consider and decide the expungement request and issue a separate
award.\156\
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    \155\ See proposed FINRA Rule 12800(e)(1)(A).
    \156\ See supra note 155. 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 forum fees would be assessed pursuant to proposed
Rule 12805(c)(9).
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    The arbitrator would decide the customer's dispute first and issue
an award to minimize any delays in resolving the customer arbitration
and any delays in potential recovery that a customer may be awarded.
Further, because the customer arbitration may not be as fully developed
when an ``on the papers'' or special proceeding is requested, the
arbitrator must hold a separate expungement-only hearing to ensure that
he or she has access to sufficient evidence to make a fully-informed
decision on the expungement request. The Director would notify all
customers whose simplified customer arbitrations and customer
complaints gave rise to the customer dispute information that is a
subject of the expungement request, of the time, date and place of the
expungement hearing.\157\
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    \157\ See proposed Rule 12800(f)(2). The Director would also
notify these customers of the expungement hearing, if the associated
person opts to file the request under the Industry Code after the
simplified case closes.
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b. Option One Hearing
    If the customer chooses to have a full ``Option One'' hearing on
his or her 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 in the award.\158\ 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. As there would be a more
complete factual record from the full hearing on the merits of the
customer case, the arbitrator could decide the customer dispute and the
expungement request after the hearing concludes.
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    \158\ See proposed Rule 12800(e)(1)(B)(i).
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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 the decision in an award.\159\ The arbitrator would need to
conduct a separate expungement hearing to develop a complete factual
record in order to make a fully-informed decision on the expungement
request.\160\
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    \159\ See proposed Rule 12800(e)(1)(B)(ii).
    \160\ See supra note 156.
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    Given the generally less complex nature of simplified arbitrations,
FINRA does not believe that it is necessary for a panel from the
Special Arbitrator Roster to decide an expungement request if a
simplified customer arbitration closes other than by award or by award
without a hearing. However, if the Commission approves the proposed
rule change, FINRA will continue to monitor expungement requests and
decisions in simplified arbitrations to determine if such requests
should be decided by the Special Arbitrator Roster, particularly if the
customer chooses to have his or her case decided on the papers or in a
special proceeding.
G. Non-Substantive Changes
    FINRA is also proposing to 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 believes the proposed changes to
the titles would more accurately reflect the contents of Part VIII of
the Customer and Industry Codes. 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.
    If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice to be published no later than 60 days following Commission
approval. The effective date will be no later than 120 days following
publication of the Regulatory Notice announcing Commission approval of
the proposed rule change.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\161\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The proposed rule change seeks to balance the important investor
protection objectives of maintaining the integrity and accuracy of the
information in the CRD system and BrokerCheck with the interest of
brokers and firms in the fairness and accuracy of the disclosures
contained in the systems.
    The proposed rule change will enhance the current expungement
framework and improve the efficiency of the FINRA arbitration forum by
codifying the Guidance as rules that arbitrators and parties must
follow. In addition, when an associated person files a claim against a
firm for the sole purpose of requesting expungement, these cases can be
complex to resolve, particularly if the customer or customer's
representative does not participate in the hearing. Having three
arbitrators available to ask questions, request evidence and generally
to serve as fact-finders in the absence of customer input will help
ensure that a complete factual record is created to support the
arbitrators' decision in such expungement hearings. In addition, the
proposed rule change will help ensure that arbitrators who will decide
these requests meet heightened qualifications and have completed
enhanced expungement training. FINRA believes that by requiring a
three-person panel from the Special Arbitrator Roster to decide
expungement requests filed under the Industry Code, the proposed rule
change will help ensure expungement is recommended in limited
circumstances.
    The proposed rule change will foreclose a practice that has emerged
in the existing expungement process where parties seek expungement
after a prior denial by a court or panel of a request

