FINRA’s New Expungement Rule and Arbitrator Training

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If you have any active FINRA cases, you likely received a flurry of updated arbitrator disclosures in the last couple of weeks identifying that the arbitrator has completed an “enhanced expungement training.” If you are wondering what this is all about, FINRA has modified its expungement rules—although they have not yet taken effect and do not yet have an effective date—and is requiring a new “enhanced” training for arbitrators—which arbitrators are now actively completing. FINRA practitioners and entities appearing before FINRA should make sure they know about the new rules and their impact on associated persons, as well as the instructions being provided to arbitrators in the enhanced training and how that may impact existing cases.

Critical Takeaways:

• If an associated person is named in the arbitration she must request expungement in that action or be barred from doing so in the future (unless it is a simplified case in which case it is optional)
• Unnamed associated person whose conduct is at issue can choose whether to request expungement in customer arbitration or “straight-in” method
• Expungement request in customer arbitration must be made in Answer or separate pleading at least 60 days before final hearing; if unnamed must also include consent form signed by associated person; in simplified case must be within 30 days of appointment of arbitrator
• Panel for customer arbitration must decide expungement request if it goes to final award (request cannot be withdrawn/abandoned once made)
• Panel for customer arbitration cannot decide expungement if it settles or is dismissed prior to final award (it must then be converted to a “straight-in” request)
• Straight-in request must name brokerage firm associated with at time of conduct as respondent; cannot name customer as a respondent
• Cannot make straight-in request if expungement request previously denied or if there has been a finding of liability against the associated person
• Straight-in request decided by panel appointed by FINRA from special roster: three randomly selected, chair eligible, public arbitrators, with four customer decisions to award; parties cannot agree to change process or removal of any arbitrator; may only challenge for cause
• Customer and state regulators encouraged to actively participate
• Associated Person must appear either by video or in person at panel’s determination
• Panel decision on expungement must be unanimous and must include grounds and rationale as well as find no investor protection or regulatory value
• Not Retroactive: any disclosure in existence at time of rule effective date must be filed within two years (as long as eligible for arbitration), but will be under new rules administratively (“straight-in” request)
• Arbitrators encouraged to actively request evidence (document and testimony) from assorted person and brokerage firms
• FINRA emphasizing importance of eligibility rule to panels; encouraging sua sponte application

Discussion/Analysis

If you have been practicing in the FINRA forum for the last several years you have probably been involved in some way with an expungement claim. Customer complaint reporting and its related expungement issues have changed over time through revised rules, guidance, and training from FINRA. FINRA has once again modified the code as it relates to the expungement of customer dispute information. FINRA notes that when it developed Rule 2080 governing expungement, “it was contemplated that expungements would be an extraordinary remedy that would be allowed only in these limited circumstances,” namely where the information to be expunged is factually impossible, clearly erroneous or false, or that the associated person was not involved in the alleged misconduct.” FINRA’s comment suggests they are seeing expungements granted in broader circumstances than it believes appropriate. In addition, clearly prompting FINRA’s modification of the rules was the fact that 84% of “straight-in” expungement requests are being granted and more than 60% of the filed claims sought to expunge disclosures that were more than 6 years old. See SR-FINRA-2022-024 at 16 n. 27 and 21 n. 38.

The changes to the rules regarding expungement are significant:[1]

Expungement Requests in Connection with a Pending Arbitration (not simplified): An associated person named as a party must request expungement in that arbitration or will be barred from doing so later. The expungement request must be made in the Answer or in a separate formal pleading, filed no less than 60 days before the final hearing, for the purpose of requesting expungement (although an extension of this deadline may be requested by motion). A party may also file an “on behalf of” request. This would be where a firm requests expungement for the associated person whose conduct is at issue but was not named as a party. An “on behalf of” request remains permissive—the party may make the request but failure to do so in the arbitration does not prevent the associated person from separately requesting expungement of the matter. If an “on behalf of” request is made, the party and the associated person must sign documentation consenting to the request and that the party will be representing the unnamed person for purposes of the expungement request. The consent form confirms the unnamed person’s understanding that if the arbitration closes by award and expungement is not granted, they are barred from seeking expungement in a future proceeding. Perhaps the most significant change is that if the matter is settled, the Panel cannot consider the expungement request; instead, the associated person must then separately file a straight-in request.[2] The rule changes also bar an associated person from moving to intervene in a customer arbitration to seek expungement.

Simplified Cases: If the associated person is named, they may request expungement in the proceeding either in the answer or by separate pleading filed within 30 days of the date the arbitrator is appointed. Otherwise, they may utilize the “straight-in” request method. If the case is decided on the papers the arbitrator will issue two awards: an award on the customer case, then hold a hearing for purposes of expungement and issue a separate award on expungement.

