasoned that because the panel would have presided over the case-in-
chief, assessing input from all involved parties, it is best situated 
to decide the expungement request.\261\ Three commenters further 
supported the proposed requirement that, in the event an expungement 
request is withdrawn or not pursued, the panel would be required to 
deny the request with prejudice, reasoning that the proposed rule 
change would prevent arbitrator-shopping by discouraging requesting 
parties from withdrawing an expungement request in order to seek a 
potentially more favorable panel.\262\
---------------------------------------------------------------------------

    \260\ See letter from Christine Lazaro, Director of the 
Securities Arbitration Clinic and Professor of Clinical Legal 
Education, et. al., Securities Arbitration Clinic at St. John's 
University School of Law, to the Commission, dated September 6, 2022 
(``St. John's) at 2; Cornell at 2.
    \261\ See id.
    \262\ See Cornell at 2; Miami at 4; St. John's at 3.
---------------------------------------------------------------------------

    Three commenters, however, suggested that associated persons should 
be able to voluntarily withdraw expungement requests without 
prejudice.\263\ One of these commenters stated that customers are free 
to withdraw claims without prejudice,\264\ while another argued that 
there is no evidence to support the claim that a person that withdraws 
an expungement request is doing so in the hopes of finding a more 
favorable panel.\265\ A third commenter stated that there are a number 
of valid and practical reasons for why a non-party associated person's 
request for expungement may be withdrawn prior to final hearing (e.g., 
time and costs), and thus that it is inappropriate to penalize an 
associated person for withdrawing their expungement request.\266\
---------------------------------------------------------------------------

    \263\ See letters from Dochtor D. Kennedy, President & Founder, 
AdvisorLaw, LLC, to the Commission, dated August 9, 2022 
(``AdvisorLaw'') at 2-3; Jennifer W. Burke, Esq., Hennion & Walsh, 
Inc., to the Commission, dated September 6, 2022 (``Hennion'') at 6; 
Russell Del Toro, Esq., TCM, P.S.C., to the Commission, dated 
December 21, 2022 (``Del Toro'').
    \264\ See Hennion at 6.
    \265\ See Advisorlaw at 2-3.
    \266\ See Del Toro.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change in response to 
comments. FINRA expressed concern that arbitrator-shopping and repeated 
attempts to seek expungement of the same customer dispute information 
are inconsistent with the arbitration process and threaten the 
integrity of the information in the CRD system because they permit 
parties to request expungement until they get a favorable 
response.\267\ FINRA highlighted the extent of its concern by pointing 
out that among the requests to expunge customer dispute information in 
arbitration from January 2016 through December 2021, FINRA identified 
282 disclosures that were the subject of a previously withdrawn or 
denied requests to expunge.\268\ FINRA further stated, in response to a 
commenter's statement that an associated person may have valid and 
practical reasons for withdrawing an expungement request, that it is 
not in a position to determine or assess, on a case-by-case basis, the 
legitimacy of an associated person's reason for withdrawing an 
expungement request during a customer arbitration.\269\
---------------------------------------------------------------------------

    \267\ See FINRA November 10 Letter at 28-29.
    \268\ See FINRA November 10 Letter at 29; see also FINRA April 3 
Letter at 5.
    \269\ See FINRA April 3 Letter at 5.
---------------------------------------------------------------------------

    Two commenters also supported the proposed requirement that 
expungement requests made during customer arbitrations that close other 
than by award or close by award without a hearing, be heard by a panel 
from the Special Arbitrator Roster.\270\ One of these commenters 
reasoned that the original arbitration panels do not get to hear the 
full presentation of the evidence on the merits of the underlying

[[Page 24298]]

customer case and that customers or their representatives have little 
incentive to attend and participate in an expungement hearing once 
their case has settled.\271\
---------------------------------------------------------------------------

    \270\ See letter from Michael S. Edmiston, PIABA President, 
Public Investors Advocate Bar Association, to the Commission, dated 
September 6, 2022 (``PIABA September 6 Letter'' at 3 and St. John's 
at 2.
    \271\ See PIABA September 6 Letter at 3.
---------------------------------------------------------------------------

    One commenter, however, contended that a named associated person 
who requests expungement during a customer arbitration that closes 
other than by award or that closes by award without a hearing should 
continue to be allowed to request an expungement-only hearing before 
the same panel from the customer arbitration.\272\ Specifically, this 
commenter stated that, even in cases that are settled or dismissed, the 
panel has often had an opportunity to review the pleadings, participate 
in the disposition of discovery and other prehearing motions, and 
otherwise familiarize itself with the facts of the case.\273\ 
Furthermore, according to the commenter, permitting the same panel to 
decide an expungement hearing may be more efficient because, in many 
cases, the parties will have already researched and ranked the panel 
members and the expungement hearing will have been scheduled for the 
same day as the hearing on the merits.\274\ According to the commenter, 
already-scheduled expungement hearings would reduce scheduling issues 
and increase the likelihood of customer participation, as customers 
will have already set aside the time.\275\
---------------------------------------------------------------------------

    \272\ See letter from Kevin M. Carroll, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, to the Commission, dated September 2, 2022 (``SIFMA 
September 2 Letter'') at 8.
    \273\ See id.
    \274\ See id.
    \275\ See id.
---------------------------------------------------------------------------

    FINRA considered these comments but declined to amend the proposed 
rule change.\276\ FINRA stated that, when a customer arbitration closes 
other than by award or by award without a hearing, the panel may not 
have heard the presentation of the evidence on the merits of the case. 
In addition, FINRA stated that customers or their representatives have 
little incentive to attend and provide their interpretation of the 
facts in a subsequent expungement hearing once their case has 
settled.\277\ Because a customer arbitration that closes other than by 
award, or by award without a hearing, has the potential for an 
inadequately developed, or nonexistent, record, FINRA contended that 
the integrity of information in the CRD system would be better 
maintained by requiring a panel randomly selected from the Special 
Arbitrator Roster to hear and decide such expungement requests.\278\ 
Furthermore, FINRA stated that requiring an associated person to file 
such an expungement request as a straight-in request under the Industry 
Code would strengthen the expungement process because the Special 
Arbitrator Roster panel deciding the request would have the experience, 
qualifications, and training necessary to help ensure the development 
of a more complete factual record; \279\ in addition, FINRA stated that 
the proposed rule change would make it easier for customers to 
participate in the expungement proceeding, further helping the panel 
establish a more complete factual record.\280\
---------------------------------------------------------------------------

    \276\ See FINRA November 10 Letter at 24.
    \277\ See id. FINRA formed its Dispute Resolution Task Force 
(``Task Force''), whose members included representatives from the 
industry and the public with a broad range of interests in 
securities dispute resolution, to consider possible enhancements to 
the DRS arbitration and mediation forum. In 2015, the Task Force 
stated that ``the majority of issues that arise in the expungement 
process are those involving settled cases that do not go to final 
resolution because in such cases: (1) the panel selected by the 
parties may not have heard the full merits of the customer dispute 
and, therefore, may not bring to bear any special insights in 
determining whether to grant an expungement request and (2) 
claimants or their counsel have little incentive to participate in 
an expungement hearing once their dispute has been settled.'' See 
Notice at 50174 n.37; see also Final Report and Recommendations of 
the FINRA Dispute Resolution Task Force (Dec. 16, 2015), available 
at http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf.
    \278\ See FINRA November 10 Letter at 24.
    \279\ See Notice at 50178, 80; see also Section III.B.3., 
``Straight-in Requests under the Industry Code and the Special 
Arbitrator Roster, The Special Arbitrator Roster.''
    \280\ See Notice at 50183; see also Section III.D.3., 
``Customer's Attendance and Participation During the Expungement 
Hearing.''
---------------------------------------------------------------------------

    The Commission believes the proposed rule changes are aimed at 
enhancing FINRA's expungement framework. On the one hand, they require 
a panel of arbitrators that has decided the merits of a case to 
leverage their understanding of the case to decide any related 
expungement requests; the panel would be required to decide the request 
even if the requesting party withdraws or fails to present a case in 
support of the request--in which case the panel would deny the 
expungement request with prejudice. This is both efficient and helps 
protect investors by preventing those requesting expungement from 
withdrawing and refiling their request to obtain new arbitrators when 
unsatisfied with the original panel. On the other hand, when a case 
closes other than by award or closes by award without a hearing, the 
efficiency benefits of having the same panel decide the request (while 
not eliminated) are diminished. Moreover, the risk that the expungement 
hearing will not benefit from either a fully developed record or the 
adversarial process increases. For example, a case may settle before 
the record has had a chance to develop and a customer who has settled 
their claims may have little incentive to commit more time and 
resources in a subsequent expungement hearing. Rather than leave it to 
arbitrators in individual cases to decide whether they have enough 
information to proceed to hear an expungement request, FINRA has 
established uniform, separate procedures to help ensure the development 
of an adequate factual record in connection with every expungement 
request. The proposed rule changes also aim to help ensure that 
arbitrators deciding straight-in expungement requests have the training 
and tools to develop an adequate factual record, particularly in the 
absence of customer participation. Finally, the proposed rule change 
allows for the effective administration of the expungement process and 
provides certainty to the parties about when requests for expungement 
may be made.
    The Commission recognizes that in some cases the arbitrators from a 
customer arbitration could bring to a related standalone expungement 
hearing insights gleaned from their engagement with a well-developed 
factual record. Nevertheless, the proposed rule changes help ensure 
that every expungement request benefits from an adequate factual 
record. Moreover, it arms arbitrators on the Special Arbitrator Roster 
with the expungement-specific training and procedural tools necessary 
to develop and understand the factual record, regardless of both the 
state of the record prior to their involvement and the presence or 
absence of customers at the expungement hearing. Finally, it makes 
procedural improvements to facilitate customer participation in 
expungement hearings.
4. No Straight-In Requests Against Customers or Intervening in Customer 
Arbitrations To Request Expungement
    The proposed rule changes would prohibit an associated person from 
filing a straight-in request against a customer, and would prohibit 
unnamed persons from intervening in a customer arbitration and 
requesting expungement. FINRA stated that the proposed rule would help 
protect investors by preventing associated persons from interrupting, 
and thus delaying,

[[Page 24299]]

customer cases, thereby safeguarding customer time and resources.\281\
---------------------------------------------------------------------------

    \281\ See Notice at 50178; see also Section II.A.2., ``No 
Intervening in Customer Arbitrations to Request Expungement.''
---------------------------------------------------------------------------

    One commenter opposed the proposed prohibition against an 
associated person filing a straight-in request against a customer.\282\ 
This commenter argued that permitting straight-in requests against 
customers would solve many of the issues addressed in the proposed rule 
change, including customer notice and participation.\283\
---------------------------------------------------------------------------

    \282\ See Del Toro.
    \283\ See id.
---------------------------------------------------------------------------

    Two commenters objected to the proposed prohibition against 
expungement interventions by unnamed persons in customer 
arbitrations.\284\ One of these commenters stated that prohibiting an 
unnamed person from intervening to clear their name results in 
potentially false allegations remaining in the CRD for upwards of a 
year (i.e., until expungement can be awarded in the straight-in request 
and confirmed by a court).\285\ The other commenter stated that the 
rules should allow for the most fair, speedy, and inexpensive 
resolution of the matters and recommended that the proposed rule change 
allow for a sub-proceeding between the intervening affected associated 
person and the parties where a separate award on the matter of 
expungement is issued by the same panel without affecting the 
resolution of the main award.\286\
---------------------------------------------------------------------------

    \284\ See AdvisorLaw at 4 and Del Toro.
    \285\ See AdvisorLaw at 4.
    \286\ See Del Toro.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change in response to 
comments. In the Notice and in response to comments, FINRA stated that 
in circumstances where an associated person is neither a named party 
nor the subject of an on-behalf-of request, the associated person's 
conduct is unlikely to be fully addressed by the parties during the 
customer arbitration, and permitting the unnamed person's intervention 
could unnecessarily interrupt or delay resolution of the case.\287\ 
FINRA further stated that it does not believe that customers should be 
compelled to attend or participate in a separate proceeding to decide 
an expungement request after the customer has resolved their 
arbitration claim or civil litigation.\288\ FINRA also stated that the 
requirement that an associated person file a straight-in request 
against the member firm at which the person was associated at the time 
the customer dispute arose would help ensure that there is a connection 
between the respondent firm and the subject matter of the expungement 
request.\289\
---------------------------------------------------------------------------

    \287\ See FINRA November 10 Letter at 29; see also FINRA April 3 
Letter at 5; see also Notice at 50178.
    \288\ See FINRA April 3 Letter at 6.
    \289\ See id. at 7.
---------------------------------------------------------------------------

    The Commission believes that prohibiting straight-in requests 
against customers, and prohibiting expungement interventions by unnamed 
persons in customer arbitrations, as proposed, will protect investors 
by conserving their time, resources, and ability to make their case 
efficiently and without interruption. The Commission appreciates that 
this will require the associated person to wait until the customer 
claim has been resolved to initiate a straight-in expungement 
proceeding, but believes such a delay is reasonable to help ensure that 
the related customer arbitration can be resolved as expeditiously as 
possible. Moreover, the panel selected from the Special Arbitrator 
Roster deciding the expungement request would have the benefit of any 
final factual record from the related customer dispute.
5. Limitations Applicable to Straight-in Requests and Expungement 
Requests During a Customer Arbitration
    The proposed rule change would provide that an associated person 
may not file a request for expungement of customer dispute information 
if: (1) a panel held a hearing to consider the merits of the associated 
person's expungement request for the same customer dispute information; 
or (2) a court of competent jurisdiction previously denied the 
associated person's request to expunge the same customer dispute 
information.\290\
---------------------------------------------------------------------------

    \290\ See proposed Rule 12805(a)(1)(B).
---------------------------------------------------------------------------

    FINRA stated that the proposed rule changes would prevent an 
associated person from forum shopping, or seeking to return to the DRS 
arbitration forum to garner a favorable outcome on their expungement 
request.\291\ The Commission received no comment letters supporting or 
opposing this proposed rule change.
---------------------------------------------------------------------------

    \291\ See Notice at 50180.
---------------------------------------------------------------------------

    The proposed rule changes should help prevent an associated person, 
or firm seeking expungement on their behalf, from forum-shopping to 
garner a more favorable outcome on an expungement request. As such, the 
proposed rule change should help protect the integrity of the 
information in the CRD system.\292\ In addition, the proposed rule 
change should promote more efficient use of resources by precluding 
duplicative claims.
---------------------------------------------------------------------------

    \292\ The proposed rule change would give unnamed persons the 
authority to reject the on-behalf-of request to preserve their 
ability to request expungement on their own if they believe their 
interests would be insufficiently represented by the named firm 
requesting expungement on their behalf. See proposed Rule 
12805(a)(2)(C) and (D).
---------------------------------------------------------------------------

B. Straight-In Requests Under the Industry Code and the Special 
Arbitrator Roster

1. Filing a Straight-In Request
a. Form of a Straight-In Request
    Proposed Rule 13805 would require an associated person to make any 
request to expunge disclosures of customer dispute information (other 
than requests made in a customer arbitration itself) as a straight-in 
request, and would limit the circumstances in which an associated 
person could request expungement.\293\ Specifically, proposed Rule 
13805(a)(1) would require an associated person to make such an 
expungement request against the member firm with which they were 
associated at the time the customer dispute arose.\294\ FINRA stated 
that this requirement would help ensure that there is a connection 
between the respondent firm and the subject matter of the expungement 
request and that the panel selected from the Special Arbitrator Roster 
would be able to request evidence from the member firm with information 
that is relevant to the expungement request.\295\
---------------------------------------------------------------------------

    \293\ See Section II.B.1., ``Filing a Straight-in Request Under 
the Industry Code.''
    \294\ Proposed Rule 13805(a)(2) would bar an associated person 
from filing a straight-in request against a member firm where the 
request has previously been heard or denied, the relevant customer 
dispute has not been resolved, specified temporal limitations have 
passed, the associated person is prohibited from seeking expungement 
under Rule 12805(a)(1)(A) (for example, by failing to seek 
expungement in the customer arbitration), or a panel or court of 
competent jurisdiction previously found the associated person liable 
or the customer dispute information involves the same conduct that 
is the basis of a final regulatory action taken by a securities 
regulator or self-regulatory organization. See Section III.B.6., 
``Limitations Applicable to Straight-in Requests Only.''
    \295\ See Notice at 50179.
---------------------------------------------------------------------------

    Two commenters recommended that FINRA adopt an alternative for 
unnamed parties to request expungement other than by straight-in 
requests.\296\ For example, one of these commenters recommended that 
FINRA establish a method for unnamed parties who ``had no say in 
whether the [underlying] case should be settled.'' \297\ Similarly, the 
other commenter expressed concern that an unnamed

[[Page 24300]]

person may not be aware of a customer arbitration (or have input in the 
resolution of customer's case) and thus may not be aware they need to 
make a straight-in request.\298\
---------------------------------------------------------------------------

    \296\ See letter from Robin M. Traxler, Senior Vice President, 
Policy & Deputy General Counsel, Financial Services Institute, to 
the Commission, dated September 6, 2022 (``FSI'') at 5-6; letter 
from Josh Barber to the Commission, dated August 24, 2022 
(``Barber'').
    \297\ See Barber.
    \298\ See FSI at 5-6.
---------------------------------------------------------------------------

    FINRA responded that its existing rules help ensure that associated 
persons are aware of arbitration disclosures on their Forms U4 and 
U5.\299\ In addition, if a party to a customer arbitration is unwilling 
to file an on-behalf-of request or if a party files an on-behalf-of 
request and the arbitration settles, the proposed rule change would 
allow the associated person to seek expungement by filing a request to 
expunge the same customer dispute information as a straight-in 
request.\300\
---------------------------------------------------------------------------

    \299\ See FINRA November 10 Letter at 30; see, e.g., FINRA Rule 
1010(c)(2)(A)-(B) and FINRA By-Laws, Article V, Sections 3(a) and 
3(b).
    \300\ See FINRA November 10 Letter at 30.
---------------------------------------------------------------------------

    Two commenters supported the proposed rule change regarding 
straight-in requests, but recommended that FINRA prohibit associated 
persons from filing a straight-in request to expunge multiple, 
unrelated requests in one arbitration claim.\301\ According to one of 
these commenters, the practice of bundling expungement requests permits 
``gaming the system'' by having such claims heard by ``expungement-
friendly arbitrators.'' \302\ One of these commenters further suggested 
that FINRA require a nexus between the hearing location and the conduct 
at issue so that customers and state regulators would have more of an 
incentive to participate.\303\ These commenters reasoned that these 
changes would prevent unnecessary complications for the panel 
considering the expungement request and provide a common set of facts 
for the panel to consider.\304\
---------------------------------------------------------------------------

    \301\ See PIABA September 6 Letter at 4-5; Miami at 4-5.
    \302\ See Miami at 4-5.
    \303\ See id. at 6.
    \304\ See PIABA September 6 Letter at 5; Miami at 5-6.
---------------------------------------------------------------------------