to expunge the same customer dispute information, or where parties
withdraw or do not pursue an expungement request and then make another
request for expungement of the same customer dispute information. The
proposed rule change imposes procedures and requirements around when
and how a party may request expungement, and expressly provides that
omission of certain of the requirements will make the expungement
request deficient. Further, the proposed rule change provides the
Director with express authority to deny the forum if an expungement
request is ineligible for arbitration under the proposed rules. Thus,
FINRA believes the proposed rule change will add more transparency to
the expungement process.
    Moreover, the proposed rule change seeks to protect investors and
the public interest by notifying customers of expungement requests
filed under the Industry Code. Although a straight-in request will be
filed against a firm, customers whose disputes are a subject of the
request will be notified and encouraged to participate in the
expungement hearing. Such notifications will make clear to arbitrators
and parties the rights of customers who choose to participate in these
hearings. The customers' input will provide the panel with additional
insight on the customer dispute and help create a complete factual
record, which will result in more informed decisions on expungement
requests. FINRA believes this enhancement, which will encourage and
facilitate customer participation in expungement hearings, will help to
maintain the integrity of the information in the CRD system.
    Further, the process of requesting expungement during a simplified
arbitration will be codified to help ensure that customers are aware of
their rights under the process and how an expungement request will
affect (and not affect) their arbitration claims. By expressly
incorporating the practice of requesting expungement during simplified
proceedings, the proposed amendments add consistency to the rules and
provide more guidance to the arbitrators and the parties requesting
expungement.
    The proposed rule change will also help ensure that state
securities regulators have knowledge of expungement requests by
requiring notification to the states, in the manner determined by
FINRA, after FINRA receives a complete expungement request.
    For these reasons, the proposed rule change represents a
significant step towards addressing concerns with the current
expungement framework. FINRA believes the proposed rule change will
improve the expungement framework by incorporating the Guidance,
establishing a Special Arbitrator Roster and addressing gaps that have
emerged in the existing expungement framework. In addition, FINRA
believes these changes will help to maintain the accuracy and integrity
of the information in the CRD system and BrokerCheck, while also
protecting brokers from the publication of false allegations against
them.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment to analyze the
regulatory need for the proposed rule change, its potential economic
impacts, including anticipated costs, benefits and distributional and
competitive effects, relative to the current baseline, and the
alternatives FINRA considered in assessing how best to meet FINRA's
regulatory objectives.
1. Regulatory Need
    The proposed rule change would address concerns relating to the
expungement process that are not consistent with the regulatory intent
to permit expungement in limited circumstances. The concerns include
the potential impact of the absence of customers and their
representatives from an expungement hearing which may result in the
arbitrator or panel receiving information only from the associated
person. The concerns also include associated persons having their
straight-in requests heard by a single arbitrator instead of a three-
person panel, and the selection of arbitrators to hear these requests.
Lastly, the concerns include requests to expunge the same customer
dispute information in multiple proceedings. The proposed rule change
would also codify and expand upon the provisions of the Guidance to
help ensure that arbitrators and parties are adhering to these
procedures for all expungement requests, and to encourage and
facilitate customer participation in expungement hearings.
2. Economic Baseline
    The economic baseline for the proposed rule change includes the
current provisions under the Codes that address the process for parties
to seek expungement relief. In addition, because arbitrators are
generally believed to be adhering to the best practices and
recommendations that are a part of the Guidance, the economic baseline
also includes the Guidance.\162\ The proposed rule change is expected
to affect associated persons and other parties to expungement requests
including member firms, customers and arbitrators. The proposed rule
change may also affect users of customer dispute information contained
in the CRD system and displayed through BrokerCheck.\163\
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    \162\ See supra note 3.
    \163\ Users of customer dispute information include investors;
member firms and other companies in the financial services industry;
individuals registered as brokers or seeking employment in the
brokerage industry; and FINRA, states and other regulators.
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    The customer dispute information contained in the CRD system is
submitted by registered securities firms and regulatory authorities in
response to questions on the uniform registration forms.\164\ The
information can be valuable to current and prospective customers to
learn about the conduct of associated persons.\165\ Current and
prospective customers may not select or remain with an associated
person or a member firm that employs an associated person with a record
of customer disputes. Similarly, member firms and other companies in
the financial services industry may use the information when making
employment decisions.\166\ In this manner, the customer dispute
information contained in the CRD system (and displayed through
BrokerCheck) may positively or negatively affect the business and
professional opportunities of associated persons. Where the information
is reliable, it also provides for customer

protections and information useful for member firms.
---------------------------------------------------------------------------

