[Federal Register Volume 88, Number 75 (Wednesday, April 19, 2023)]
[Notices]
[Pages 24282-24320]
[FR Doc No: 2023-08147]

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

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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

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

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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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

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.

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

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \140\ See FINRA Rules 12805(a) and 13805(a).
    \141\ See proposed Rules 12805(c)(1) and 13805(c)(1).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \142\ See proposed Rules 12805(c)(2) and 13805(c)(2).
    \143\ See id.
    \144\ See id.
    \145\ See Notice at 50182.
---------------------------------------------------------------------------

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

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

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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

3. Notifications to State Securities Regulators
    The proposed rule change would require FINRA to notify state
securities

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
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    \194\ See Notice at 50186.
    \195\ See id. at 50186 n.182.
    \196\ See proposed Rule 13805(c)(6)(A).
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    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\
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    \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.
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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\
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    \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.
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    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\
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    \201\ See FINRA Rule 12800(c).
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    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\
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    \202\ See Notice at 50186.
    \203\ See Notice at 50186, proposed Rules 12800(d) and (e).
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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\
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    \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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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\
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    \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.
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    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\
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    \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.
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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.''
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    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).
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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.''
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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\
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    \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).
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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.
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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\
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    \223\ See proposed Rule 12800(e)(1)(B)(i).
    \224\ See Notice at 50188.
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    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

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\
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    \225\ See proposed Rule 12800(e)(1)(B)(ii).
    \226\ See Notice at 50188.
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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\
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    \227\ See proposed Rule 12800(f)(2).
    \228\ See Notice at 50188.
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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.
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    \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).
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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\
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    \232\ See proposed Rule 12805(a)(1)(A).
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    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.''
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    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\
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    \237\ See proposed Rule 12805(a)(1)(C)(ii).
    \238\ See proposed Rule 12805(a)(1)(C)(ii)e.