    FINRA responded that the proposed time limits for filing a request 
\305\ may curtail the common practice of bundling unrelated and aged 
expungement requests in one straight-in request; and the requirement 
under the proposed rule change that an associated person would be 
required to file a straight-in request against the member firm at which 
the person was associated at the time the customer dispute arose would 
help ensure that there is a connection between the respondent firm and 
the subject matter of the straight-in request. With respect to 
requiring a locational nexus, FINRA stated that the ability for a 
customer to attend and participate in an expungement hearing by 
telephone or by video conference should help address concerns about 
there being a connection between the hearing location and the 
allegation at issue.\306\ FINRA further stated that concerns about 
expungement requests being brought before expungement-friendly 
arbitrators should be mitigated by several proposed requirements to 
minimize the potential for associated person or broker-dealer influence 
in the arbitrator selection process for straight-in requests. For 
example, the proposed change would require FINRA's list selection 
algorithm to randomly select a three-person panel from the Special 
Arbitrator Roster and the parties would not be able to agree to fewer 
than three arbitrators, strike any arbitrators selected by the list 
selection algorithm or stipulate to their removal, or be permitted to 
stipulate to the use of pre-selected arbitrators.\307\ According to 
FINRA, ``these requirements would help ensure that arbitrators on the 
Special Arbitrator Roster have the qualifications and training to 
decide straight-in requests and that the arbitrators conducting the 
expungement hearings are impartial and experienced in managing and 
conducting arbitration hearings in the DRS arbitration forum.'' \308\
---------------------------------------------------------------------------

    \305\ See Section III.B.6., ``Limitations Applicable to 
Straight-in Requests Only.''
    \306\ See FINRA November 10 Letter at 20.
    \307\ See id. at 20-21.
    \308\ See id. at 21.
---------------------------------------------------------------------------

    The Commission believes the requirements set forth in the proposed 
rule change are designed to promote investor protection because it 
should enhance the integrity of the CRD system. The firm with which the 
person requesting expungement was associated at the time the dispute 
arose should have knowledge of the dispute and access to relevant 
documentary or other evidence.\309\ Thus, requiring that a straight-in 
request be filed against the member firm with which the person was 
associated at the time of the conduct would increase the likelihood 
that the firm would be in a position to contribute to the development 
of any record, including at the request of the panel.\310\
---------------------------------------------------------------------------

    \309\ See Notice at 50179.
    \310\ Proposed Rule 13203(b) would provide the Director 
authority to deny the use of the forum to decide the request if the 
requisite connection between the associated person and the firm is 
not present. See Notice at 50179. In addition, proposed Rule 
13805(a)(2) would impose limitations on when such requests may be 
made. See Section III.B.6., ``Limitations Applicable to Straight-in 
Requests Only.''
---------------------------------------------------------------------------

    Also, the practice of bundling multiple, unrelated claims should be 
largely curtailed by the proposed time limits and requirement that 
claims be filed against the member firm at which the person was 
associated at the time the customer dispute arose; and that the 
constraints on parties' ability to influence the composition of the 
panel should minimize the use of pre-selected, expungement-friendly 
arbitrators.
    Finally, associated persons should be aware of arbitration 
disclosures on their Forms U4 and U5.\311\ To the extent they are not, 
the proposed time limits (discussed below) provide associated persons a 
reasonable amount of time to become aware and seek expungement by 
filing a request to expunge the same customer dispute information as a 
straight-in request.\312\ Thus, seeking expungement via a straight-in 
request, with the procedural safeguards discussed herein, should not 
unduly burden an associated person seeking expungement.
---------------------------------------------------------------------------

    \311\ See supra note 299.
    \312\ See supra note 300; see also Section III.B.6.b., 
``Limitations Applicable to Straight-in Requests Only, Time Limits 
for Expungement Requests.''
---------------------------------------------------------------------------

b. Content of a Straight-In Request
    In addition, as with named associated person requests, the proposed 
rule change also would establish content requirements for straight-in 
expungement requests.\313\ The required content of a straight-in 
request would be the same as those required for expungement requests 
filed under proposed Rule 12805.\314\ Specifically, an associated 
person would be required to include the following in a straight-in 
request: the applicable filing fee; the CRD number of the party 
requesting expungement; each CRD occurrence number that is the subject 
of the request; the case name and docket number associated with the 
customer dispute information, if applicable; and an explanation of 
whether expungement of the same customer dispute information was 
previously requested and, if so, how it was decided.\315\
---------------------------------------------------------------------------

    \313\ See Notice at 50179.
    \314\ See proposed Rule 13805(a)(3); see also Notice at 50179; 
see also Section III.A.1., ``Expungement Requests by Respondents 
Named in Customer Arbitration.''
    \315\ See proposed Rule 13805(a)(3); see also Notice at 50179.
---------------------------------------------------------------------------

    The Commission received no comment letters supporting or opposing 
this proposed rule change.
    The proposed form and content requirements are reasonable for 
straight-in requests. In particular, requiring an associated person to 
file their expungement request against the

[[Page 24301]]

member firm with which they were associated at the time the customer 
dispute arose should provide the panel deciding the expungement request 
with another source of documents potentially pertinent to its 
consideration of the request. As such, it could help a panel establish 
a more complete factual record upon which to base an award. In 
addition, as discussed in more detail above, the content required for 
an expungement request under the proposed rule change, including the 
CRD occurrence number that is the subject of the request, the case name 
and docket number associated with the customer dispute information, and 
whether expungement of such information had previously been requested 
and any resolution thereof, should improve the expungement process by 
clearly documenting both the request and whether it repeats a previous 
request. The required content would provide the panel with information 
sufficient to know who is requesting expungement and the customer 
dispute with which it is connected. In addition, requiring the party 
requesting expungement to explain whether expungement of the same 
customer dispute information was previously requested and, if so, how 
it was decided will help prevent parties from pursuing second requests 
for expungement, consistent with the proposed prohibition against 
repeat requests.\316\
---------------------------------------------------------------------------

    \316\ See Section III.A.2., ``Content and Timing of On-Behalf-of 
Requests in Customer Arbitration.''
---------------------------------------------------------------------------

2. Deciding Straight-In Expungement Requests
    The proposed rule change would establish a new framework for 
arbitrators hearing straight-in expungement requests. The proposed rule 
change would require a three-person panel \317\ to hold an expungement 
hearing, decide the expungement request, and issue an award in response 
to a straight-in request filed in accordance with proposed Rule 
13805.\318\ As with expungement requests decided in customer 
arbitration, the panel would be required to deny an expungement request 
with prejudice in cases in which an associated person withdraws or does 
not pursue the request. FINRA stated that requiring a panel to deny a 
request that is withdrawn or not pursued would protect investors by 
preventing associated persons from withdrawing and refiling expungement 
requests until they obtain a panel whose composition they believe is 
more likely to deliver a favorable recommendation.\319\
---------------------------------------------------------------------------

    \317\ As discussed in more detail below, the three-person panel 
would be selected from the Special Arbitrator Roster pursuant to 
proposed Rule 13806. See Section III.B.3., ``Straight-in Requests 
under the Industry Code and the Special Arbitrator Roster, The 
Special Arbitrator Roster.''
    \318\ See proposed Rule 13805(a)(4).
    \319\ See Notice at 50179.
---------------------------------------------------------------------------

    The Commission received no comment letters supporting or opposing 
this proposed rule change. However, as discussed above, the Commission 
received, and FINRA responded to, comments supporting and opposing 
similar procedures for deciding expungement requests during customer 
arbitration.\320\
---------------------------------------------------------------------------

    \320\ See Section III.A.3., ``Deciding Expungement Requests 
during Customer Arbitrations.''
---------------------------------------------------------------------------

    The Commission believes that requiring a panel selected from the 
Special Arbitrator Roster to decide a straight-in expungement request 
and deny a claim that is withdrawn or not pursued, would help to 
prevent an associated person from undermining the enhanced expungement 
framework with this form of arbitrator-shopping.\321\
---------------------------------------------------------------------------

    \321\ See Section III.A.3., ``Deciding Expungement Requests 
during Customer Arbitrations'' (discussing comments received 
regarding the proposed rule change's treatment of expungement claims 
that are withdrawn or not pursued).
---------------------------------------------------------------------------

3. The Special Arbitrator Roster
    The proposed rule change would establish a Special Arbitrator 
Roster from which a three-person panel would be drawn to decide all 
straight-in expungement requests.\322\ Proposed Rule 13806(b) would 
limit the Special Arbitrator Roster to arbitrators with specified 
experience and training. Specifically, the proposed rule change would 
limit the roster to public arbitrators who are eligible for the 
chairperson roster, have completed FINRA's enhanced expungement 
training, and have served as an arbitrator through award on at least 
four customer-initiated arbitrations administered by FINRA or by 
another SRO in which a hearing was held.\323\ In proposing the rule, 
FINRA stated that these requirements would help ensure that arbitrators 
on the Special Arbitrator Roster: have the experience, qualifications, 
and training to conduct a fair and impartial expungement hearing; 
appreciate the unique, distinct role they play as expungement hearing 
arbitrators; and understand the limited circumstances in which 
expungement should be awarded.\324\
---------------------------------------------------------------------------

    \322\ See proposed Rule 13806.
    \323\ See id.; see also Notice at 50179-80.
    \324\ See Notice at 50179-80.
---------------------------------------------------------------------------

    Once the Special Arbitrator Roster has been established, the 
proposed rule change would require that three members of that roster be 
selected at random to decide each expungement request filed under 
proposed Rule 13805.\325\ In addition, the first arbitrator selected 
would be the chair of the panel,\326\ the parties would not be 
permitted to agree to fewer than three arbitrators,\327\ and the 
parties would not be permitted to strike any arbitrators or to 
stipulate to their removal, but would be permitted to challenge an 
arbitrator selected for cause.\328\ In proposing the rule, FINRA stated 
that this process would minimize the potential for influence in the 
arbitrator selection process by the associated person and member firm, 
whose interests may be aligned.\329\
---------------------------------------------------------------------------

    \325\ See proposed Rule 13806(b).
    \326\ See proposed Rule 13806(b)(3).
    \327\ See proposed Rule 13806(b)(5).
    \328\ See proposed Rule 13806(b)(4).
    \329\ See Notice at 50180.
---------------------------------------------------------------------------

    Four commenters supported the proposed rule change's establishment 
of a Special Arbitrator Roster, the selection of a panel from this 
roster for expungement requests under the Industry Code, and the 
restrictions on parties' ability to influence the panel's 
composition.\330\ Three of these four commenters supported the proposed 
rule change on the basis that the three-person panel would minimize the 
impact of unopposed expungement requests, facilitate expanded fact-
finding during the expungement request, and that the prohibition on 
ranking and striking, or agreeing to arbitrators would reduce both the 
prevalence of arbitrator-shopping and repeat-player incentives for 
arbitrators (i.e., from choosing arbitrators who are historically more 
likely to award expungements).\331\ The fourth commenter further stated 
that the proposed rule change would increase efficiency and decrease 
costs for all parties to the expungement matter, since the parties will 
no longer need to spend hours researching and ranking arbitrators to 
find the individuals most experienced at handling these issues.\332\ In 
addition, one commenter also stated that the enhanced training to be 
received by the Special Arbitrator Roster would give associated persons 
fewer causes for removal of an arbitrator for cause.\333\
---------------------------------------------------------------------------

    \330\ See Cambridge at 2; Cornell at 1-2; PIABA September 6 
Letter at 3; St. John's at 2-3.
    \331\ See Cornell at 1-2; PIABA September 6 Letter at 3; St. 
John's at 2-3.
    \332\ See Cambridge at 2.
    \333\ See Cornell at 2.
---------------------------------------------------------------------------

    Five commenters, however, objected to the proposed rule change's 
limitations on ranking and striking

[[Page 24302]]

arbitrators.\334\ One of these commenters stated that ranking and 
striking is ``enjoyed by all other participants in FINRA arbitration 
proceedings'' \335\ while another commenter similarly stated that 
customers have the ability to rank and strike arbitrators.\336\ A third 
commenter argued that because different arbitrators approach issues 
differently, there is a benefit to starting with a large pool of 
potential panelists and then letting the parties ``winnow the pool.'' 
\337\
---------------------------------------------------------------------------

    \334\ See letter from Tosh Grebenik to the Commission, dated 
November 21, 2022 (``Grebenik''); letter from Ronald Beckner to the 
Commission, dated October 12, 2022 (``Beckner''); Del Toro; 
Advisorlaw at 2; Hennion at 6.
    \335\ See AdvisorLaw at 2-3.
    \336\ See Hennion at 6.
    \337\ See Grebenik.
---------------------------------------------------------------------------

    FINRA stated that currently, based on its experience with straight-
in requests filed in the DRS arbitration forum, associated persons 
typically file straight-in request for expungement against the broker-
dealer firm at which the associated person is currently employed.\338\ 
In such instances, the proceeding is less likely to be adversarial in 
nature than if the associated person files an expungement request 
against a customer.\339\ For example, FINRA stated that a respondent 
firm may support the request for expungement because it has an interest 
in removing negative information from the associated person's CRD 
record.\340\ Accordingly, FINRA stated that it would not be appropriate 
to continue to use the current process for selecting arbitrators--
striking and combining ranked lists--to select arbitrators to decide 
straight-in requests.\341\ FINRA reasoned that in arbitrations that 
occur outside of the expungement context, the parties are typically 
adverse, which means that during arbitrator selection, each side may 
rank arbitrators on the lists whom they believe may be favorable to 
their case.\342\ Therefore, the adversarial nature of the proceedings 
serves to minimize the impact of each party's influence in arbitrator 
selection.\343\ An adversarial proceeding is less likely to occur in 
straight-in requests.\344\ Thus, the proposed rule change would prevent 
associated persons and member firms from collaboratively seeking to 
influence the outcome of the expungement request through arbitrator 
selection.\345\
---------------------------------------------------------------------------

    \338\ See Notice at 50174 n.41; FINRA April 3 Letter at 6.
    \339\ See FINRA November 10 Letter at 26-27; FINRA April 3 
Letter at 5; Notice at 50180.
    \340\ See id. at 50174.
    \341\ See FINRA November 10 Letter at 26; FINRA April 3 Letter 
at 5; Notice at 50180.
    \342\ See FINRA November 10 Letter at 26; FINRA April 3 Letter 
at 5; Notice at 50180.
    \343\ See FINRA November 10 Letter at 26; FINRA April 3 Letter 
at 5; Notice at 50180.
    \344\ See FINRA November 10 Letter at 26-27; FINRA April 3 
Letter at 5; Notice at 50180.
    \345\ See FINRA November 10 Letter at 27; FINRA April 3 Letter 
at 5; Notice at 50180.
---------------------------------------------------------------------------

    FINRA also recognized the potential for the proposed rule change to 
limit the associated person's and member firm's input on arbitrator 
selection for reasons that may be unrelated to whether the arbitrator 
would potentially be sympathetic to the expungement request, such as 
their perception of the arbitrator's competence or efficiency.\346\ 
However, FINRA stated that the higher standards that the arbitrators 
would be required to meet to serve on the Special Arbitrator Roster 
should mitigate the impact of the absence of party input on the 
selection of arbitrators.\347\ In addition, associated persons and 
member firms would still be permitted to challenge any arbitrator for 
cause.\348\
---------------------------------------------------------------------------

    \346\ See FINRA November 10 Letter at 27; FINRA April 3 Letter 
at 5; Notice at 50180.
    \347\ See FINRA November 10 Letter at 27; FINRA April 3 Letter 
at 5.
    \348\ See FINRA November 10 Letter at 27; FINRA April 3 Letter 
at 5.
---------------------------------------------------------------------------

    Given the potential lack of adverse parties in straight-in 
expungement requests, FINRA reasonably determined that the random 
selection of a set number of arbitrators is appropriate. Random 
arbitrator selection, along with other aspects of the proposed rule 
change (e.g., the requirement that a panel decide an expungement 
request that is filed by an associated person, and the prohibition on 
an associated person withdrawing and re-filing their expungement 
request), should help eliminate arbitrator-shopping and serve to 
protect investors and the integrity of information in the CRD system. 
In addition, parties would continue to be able to challenge and remove 
arbitrators for cause.
    Several commenters also recommended that FINRA expand the pool of 
arbitrators eligible to serve on the Special Arbitrator Roster, in 
particular to allow for non-public arbitrators, stating that such a 
change would bring securities industry expertise to deciding 
expungement requests.\349\ One commenter suggested that industry 
participants who have worked as a general securities principal for a 
least five consecutive years, in the prior seven-year period, be 
eligible for inclusion on the Special Arbitrator Roster.\350\ This 
commenter also suggested that at least one person on each three-person 
panel be required to have securities industry experience either as a 
general securities principal or as an attorney who has the requisite 
five years' experience in state or federal securities regulation or as 
a securities regulator.\351\ Another commenter likewise recommended 
including the ability to have an industry arbitrator on any expungement 
panel where more than one arbitrator was required.\352\ A third 
commenter argued that requiring one public arbitrator, one non-public 
arbitrator, and a chairperson that can either be public or non-public, 
would help create a diverse knowledge base and would help the panel 
make better, more informed decisions.\353\
---------------------------------------------------------------------------

    \349\ See FSI at 4; Hennion at 6; Grebenik.
    \350\ See FSI at 4.
    \351\ Id.
    \352\ See Hennion at 6. Hennion further suggested that 
arbitrators should be required to pay for the training. See id. at 
5. FINRA responded that it does not now, and will not in the future, 
charge arbitrators for any arbitrator training. See FINRA November 
10 Letter at 25.
    \353\ See Grebenik. This commenter further suggested that the 
enhanced expungement training should be made public and be neutral 
rather than ``persuasive'' in an attempt to prevent panels from 
granting expungement. Id. FINRA responded that like other arbitrator 
training provided by DRS, the proposed training will be neutral and 
informative and it will be publicly available on FINRA's website. 
See FINRA April 3 Letter at 4 n.10. The Commission believes that 
FINRA has addressed the commenter's suggestion.
---------------------------------------------------------------------------

    Another commenter suggested not limiting the Special Arbitrator 
Roster to chair-qualified public arbitrators.\354\ This commenter 
stated that experience in understanding and appreciating the regulatory 
value of a customer complaint should be the most important 
qualification, thus concluding that the Special Arbitrator Roster 
should be expanded to include current and former state, federal and SRO 
securities regulators. This commenter further suggested that the most 
experienced arbitrators should not be on the Special Arbitrator Roster 
as they have exhibited bias in favor of granting expungements in the 
past.\355\
---------------------------------------------------------------------------

    \354\ See letter from Celiza Braganca, President, et. al., The 
PIABA Foundation, to the Commission, dated September 6, 2022 
(``PIABA Foundation September 6 Letter'') at 2-3.
    \355\ See id.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change in response to 
these comments. FINRA stated that it ``believes that having experienced 
public arbitrators, without significant ties to the financial industry, 
deciding straight-in requests would help achieve the goal of balancing 
the competing interests in the expungement process of providing a fair 
process and ensuring that information about associated persons that is 
available to investors is accurate.'' \356\ Such arbitrators would be 
provided training that is neutral and

[[Page 24303]]

informative and the training would be made publicly available on 
FINRA's website. Moreover, FINRA stated that the enhanced training that 
arbitrators on the Special Arbitrator Roster would be required to take 
(as well as the other eligibility requirements) would help ensure that 
arbitrators on the Special Arbitrator Roster have the qualifications 
and training to appropriately decide straight-in requests and that the 
persons conducting the expungement hearings are impartial and 
experienced in managing and conducting arbitration hearings in the DRS 
arbitration forum.\357\
---------------------------------------------------------------------------

    \356\ FINRA November 10 Letter at 25.
    \357\ See FINRA November 10 Letter at 25-26; see also FINRA 
April 3 Letter at 4-5.
---------------------------------------------------------------------------