    \164\ See supra note 5 and accompanying text for additional
discussion of the uniform registration forms and the information
contained in the CRD system. Some of the information may involve
pending actions or allegations that have not been resolved or
proven.
    \165\ Recent academic studies provide evidence that the past
disciplinary and other regulatory events associated with a firm or
individual can be predictive of similar future events. See Hammad
Qureshi & Jonathan Sokobin, Do Investors Have Valuable Information
About Brokers? FINRA Office of the Chief Economist Working Paper,
Aug. 2015; see also Mark Egan, Gregor Matvos, & Amit Seru, The
Market for Financial Adviser Misconduct, Journal of Political
Economy 127, no. 1 (February 2019): 233-295.
    \166\ Customer dispute information submitted to the CRD system
and displayed through BrokerCheck may have other uses. For example,
investors may use the information when deciding with whom to do
business. FINRA, states and other regulators also use the
information to regulate brokers.
---------------------------------------------------------------------------

    Any negative impact on the business and professional opportunities
of associated persons may be appropriate and consistent with investor
protection, such as when the customer dispute information has merit.
Any such negative impact may be inappropriate, however, if, for
example, the customer dispute information is factually impossible,
clearly erroneous, or false. Regardless of the merit, associated
persons have an incentive to remove customer dispute information from
the CRD system and its public display through BrokerCheck.
    An associated person, or a party on-behalf-of an unnamed person,
typically begins the process to remove customer dispute information
from the CRD system by filing an expungement request in FINRA
arbitration. FINRA is able to identify 6,928 requests to expunge
customer dispute information in FINRA arbitration from January 2016
through December 2019 (the ``sample period''). More than one
expungement request can be made in a single arbitration, and multiple
expungement requests may relate to the same arbitration, civil
litigation or complaint if the dispute relates to more than one
associated person.
    Among the 6,928 expungement requests, 3,203 requests (46 percent)
were made during a customer arbitration, and 3,725 requests (54
percent) were filed as a straight-in request.\167\ The 3,203
expungement requests made during a customer arbitration include 2,936
requests made during a non-simplified customer arbitration and 267
requests made during a simplified customer arbitration. The 3,725
requests to expunge customer dispute information disclosures filed as a
straight-in request include 3,657 requests in arbitrations filed solely
against a member firm or against a member firm and a customer, and 68
requests in arbitrations filed solely against a customer. In the 3,203
expungement requests made during a customer arbitration, the associated
person was a named party in 1,504 of the requests (47 percent), and an
unnamed party in 1,699 of the requests (53 percent).
---------------------------------------------------------------------------

    \167\ Sixteen requests to expunge customer dispute information
were made during industry arbitrations that were not straight-in
requests. To simplify the analysis, we exclude these 16 requests
from the sample.
---------------------------------------------------------------------------