Straight-In Requests: All other requests must be made via “straight-in” requests. The rule now requires that for straight-in requests the respondent party must be the brokerage firm with whom the person was associated during the conduct at issue and cannot be the customer. The contents of a straight-in request are the same as those presently in Rule 12805. Straight-in requests will all be decided by a three-person panel from the new “special roster” of arbitrators. The special roster includes only public arbitrators, who are chair-person eligible, that have completed the enhanced expungement training, and have served on customer panels through award on four cases.[3] The Panel for a straight-in request must be comprised of three arbitrators that are randomly appointed by FINRA. The parties cannot stipulate to removal of any of the arbitrators, however, a party may still challenge an arbitrator for cause.

A straight-in request is not permitted (1) where the customer arbitration, litigation or complaint is not closed; (2) if a panel or court previously found the person liable; (3) when an associated person was named but did not seek expungement in the arbitration. The new rules also add time limits: a request must be filed within two years after the arbitration or litigation closes or three years after the disclosure if there was not litigation/arbitration. For those disclosures made prior to the rule change effective date, if the request is otherwise eligible under the six-year limitation period, it must be brought within two years of the new rule’s effective date. Instead of leaving enforcement to the parties to the expungement (like eligibility currently is), the Director is empowered to deny the forum to improper expungement requests.

Limits on all Requests: No expungement request may be made where it has already been denied. Once any expungement request is submitted, it cannot be withdrawn—a Panel must deny the request if such a withdrawal is attempted. The reason for this change is FINRA’s belief that associated persons are “arbitrator shopping.”

Customer and State Regulator Notification and Participation: the associated person would have to appear in person or by video—telephone appearance is no longer permitted. The Panel determines the method of appearance. Customers are encouraged to participate. The rule requires that the associated person serve a copy of the SOC and answer on the customers in the underlying claim within 10 days of filing, unless the Panel determines that there are “extraordinary circumstances” making service “impracticable.” The rule permits a customer or customer’s representative to introduce evidence during the hearing. The customer may testify or call witnesses; however, they would be subject to cross-examination. They would also be entitled to object to and cross-examine the associated person. They would be permitted to present opening and closing arguments. Similarly, state regulators will now be notified of every expungement request and given the right to participate in all “straight-in” requests. They will not be permitted to seek discovery, but they will be permitted to examine and cross-examine witnesses, make opening and closing-statements, and present evidence.

Arbitrators as Investigators: The proposed rule changes also specifically empowers the Panel to request additional information or evidence from the associated person or member firm of the associated person in order to obtain all evidence needed on the issue.[4]

Awards: The new rule requires a unanimous panel decision and eliminates any possibility of expungement on any ground but the 3 grounds enumerated in the rule itself. The Rule also now requests more from the arbitrators in the award—they must identify the documentary, testimonial, or other evidence on which they relied in awarding expungement and provide a detailed explanation of their decision.

FINRA’s Enhanced Arbitrator Training:  FINRA’s training has two main points of emphasis. First, that expungement should be an extraordinary remedy (and implicitly it should rarely be granted). Second, no expungement should really be “uncontested.” Whether it’s through encouragement of the customers to participate, or notification of state regulators of every expungement request and encouraging the state regulators to participate, or in the absence of either of those telling the arbitrators to request evidence to make sure they have everything they need, FINRA makes clear that associated person’s claims should be tested. FINRA instructs arbitrators that “the arbitrator can and should request documents, testimony, and evidence before deciding.” The training also places emphasis on the current eligibility rules and encourages arbitrators to raise the six-year limit sua sponte. With respect to serving customers, FINRA actually states that service should be completed in all instances and gives the example that if the customer is deceased the associated person should be required to notify the estate. The training specifically discusses that settlement cannot be conditioned on expungement and actually encourages the arbitrators to make a disciplinary referral if they believe there has been a violation.[5] Finally, FINRA stresses that a Panel absolutely cannot give any weight to the fact that a customer is not opposing an expungement request.

If you would like to discuss these issues further, or for assistance with expungements or with any FINRA cases or questions, please do not hesitate to reach out to a member of Maynard Nexsen's Securities Litigation team.

[1] The new rules do not address termination disclosure expungement cases.

[2] While the associated person will not be required to pay a second filing fee when the request is converted from the customer arbitration to a straight-in request, the member firm will have to pay additional member fees. 

[3] FINRA notes that the training will emphasize “the unique, distinct role [the arbitrators] play in determining whether to issue an award containing expungement relief and that expungement should be issued in limited circumstances.”

[4] This change appears to encourage arbitrators to take an active, as opposed to neutral role, in hearings where customers do not appear to contest expungement. Such encouragement raises questions about the impact it may have on all arbitrations and arbitrator roles as neutral versus advocate. FINRA’s enhanced training emphasizes to arbitrators that they should make sure they have everything they need.

[5] To the extent you do not already include language in your settlement agreements specifically confirming that it is not premised on expungement and confirming the customer’s right to participate in any expungement proceeding, we would encourage you to consider including such language going forward.