    The Commission believes that FINRA reasonably determined which 
arbitrators would be eligible to serve on the Special Arbitrator 
Roster. Specifically, limiting eligibility to public arbitrators 
reasonably balances the competing interests in the expungement process 
of providing a fair process and ensuring the integrity of the 
information in the CRD system. This approach should also enhance the 
public's perception that the expungement process and rules are fair, 
which, in turn, should enhance the perception of the integrity of the 
information on the CRD system. In addition, the proposed eligibility 
requirements should help ensure that experienced arbitrators are 
deciding expungement requests in light of the public interest in the 
integrity of the information in the CRD system.
4. State Attendance and Participation in Straight-In Expungement 
Requests
    The proposed rule change would provide a mechanism for an 
authorized representative of a state securities regulator to present 
the state securities regulator's position on an expungement request in 
writing or by attending and participating in the expungement hearing in 
person or by video conference.\358\ The proposed rule change would 
limit the authorized representative's ability to attend and participate 
to only straight-in requests, where the panel may otherwise only hear 
evidence from the party requesting expungement.\359\ To facilitate 
attendance and participation, the Director would notify the applicable 
state securities regulator (in a manner determined by the Director in 
collaboration with state securities regulators) and provide applicable 
information and documents related to the associated customer 
arbitration.\360\ In addition, under the proposed rule change, the 
panel would not be permitted to allow the attendance or participation 
of the authorized representative to materially delay the scheduling of 
an expungement hearing.\361\
---------------------------------------------------------------------------

    \358\ See proposed Rule 13805(c)(6)(A).
    \359\ See Notice at 50185-86.
    \360\ See proposed Rules 13805(b)(2)(A) and (B).
    \361\ See proposed Rule 13805(c)(6)(A).
---------------------------------------------------------------------------

    While an authorized representative of a state securities regulator 
would not be a party to the expungement hearing, the authorized 
representative would be permitted to: (1) introduce documentary, 
testimonial, or other evidence; (2) cross-examine witnesses; and (3) 
present opening and closing arguments if the panel allows any party to 
present such arguments.\362\ The other persons appearing at the 
expungement hearing could state objections to the authorized 
representative's evidence and cross-examine the authorized 
representative's witnesses.\363\
---------------------------------------------------------------------------

    \362\ See proposed Rule 13805(c)(6)(B).
    \363\ See proposed Rule 13805(c)(6)(C).
---------------------------------------------------------------------------

    In the Notice, FINRA stated that allowing an authorized 
representative to attend and participate in straight-in requests may 
provide meaningful opposition to the expungement request, which might 
otherwise be unopposed, and thus help create a more complete factual 
record for the panel to rely upon to decide the expungement 
request.\364\ Moreover, FINRA believes that state participation in 
straight-in requests is important in light of the importance of the CRD 
to state registration and oversight responsibilities.\365\
---------------------------------------------------------------------------

    \364\ See Notice at 50186.
    \365\ See id.; see also NASAA September 6 Letter at 1 (stating 
that securities regulators depend on accurate information to make 
regulatory decisions).
---------------------------------------------------------------------------

    Seven commenters supported the proposed rule change's inclusion of 
state securities regulators in the expungement process.\366\ These 
commenters supported including a representative of a state securities 
regulator in straight-in expungement requests on the basis that such 
participation would serve to counterbalance a potentially unopposed 
expungement request since customers are less likely to participate in 
straight-in requests,\367\ and would therefore help protect the 
integrity of the information in the CRD system needed for the 
performance of state regulatory obligations.\368\ One commenter stated 
that while it appreciates the opportunity to appear for arbitration 
proceedings hearing expungement requests, state participation in such 
proceedings would be limited by resources and state-specific procedural 
hurdles that could inhibit the ability to appear.\369\
---------------------------------------------------------------------------

    \366\ See letter from Benjamin P. Edwards, Associate Professor 
of Law, University of Nevada, Las Vegas William S. Boyd School of 
Law, to the Commission, dated September 6, 2022 (``Edwards'') at 1-
2; Miami at 6-7; PIABA September 6 Letter at 2; Cornell at 3; NASAA 
September 6 Letter at 3-4; PIABA Foundation September 6 Letter at 2; 
St. John's at 3-4.
    \367\ See PIABA Foundation September 6 Letter at 2; Miami at 6-
7; Cornell at 3; Edwards at 1-2.
    \368\ See PIABA September 6 Letter at 3; NASAA September 6 
Letter at 3-4; Cornell at 3; St. John's at 3-4.
    \369\ See NASAA September 6 Letter at 3.
---------------------------------------------------------------------------

    Five commenters expressed concern about permitting state securities 
regulator participation in straight-in expungement hearings.\370\ One 
of these commenters suggested that notification to state securities 
regulators should instead occur at the point FINRA seeks to obtain an 
order from a court of competent jurisdiction confirming an award 
containing expungement.\371\ Another commenter objected to a non-party 
participating in an expungement proceeding without being subject to the 
forum's jurisdiction because: (1) a panel could not sanction a non-
party for perjury, and (2) ``increasing the barriers'' to expungement 
would decrease the proceeding's efficiency.\372\ A third commenter 
argued that participation of state securities regulators would increase 
costs.\373\
---------------------------------------------------------------------------

    \370\ See letter from Michael Neal, Financial Advisor, M. A. 
NEAL Financial Services, to the Commission, dated August 31, 2022 
(``Neal''); Hennion at 6; AdvisorLaw at 3; Beckner; Grebenik 
(supporting notification and attendance of state regulators, but 
opposing participation).
    \371\ See Hennion at 6; see also supra notes 28-30.
    \372\ See AdvisorLaw at 3.
    \373\ See Neal.
---------------------------------------------------------------------------

    FINRA responded that state securities regulators are already 
notified about, and can participate in, proceedings at the state court 
confirmation level. FINRA Rule 2080 requires that FINRA be named as a 
party in such proceedings, unless this requirement is waived by FINRA. 
Upon receipt of a complaint naming FINRA or a request for a waiver from 
the requirement to name FINRA as an additional party, FINRA will notify 
NASAA of the complaint or waiver request. NASAA, in turn, will notify 
the appropriate state securities regulator.\374\ FINRA stated that 
under the proposed rule change FINRA would notify state securities 
regulators within 15 days of receiving a request for expungement, 
giving them time to review and decide whether to participate in a 
straight-in request, including in any prehearing conference.\375\
---------------------------------------------------------------------------

    \374\ See FINRA November 10 Letter at 8 n.33.
    \375\ See Notice at 50196 n.251 and accompanying text.
---------------------------------------------------------------------------

    FINRA also responded that the arbitrators who would decide 
straight-in

[[Page 24304]]

requests would have the experience, qualifications and training 
necessary to conduct a fair and impartial expungement hearing in 
accordance with the proposed rules and that the proposed rule change 
would provide an associated person requesting expungement the 
opportunity to cross-examine any witness called by a state securities 
regulator's authorized representative. FINRA stated that these 
mechanisms should be sufficient to help ensure that a non-party's 
testimony or documentary information presented is appropriately 
scrutinized.\376\ FINRA responded further by stating that concerns 
about state participation increasing costs to file an expungement 
request may be overstated, as under the proposed rule change the 
authorized representative would not be a party to the request, and 
thus, would not be permitted to take actions that could delay the 
proceeding or add to the parties' costs.\377\
---------------------------------------------------------------------------

    \376\ See FINRA November 10 Letter at 9-10.
    \377\ See id. at 9; see also FINRA April 3 Letter at 8.
---------------------------------------------------------------------------

    FINRA acknowledged that in person attendance and participation by 
an authorized state representative may be limited given state resource 
constraints. FINRA pointed out that the proposed rule change provides 
low-cost options to help facilitate state participation; specifically, 
that it would permit the authorized representative to attend and 
participate via video conference or submit a state's position in 
writing.\378\
---------------------------------------------------------------------------

    \378\ See FINRA November 10 Letter at 8; see also proposed Rule 
13805(c)(6)(A).
---------------------------------------------------------------------------

    The Commission believes that permitting attendance and 
participation by state securities regulators in straight-in expungement 
proceedings, which have a higher likelihood of proceeding unopposed, 
and providing state regulators low-cost options to do so, will enhance 
the straight-in expungement process. Specifically, including state 
securities regulators and providing them with access to documents 
relevant to the expungement request provides them the opportunity to 
fulfill their own regulatory obligations, while at the same time 
increasing the likelihood that the panel in an expungement proceeding 
will hear evidence from multiple viewpoints, thus allowing the panel to 
make more informed decisions. At the same time, the conditions 
applicable to state securities regulator participation are designed so 
that they do not delay the resolution of an expungement request and 
allow the claimants the opportunity to challenge any information 
presented in the forum by the state's representative. As such, the 
proposed rule change appropriately balances the interests of state 
regulators in the expungement process, as well as their need to 
allocate and preserve resources, with the importance of maintaining an 
efficient and cost effective process for associated persons requesting 
expungement.
    Two commenters recommended that FINRA extend the option for a state 
regulator's representative to participate in other expungement 
requests, including those in customer arbitration,\379\ and simplified 
arbitration.\380\ These commenters considered state participation in 
other contexts as providing a similar counterbalance as in a straight-
in request because expungement requests in both customer arbitrations, 
whether standard or simplified, are similarly often unopposed because 
customers do not participate in that aspect of the proceeding.\381\
---------------------------------------------------------------------------

    \379\ See Edwards at 1-2.
    \380\ See Miami at 6-7.
    \381\ See Edwards 1-2; see also Miami at 6-7.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change in response to 
these comments. FINRA stated that attendance or participation in a 
customer arbitration could substantially disrupt the customer's case 
and would likely be less impactful, as the panel from the customer 
arbitration hears the customer's evidence on the merits.\382\ 
Furthermore, in simplified arbitration the expungement-only hearing 
would likely be scheduled shortly after the customer's dispute is 
decided or closes, increasing the likelihood of customer attendance and 
participation. Thus, FINRA does not believe that it is necessary for 
state securities regulators to also attend and participate in 
expungement-only hearings in simplified arbitrations.\383\
---------------------------------------------------------------------------

    \382\ See FINRA November 10 Letter at 8.
    \383\ See id. at 22.
---------------------------------------------------------------------------

    The Commission believes that it is reasonable for FINRA to limit 
state securities regulator participation to straight-in requests where 
there is a higher likelihood of proceeding without meaningful 
opposition and state participation may provide the greatest benefit. In 
customer arbitration, the panel will have the benefit of a balanced 
presentation of the merits of the case that should allow it to make an 
informed decision on the expungement request. Moreover, in simplified 
arbitration it is more likely that a customer will participate, 
providing their version of events, in an expungement hearing when it 
occurs soon after the panel makes an award based on the merits of the 
claim. Finally, FINRA stated it will continue to evaluate whether there 
are other ways to further strengthen the current expungement process, 
including whether to allow state securities regulators to attend and 
participate in separate expungement-only hearings in simplified 
arbitrations.\384\
---------------------------------------------------------------------------

    \384\ See FINRA April 3 Letter at 18-19.
---------------------------------------------------------------------------

5. Alternatives to Deciding Expungement Requests Through Arbitration
    While expressing support for the proposed rule change, three 
commenters contended that expungement determinations are more 
appropriately a regulatory decision not properly adjudicated by FINRA's 
arbitration process.\385\ One of these commenters argued that the 
degree to which such records are preserved in CRD and BrokerCheck for 
all stakeholders should not turn on the varying abilities of any 
party--state securities regulator, authorized representative or 
customer--to appear to make an argument. According to the commenter, 
doing so would continue to lead to inconsistent results that have no 
relationship to the importance of this information.\386\
---------------------------------------------------------------------------

    \385\ See PIABA September 6 Letter at 3-4; PIABA Foundation 
September 6 Letter at 2; NASAA September 6 Letter at 3-4.
    \386\ See NASAA September 6 Letter at 3.
---------------------------------------------------------------------------

    FINRA did not amend the proposed rule change in response to these 
comments. FINRA stated that it believes it is important to pursue a 
two-track approach to improving the expungement process. In the near 
term, FINRA stated the integrity of the information in the CRD system 
should be better protected by adopting the ``substantial improvements'' 
to the current expungement process that can be achieved with the 
proposed rule change.\387\ Concurrently, FINRA stated that it would 
continue working with NASAA and other interested parties to consider a 
redesign of the current expungement process.\388\
---------------------------------------------------------------------------

    \387\ See FINRA November 10 Letter at 6.
    \388\ See id. at 6-7.
---------------------------------------------------------------------------

    The proposed rule change is designed to strengthen the current 
expungement framework and to protect investors and the public interest. 
The proposed rule change's establishment of a special roster of 
specially qualified and trained arbitrators to decide certain 
expungement requests should help mitigate the potentially non-
adversarial nature of straight-in expungement requests. In particular, 
the Commission believes that having three specially qualified and 
trained arbitrators available to ask questions and

[[Page 24305]]

empowered to request evidence, along with the proposed rule change's 
inclusion of state securities regulators in straight-in requests where 
there may otherwise be no opposing viewpoint, should help ensure that a 
complete factual record is created upon which the arbitrators can base 
a decision in such expungement hearings. The proposed rule change also 
updates the Codes to incorporate provisions from FINRA Guidance that, 
among other things, facilitate customer attendance and participation in 
expungement hearings, permit panels to request additional documents or 
evidence relevant to an expungement request, and codify the grounds for 
awarding expungement.\389\ In addition, the Commission believes that 
continuing dialogue among FINRA, state regulators, industry 
participants, consumer advocates, and other stakeholders in the 
expungement process will lead to future improvements as the expungement 
process continues to evolve.
---------------------------------------------------------------------------

    \389\ See Section III.D., ``Procedural Requirements Relating to 
All Expungement Hearings.''
---------------------------------------------------------------------------

6. Limitations Applicable to Straight-In Requests Only
    The proposed rule change also would codify and expand upon other 
aspects of the Guidance applicable to straight-in requests, in 
particular those related to eligibility to file the request. For 
example, the proposed rule change would: prohibit an associated person 
from filing a straight-in request if the customer arbitration, civil 
litigation, or customer complaint that gave rise to the customer 
dispute information has not closed; establish time limits for 
expungement requests that are specifically tied to the close of 
customer arbitrations and civil litigations, or the reporting of 
customer complaints in the CRD system; and, prevent an associated 
person from filing an expungement request if (1) a panel or court of 
competent jurisdiction previously found the associated person liable in 
a customer arbitration or civil litigation associated with the same 
customer dispute information or (2) the customer dispute information 
involves the same conduct that is the basis of a final regulatory 
action \390\ taken by a securities regulator or SRO.\391\
---------------------------------------------------------------------------

    \390\ FINRA stated that a ``final regulatory action'' includes 
any final action, including any action that is on appeal, by a 
securities regulator or SRO. See FINRA Rule 8312(c); see also 
Regulatory Notice 09-66 (November 2009) (stating that ``actions that 
are delineated in current Form U4 Questions 14C, 14D or 14E will be 
considered `final regulatory actions.' Similarly, actions that are 
detailed in current Form U5 Question 7D, and have a status of 
`final' or `on appeal,' will be considered `final regulatory 
actions' as such actions are also addressed in Form U4.''). For 
example, a Letter of Acceptance, Waiver, and Consent and an accepted 
Offer of Settlement are two examples, among others, of final 
regulatory actions taken by FINRA. See FINRA Rule 9216(a)(4) and 
Rule 9270(g). A ``final regulatory action'' may also include a final 
action reported by a regulator on Form U6. See Regulatory Notice 09-
66 (November 2009). See FINRA April 3 Letter at 14 n.49. For 
purposes of this proposed rule, a ``final regulatory action'' would 
not include a final action by a securities regulator or SRO that is 
dismissed, vacated or withdrawn. If, after dismissal, vacatur, or 
withdrawal of the final regulatory action, the associated person's 
expungement request in the DRS arbitration forum would be ineligible 
pursuant to Rule 13805(a)(2) (e.g., because the request is time 
barred), the associated person could seek a court order directing 
expungement of the customer dispute information. See FINRA April 3 
Letter at 14 n.52.
    \391\ See Amendment No. 2; see also infra note 430 and 
accompanying text.
---------------------------------------------------------------------------

a. No Expungement Request Until Underlying Case Closes
    The proposed rule change would codify and expand upon the Guidance 
by providing that an associated person may not file a straight-in 
request if the customer arbitration, civil litigation, or customer 
complaint that gave rise to the customer dispute information has not 
closed, a limitation that is designed to prevent an associated person 
from obtaining a decision on an expungement request while the related 
customer dispute is ongoing.\392\ FINRA stated this change would 
prevent potentially inconsistent expungement decisions on related 
customer dispute information and help ensure that the panel that would 
decide the straight-in request is able to consider the final factual 
record from the customer arbitration or civil litigation.\393\ The 
Commission received no comment letters supporting or opposing this 
proposed rule change.
---------------------------------------------------------------------------

    \392\ See proposed Rule 13805(a)(2)(A)(iii); see also Notice at 
50180.
    \393\ See Notice at 50180.
---------------------------------------------------------------------------

    The proposed rule change would help maintain the integrity of the 
information in the CRD system by helping to prevent inconsistent 
expungement decisions on related customer dispute information. The 
proposed rule change would also help ensure that the panel deciding the 
straight-in request is able to consider the final factual record from 
the customer arbitration or civil litigation.
b. Time Limits for Expungement Requests
    Currently, FINRA Rules 12206(a) and 13206(a) require an associated 
person to submit an arbitration claim, including requests for 
expungement of customer dispute information, within six years from the 
occurrence or event giving rise to the claim.\394\ The proposed rule 
change would eliminate this six-year eligibility rule and instead 
establish shorter time limits for expungement requests that are 
specifically tied to the close of customer arbitrations and civil 
litigations, or the reporting of customer complaints in the CRD system, 
as applicable.\395\ FINRA stated that the time periods provided for in 
the proposed rule changes for each situation would provide a sufficient 
amount of time for associated persons and their firms to, among other 
things, gather the documents, information, and other resources required 
to file the expungement request.\396\
---------------------------------------------------------------------------

    \394\ See supra note 125 and 127 and accompanying text.
    \395\ See Notice at 50181. As described above, the proposed rule 
change would prescribe different time limits in connection with 
customer arbitrations or civil litigations and customer complaints. 
In the case of a customer arbitration or civil litigation that gave 
rise to the customer dispute information in question, proposed Rule 
13805(a)(2)(A)(iv) would require an associated person to file a 
straight-in request within two years of such matters closing. In the 
case of customer complaints, proposed Rule 13805(a)(2)(A)(v) would 
prohibit an associated person from filing a straight-in request 
where more than three years has elapsed from the time the complaint 
was first reported to the CRD system and there was no customer 
arbitration or civil litigation that gave rise to the customer 
dispute information. The proposed rule change would also establish 
similar time limits for requests to expunge customer dispute 
information arising from customer arbitrations and civil litigations 
that close, and for customer complaints that were initially reported 
to the CRD system, on or prior to the effective date of the proposed 
rule change. See Notice at 50181-82; see also Section II.C.2.d., 
``Time Limits Applicable to Disclosures Arising After the Effective 
Date of the Proposed Rule Change.''
    \396\ See Notice at 50181.
---------------------------------------------------------------------------