    Among the expungement requests during the sample period, FINRA is
able to identify 82 requests to expunge the same customer dispute
information in a subsequent arbitration.\168\ For purposes of this
analysis, FINRA limited the identification of additional expungement
requests to those requests where both the initial request and the
subsequent request were made during the sample period. Additional
subsequent expungement requests may have been filed during the sample
period if the initial expungement request was made prior to the sample
period (i.e., before January 2016). The 82 requests to expunge the same
customer dispute information in a subsequent arbitration can,
therefore, be considered a lower bound for the number of these requests
during the sample period. The proposed rule change would foreclose
associated persons from filing additional requests.
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    \168\ Eighty of the 82 subsequent expungement requests relate to
previous requests in another arbitration that were withdrawn or
otherwise not pursued by the associated person or party that filed
the request. For the two remaining subsequent expungement requests,
one relates to a previous request on behalf of an unnamed person
that was denied, and the other to a previous request that was
determined by the panel to be ineligible for arbitration. An
arbitrator or panel recommended expungement in 60 of the 82
subsequent expungement requests and denied eight. One of the granted
requests relates to the previous request that was denied. Another of
the granted requests relates to the previous request that was
deficient and therefore not decided. Seven subsequent expungement
requests were withdrawn or deficient and, therefore, not decided. In
addition, seven subsequent expungement requests were still pending
as of the end of the sample period. In 42 of the 82 subsequent
expungement requests, the associated person was an unnamed party in
the first arbitration.
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    As of December 2019, 5,159 of the 6,928 expungement requests were
made in an arbitration that closed. Among the 5,159 expungement
requests, 2,255 requests (44 percent) were made during a customer
arbitration and 2,904 requests (56 percent) were filed as a straight-in
request. The 2,255 expungement requests made during a customer
arbitration include 2,015 requests made during a non-simplified
customer arbitration and 240 requests made during a simplified customer
arbitration. The 2,904 requests filed as a straight-in request include
2,838 requests in arbitrations filed solely against a member firm or a
member firm and a customer, and 66 requests in arbitrations filed
solely against a customer. Under the proposed rule change, an
associated person would be prohibited from filing a straight-in request
against a customer.
    An arbitrator or panel made a decision in arbitrations relating to
3,722 of the 5,159 requests in arbitrations that closed, and made no
decision in arbitrations relating to the remaining 1,437 requests. A
single arbitrator made a decision in arbitrations relating to 2,692 of
the 3,722 requests, and a two- or three-person panel made a decision in
arbitrations relating to the remaining 1,030 requests. For the customer
arbitrations, the decision by an arbitrator or panel may relate to the
arbitration, an expungement request, or both. For the straight-in
requests, the decision would relate to the expungement request only. In
arbitrations where no decision on the merits of the customer case or an
expungement request was made, the requests were either not eligible (as
determined by the arbitrator or panel), withdrawn, or otherwise not
pursued by the associated person or party that filed the request.
    As detailed in the next paragraph, the percentage of expungement
requests that are recommended is higher when the arbitrator or panel
receives information only from the associated person or other party
requesting expungement. The arbitrator or panel is likely to receive
information only from the party requesting expungement when (1) the
customer arbitration does not close by award after a hearing (e.g.,
settles), or (2) an associated person files a straight-in request
against a member firm. In both circumstances, the customer and his or
her representative have little incentive to participate in an
expungement hearing.
    Among the 3,722 expungement requests in arbitrations where an
arbitrator or panel made a decision, 2,874 resulted in an arbitrator or
panel recommending expungement (77 percent). Among the 3,722
expungement requests, 976 requests were made during a non-simplified or
simplified customer arbitration, and 2,746 requests were filed as a
straight-in request. An arbitrator or panel recommended expungement in
response to 595 of the 976 requests (61 percent) made during a customer
arbitration. This includes 168 of the 369 requests (46 percent) made
during a customer arbitration that closed by award after a hearing, and
427 of the 607 expungement requests (70 percent) made during a customer
arbitration that closed by award without a hearing or other than by
award. An arbitrator or panel recommended expungement in 2,279 of the
2,746 requests filed as a straight-in request (83 percent).\169\
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    \169\ Among the 976 expungement requests during a non-simplified
or simplified customer arbitration, a single arbitrator made a
decision in arbitrations relating to 306 requests, and a two- or
three-person panel made a decision in arbitrations relating to 670
requests. In addition, among the 2,746 straight-in requests, a
single arbitrator made a decision in arbitrations relating to 2,386
requests and a two- or three-person panel made a decision in
arbitrations relating to 360 requests. See infra note 190 for a
discussion of the percentage of expungement requests recommended
between two- or three-person panels and one-person panels.

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    A recommendation for expungement in FINRA arbitration is not the
final step in the expungement process. If the arbitrator or panel
recommends expungement, then the firm or associated person must confirm
the arbitration award in a court of competent jurisdiction and serve
the confirmed award on FINRA.\170\ As of July 2020, FINRA had removed
2,641 customer dispute information disclosures from the CRD system from
the possible 2,874 requests (92 percent) in which an arbitrator or
panel recommended expungement. Firms or associated persons may have not
yet sought or obtained a court order for the remaining disputes.
---------------------------------------------------------------------------