    With respect to customer arbitrations and civil litigations, FINRA 
stated that it believes the two-year period would help ensure that 
expungement hearings are held close enough in time to the customer 
arbitration or civil litigation such that information regarding the 
dispute is available and in a timeframe that could increase the 
likelihood of customer participation where a customer so chooses. The 
shorter timeframe, FINRA believes, should help encourage customer 
attendance and participation in expungement proceedings and help ensure 
that straight-in requests are brought before relevant evidence and 
testimony

[[Page 24306]]

becomes stale or unavailable.\397\ Accordingly, FINRA believes the 
proposed time limit would help provide panels with more complete 
factual records on which to base their expungement decisions, while at 
the same time allowing the associated person adequate time to determine 
whether to seek expungement.\398\
---------------------------------------------------------------------------

    \397\ See id.
    \398\ See id.
---------------------------------------------------------------------------

    With respect to customer complaints where there was no customer 
arbitration or civil litigation associated with the customer dispute 
information, FINRA stated that it believes that the three-year period 
would help ensure that the expungement hearing is held close in time to 
the events that gave rise to the customer dispute and increase the 
likelihood of customer attendance and participation. The three-year 
time limitation should also provide sufficient time for firms to 
complete their investigation of the complaint, for associated persons 
to develop a sense of whether the complaint may evolve into an 
arbitration or civil litigation, and for the associated person to 
gather the necessary resources and determine whether to seek 
expungement. FINRA also believes that the three-year time limitation 
may curtail requests to expunge customer complaints that are filed many 
years after first being reported to the CRD system and the bundling of 
multiple unrelated and aged disclosures in a single expungement 
request.\399\
---------------------------------------------------------------------------

    \399\ See id.
---------------------------------------------------------------------------

    Six commenters supported the proposed time limitations.\400\ Two of 
these commenters stated that the time limitations will make it more 
likely that customers will participate \401\ and one of these 
commenters stated that the timeframes provide enough time for 
associated persons to determine whether to file an expungement request 
and gather the relevant information to support their request.\402\ 
Another commenter stated that the time limitations would increase the 
efficiency of the expungement process and decrease the cost to member 
firms because when expungement requests are filed ``four or five or 
even ten years'' after the event giving rise to the request, a party's 
ability to respond to discovery requests and produce relevant 
information becomes much more difficult and time consuming.\403\
---------------------------------------------------------------------------

    \400\ See Miami at 5; Cambridge at 2; Cornell at 3-4; NASAA at 
2; St. John's at 3; PIABA September 6 Letter at 4.
    \401\ See Cornell at 4; St. John's at 3.
    \402\ See Cornell at 3-4.
    \403\ See Cambridge at 2.
---------------------------------------------------------------------------

    Seven commenters objected to the time period limitations.\404\ One 
commenter stated that time limits for filing an expungement request 
should mirror those provided to customers (a six-year period of 
eligibility with expansion for good cause).\405\ This commenter argued 
that providing the associated person the opportunity to file for 
expungement within a six-year time frame--regardless of whether there 
was a customer-filed arbitration--recognizes that representatives may 
not have been meaningfully involved in the underlying arbitration for a 
variety of reasons (e.g., separation from the firm).\406\ Two other 
commenters stated that the amount of time that passes has no bearing on 
the merits of the expungement request.\407\ Another commenter stated 
that time limits may preclude expungement requests because associated 
persons are not aware of the expungement process and suggested 
grandfathering in associated persons with existing disclosures or 
sending notifications to such persons.\408\ Two other commenters stated 
that associated persons may lack the resources to seek expungement 
within the proposed two-year time limit.\409\ One of these commenters 
added that associated persons may not consider expungement important at 
the time only to change their minds later on in their careers; however, 
the commenter recommended that if FINRA moved forward with the two-year 
time limit, it should ensure all associated persons affected by a given 
arbitration claim are given proper notice of the case's closure, as 
well as a description of any applicable time limits for making an 
expungement request.\410\ Finally, one commenter that otherwise 
supported the proposed rule change argued that less time was necessary 
and urged FINRA to adopt a shorter, one-year time period for all 
straight-in expungement requests.\411\
---------------------------------------------------------------------------

    \404\ See letter from James P. Galvin, Esq., Galvin Legal PLLC, 
to the Commission, dated April 7, 2023 (Galvin) at 2; Hennion at 6; 
AdvisorLaw at 3; Grebenik; Beckner; Del Toro; Barber.
    \405\ See Hennion at 6. See also FINRA Rule 12206 (Time Limits) 
(stating that no claim shall be eligible for submission to 
arbitration under the Customer Code where six years have elapsed 
from the occurrence or event giving rise to the claim).
    \406\ See Hennion at 6.
    \407\ See AdvisorLaw at 3; Barber; see also letter from John 
O'Bannon, Financial Advisor, Diversified Financial Group, to the 
Commission, dated October 11, 2022 (stating that ``[i]f a customer 
complaint is truly meritless, then the advisor should not continue 
to be potentially harmed by having there [sic] meritless disclosures 
continue to be on record.'' And recommending: (1) that 
``[d]isclosures that were dropped by clients should be dropped by 
FINRA no later than 3 years after filing''; (2) allowing ``[e]diting 
of [Form] U4 listings [to] correctly describe the issue and 
resolution [in a manner that does not] immediately give the negative 
connotation that the advisor is a cheat/liar if it's not accurate''; 
and (3) establish ``an expungement process for those convictions 
that [are more than 15 years old]''); see also Grebenik (stating 
that ``FINRA should evaluate the complaint first to determine a 
basic level of legitimacy. Otherwise, the meritless and frivolous 
complaints will continue to be filed and will continue to be 
expunged at a high rate of success.''). These comments from O'Bannon 
and Grebnik are outside the scope of the proposed rule change.
    \408\ See Grebenik.
    \409\ See Galvin at 2; Del Toro.
    \410\ See Del Toro.
    \411\ See PIABA September 6 Letter at 4.
---------------------------------------------------------------------------

    FINRA considered these comments but declined to amend the proposed 
rule change. FINRA responded that it believes that the proposed time 
limitations appropriately address its concern that a number of 
expungement requests are currently filed many years after a customer 
arbitration closes or the reporting of a customer complaint in the CRD 
system.\412\ FINRA stated that requiring associated persons to file 
straight-in requests within three years of the filing of the customer 
complaint, rather than six, would help ensure that expungement hearings 
are held close in time to the events that led to the customer dispute 
information disclosure.\413\ FINRA stated that, in turn, this may: (1) 
increase the likelihood of customer participation; (2) ensure that 
straight-in requests are filed before relevant evidence and testimony 
becomes stale or unavailable; and (3) generally help to develop a more 
complete factual record on which to decide an expungement request.\414\
---------------------------------------------------------------------------

    \412\ See FINRA November 10 Letter at 19. In response to a 
commenter's request that associated persons with existing disclosure 
be ``grandfathered in'' or provide notice, FINRA stated such 
``grandfathering'' would be contrary to the purpose of the proposed 
rule change to address concerns about expungement requests made many 
years after the fact, and further stated that if the proposed rule 
change is approved, it would issue a Regulatory Notice that will 
provide notice to associated persons of when the time period will 
commence for seeking expungement of customer dispute information 
already on their records. See Grebenik; FINRA April 3 Letter at 11-
12.
    \413\ See FINRA April 3 Letter at 10-11.
    \414\ See id. FINRA recognized that as a result of the three-
year time limitation, an associated person may be prevented from 
filing a request for expungement of customer dispute information 
because the member firm's investigation of the customer complaint 
has not concluded and, therefore, the customer complaint associated 
with the customer dispute information has not closed. However, FINRA 
stated that it believes that such instances would occur rarely. 
Furthermore, in the event that an associated person is prevented 
from filing a request for expungement of customer dispute 
information in the DRS arbitration forum because of the three-year 
time limitation, the associated person could seek a court order 
directing expungement of the customer dispute information. See id.
---------------------------------------------------------------------------

    FINRA also stated that allowing two years from the close of the 
customer arbitration or civil litigation to bring an

[[Page 24307]]

expungement request would provide a reasonable amount of time for 
associated persons and firms to gather the necessary documents, 
information and other necessary resources required to file the 
expungement request and help ensure that the expungement hearing is 
held close enough in time to the customer arbitration. In addition, the 
two-year time limitation would reduce the potential for such 
information to become stale and increase the likelihood of customer 
participation.\415\ Moreover, FINRA stated that it believes the three-
year time period for expungement requests in connection with customer 
complaints would: (1) allow firms to complete their investigation of 
the customer complaint and close it in the CRD system; (2) allow 
associated persons to develop a sense of whether the complaint may 
evolve into an arbitration or civil litigation; and (3) allow 
associated persons to determine whether to proceed with a request to 
expunge the complaint.\416\
---------------------------------------------------------------------------

    \415\ See FINRA November 10 Letter at 19; FINRA April 3 Letter 
at 11-12 and n.39.
    \416\ See FINRA November 10 Letter at 19.
---------------------------------------------------------------------------

    FINRA acknowledged that there could be instances when associated 
persons may not be aware that a customer arbitration has closed, and 
that the two-year time limit for requesting expungement of customer 
dispute information has begun to run.\417\ To facilitate an associated 
person's awareness of the proposed time limits, FINRA stated that if 
the proposed rule change is approved, it would issue a Regulatory 
Notice providing notice to associated persons of when the time period 
will commence for seeking expungement of customer dispute information 
already on their records. FINRA also stated it would update the cover 
letter that is provided by DRS to respondents once a statement of claim 
has been filed to explain that: (1) an associated person is prohibited 
from filing a straight-in request while a customer arbitration or civil 
litigation associated with the customer dispute information that is the 
subject of the straight-in request is pending; (2) an associated person 
is permitted to file a straight-in request within two years of the 
close of a customer arbitration or a civil litigation associated with 
the customer dispute information, unless such request is barred under 
the Industry Code; and (3) associated persons may remain apprised of 
the status of the customer arbitration, including case closure, by 
contacting the parties to the arbitration or DRS.\418\ FINRA further 
stated that the updated cover letter would also encourage member firms 
to provide updates about the status of the customer arbitration to 
associated persons who are not named parties to the customer 
arbitration, including case closure.\419\ Finally, FINRA stated it 
would publish guidance on its website about the changes to the Codes 
that would include information about how associated persons can remain 
apprised of the status of a customer arbitration, including through 
contacting DRS.\420\
---------------------------------------------------------------------------

    \417\ See FINRA April 3 Letter at 9.
    \418\ Id.
    \419\ Id. at 9-10.
    \420\ Id. at 10.
---------------------------------------------------------------------------

    FINRA's time limitations seek to balance two competing interests: 
(1) promoting customer participation and the availability of evidence 
and (2) providing sufficient time for an associated person to determine 
whether to seek expungement and, in the case of customer complaints, 
for firms to investigate and close a complaint and for the complaint to 
evolve, or not, into arbitration or civil litigation. The Commission 
believes that the proposed rule change strikes a reasonable balance 
between these competing interests. Holding expungement hearings closer 
in time to the event that gave rise to the customer dispute information 
should promote the availability of evidence and customer participation, 
which would help contribute to more informed expungement determinations 
and therefore to investor protection and the integrity of information 
in the CRD system.\421\
---------------------------------------------------------------------------

    \421\ As stated above, the proposed rule changes would give the 
Director the express authority to deny the use of the DRS 
arbitration forum to decide expungement requests, including where 
the request is ineligible under the proposed time limitations. The 
Commission believes that these powers are a reasonable method to 
help ensure adherence to the limitations contained in proposed Rules 
12805 and 13805.
---------------------------------------------------------------------------

c. Preclusion of Certain Expungement Requests
    The proposed rule change, as modified by Amendments No. 1 and No. 
2, would also preclude an associated person from filing an expungement 
request if: (1) a panel or court of competent jurisdiction previously 
found the associated person liable in a customer arbitration or civil 
litigation associated with the same customer dispute information or (2) 
the customer dispute information involves the same conduct that is the 
basis of a final regulatory action \422\ taken by a securities 
regulator or SRO.\423\
---------------------------------------------------------------------------

    \422\ See supra note 390.
    \423\ See proposed Rule 13805(a)(2)(A)(v).
---------------------------------------------------------------------------

    FINRA included the proposed preclusion of expungement requests 
where the associated person was previously found liable in a customer 
arbitration or civil litigation associated with the same customer 
dispute information as an amendment to its proposed rule change in 
response, in part, to a commenter's recommendation.\424\ FINRA reasoned 
that these expungement requests are in effect a collateral attack on 
the binding arbitration award and that a collateral attack is not 
contemplated under FINRA rules and is contrary to the Codes.\425\ FINRA 
stated that the only avenue for challenging a prior adverse arbitration 
award is to file a timely motion with an appropriate court to vacate, 
modify, or correct the award.\426\
---------------------------------------------------------------------------

    \424\ See St. John's at 2 (suggesting that associated persons be 
prohibited from seeking expungement if there has been a finding of 
liability in the underlying customer arbitration). See Amendment No. 
1; see also FINRA November 10 Letter at 28.
    \425\ See FINRA November 10 Letter at 28; see also FINRA Rules 
12904(b) and 13904(b).
    \426\ See FINRA November 10 Letter at 28.
---------------------------------------------------------------------------

    Two commenters supported the amendment.\427\ These commenters 
agreed that an arbitral or judicial finding that a claim is valid 
should preclude the ability to have such information expunged.\428\ A 
third commenter supported the amendment, but suggested the reason for 
the amendment would apply equally in other contexts, and recommended 
that associated persons should be prevented from seeking expungement of 
customer dispute information that forms the basis for a finding of 
liability in all of the contexts in which such information forms part 
of a regulatory record, such as state regulatory proceedings, 
proceedings brought by the Commission, or self-regulatory 
proceedings.\429\
---------------------------------------------------------------------------

    \427\ See letters from Celiza P. Bragan[ccedil]a, Past-President 
& Director, et. al., The PIABA Foundation, to the Commission, dated 
December 7, 2022 (``PIABA Foundation December 7 Letter'') at 2; see 
also Hugh D. Berkson, President, Public Investors Arbitration Bar 
Association, to the Commission, dated December 7, 2022 (``PIABA 
December 7 Letter'') at 2-3.
    \428\ See id.
    \429\ See letter from Andrew Hartnett, President, North American 
Securities Administrators Association, Inc., to the Commission, 
dated December 7, 2022 (``NASAA December 7 Letter'') at 3.
---------------------------------------------------------------------------

    After further consideration of the issue, FINRA proposed a 
modification to the proposed rule change in Amendment No. 2 to provide 
that an associated person shall not file a claim requesting expungement 
of customer dispute information from the CRD system against a member 
firm at which the person was associated at the time the customer 
dispute arose if the customer dispute information involves

[[Page 24308]]

the same conduct that is the basis of a final regulatory action taken 
by a securities regulator or SRO. If an associated person requests 
expungement of such customer dispute information, the Director would 
deny the forum to the expungement request.\430\ FINRA stated that 
prohibiting an associated person from filing such expungement requests 
would promote greater efficiency in the DRS arbitration forum because 
it would preclude requests that otherwise would be unsuccessful.\431\
---------------------------------------------------------------------------

    \430\ See FINRA April 3 Letter at 14; Amendment No. 2; see also 
proposed Rule 13203(b).
    \431\ See FINRA April 3 Letter at 13-14.
---------------------------------------------------------------------------

    Permitting expungement following a finding of liability in an 
arbitration or civil litigation associated with the same customer 
dispute information or a final regulatory action based on the same 
conduct sought to be expunged would be inconsistent with the specified 
grounds that can form the basis for an expungement award under the 
proposed rule change (i.e., factual impossibility, mistake, or 
falsity). Permitting an expungement claim in these circumstances would, 
in addition to constituting a collateral attack on the results of the 
underlying dispute, contribute to inefficiencies in the expungement 
process by allowing for claims to proceed that could not succeed.

C. Expungement Requests During Simplified Arbitrations

1. Filing and Considering Requests During Simplified Arbitration
    The proposed rule change would permit a named associated person to 
request expungement, or a party to file an on-behalf-of request, during 
a simplified arbitration,\432\ and would establish procedures for 
requesting and considering expungement requests in simplified 
arbitrations that are consistent with the expedited nature of these 
proceedings.\433\
---------------------------------------------------------------------------

    \432\ See proposed Rule 12800(d)(1)(A). If the requesting party 
requests expungement in a pleading other than an answer, the request 
must be filed within 30 days from the date that FINRA notifies the 
associated person of arbitrator appointment. See proposed Rule 
12800(d)(1)(B). When FINRA notifies the parties that an arbitrator 
has been appointed, FINRA informs the parties that they have 30 days 
from the date of notification to submit additional documents or 
other information before the case is submitted to the arbitrator. 
See Notice at 50187 n.193 and accompanying text. The request would 
be required to include the same information as a request filed in a 
non-simplified arbitration. See proposed Rules 12800(d)(1)(B)(i) and 
12805(a)(1)(C)(ii); see also Notice at 50187.
    \433\ See proposed Rules 12800(d) and (e); see also Notice at 
50186. See Section II.A., ``Requests for Expungement under the 
Customer Code.''
---------------------------------------------------------------------------

    The proposed rule change would require an arbitrator in a 
simplified arbitration to decide an expungement request that is filed 
by an associated person or as an on-behalf-of request.\434\ In 
addition, as in the proposed rule change governing regular customer 
arbitration, under the proposed rule change if the requesting party 
withdraws or does not pursue the request after filing, the arbitrator 
would be required to deny the request with prejudice so that it could 
not be re-filed.\435\ FINRA stated that these proposed rule changes 
would help eliminate arbitrator-shopping by requiring the panel in 
which the request is made to decide the request.\436\ FINRA also stated 
that, unlike the proposed amendments to a regular customer arbitration, 
FINRA was not proposing that a panel from the Special Arbitrator Roster 
decide an expungement request made during a simplified customer 
arbitration where the arbitration closes other than by award or closes 
by award without a hearing, because the public chairpersons who decide 
simplified arbitrations would be fully capable of making appropriate 
expungement decisions on the basis of their experience and would have 
the same enhanced expungement training as the arbitrators on the 
Special Arbitrator Roster.\437\
---------------------------------------------------------------------------

    \434\ See proposed Rules 12800(d)(1)(B)(ii) and 12800(e)(1); see 
also Notice at 50187.
    \435\ See proposed Rule 12800(d)(1)(C); see also Notice at 
50187.
    \436\ See Notice at 50187.
    \437\ See Notice at 50188. Under the proposed rule change, the 
public chairperson would be required to evidence successful 
completion of, and agreement with, the enhanced expungement training 
provided by DRS prior to considering and deciding the expungement 
request. See also proposed Rule 12800(b).
---------------------------------------------------------------------------

    In addition, unlike in a regular customer arbitration, if 
expungement is not requested during a simplified arbitration, the 
proposed rule change would permit the associated person to file a 
straight-in expungement request for the same customer dispute 
information under the Industry Code and have the request decided by a 
three-person panel randomly selected from the Special Arbitrator 
Roster.\438\
---------------------------------------------------------------------------

    \438\ See proposed Rule 12800(e)(2).
---------------------------------------------------------------------------

    One commenter requested that a named associated person should be 
required to request expungement during the arbitration of the 
customer's claim, as proposed for non-simplified cases.\439\ The 
commenter stated that arbitrators in simplified arbitrations are 
experienced public arbitrators who have the same enhanced expungement 
training as the arbitrators on the Special Arbitrator Roster and would 
therefore be able to make an informed decision on the merits of an 
expungement request.\440\ The commenter also stated that requiring a 
named party to request expungement during the arbitration of the 
customer's claim in simplified arbitration would encourage customer 
participation because the expungement request would be closer in time 
to the complained-about conduct and therefore easier for the customer 
to recall the facts.\441\
---------------------------------------------------------------------------

    \439\ See Miami at 2-3.
    \440\ See Miami at 3-4. Similarly, Cornell requested that FINRA 
add to the proposed rule change that if an expungement is requested 
during a simplified arbitration and if the parties agree to have a 
specific arbitrator, this arbitrator must be required to undergo the 
enhanced expungement training provided to the arbitrators on the 
Special Arbitrator Roster prior to considering the expungement 
request. See Cornell at 4-5. In response, FINRA stated that the 
proposed rule change would require that arbitrators deciding 
expungement requests in simplified arbitrations be experienced 
public arbitrators who have taken the same expungement training as 
arbitrators on the Special Arbitrator Roster, including where the 
parties agree to a specific arbitrator. See FINRA November 10 Letter 
at 22.
    \441\ See Miami at 3-4.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change, referencing the 
expedited nature of simplified arbitrations.\442\ FINRA stated that 
because there may be less discovery in simplified arbitration and the 
customer can dictate the extent of the evidence presented to the 
arbitrator, there may be less information available for the arbitrator 
to evaluate an expungement request.\443\ Accordingly, FINRA stated that 
it is appropriate that an associated person should retain the ability 
to choose to file the request as a straight-in request under the 
Industry Code.\444\ FINRA also stated, however, that it will continue 
to monitor expungement requests and decisions in simplified 
arbitrations to determine if additional changes are warranted, 
including whether a panel from the Special Arbitrator Roster should be 
required to decide an expungement request in simplified 
arbitrations.\445\
---------------------------------------------------------------------------

    \442\ See FINRA November 10 Letter at 23.
    \443\ See id.; see also Notice at 50187.
    \444\ See Notice at 50187.
    \445\ See id.; see also FINRA April 3 Letter at 18-19.
---------------------------------------------------------------------------

    Requiring an arbitrator to decide an expungement request that is 
filed in a simplified arbitration, regardless of the outcome of that 
arbitration, along with requiring an arbitrator to a reject such a 
request with prejudice if it is withdrawn, will help protect the 
integrity of the information in the CRD system by limiting an 
associated person's ability to request expungement for the same claim 
(even if it has been denied in the past) until they find a panel 
willing to award it. By allowing an associated person to determine

[[Page 24309]]

whether to request expungement in a simplified arbitration or to 
instead file the request as a straight-in request under the Industry 
Code, the proposed rule change appropriately puts the decision to seek 
expungement in the hands of the party most impacted by the outcome. 
Because claims in simplified arbitration generally are decided by one 
arbitrator based on the documents that are submitted by the parties, 
with limited discovery, and without a hearing, there may be less 
information available for the arbitrator to evaluate an expungement 
request during a simplified arbitration. Therefore, the Commission 
believes that associated persons should be given the choice of how they 
want to proceed with their request for expungement, while at the same 
time balancing customer and regulator interests in the process. The 
Commission notes, however, that FINRA has stated it will monitor this 
issue and propose changes as warranted.
2. Deciding Requests in Simplified Arbitration
    As stated above, if expungement is requested during a simplified 
arbitration, the proposed rule change would require the arbitrator to 
decide the expungement request regardless of how the simplified 
arbitration case closes, including by settlement, in one of two ways, 
depending on the how the customer chooses to have their claim 
decided.\446\
---------------------------------------------------------------------------

    \446\ See Notice at 50187-88; see also proposed Rules 
12800(d)(1)(B)(ii) and 12800(e)(1).
---------------------------------------------------------------------------

    If the customer chooses to have their claim decided either (1) ``on 
the papers'' (i.e., without a hearing) or (2) in an ``Option Two'' 
special proceeding, the arbitrator would decide the customer's dispute 
first and then issue an award before deciding the expungement 
request.\447\ After the customer's dispute is decided, the arbitrator 
would hold a separate expungement-only hearing to consider and decide 
the expungement request and issue a separate award.\448\ FINRA reasoned 
that this requirement would minimize any delays in resolving the 
customer arbitration and in determining any potential recovery that a 
customer may be awarded.\449\ FINRA further stated that the separate 
expungement-only hearing would be necessary to enable the arbitrator to 
request any documentary, testimonial, or other evidence it deems 
relevant to the expungement request to make a fully informed 
decision.\450\
---------------------------------------------------------------------------

    \447\ See proposed Rule 12800(e)(1)(A).
    \448\ See proposed Rule 12800(e)(1)(A). The arbitrator would 
have to conduct the expungement hearing pursuant to proposed Rule 
12805(c); the expungement award would have to meet the requirements 
of proposed Rule 12805(c)(8); and forum fees would be assessed 
pursuant to proposed Rule 12805(c)(9). See id.; see also Notice at 
50188 n.206.
    \449\ See Notice at 50188.
    \450\ See id. FINRA stated that the customer arbitration may not 
be as fully developed when a customer has requested an ``on the 
papers'' or special proceeding. See id.
---------------------------------------------------------------------------

    Alternatively, if the customer chooses to have their claim decided 
by an ``Option One'' full hearing and it closes by award, the proposed 
rule change would require the arbitrator to consider and decide the 
expungement request during the customer arbitration and include the 
decision in the award.\451\ This process would be the same as deciding 
an expungement request during a regular customer arbitration that 
closes by award after a hearing, where the customer's claim and 
expungement request are addressed during the customer arbitration.\452\
---------------------------------------------------------------------------

    \451\ See proposed Rule 12800(e)(1)(B)(i); see also Section 
III.A.3., ``Deciding Expungement Requests during Customer 
Arbitrations.''
    \452\ See Notice at 50188.
---------------------------------------------------------------------------

    If a simplified arbitration closes other than by award or closes by 
award without a hearing, however, the proposed rule change would 
require the arbitrator to hold a separate expungement-only hearing to 
consider and decide the expungement request and issue a separate award 
containing the decision on the expungement request.\453\ Under the 
proposed rule change, the Director would notify all customers from the 
simplified arbitration of the separate expungement-only hearing, if 
applicable.\454\ FINRA believes that a separate expungement hearing 
would be necessary in these circumstances for the arbitrator to develop 
a complete factual record in order to make a fully informed decision on 
the expungement request.\455\ FINRA also believes that the Director's 
notice would further this objective by providing a timely reminder to 
customers of the expungement hearing so that they may plan and prepare 
to attend and participate if they choose.\456\ Moreover, FINRA stated 
that it would continue to monitor expungement requests and decisions in 
simplified arbitrations to determine if additional changes are 
warranted.\457\
---------------------------------------------------------------------------

    \453\ See proposed Rule 12800(e)(1)(B)(ii).
    \454\ See proposed Rule 12800(f)(2).
    \455\ See Notice at 50188.
    \456\ See id.
    \457\ See id.
---------------------------------------------------------------------------

    Three commenters voiced support for the proposed rule change, 
specifically identifying the bifurcation of the expungement hearing and 
simplified arbitration where the customer's claim is decided ``on the 
papers'' or in an ``Option Two'' hearing.\458\ One of these commenters 
reasoned that by requiring a separate hearing on the expungement 
request following a final decision on the customer's claim, the 
proposed rule change would allow for a just resolution of the request 
because the arbitrator would have all of the facts and special insights 
necessary to decide whether to award expungement, while ensuring the 
resolution of the investor's claim is not delayed.\459\ Another 
commenter similarly stated that deciding the customer dispute before 
the request for expungement would minimize delays in customer recovery 
but allow the arbitrator to make a more fully developed record before 
deciding the expungement request.\460\
---------------------------------------------------------------------------

    \458\ See Miami at 2-3; St. John's at 2; Cornell at 4.
    \459\ See St. John's at 2.
    \460\ See Cornell at 4.
---------------------------------------------------------------------------

    Another commenter suggested that FINRA create a simplified process 
for expungement with similar fees and an ``on the papers'' option 
before a single arbitrator for requests for expungement associated with 
customer complaints and customer arbitrations under $50,000.\461\ In 
response, FINRA declined to amend the proposed rule change, stating 
that an important part of ensuring the expungement process works as 
intended is for arbitrators to hold recorded expungement hearings 
during which they can hear testimony and assess the credibility of the 
associated person requesting expungement and any witnesses.\462\
---------------------------------------------------------------------------

    \461\ See Hennion at 6.
    \462\ See FINRA November 10 Letter at 23.
---------------------------------------------------------------------------

    The proposed rule change's procedure for determining the order in 
which a panel would decide an expungement request in a simplified 
arbitration based on the type of proceeding chosen by the customer is 
reasonable. For example, where a customer opts to have their claim 
decided without a hearing (i.e., ``on the papers'') or chooses an 
``Option Two'' special proceeding, the arbitrator would hold a separate 
expungement-only hearing to consider and decide the expungement request 
after it decides the customer's dispute. The Commission believes that 
this process benefits both customers and associated persons. The 
customer would avoid any delay in resolving their claim that 
consideration of an expungement request would cause; and the associated 
person would have a separate hearing to help ensure that the arbitrator 
has sufficient evidence upon which to rule on their expungement 
request. Alternatively, where the customer chooses to have their claim 
decided after a full hearing

[[Page 24310]]

(i.e., an ``Option One'' proceeding), it is reasonable to allow the 
panel to rule on an expungement request because the request would not 
unduly burden the customer or an associated person requesting 
expungement in the hearing. By choosing ``Option One'', a customer has 
agreed to participate in a more involved and time-consuming process 
than having their claim decided ``on the papers.'' Likewise, the 
customer has assumed the risk that the resolution of their claim could 
be delayed by an associated person's expungement request. In addition, 
the associated person gets an opportunity during the hearing to help 
the panel fully develop a record on which to decide the expungement 
request.

D. Procedural Requirements Relating to All Expungement Hearings

    The proposed rule changes would include certain procedural 
provisions that would apply to all expungement hearings. As described 
above, these would include procedural requirements relating to: (1) 
hearing format; (2) associated person's appearance; (3) customer 
attendance and participation; (4) panel requests for additional 
documents or evidence; (5) review of settlement documents; (6) 
requirement for a unanimous decision to issue an award containing 
expungement relief; (7) contents of an expungement award; (8) grounds 
for awarding expungement; (9) evidentiary weight of a decision by 
customers or authorized representatives not to attend or participate; 
and, (10) forum fees.\463\ In addition, the proposed rule change would 
expand the authority of the Director to deny the use of the DRS 
arbitration forum.\464\
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    \463\ See Section II.D., ``Procedural Requirements Relating to 
All Expungement Hearings.''
    \464\ See Section II.C.3, ``Director's Authority to Deny the 
Forum.''
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1. Hearing Format
    Current FINRA rules require a panel that is deciding an expungement 
request to hold a recorded hearing session (by telephone or in person) 
regarding the appropriateness of expungement.\465\ The proposed rule 
change would also permit the panel to hold a recorded hearing session 
by video conference. The proposed rule change would also clarify that a 
panel would not be limited in the number of hearing sessions it could 
hold to decide an expungement request.\466\ No commenter supported or 
objected to these proposed changes.
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    \465\ See FINRA Rules 12805(a) and 13805(a).
    \466\ See proposed Rules 12805(c)(1) and 13805(c)(1).
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    This is an appropriate approach. Permitting parties to hold a 
recorded hearing session by video conference enhances party 
participation by making it more convenient and allowing others to read 
facial expressions of those testifying. In addition, by not limiting 
the number of hearing sessions a panel could schedule to hear an 
expungement request, the proposed rule change would help ensure that 
parties would not be limited in presenting their arguments.\467\
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    \467\ Arbitrators would remain in control of the number of 
hearings needed to decide an expungement request. See FINRA Rule 
12500 (Initial Prehearing Conference) (requiring the Director to 
schedule an Initial Prehearing Conference during which the panel 
will, among other things, schedule any subsequent hearing sessions 
during which a request would be heard).
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2. Appearance by Associated Person or Party Requesting Expungement
    The proposed rule change would require the associated person whose 
information in the CRD system is the subject of the expungement request 
to appear in person or by video conference at the expungement 
hearing.\468\ Likewise, a party requesting expungement on behalf of an 
unnamed person or the party's representative would also be required to 
appear in person or by video conference at the hearing.\469\ The panel 
would determine the method of appearance.\470\ FINRA stated that it 
believes the associated person should be required to appear in person 
or by video conference at the expungement hearing and be available to 
respond to questions. Requiring the associated person's appearance to 
be in person or by video conference would help the panel assess the 
associated person's credibility, which may be particularly important if 
the request is unopposed.\471\
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    \468\ See proposed Rules 12805(c)(2) and 13805(c)(2).
    \469\ See id.; see also FINRA April 3 Letter at 7.
    \470\ See id.
    \471\ See Notice at 50182.
---------------------------------------------------------------------------

    No commenter supported or objected to these proposed changes. One 
commenter stated that ``FINRA should be mindful that not all persons 
have the same kind of access to technology and bandwidth. As such, the 
panel should also have discretion to decide the appropriateness of the 
manner and form of the requesting . . . [associated person's] 
participation given the circumstances.'' \472\ FINRA responded that the 
proposed rule change provides the panel with that discretion. However, 
FINRA stated that the method of appearance would be required to be in 
person or by video conference because FINRA believes the panel may be 
better able to assess the associated person's credibility through these 
methods of appearance.\473\
---------------------------------------------------------------------------

    \472\ Del Toro.
    \473\ See FINRA April 3 Letter at 7.
---------------------------------------------------------------------------

    Given the importance of protecting the integrity of the information 
in the CRD system, FINRA reasonably determined to require that a party 
requesting expungement appear at the expungement hearing either in 
person or by video conference. Such a requirement will allow the panel 
to better assess the testimony of such persons, but also provides 
flexibility to accommodate instances in which it may not be reasonable 
or necessary to require an in-person hearing. Leaving the manner of 
appearance within the panel's discretion is appropriate, as the panel 
will be free to require an in-person appearance where, from the panel's 
perspective, the record requires or will be improved by such an 
appearance.
3. Customer's Attendance and Participation During the Expungement 
Hearing
    The proposed rule change would codify certain provisions of the 
Guidance to: (1) allow the customer and their representative to appear 
at the expungement hearing; \474\ (2) allow the customer to testify 
(telephonically, in person, or by other method) at the expungement 
hearing; \475\ (3) allow the representative for the customer or a pro 
se customer to introduce documents and evidence at the expungement 
hearing; \476\ (4) allow the representative for the customer or a pro 
se customer to cross-examine the associated person or other witnesses 
called by the party seeking expungement; \477\ and (5) allow the 
representative for the customer or a pro se customer to present opening 
and closing arguments if the panel allows any party to present such 
arguments.\478\
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    \474\ See proposed Rules 12805(c)(3)-(4) and 13805(c)(3)-(4).
    \475\ See proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B).
    \476\ See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).
    \477\ See proposed Rules 12805(c)(5)(C) and 13805(c)(5)(C).
    \478\ See proposed Rules 12805(c)(5)(D) and 13805(c)(5)(D).
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    FINRA stated that it believes that customer participation during an 
expungement hearing provides the panel with important information and 
perspective that it might not otherwise receive. Through the proposed 
rule change, FINRA seeks to make it easier for customers to participate 
and, thereby, to encourage them to do so.\479\ FINRA further stated 
that the proposed rule change strikes the right balance

[[Page 24311]]

between allowing the customer to participate fully in the hearing and, 
on the other hand, giving the requesting party the opportunity to 
substantiate arguments in support of the expungement request.\480\ This 
opportunity includes the ability of the requesting party to cross-
examine a customer who chooses to testify and to object to evidence 
introduced by a customer.\481\
---------------------------------------------------------------------------

    \479\ See Notice at 50183.
    \480\ See id.
    \481\ See id.
---------------------------------------------------------------------------

    Commenters both supporting and opposing the proposed rule change 
recommended modifications to these provisions.\482\ One commenter who 
opposed the proposed rule change objected to the participation of non-
parties (such as customers in a straight-in proceeding) without such 
parties submitting to FINRA jurisdiction because non-parties who commit 
perjury cannot be sanctioned or reprimanded.\483\ Another commenter 
supported the proposed rule change but recommended that the proposed 
rule change be amended to make clear that customers would have the 
opportunity and ability to participate ``in all aspects'' of the 
hearing, such that customers could attend the entire hearing, introduce 
arguments, and make their points at any time they deem 
appropriate.\484\
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    \482\ See AdvisorLaw at 3; NASAA September 6 Letter at 4.
    \483\ See AdvisorLaw at 3. The Commission notes that, with 
respect to customer participation for purposes of FINRA Rules 13512 
(Subpoenas), 13513 (Authority of Panel to Direct Appearances of 
Associated Person Witnesses and Production of Documents Without 
Subpoenas), 13602 (Attendance at Hearings), and 13903 (Hearing 
Session Fees, and Other Costs and Expenses), the customer would be a 
non-party only to the extent that an expungement request was made as 
a straight-in request under the Industry Code.
    \484\ See NASAA September 6 Letter at 4.
---------------------------------------------------------------------------

    In response to the first commenter, FINRA stated that arbitrators 
on the Special Arbitrator Roster would have the experience necessary to 
assess the credibility of those attending and participating in the 
hearing, as well as any documentary information. In addition, FINRA 
pointed out that the proposed rule change would give an associated 
person requesting expungement the opportunity to cross-examine a non-
party customer if the person chooses to testify or any witness called 
by the customer or authorized representative.\485\ FINRA believes these 
mechanisms should be sufficient to ensure that a non-party's testimony 
or documentary information presented is appropriately scrutinized.\486\
---------------------------------------------------------------------------

    \485\ See FINRA November 10 Letter at 9.
    \486\ See id. at 10.
---------------------------------------------------------------------------

    FINRA responded to the other comment by making one of the proposed 
modifications in Amendment No. 1 to provide that customers would have 
the opportunity and ability to participate in all aspects of the 
hearing.\487\ Three commenters supported this amendment, stating that 
the amendment would enable arbitration panels to have a more detailed 
and balanced view of the relevant facts and events underlying the 
expungement request.\488\ Another commenter recommended limiting a 
customer's ability to participate in a hearing, stating that while 
allowing customer participation ``can provide value,'' for logistics 
reasons, the customer should not be able to request discovery.\489\
---------------------------------------------------------------------------

    \487\ See Amendment No. 1; see also supra note 11.
    \488\ See PIABA Foundation December 7 Letter at 2; PIABA 
December 7 Letter at 2; NASAA December 7 Letter at 2.
    \489\ See Grebenik.
---------------------------------------------------------------------------

    In response, FINRA stated that customer attendance and 
participation in expungement hearings helps the panel fully develop a 
record on which to decide the expungement request.\490\ FINRA further 
responded that as a non-party to the straight-in request, the customer 
would not be permitted under the proposed rule change to seek discovery 
from the parties through the DRS arbitration forum, so the proposed 
rule change is consistent with the commenter's view in this 
regard.\491\
---------------------------------------------------------------------------

    \490\ See FINRA April 3 Letter at 12.
    \491\ See id. 11-12; see also Notice at 50186 n.182.
---------------------------------------------------------------------------

    Customer participation during an expungement hearing should provide 
a panel with important information and perspective that it might not 
otherwise receive. The Commission also understands that customers may 
have little personal interest in participating in a hearing once their 
claim has been resolved. The proposed rule changes would implement 
enhancements to facilitate customer participation in those cases where 
customers wish to participate. The Commission further believes that the 
procedural safeguards will appropriately balance the ability of a 
customer to participate in a hearing and provide relevant information 
with the interest of an associated person in testing any such 
information through objection or cross-examination. This ability to 
object or cross-examine should also help address concerns that non-
parties are not themselves subject to FINRA's jurisdiction.
4. Panel Requests for Additional Documents or Evidence
    The proposed rule change would codify the ability of the panel to 
request from the associated person, the party requesting expungement on 
behalf of an unnamed person, and the member firm at which the person 
was associated at the time the customer dispute arose, as applicable, 
any documentary, testimonial, or other evidence that the panel deems 
relevant to the expungement request.\492\ FINRA stated that in deciding 
an expungement request, particularly in cases that settle before an 
evidentiary hearing or in cases where the customer does not attend or 
participate in the expungement hearing, the panel's role as fact finder 
is critical.\493\ FINRA further stated that, given this significant 
role, the panel must ensure that it has all of the information 
necessary to make a fully informed decision on the expungement request 
on the basis of a complete factual record.\494\
---------------------------------------------------------------------------

    \492\ See proposed Rules 12805(c)(6) and 13805(c)(7).
    \493\ See Notice at 50183.
    \494\ See id.
---------------------------------------------------------------------------

    One commenter expressed support for the proposed rule change and 
suggested that FINRA amend the proposed rule change to consider the 
failure to produce requested documents to be grounds for denial of the 
expungement request with prejudice.\495\ FINRA declined to amend the 
proposed rule change in response to this comment.\496\ FINRA stated 
that its rules already provide arbitrators with authority to determine 
whether sanctions should be imposed for failure to comply with any 
provision of the Code, or any order of a panel or single arbitrator 
authorized to act on behalf of the panel.\497\ FINRA specifically 
pointed out that: (1) a panel may assess monetary penalties payable to 
one or more parties; preclude a party from presenting evidence; make an 
adverse inference against a party; assess postponement and forum fees; 
and assess attorneys' fees, costs and expenses; \498\ (2) a panel may 
dismiss a claim, defense, or arbitration with prejudice as a sanction 
for material and intentional failure to comply with an order of the 
panel if prior warnings or sanctions have proven ineffective; \499\ (3) 
a member or an associated person could be subject to disciplinary 
action for failure to produce requested documents; \500\ and (4) such 
failure may

[[Page 24312]]

be deemed conduct inconsistent with just and equitable principles of 
trade and a violation of FINRA Rule 2010.\501\
---------------------------------------------------------------------------

    \495\ See NASAA September 6 Letter at 5.
    \496\ See FINRA November 10 Letter at 30-31.
    \497\ See id.
    \498\ See id. at 30 (citing FINRA Rules 12212(a) and 13212(a)).
    \499\ See id. at 30-31 (citing FINRA IM-12000(c), FINRA Rule 
12212(c), FINRA IM-13000(c), and FINRA Rule 13212(c)).
    \500\ See id. at 31 (citing FINRA Rules 12212(b) and 13212(b)).
    \501\ See id. (citing FINRA IM-12000(c) and FINRA IM-13000(c)).
---------------------------------------------------------------------------

    The proposed rule change should help ensure that a panel receives 
the documents or information that it requests, and further that a panel 
is already empowered to dismiss a claim with prejudice for failure to 
comply with an order of the panel. Further, the arbitrator's critical 
role as fact-finder in deciding expungement requests requires that 
arbitrators have the ability to request evidence relevant to their 
decisions. By providing arbitrators with this power, the proposed rule 
change will help panels establish more fully developed records upon 
which to base awards.
5. Review of Settlement Documents
    The proposed rule change would retain current FINRA Rules 
12805(b)'s and 13805(b)'s requirement for a panel considering an 
expungement request to review any related settlement documents and 
consider the amount of payments made to any party, and any other terms 
and conditions of the settlement.\502\ In addition, in cases in which a 
customer does not participate in the expungement hearing, or a 
requesting party states that a customer has indicated that they will 
not oppose the expungement request, the proposed rule change would 
codify the suggestion, currently in the Guidance, that the panel should 
inquire and fully consider whether a party impermissibly conditioned a 
settlement of the arbitration upon the customer's agreement not to 
oppose the request for expungement.\503\ No commenter supported or 
objected to these proposed changes. The proposed rule change should 
provide arbitrator oversight of past settlement agreements which should 
help ensure (through deterrence) that future settlements are not 
impermissibly conditioned on a customer's agreement not to oppose the 
request for expungement.
---------------------------------------------------------------------------

    \502\ See proposed Rules 12805(c)(7) and 13805(c)(8); see also 
Notice at 50183-84.
    \503\ See id.
---------------------------------------------------------------------------

6. Unanimous Decision To Issue an Award Containing Expungement Relief
    Under current FINRA rules, consistent with arbitration cases 
generally, a panel may award expungement based on a majority decision 
of the arbitrators.\504\ The proposed rule change would require that 
the arbitrators agree unanimously to issue an award containing 
expungement relief.\505\ FINRA stated that, although the vast majority 
of expungement decisions are already unanimous,\506\ this change would 
help protect the integrity of the information in the CRD system and 
help ensure that the expungement process operates as intended--as a 
remedy that is appropriate only in limited circumstances in accordance 
with the narrow standards in FINRA rules.\507\
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    \504\ See FINRA Rules 12410 and 13414.
    \505\ See proposed Rules 12805(c)(8)(A) and 13805(c)(9)(A).
    \506\ In the Notice, FINRA stated that during the sample period 
of January 2016 to December 2021, in arbitrations decided by a 
three-person arbitration panel and involving an expungement request, 
the panel decision was unanimous in 98 percent and not unanimous in 
2 percent of arbitrations. See Notice at 50184 n.157; see also id. 
at 50173 n.28 (defining the length of the sample period).
    \507\ See id. at 50184.
---------------------------------------------------------------------------

    Five commenters supported the proposed unanimity requirement.\508\ 
Two of these commenters reasoned that the unanimity requirement would 
further safeguard the integrity of the information in the CRD 
system.\509\ Three commenters also supported the unanimity requirement 
as ensuring that expungement is an ``extraordinary'' \510\ or 
``exceptional'' \511\ remedy.
---------------------------------------------------------------------------

    \508\ See Cornell at 4; NASAA September 6 Letter at 3; Edwards 
at 1; St. John's at 3; PIABA September 6 Letter at 2.
    \509\ See Cornell at 4 and St. John's at 3.
    \510\ See St. John's at 3; PIABA September 6 Letter at 2.
    \511\ See Cornell at 4.
---------------------------------------------------------------------------

    Six commenters, on the other hand, opposed the unanimity 
requirement.\512\ One of these commenters argued that the requirement 
of the written rationale would encourage unanimity of the decision 
without mandating it and would further ensure the remedy is 
extraordinary, thus maintaining the necessary balance between investor 
protection and regulatory value with fairness to advisors.\513\ Two of 
these commenters argued that no single arbitrator should hold veto 
power over an expungement decision because it would lead to more 
inaccurate and misleading data in the CRD system,\514\ while a fourth 
argued that requiring unanimous agreement does not value the opinions 
of all arbitrators.\515\
---------------------------------------------------------------------------

    \512\ See letter from Victoria Staudinger, to the Commission, 
dated August 16, 2022; SIFMA September 2 Letter at 7; FSI at 5; 
Grebenik; Beckner; Del Toro.
    \513\ See FSI at 5.
    \514\ See SIFMA September 2 Letter at 7; see also Del Toro.
    \515\ See Grebenik.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change and responded that 
requiring a unanimous decision of the arbitrators would help protect 
the integrity of the information in the CRD system and help ensure that 
the expungement process operates as intended.\516\
---------------------------------------------------------------------------

    \516\ See FINRA November 10 Letter at 11; see also FINRA April 3 
Letter at 4-5.
---------------------------------------------------------------------------

    Requiring a unanimous decision will help enhance the integrity of 
the information in the CRD system by helping ensure expungement will 
only be awarded when there is no disagreement among the arbitrators 
that the factual record supports it. The importance of the CRD system 
extends to all aspects of regulation of broker-dealers and registered 
representatives. Among other things, the information about firms and 
registered representatives available on CRD facilitates regulators, 
such as FINRA and the other SROs, state regulators, as well as the 
Commission, in meeting their regulatory obligations. In addition, 
certain information in the CRD system is available to the public 
through BrokerCheck; this information helps investors make better-
informed choices about the registered representatives and broker-dealer 
firms with whom they may conduct business. For these reasons, the 
importance of the integrity of information in the CRD system militates 
against awarding expungement in circumstances where there may be 
disagreement about the merits of a claim.
    One commenter recommended that the panel's unanimous decisions to 
expunge records should only be reached when the evidence presented in 
support of expungement meets a clear and convincing standard of 
proof.\517\ This commenter reasoned that such an evidentiary standard 
would be consistent with the extraordinary nature of expungement.\518\
---------------------------------------------------------------------------

    \517\ See NASAA September 6 Letter at 3.
    \518\ See id.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change in response to 
this recommendation. FINRA stated that to further clarify the limited 
circumstances under which arbitrators must decide expungement requests, 
the proposed rule change would expressly list in the Codes the narrow 
grounds in FINRA Rule 2080(b)(1) for deciding these requests.\519\ 
FINRA stated that it believes that the explicit incorporation of these 
grounds into the Codes and the requirement for a unanimous decision by 
arbitrators from the Special Arbitrator Roster would achieve the goal 
of balancing the competing interests in the expungement process of 
providing a fair process and protecting the integrity of the 
information in the CRD system.\520\

[[Page 24313]]

Finally, FINRA stated it will continue to evaluate whether there are 
other ways to further strengthen the expungement process, including 
whether to require that a panel find that the evidence presented in 
support of an expungement request meets a clear and convincing standard 
of proof in order to issue an award containing expungement relief.\521\
---------------------------------------------------------------------------

    \519\ See FINRA November 10 Letter at 17; see also proposed 
Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i).
    \520\ See FINRA November 10 Letter at 17.
    \521\ See FINRA April 3 Letter at 18-19.
---------------------------------------------------------------------------

    The importance of the integrity of information in the CRD system 
militates against awarding expungement in circumstances where there may 
be disagreement about the merits of a claim. Thus, as stated above, 
requiring a unanimous decision will enhance the integrity of the 
information in the CRD system by helping ensure expungement will only 
be awarded when there is no disagreement among the arbitrators that the 
factual record supports it. Furthermore, by requiring a three-person 
panel of specially trained, specially qualified arbitrators to 
unanimously decide an expungement request based on three specified 
grounds \522\ (in addition to the proposed reforms to the process for 
selecting arbitrators and the enhanced training and qualification), the 
proposed rule change is reasonably designed to help ensure that 
arbitrators only award expungement when there is evidentiary support of 
their decisions. Therefore, FINRA's decision regarding the evidentiary 
standard is reasonable in light of the implementation of a unanimous 
decision requirement, and other proposed safeguards.
---------------------------------------------------------------------------

    \522\ See Section III.D.8., ``Grounds for Recommending 
Expungement.''
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7. Awards
    Current FINRA Rules 12805(c) and 13805(c) require that the panel 
provide a ``brief'' written explanation of the reasons for its finding 
that one or more of the grounds for expungement applies to the facts of 
the case. The proposed rule change would retain the requirements of 
current Rules 12805(c) and 13805(c) but would remove the word 
``brief.'' As a result, the panel would be required to provide enough 
detail in the award to explain its rationale for awarding expungement 
relief.\523\ In addition, the proposed rule change would incorporate 
language from the Guidance by requiring that the panel's explanation 
identify any specific documentary, testimonial or other evidence on 
which the panel relied in awarding expungement relief.\524\
---------------------------------------------------------------------------

    \523\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B); see 
also Notice at 50184.
    \524\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B).
---------------------------------------------------------------------------

    One commenter suggested that FINRA ``strengthen'' this aspect of 
the proposed rule change by requiring arbitrators to provide a thorough 
explanation of how a request meets expungement's extraordinary 
standard, including an explanation of how the arbitrators determined 
that the requesting party's uncontested assertions accurately reflected 
the truth of the matter.\525\
---------------------------------------------------------------------------

    \525\ See NASAA September 6 Letter at 5.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change and responded that 
the panel's explanation would be required to not be solely a recitation 
of one of the grounds for awarding expungement relief or language 
provided in the expungement request and that the proposed rule change 
would require the panel to identify any specific documentary, 
testimonial, or other evidence on which the panel relied in awarding 
expungement relief.\526\ In addition, FINRA stated that it would 
specify in its enhanced expungement training for arbitrators the 
importance of explaining their rationale for awarding expungement 
relief.\527\
---------------------------------------------------------------------------

    \526\ See FINRA November 10 Letter at 18.
    \527\ See id.
---------------------------------------------------------------------------

    Requiring a written rationale that specifically identifies the 
basis for an expungement award and the documents or other evidence that 
supports such an award should be sufficient both to help ensure that a 
panel has considered the available evidence and its bearing on the 
available bases for an expungement award and should help ensure that a 
panel has correctly identified a permissible ground for expungement. 
Further, the written rationale requirement should provide interested 
parties with enough information to understand the reasons for an 
expungement award.
8. Grounds for Recommending Expungement
    As stated above, both currently and under the proposed rule change, 
an associated person may seek expungement of customer dispute 
information by obtaining a court expungement order by either: (1) going 
through the arbitration process and obtaining an award recommending 
expungement (and then obtaining a court order confirming the 
arbitration award); or (2) going directly to court (without first going 
through arbitration). Regardless of whether expungement of customer 
dispute information is sought directly through a court or by first 
going through arbitration, FINRA Rule 2080 requires an associated 
person seeking expungement to obtain a court order directing such 
expungement or confirming an award containing such expungement.\528\ 
Moreover, under FINRA Rule 2080(b) members or associated persons 
petitioning a court for expungement relief, or seeking judicial 
confirmation of an arbitration award containing expungement relief, 
must name FINRA as an additional party and serve FINRA with all 
appropriate documents unless this requirement is waived by FINRA 
pursuant to either Rule 2080(b)(1) or 2080(b)(2). Specifically, FINRA 
Rule 2080(b)(1) provides that FINRA may waive the requirement to name 
FINRA as a party in situations where ``expungement relief is based on 
affirmative judicial or arbitral findings'' of factual impossibility, 
mistake, or falsity.\529\
---------------------------------------------------------------------------

    \528\ See supra notes 25-30 and accompanying text.
    \529\ See FINRA Rule 2080(b)(1). FINRA Rule 2080 is not part of 
the Codes. FINRA stated that it is not proposing amendments to FINRA 
Rule 2080 at this time but is considering whether enhancements to 
the current expungement process through changes to FINRA Rule 2080 
may be warranted. See Notice at 50184 n.162.
---------------------------------------------------------------------------

    In addition to FINRA's ability to waive the obligation to name 
FINRA as a party under FINRA Rule 2080(b)(1), FINRA may also waive the 
requirement to name FINRA as a party to a court proceeding seeking 
confirmation of an arbitration award pursuant to FINRA Rule 
2080(b)(2).\530\ FINRA Rule 2080(b)(2) provides that FINRA may waive 
this requirement in situations in which ``the expungement relief is 
based on judicial or arbitral findings other than those described 
above''--that is, situations in which an arbitrator has not found 
factual impossibility, mistake, or falsity but, nevertheless, has 
recommended expungement based on findings not named in Rule 2080. In 
such situations, ``FINRA, in its sole discretion and under 
extraordinary circumstances, also may waive the obligation to name 
FINRA as a party if [FINRA] determines that: (A) the expungement relief 
and accompanying findings on which it is based are meritorious; and (B) 
the expungement would have no material adverse effect on investor 
protection, the integrity of the CRD system or regulatory 
requirements.'' \531\ In other words, if an arbitrator recommends 
expungement on grounds other than factual impossibility, mistake, or 
falsity, FINRA may, in ``extraordinary circumstances'' nevertheless 
decide to waive the obligation to name FINRA as a party if FINRA finds: 
(1) that the alternative grounds supplied by the arbitrator and the 
arbitrator's recommendation are

[[Page 24314]]

meritorious and (2) that the expungement would have no material adverse 
effect on investor protection, the integrity of the information in the 
CRD system, or regulatory requirements.\532\
---------------------------------------------------------------------------

    \530\ See supra note 29 and accompanying text.
    \531\ See FINRA Rule 2080(b)(2).
    \532\ See Notice at 50184 n.162; see also FINRA November 10 
Letter at 12 n.54.
---------------------------------------------------------------------------

    It is FINRA's view that, currently, in order to issue an award 
containing expungement relief, a panel must affirmatively find that one 
of the three grounds contained in FINRA Rule 2080(b)(1) has been 
met.\533\ More specifically, current FINRA Rules 12805 and 13805 
require that, in order to issue an award containing expungement of 
customer dispute information, a panel must indicate in the arbitration 
award which of the FINRA Rule 2080 grounds for expungement serves as 
the basis for its expungement order. In other words, according to 
FINRA, to include expungement relief in an award, FINRA Rules 12805 and 
13805 currently require a panel to find that: (1) the claim, 
allegation, or information is factually impossible or clearly 
erroneous; (2) the associated person was not involved in the alleged 
investment-related sales practice violation, forgery, theft, 
misappropriation, or conversion of funds; or (3) the claim, allegation, 
or information is false.\534\
---------------------------------------------------------------------------

    \533\ See Notice at 50173.
    \534\ See id. at 50173 n.31 and accompanying text; see also id. 
at 50184 n.162.
---------------------------------------------------------------------------

    The proposed rule change would replace FINRA Rules 12805's and 
13805's reference to FINRA Rule 2080 with an enumeration of the 
specific grounds identified in FINRA Rule 2080(b)(1) (i.e., factual 
impossibility, mistake, or falsity). FINRA stated that the proposed 
rule change thus would codify, in the Codes, the grounds identified in 
FINRA Rule 2080(b)(1) as the exclusive grounds upon which an 
arbitration panel may issue an award containing expungement of customer 
dispute information from the CRD system.\535\
---------------------------------------------------------------------------

    \535\ See id. at 50184 n.162 and accompanying text.
---------------------------------------------------------------------------

    In FINRA's view, both FINRA and the Commission historically have 
treated the grounds in Rule 2080(b)(1) as the exclusive grounds upon 
which expungement may be awarded.\536\ Consistent with this view, the 
proposed rule change, in addition to codifying the FINRA Rule 
2080(b)(1) grounds as the exclusive grounds upon which a panel may base 
an expungement award, would also state that a panel shall not issue, 
and the Director shall not serve, an award containing expungement 
relief based on grounds other than those in proposed Rules 
12805(c)(8)(A)(i) and 13805(c)(9)(A)(i).\537\ Three commenters 
supported these proposed changes to FINRA Rules 12805 and 13805.\538\ 
Two of these commenters stated that the required grounds for issuing an 
expungement award would help ensure that expungement is an 
extraordinary remedy.\539\ The third commenter reasoned that the 
proposed rule change should drive outcomes that are more consistent 
with the limited circumstances under which expungement can be granted 
and favors consistency in the expungement process.\540\
---------------------------------------------------------------------------

    \536\ See id. at 50173 n.31 (citing, among other things, 
Exchange Act Release No. 58886 (Oct. 30, 2008), 73 FR 66086, 66087 
(Nov. 6, 2008) (Order Approving File No. SR-FINRA-2008-010) (stating 
that new Rules 12805 and 13805 require the arbitration panel to 
indicate ``which of the grounds for expungement in Rule 
[2080](b)(1)(A)-(C) serves as the basis for the expungement'') and 
Regulatory Notice 08-79 (December 2008) (stating that ``[t]he 
arbitration panel must indicate which of the grounds for expungement 
under Rule [2080](b)(1)(A)-(C) serve as the basis for their 
expungement order'')). Id. See also FINRA November 10 Letter at 13-
14 and 14 n.62; see also FINRA April 3 Letter at 16.
    \537\ See proposed Rules 12805(c)(8)(A)(ii) and 
13805(c)(9)(A)(ii).
    \538\ See Cambridge at 2-3; Cornell at 4; St. John's at 3.
    \539\ See Cornell at 4; St. John's at 3.
    \540\ See Cambridge at 2.
---------------------------------------------------------------------------

    One commenter objected to this provision of the proposed rule 
change, positing that FINRA should not limit the grounds for when 
arbitrators can recommend expungement to those contained in current 
Rule 2080(b)(1), incorporated into proposed Rule 12805 and 13805, but 
should also allow arbitrators to recommend expungement on the grounds 
contained in Rule 2080(b)(2) by also incorporating those grounds into 
the proposed rule change.\541\ The commenter stated that the current 
grounds for granting expungement under FINRA rules are not limited to 
the three grounds listed in Rule 2080(b)(1) (i.e., factual 
impossibility, mistake, or falsity), but also include the grounds 
listed in Rule 2080(b)(2) (i.e., (1) the expungement and accompanying 
findings on which it is based are meritorious and (2) expungement would 
have no material adverse effect on investor protection, the integrity 
of the information in the CRD system, or regulatory requirements).\542\ 
Accordingly, and notwithstanding prior FINRA guidance purporting to 
limit the grounds upon which a panel may grant expungement to those 
contained Rule 2080(b)(1), in the commenter's view arbitrators may also 
award expungement based on Rule 2080(b)(2).\543\ The commenter 
disagreed with FINRA's position that subsection (b)(2) only provides 
factors for FINRA to consider in deciding whether to waive the 
obligation to name FINRA as a party in a court petition for expungement 
relief. Instead, the commenter stated that Rules 2080(b)(1) and 
2080(b)(2) operate in the same manner and that Rule 2080(b)(2) provides 
additional grounds on which a panel may base an expungement award.\544\ 
In support of its recommendation, the commenter argued that failing to 
permit expungement on the grounds contained in Rule 2080(b)(2) would 
result in meritorious expungement requests being rejected, leading to 
inaccurate and misleading information remaining in the CRD system.\545\ 
The commenter further stated that FINRA has not justified limiting the 
grounds upon which expungement may be awarded to those contained in the 
proposed rule change (i.e., the grounds in Rule 2080(b)(1)).\546\ The 
commenter added that the proposed rule change is inconsistent with the 
Exchange Act because FINRA: (1) circumvented the proper rulemaking 
process by failing to provide adequate notice that it was proposing a 
significant rule change to limit the expungement grounds to Rule 
2080(b)(1) or an opportunity for comment; \547\ and (2) failed to 
provide any cost-benefit analysis, or other justification, to support 
limiting the grounds for expungement to those under Rule 
2080(b)(1).\548\
---------------------------------------------------------------------------

    \541\ See SIFMA September 2 Letter at 4-6; see also letter from 
Kevin M. Carroll, Managing Director and Associate General Counsel, 
Securities Industry and Financial Markets Association, to the 
Commission, dated December 7, 2022 (``SIFMA December 7 Letter'') 
(expanding on its argument that the proposed rule change should 
permit arbitrators to recommend expungement if they find the grounds 
contained in Rule 2080(b)(2), in addition to Rule 2080(b)(1), in 
response to FINRA November 10 Letter); Del Toro (arguing that 
``[e]xpungement awards based solely on Rule 2080(b)(2) are rare, but 
they are nevertheless allowed under the current rules'').
    \542\ See SIFMA September 2 Letter at 3-4 (quoting FINRA Rules 
12805 and 13805); SIFMA December 7 Letter at 2.
    \543\ See SIFMA September 2 Letter at 2-4; SIFMA December 7 
Letter at 2.
    \544\ See SIFMA September 2 Letter at 4; SIFMA December 7 Letter 
at 2.
    \545\ See SIFMA September 2 Letter at 5-6; SIFMA December 7 
Letter at 3.
    \546\ See SIFMA September 2 Letter at 4-6; SIFMA December 7 
Letter at 3; Del Toro (stating that ``FINRA Rule 2080 is a 
substantive rule and its modification requires a comprehensive 
rulemaking process through which FINRA must provide justification 
for making said change. FINRA has provided no such justification 
here,'' and ``[FINRA] provides no evidence or data suggesting that 
arbitrators are applying an incorrect standard in arbitration 
cases'').
    \547\ See SIFMA December 7 Letter at 2; see also SIFMA September 
2 Letter at 4, 10; Del Toro (stating that ``some of the Proposal[']s 
changes result in the indirect abrogation of FINRA Rule 2080(b)(2) 
through a procedural rule change'').
    \548\ See SIFMA December 7 Letter at 3.

---------------------------------------------------------------------------

[[Page 24315]]

    FINRA disagreed with the commenter, stating that Rules 12805 and 
13805 and their rulemaking history and related guidance establish that 
arbitrators in the forum are currently limited to the grounds 
enumerated in FINRA Rule 2080(b)(1)(A)-(C) when awarding 
expungement.\549\ According to FINRA, the plain language of current 
FINRA Rules 12805 and 13805 is consistent with FINRA's position that, 
currently, FINRA Rule 2080(b)(1) lists the exclusive grounds upon which 
a panel may award expungement.\550\ Specifically, FINRA stated that 
current FINRA Rules 12805 and 13805 describe what ``the panel must'' do 
in order to grant expungement of customer dispute information, and only 
FINRA Rule 2080(b)(1) describes grounds upon which arbitrators may 
grant expungement in the forum.\551\ By contrast, Rule 2080(b)(2) 
provides a general standard for FINRA to consider in making its own 
regulatory determination in extraordinary circumstances when the court 
or arbitrator makes findings ``other than those described in 
[2080](b)(1)].'' \552\ According to FINRA, as a result, the language in 
current FINRA Rules 12805 and 13805 requiring the panel to ``[i]ndicate 
in the arbitration award which of the Rule 2080 grounds for expungement 
serve(s) as the basis for its expungement order'' is properly 
understood as referring only to the grounds listed in paragraph (b)(1), 
as those are the only specific grounds listed in FINRA Rule 2080 that a 
panel could affirmatively find in making an expungement 
determination.\553\
---------------------------------------------------------------------------

    \549\ See FINRA November 10 Letter at 12-15; see also FINRA 
April 3 Letter at 15-16.
    \550\ See FINRA November 10 Letter at 14.
    \551\ See id. at 14-15.
    \552\ See id. at 14.
    \553\ See id. at 15.
---------------------------------------------------------------------------

    FINRA further stated that by approving FINRA Rule 2080 and FINRA 
Rules 12805 and 13805, the Commission demonstrated its expectation that 
a panel should indicate in the arbitration award which of the grounds 
for expungement in Rule 2080(b)(1)(A)-(C) serves as the basis for the 
expungement order.\554\ According to FINRA, the Commission thus 
``explicitly approved the FINRA Rule 2080(b)(1) limitation.'' \555\
---------------------------------------------------------------------------

    \554\ Id. at 13-14 (citing Exchange Act Release No. 58886 
(October 30, 2008), 73 FR 66086, 66087 (November 6, 2008) (Order 
Approving File No. SR-FINRA-2008-010)).
    \555\ Id. at 14 (citing Exchange Act Release No. 58886 (October 
30, 2008), 73 FR 66086, 66087 (November 6, 2008) (Order Approving 
File No. SR-FINRA-2008-010)).
---------------------------------------------------------------------------

    FINRA also disagreed with the commenter that not permitting 
expungement on Rule 2080(b)(2) grounds would lead to inaccurate and 
misleading information in the CRD system.\556\ On the contrary, FINRA 
stated that it believes that allowing arbitrators in the forum to issue 
awards containing expungement relief by applying an ``equitable'' 
standard would not sufficiently protect the integrity of the 
information in the CRD system, as, in FINRA's view, any removal of 
information from the CRD system should be based on specific, enumerated 
standards, such as those provided in FINRA Rule 2080(b)(1).\557\ If 
FINRA were to change course and expand the grounds for expungement to 
allow for (b)(2) grounds, as advocated by the commenter, FINRA believes 
it would inappropriately broaden the grounds for expungement to allow 
for removal of dispute information beyond the extraordinary 
circumstances in which expungement is appropriate.\558\ In particular, 
whereas (b)(1) identifies specific grounds for expungement, the (b)(2) 
grounds are entirely open ended, as they refer only to grounds ``other 
than those described'' in (b)(1).\559\
---------------------------------------------------------------------------

    \556\ See id. at 12-13.
    \557\ See id.
    \558\ See FINRA November 10 Letter at 12-17; see also FINRA 
April 3 Letter at 16-17.
    \559\ See FINRA November 10 Letter at 12-17; see also FINRA 
April 3 Letter at 16-17.
---------------------------------------------------------------------------

    In response to the commenter's assertion that FINRA has not 
justified the proposed rule changes, FINRA reiterated its view, stated 
in the Notice, that the proposed rule changes would further protect the 
integrity of the information in the CRD system.\560\ FINRA stated the 
proposed rule changes would reinforce that expungement is appropriate 
only in extraordinary circumstances by specifying in the Codes the 
narrow grounds that arbitrators must find in issuing an award 
containing expungement relief.\561\ FINRA stated that amending Rules 
12805 and 13805 to codify the three narrow grounds in Rule 2080(b)(1) 
as the only grounds on which arbitrators may determine to award 
expungement relief best aligns with FINRA's position that its 
expungement framework should allow for the removal of customer dispute 
information from the CRD system only in extraordinary circumstances in 
accordance with FINRA's rules.\562\ These three narrow grounds, in 
FINRA's view, fairly address the circumstances in which an associated 
person would appropriately seek expungement of customer dispute 
information in the DRS arbitration forum.\563\ In addition, FINRA 
stated that allowing expungement only in these extraordinary 
circumstances would continue to balance the competing interests of 
providing regulators with broad access to information about customer 
disputes to fulfill their regulatory obligations, providing a fair 
process that recognizes an associated person's interest in protecting 
their reputation, and ensuring investors have access to accurate 
information about associated persons with whom they may decide to do 
business.\564\ Furthermore, FINRA stated that is has undertaken an 
economic impact assessment to analyze the regulatory need for the 
proposed rule change, its potential economic impacts, including 
anticipated costs, benefits and distributional and competitive effects, 
relative to the current baseline, and the alternatives FINRA considered 
in assessing how best to meet FINRA's regulatory objectives.\565\
---------------------------------------------------------------------------

    \560\ See FINRA November 10 Letter at 12, 16; see also FINRA 
April 3 Letter at 17; see also Notice at 50186.
    \561\ See FINRA November 10 Letter at 12, 16; see also FINRA 
April 3 Letter at 16.
    \562\ See FINRA April 3 Letter at 16.
    \563\ See id. at 16-17.
    \564\ See id. at 17.
    \565\ See id. (citing Notice at 50189-50198).
---------------------------------------------------------------------------

    Finally, FINRA also disagreed with the commenter's assertion that 
FINRA has not provided adequate notice or opportunity for public 
comment of its intent to amend FINRA Rules 12805 and 13805 to codify 
the exclusive grounds upon which an arbitration panel may issue an 
award containing expungement of customer dispute information from the 
CRD system.\566\ FINRA stated that by proposing the proposed rules it 
has solicited comment on the proposed rule change, which FINRA stated 
clearly articulates the amendment and the basis for it.\567\ In 
addition, FINRA stated that it had also previously solicited comment in 
Regulatory Notice 17-42.\568\ According to FINRA, adequate notice and 
opportunity for comment in this instance is demonstrated by publication 
of the proposed rules explaining the reasons for the proposed rule 
change, the commenter's comment letters in response to the proposed 
rules, and FINRA's consideration of and responses to comments.\569\
---------------------------------------------------------------------------

    \566\ See FINRA November 10 Letter at 16; see also FINRA April 3 
Letter at 17.
    \567\ See FINRA November 10 Letter at 16; see also FINRA April 3 
Letter at 17.
    \568\ See FINRA November 10 Letter at 16.
    \569\ See FINRA April 3 Letter at 17.
---------------------------------------------------------------------------

    The Commission's order approving Rules 12805 and 13805 stated that 
``in order to grant expungement of customer dispute information under 
Rule [2080], the panel must . . . indicate in the arbitration award 
which of the grounds

[[Page 24316]]

for expungement in Rule [2080](b)(1)(A)-(C) serves as the basis for the 
expungement order.'' \570\ The proposed rule change would codify 
FINRA's intended exclusive grounds for expungement. Codifying in FINRA 
Rules 12805 and 13805 the grounds enumerated in Rule 2080(b)(1) as the 
only grounds on which an arbitrator may recommend expungement would 
give arbitrators a clear mandate. It would resolve any potential 
uncertainty regarding the applicability of FINRA Rule 2080(b)(2) as an 
appropriate ground upon which arbitrators may issue awards containing 
expungement relief. Moreover, consistent with FINRA guidance, it would 
help ensure that arbitrators recommend expungement only as an 
extraordinary remedy in the extraordinary circumstances of factual 
impossibility, mistake, or falsity.
---------------------------------------------------------------------------

    \570\ Id. The Commission's approval order also similarly 
describes FINRA's response to comments as stating ``that the 
proposal requires arbitrators to evaluate fully whether the party 
requesting expungement either in arbitration or in connection with a 
settlement agreement has met the criteria promulgated under Rule 
[2080](b)(1)(A)-(C).'' Id.
---------------------------------------------------------------------------

    The proposed rule change would also help protect the integrity of 
information in the CRD system by helping ensure that expungement 
remains an extraordinary remedy limited to narrow, enumerated 
circumstances. The Commission also believes that FINRA's decision to 
limit the grounds for expungement to those enumerated in Rule 
2080(b)(1) is appropriate. Because Rule 2080(b)(2) describes a general 
standard for FINRA to consider in determining whether or not to waive 
an associated person's obligation to name FINRA as a party when seeking 
judicial confirmation of an expungement award, including Rule 
2080(b)(2)'s standard would make the type of information that could be 
expunged broader and less foreseeable and thus risk undermining the 
integrity of the information in the CRD system.\571\
---------------------------------------------------------------------------

    \571\ Although FINRA Rule 2080(b)(2) states that FINRA ``in its 
sole discretion and in extraordinary circumstances'' may waive an 
associated person's obligation to name FINRA as a party when seeking 
judicial confirmation of an expungement award where FINRA 
``determines that . . . the expungement relief and accompanying 
findings on which it is based are meritorious'' and ``would have no 
material adverse effect on investor protection, the integrity of the 
CRD system or regulatory requirements,'' these ``extraordinary 
circumstances'' are not further delineated by the rule and are at 
FINRA's discretion. By contrast, proposed Rules 12805 and 13805 
would specifically identify the extraordinary circumstances in which 
a panel may award expungement--factual impossibility, mistake, or 
falsity.
---------------------------------------------------------------------------

    Further, in contrast to the commenter's statement, FINRA provided 
justification to support limiting the grounds for awarding expungement 
to those under Rule 2080(b)(1). In its filing, FINRA details the 
economic impact analyzing ``the regulatory need for the proposed rule 
change, its potential economic impacts, including anticipated costs, 
benefits and distributional and competitive effects, relative to the 
current baseline, and the alternatives FINRA considered in assessing 
how best to meet [its] regulatory objectives.'' \572\ FINRA's analysis 
covers the potential economic impact of the entire proposed rule 
change, including proposed Rules 12805(c)(8)(A) and 
13805(c)(9)(A).\573\ Thus, FINRA's economic analysis addressed its 
codification, in the Codes, of the grounds identified in FINRA Rule 
2080(b)(1) as the exclusive grounds upon which an arbitration panel may 
issue an award containing expungement of customer dispute information 
from the CRD system.
---------------------------------------------------------------------------

    \572\ Notice at 50189-98.
    \573\ See id.
---------------------------------------------------------------------------

    Furthermore, as stated above, BrokerCheck helps investors make more 
informed choices about the associated persons and broker-dealer firms 
with whom they may conduct business. Since the information on 
BrokerCheck is populated by information from CRD, the integrity of the 
information investors use to make their investment decisions is 
dependent on the integrity of the information in the CRD system. An 
expungement process limited to clear, enumerated standards helps ensure 
that factually impossible, mistaken, or false information can be 
removed from the CRD system, while also decreasing the likelihood that 
arbitrators award expungement on unforeseen or unsound grounds to the 
detriment of the quality of information in the CRD system. In light of 
this, the Commission believes that FINRA has appropriately balanced the 
investor protection benefits of the proposed rule change against the 
potential harm to associated persons, and that FINRA has reasonably 
considered the impacts of the proposed rule change as outlined in its 
economic impact analysis and its response to comments.
    Finally, Section 19(b) of the Act,\574\ and Rule 19b-4 
thereunder,\575\ set forth the requirements for notice and comment for 
an SRO proposed rule change. That process was followed for this 
proposed rule change. The Notice articulated FINRA's proposed rule 
change, as well as its bases for it. In response, the Commission 
received forty-five comment letters including from commenters 
expressing concern about the proposed codification of Rule 2080(b)(1)'s 
grounds for expungement. On November 10, 2022, FINRA responded to those 
commenters and filed Amendment No. 1, modifying the original proposed 
rule change. In the Order Instituting Proceedings, the Commission 
noticed Amendment No. 1 and requested comment on the proposed rule 
change, as modified. In response, the Commission received seven comment 
letters including from commenters expressing concern about the proposed 
codification of Rule 2080(b)(1)'s grounds for expungement.
---------------------------------------------------------------------------

    \574\ 15 U.S.C. 78s(b)(1).
    \575\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

9. Evidentiary Weight of Decision of Customer or Authorized 
Representative Not To Attend or Participate
    Originally, the proposed rule change would have included an 
instruction for arbitration panels that the decision of a customer or 
an authorized representative of state securities regulators not to 
attend or participate in the expungement hearing would not be material 
to the determination of whether expungement is appropriate.\576\ One 
commenter suggested that FINRA amend the proposed rule change to state 
clearly that arbitrators must give no weight to such decisions.\577\ 
FINRA agreed that a customer's or an authorized representative's 
decision not to attend or participate should not be given any 
evidentiary weight by the panel when making the expungement 
determination, and accordingly amended the proposed rule change to 
clarify this position.\578\
---------------------------------------------------------------------------

    \576\ See Notice at 50184.
    \577\ See NASAA September 6 Letter at 5.
    \578\ See FINRA November 10 Letter at 11 and Amendment No. 1.
---------------------------------------------------------------------------

    As amended, the proposed rule change states that a panel shall not 
give any evidentiary weight to a decision by a customer or an 
authorized representative not to attend or participate in an 
expungement hearing when making a determination of whether expungement 
is appropriate.\579\ FINRA stated that it is aware that some panels 
have indicated in expungement awards that a customer did not appear at 
the expungement hearing.\580\ But, FINRA stated that it believes that a 
customer or an authorized representative may not attend, participate in 
or appear at an expungement hearing for a variety of reasons that may 
be unrelated to the merits of the expungement request and thus it 
should not be considered by the panel when deciding a request for

[[Page 24317]]

expungement.\581\ Three commenters supported the amendment.\582\ The 
Commission received no comment letters opposing the amendment.
---------------------------------------------------------------------------

    \579\ See proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C).
    \580\ See Notice at 50184-85.
    \581\ See id.; see also FINRA November 10 Letter at 10-11.
    \582\ See PIABA Foundation December 7 Letter at 2; PIABA 
December 7 Letter at 2; NASAA December 7 Letter at 2.
---------------------------------------------------------------------------

    The Commission agrees that customers or authorized representatives 
of a state securities regulator may decide not to appear for a variety 
of reasons unrelated to the merits of an expungement request and that 
FINRA reasonably determined that such a decision by a customer or an 
authorized representative should not be given weight by the panel 
assessing the request.
10. Forum Fees
    The proposed rule change would retain the current requirement that 
the panel must assess against the parties requesting expungement all 
forum fees for each hearing in which the sole topic is the 
determination of the appropriateness of expungement.\583\
---------------------------------------------------------------------------

    \583\ See proposed Rules 12805(c)(9) and 13805(c)(10); see also 
FINRA Rules 12805(d) and 13805(d).
---------------------------------------------------------------------------

    One commenter characterized the existing minimum member surcharge 
and process fees that would be assessed to firms if an associated 
person files a straight-in request, following an arbitration that 
closes other than by award or closes by award without a hearing, as 
``duplicative'' and suggested that these fees be eliminated.\584\ 
According to this commenter, in a customer arbitration that closes 
other than by award or by award without a hearing, the member firm 
would have already paid the member surcharge and processing fee for 
using the forum.\585\ The member would then have to pay again if named 
in a subsequent straight-in request.\586\ Another commenter stated 
similarly that where firms have already paid the fee in the original 
matter, associated persons should not then be required to pay another 
full fee for expungement requests.\587\
---------------------------------------------------------------------------

    \584\ See SIFMA September 2 Letter at 9.
    \585\ See id.
    \586\ See id.
    \587\ See FSI at 6.
---------------------------------------------------------------------------

    In response, FINRA stated that the member surcharge and process 
fees that a member firm would be assessed if an associated person files 
a straight-in request are not duplicate fees.\588\ FINRA stated it is 
appropriate to assess these fees for straight-in requests because such 
requests initiate separate arbitrations seeking different relief--
namely, expungement.\589\ FINRA also stated that if the associated 
person, or the requesting party in the case of an on-behalf-of request, 
files a straight-in request after having previously paid the filing fee 
to request expungement of the same customer dispute information during 
a customer arbitration that settles or is dismissed, FINRA would not 
assess a second filing fee when the associated person files the 
straight-in request.\590\ Moreover, FINRA explained that, in instances 
in which DRS's fees may be challenging to pay due to financial 
hardship, the Director has the authority to defer payment of all or 
part of an associated person's filing fee on a showing of financial 
hardship.\591\
---------------------------------------------------------------------------

    \588\ See FINRA November 10 Letter at 31.
    \589\ See id.
    \590\ See id. at 32; see also Notice at 50179 n.95.
    \591\ See FINRA November 10 Letter at 6.
---------------------------------------------------------------------------

    FINRA may reasonably assess member surcharge and process fees for 
straight-in requests. Straight-in requests are separate arbitrations 
before a separate panel of specially trained arbitrators. Proceedings 
have costs and it is appropriate that FINRA would require the parties 
generating those costs to pay them.\592\
---------------------------------------------------------------------------

    \592\ Any such fee filings must be filed pursuant to Section 
19(b) and Rule 19b-4, and must be consistent with all the relevant 
statutory and rule requirements.
---------------------------------------------------------------------------

11. Director's Authority To Deny the Forum
    The proposed rule change would require the Director to decline the 
use of the DRS arbitration forum if an associated person files an 
expungement request that the Director determines is ineligible for 
arbitration under proposed Rules 12805 and 13805.\593\ The proposed 
rule change would also provide the Director with authority to decline 
the use of the DRS arbitration forum if the Director determines that 
the expungement request was not filed under, or considered in the DRS 
arbitration forum in accordance with, proposed Rules 12805 or 
13805.\594\ FINRA stated that the proposed rule change would help 
ensure additional safeguards around the expungement process by 
expanding the circumstances in which the Director is authorized to deny 
the DRS arbitration forum.\595\
---------------------------------------------------------------------------

    \593\ See proposed Rules 12203(b) and 13203(b). For example, 
FINRA stated that under the proposed rule change the Director would 
decline the use of the DRS arbitration forum if: (1) an expungement 
request is ineligible under the proposed time limitations; (2) a 
panel has previously considered the merits of, or a court has 
previously decided, an expungement request associated with the same 
customer dispute information; (3) an associated person was named as 
a respondent in a customer arbitration but did not request 
expungement; (4) an associated person requested expungement but 
withdrew or did not pursue the expungement request; or (5) a party 
to a customer arbitration requested expungement on behalf of an 
unnamed person but the party withdrew or did not pursue an 
expungement request on behalf of the unnamed person. See Notice at 
50182.
    \594\ See proposed Rules 12203(c) and 13203(c). For example, 
FINRA stated that the Director may decline the use of the DRS 
arbitration forum if the Director determines that: (1) a panel is 
proposing to issue an award containing expungement of customer 
dispute information other than pursuant to proposed Rules 12805, 
12800(d) and (e) or 13805, as applicable; or (2) an associated 
person seeks expungement of customer dispute information other than 
pursuant to proposed Rules 12805, 12800(d) and (e) or 13805, as 
applicable. See Notice at 50182.
    \595\ See Notice at 50182.
---------------------------------------------------------------------------

    No commenter supported or objected to these proposed changes. The 
Commission believes that providing the Director with the authority to 
deny the use of the DRS arbitration forum should enhance the integrity 
of the expungement process and the CRD system.

E. Notifications to Customers and States Regarding Expungement Requests

1. Associated Persons Notify Customers
    The proposed rule change would codify a practice from the Guidance 
to require the associated person who files a straight-in request to 
serve all customers whose customer arbitrations, civil litigations, and 
customer complaints are a subject of the expungement request with a 
copy of the statement of claim requesting expungement and any 
answer.\596\ The panel would be authorized to decide whether 
extraordinary circumstances exist that make service on the customers 
impracticable.\597\ The proposed rule change would further require the 
associated person to file with the panel proof of service for the 
statement of claim and any answers, copies of all documents provided by 
the associated person to the customers, and copies of all 
communications sent by the associated person to the customers and any 
responses received from the customers.\598\ FINRA stated that these 
proposed rule changes would help ensure that a customer knows about the 
expungement request and has an opportunity to attend and participate in 
the expungement hearing.\599\
---------------------------------------------------------------------------

    \596\ See proposed Rule 13805(b)(1)(A)(i) and (ii). Proposed 
Rule 13805(b)(1)(A)(ii) would require the associated person to serve 
a copy of the statement of claim and a copy of any answer within 10 
days of filing.
    \597\ See proposed Rule 13805(b)(1)(A)(i).
    \598\ See proposed Rule 13805(b)(1)(A)(iv).
    \599\ See Notice at 50185.
---------------------------------------------------------------------------

    Three commenters supported this aspect of the proposed rule 
change.\600\ Two commenters reasoned that the notification requirement 
would

[[Page 24318]]

encourage customer participation and reduce unopposed expungement 
hearings.\601\ For the same reasons, one of these commenters further 
supported the requirement that the associated person file proof of 
service and copies of all communications with the panel.\602\
---------------------------------------------------------------------------

    \600\ See Cornell at 3; NASAA September 6 Letter at 4; St. 
John's at 3.
    \601\ See Cornell at 3; St. John's at 3.
    \602\ See Cornell at 3.
---------------------------------------------------------------------------

    The proposed customer notification provision will help ensure that 
customers are aware of expungement requests and have an opportunity to 
participate. Further, requiring filing of proof of service and any 
communications will help ensure that customers are notified in 
accordance with the proposed rule change and that customers are not 
inappropriately dissuaded from participating in an expungement 
proceeding. Under these proposed rule changes, customers should be more 
likely to participate in a hearing to decide an expungement request, 
which helps ensure that the panel has a more fully formed set of 
evidence upon which to base its decision. With this additional 
information, the panel should be more likely to award expungement only 
when appropriate, thereby helping protect the integrity of the 
information in the CRD system.
2. Director Notifies Customers
    To facilitate customer notification of an expungement request, 
proposed Rule 13805(b)(1)(B)(i) would require an associated person to 
include in any request to expunge customer dispute information a 
current address for the relevant customer.\603\ To help ensure an 
associated person complies with this proposed obligation, proposed Rule 
13307(a)(7) would provide that an expungement request that does not 
include such address is ``deficient,'' and the Director may not serve 
any expungement request that does not include such address, the effect 
being that such request would not move forward.\604\
---------------------------------------------------------------------------

    \603\ See proposed Rule 13805(b)(1)(B)(i).
    \604\ Specifically, under proposed Rule 13307(a)(7), a request 
for expungement that does not include a current address for the 
customer would be considered deficient. Pursuant to FINRA Rule 
13307(a), the Director will not serve a deficient claim, effectively 
halting the expungement request until the deficiency is corrected. 
See also FINRA Rule 13302.
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    Proposed Rule 13805(b)(1)(B)(i) would require the Director to 
notify all customers whose customer arbitrations, civil litigations, or 
customer complaints are the subject of an expungement request of the 
time, date, and place of any prehearing conferences and the expungement 
hearing. FINRA stated that this proposed notification requirement would 
facilitate customer participation in the expungement process by 
providing the customer the time to plan and prepare for the 
hearing.\605\ The proposed rule change would also require the Director 
to: (1) include language in the notice encouraging the customer to 
attend and participate; and (2) provide the notified customers with 
access to all documents on the Portal relevant to the expungement 
request that are filed in: (a) the arbitration requesting expungement 
relief and (b) a customer-initiated arbitration brought by the customer 
under the Customer Code that is a subject of the expungement 
request.\606\
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    \605\ See Notice at 50185.
    \606\ See proposed Rule 13805(b)(1)(B)(ii); see also Notice at 
50185; see also supra notes 86 and 184 and accompanying text 
(discussing the Portal).
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    Three commenters recommended amendments to these provisions.\607\ 
One of these commenters argued that for logistics reasons, customers 
should only be notified once for the pre-hearing conference and should 
not be notified again for the expungement hearing.\608\ Another 
commenter recommended that the proposed rule change be amended to 
provide that FINRA ``will `deliver' the relevant documents to customers 
upon request,'' rather than providing customers with ``access.'' \609\ 
The third commenter recommended that FINRA amend the rule to allow 
firms to provide the customer's last known address instead of the 
current address, stating that an error in the listed current address in 
the petition for expungement, after the appropriate diligence and 
attempts to correct the error, should not preclude the filing and 
granting of the expungement request.\610\
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    \607\ See Grebenik; NASAA September 6 Letter at 4; Del Toro.
    \608\ See Grebenik.
    \609\ See NASAA September 6 Letter at 4.
    \610\ See Del Toro.
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    With respect to the notification requirements, FINRA stated that 
customer attendance and participation in expungement hearings helps the 
panel fully develop a record on which to decide the expungement 
request.\611\ FINRA further stated that the associated person seeking 
expungement should provide the customer's current address, so that the 
Director will have the most recent contact information to timely notify 
the customer of the expungement request, prehearing conferences, and 
expungement hearings.\612\ FINRA accordingly declined to amend the 
proposed rule change in response to these comments.\613\
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    \611\ See FINRA April 3 Letter at 12.
    \612\ See id. at 7.
    \613\ See id. at 8, 12-13.
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    FINRA likewise declined to amend the proposed rule change in 
response to one commenter's suggestion that FINRA ``will deliver'' 
materials on request, rather than providing access.\614\ FINRA 
responded that these changes were unnecessary because the Portal 
currently helps ensure that customers receive necessary notifications 
regarding their arbitration and mediation cases.\615\ FINRA stated that 
it provides case participants with access to documents through the 
Portal. FINRA explained that once registered on the Portal, a customer 
may, among other things, view documents and submit documents to FINRA 
and, for those customers who are unable to access the Portal, DRS would 
provide paper documents upon request.\616\
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    \614\ See id. at 12-13; see also supra notes 86 and 184 and 
accompanying text (discussing the Portal).
    \615\ See FINRA November 10 Letter at 10.
    \616\ See id.
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    The proposed rule change related to customer notification would 
help ensure that customers are notified of expungement requests and 
able to access related necessary documents. The requirement that an 
associated person include a current address for the relevant customer 
would help ensure that customers are notified of expungement requests 
in a timely manner. Moreover, DRS will provide paper documents to 
customers that may not have the ability to access the Portal upon 
request. Notified customers would be more likely to participate in a 
hearing to decide an expungement request, which would help ensure that 
the panel has a more fully formed set of evidence upon which to base 
its decision. With this additional information, the panel is more 
likely to appropriately decide whether to award expungement, thereby 
helping protect the integrity of the information in the CRD system.
3. FINRA Notifies State Securities Regulators
    The proposed rule change would require FINRA to notify state 
securities regulators, in the manner to be determined by the Director 
in collaboration with state securities regulators, of an expungement 
request within 15 days of receiving an expungement request.\617\ FINRA 
stated that the proposed notification requirement would help ensure 
that

[[Page 24319]]

state securities regulators are timely notified of expungement 
requests.\618\
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    \617\ See proposed Rules 12800(f)(1), 12805(b) and 
13805(b)(2)(A). FINRA stated that it would make this notification in 
connection with expungement requests under the Customer and Industry 
Codes. See Notice at 50185 n.176.
    \618\ See Notice at 50185.
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    No commenter supported or objected to these proposed changes. Two 
commenters, however, recommended that FINRA take further action.\619\ 
One commenter suggested that FINRA consider notifying state securities 
regulators about separate, expungement-only hearings following a 
simplified arbitration.\620\ The other commenter suggested that FINRA 
provide notification to state securities regulators regarding 
expungement requests ``at the time when they have the ability to become 
involved--at the state court confirmation level.'' \621\
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    \619\ See Miami at 7; Hennion at 6.
    \620\ See Miami at 7.
    \621\ Hennion at 6.
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    In response, FINRA stated that FINRA Rule 2080 requires an 
associated person seeking to confirm an arbitration award containing 
expungement relief to name FINRA as an additional party unless this 
requirement is waived by FINRA.\622\ In addition, it is FINRA's 
practice to notify state regulators when it receives a complaint naming 
FINRA, or a request for a waiver.\623\ Furthermore, FINRA stated that 
it is not necessary for state securities regulators to participate in 
separate expungement-only hearings in simplified arbitrations because 
the panel already would have sufficient information upon which to 
develop a complete factual record in order to make a fully-informed 
decision on the expungement request.\624\ For example, expungement-only 
hearings in simplified arbitrations would occur after the arbitrator 
has heard the merits of the customer's case in an adversarial 
process.\625\ Similarly, FINRA stated that it expects an expungement-
only hearing to be scheduled shortly after the customer's dispute is 
decided or closes, increasing the likelihood of customer attendance and 
participation.\626\ Accordingly, FINRA did not amend the proposed rule 
change in response to these comments.\627\
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    \622\ See FINRA November 10 Letter at 8 n.33.
    \623\ See id.; see also FINRA Rule 2080.
    \624\ See FINRA November 10 Letter at 22.
    \625\ See id.
    \626\ See id.
    \627\ See id. at 22 and 8 n.33.
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    The Commission believes that notification to state securities 
regulators within 15 days of receiving an expungement request should 
provide adequate notice and, for straight-in requests, allow the state 
securities regulator to determine whether to participate in the 
expungement proceeding. As stated above, permitting attendance and 
participation by state securities regulators in straight-in expungement 
proceedings should enhance the straight-in expungement process. 
Specifically, inclusion of state securities regulators provides them 
the opportunity to fulfill their own regulatory obligations, while at 
the same time increasing the likelihood that the panel in an 
expungement proceeding that may not involve a customer will hear 
evidence from multiple viewpoints. With this additional information, 
the panel is more likely to award expungement only when appropriate, 
thereby helping protect the integrity of the information in the CRD 
system. The Commission also believes that panels deciding separate 
expungement-only hearings in simplified arbitrations should have 
sufficient information from the underlying claim to develop a complete 
factual record in order to make a fully-informed decision on the 
expungement request. In this way, the rule as proposed would help 
protect the integrity of the information in the CRD system. Finally, 
FINRA has stated that it will continue to monitor the expungement 
process to evaluate whether additional rule changes may be necessary to 
further strengthen the expungement process, including whether to allow 
state securities regulators to attend and participate in separate 
expungement-only hearings in simplified arbitrations.\628\
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    \628\ See FINRA April 3 Letter at 18-19.
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IV. Solicitation of Comments on Amendment No. 2

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 2 is consistent with the 
Act. Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2022-024 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2022-024. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of FINRA. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2022-024 and should be submitted 
on or before May 10, 2023.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendments Nos. 1 and 2

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendments Nos. 1 and 2, prior to the thirtieth 
day after the date of publication of notice of the filing of Amendment 
No. 2 in the Federal Register.\629\ In Amendment No. 2, FINRA modified 
the proposed rule change to provide that an associated person would be 
precluded from filing a straight-in request if the customer dispute 
information involves the same conduct that was the basis of a final 
regulatory action taken by a securities regulator or SRO. The basis for 
extending this prohibition is the same as the basis for the original 
proposed rule change prohibiting an associated person from filing a 
straight-in request if the customer dispute information is associated 
with a finding of liability in an arbitration or civil litigation--
permitting an expungement claim in these circumstances would constitute 
a collateral attack on the results of the underlying resolved dispute.
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    \629\ See 15 U.S.C. 78s(b)(2)(C)(iii).
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    After consideration of the comments FINRA received on the proposed 
rule change, the Commission believes that Amendment No. 2 represents a

[[Page 24320]]

reasonable extension of, and is substantially similar to, the original 
prohibition of an associated person filing a straight-in request where 
the customer dispute information formed the basis for a past finding of 
liability and is appropriate and responsive to commenter's concerns. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\630\ to approve the proposed rule change, as 
modified by Amendments Nos. 1 and 2, on an accelerated basis.
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    \630\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    For the reasons set forth above, the Commission finds that the 
proposed rule change, as modified by Amendments Nos. 1 and 2, is 
consistent with the provisions of Exchange Act Section 15A(b)(6),\631\ 
which requires, among other things, that FINRA rules must be designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, and, in general, to protect 
investors and the public interest. The Commission also finds that the 
proposed rule change is consistent with Section 15A(b)(5) of the 
Exchange Act,\632\ which requires, among other things, that FINRA rules 
provide for the equitable allocation of reasonable dues, fees and other 
charges among members and issuers and other persons using any facility 
or system that FINRA operates or controls.
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    \631\ 15 U.S.C. 78o-3(b)(6).
    \632\ 15 U.S.C. 78o-3(b)(5).
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    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \633\ that the proposed rule change (SR-FINRA-2022-024), 
as modified by Amendments Nos. 1 and 2, be, and hereby is, approved on 
an accelerated basis.
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    \633\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\634\
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    \634\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-08147 Filed 4-18-23; 8:45 am]
BILLING CODE 8011-01-P