    \170\ See supra note 10.
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    Approximately one-third of the 2,641 customer dispute information
disclosures (965, or 37 percent) that were expunged were submitted to
the CRD system from 2014 to 2019. The 965 customer dispute information
disclosures reflect three percent of the total number of customer
dispute information disclosures submitted to the CRD system during this
period of time (approximately 37,000). The remaining 1,676 customer
dispute information disclosures were submitted to the CRD system prior
to 2014. The number of customer dispute information disclosures
expunged during the sample period that were submitted to the CRD system
prior to 2014 suggests that associated persons may yet still expunge
customer dispute information disclosures submitted to the CRD system
during or prior to the sample period. The three percent of expunged
customer dispute information disclosures should therefore be considered
a lower bound for the rate at which customer dispute information
disclosures are expunged.
    A firm or associated person can also initiate a proceeding directly
in a court of competent jurisdiction without first going through any
arbitration proceeding. From January 2016 through December 2019, the
expungement of 138 customer dispute information disclosures were sought
directly in court. As of July 2020, court proceedings had concluded for
118 of those disclosures and proceedings remained ongoing for 20
disclosures. Among the 118 disclosures for which the court proceeding
had concluded, 86 disclosures were ordered expunged by a court and 32
disclosures were not ordered to be expunged. FINRA will challenge these
requests in court in appropriate circumstances.
3. Economic Impact
A. Overview
    The proposed rule change would codify the best practices described
in the Guidance.\171\ The best practices include the prohibition on the
filing of an expungement request if (1) an arbitration panel or court
of competent jurisdiction previously denied a request to expunge the
same customer dispute information, or (2) the customer dispute
information arises from a customer's arbitration that has not
concluded. Based on FINRA staff observations, arbitrators are generally
believed to be adhering to these best practices and, therefore,
codifying them should not result in new material economic impacts.
Codifying the best practices in the Guidance should, however, clarify
among parties how the practices should be applied, including what is
permitted during the expungement hearing and the responsibilities of
the parties and the arbitrator or panel when expungement is requested.
Codifying the Guidance may also help inform customers more generally of
the practices that the forum has implemented to encourage and
facilitate customer participation in expungement hearings. In addition,
parties may incur fewer costs from the codification of the practices,
including the costs from actions or decisions (e.g., requesting
expungement of customer dispute information that was previously denied
in another arbitration or court) that would be denied by an arbitration
panel pursuant to the Guidance.
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    \171\ See supra note 3.
---------------------------------------------------------------------------

    The proposed rule change would also introduce other changes to the
Codes that expand upon or that are not a part of the Guidance. In
particular, the proposed rule change would restrict when an associated
person is permitted to request expungement in FINRA arbitration. The
proposed rule change would also require an arbitrator or panel from a
customer arbitration that closes by award after a hearing, from a
simplified customer arbitration, or a panel from the Special Arbitrator
Roster to decide an expungement request. Finally, the proposed rule
change would address the participation by associated persons and
customers in expungement hearings. These changes may result in new
material economic benefits and costs. These economic effects are
discussed in further detail below.
B. Expungement Requests During Customer Arbitrations
    The proposed rule change would set forth requirements for
expungement requests during customer arbitrations. The proposed rule
change would establish different requirements for non-simplified
customer arbitrations and simplified customer arbitrations, and for an
associated person named or unnamed to a (non-simplified or simplified)
customer arbitration.
i. Expungement Requests by Named Associated Persons During Non-
Simplified Customer Arbitrations
    The proposed rule change would require an associated person named
in a non-simplified customer arbitration to request expungement during
the customer arbitration regarding the conduct that gave rise to the
arbitration. Otherwise, the associated person would forfeit the
opportunity to seek expungement of the same customer dispute
information in any subsequent proceeding. The arbitrator or panel from
a non-simplified customer arbitration would decide an expungement
request if the arbitration closes by award after a hearing.\172\
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    \172\ See supra Item II.A.1.(II)A.1.a., ``Expungement Requests
During the Customer Arbitration, By a Respondent Named in a Customer
Arbitration.''
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    The proposed rule change would help ensure that, if possible, the
arbitrator or panel from a non-simplified customer arbitration, with
input from all parties and access to all evidence, testimony and other
documents, would decide an expungement request. These arbitrators or
panels would be best situated to decide the related issue of
expungement, and thereby help ensure that expungement recommendations
and the customer dispute information contained in the CRD system and
displayed through BrokerCheck reflect the conduct of associated
persons.
    An associated person named in a non-simplified customer arbitration
may lose the ability to request expungement of the customer dispute
information arising from the arbitration. A named associated person who
does not request expungement during a non-simplified customer
arbitration (or within the required time) would lose the ability to
seek expungement relief.\173\ Because the named associated person may
lose the ability to assess information that arises as a part of
arbitration before they are required to request expungement,

associated persons may incur costs to preserve their right to request
expungement by filing a request with or without the expectation that
the arbitrator or panel would recommend expungement. FINRA believes,
however, that the proposed rule change would mitigate these potential
costs by providing associated persons a reasonable amount of time
(i.e., within 45 days of receipt of the customer's statement of claim
if the request is included in an answer, or 30 days before the first
scheduled hearing begins if the request is included in a pleading)
during the arbitration to consider whether to file a request. Parties
may also incur other, indirect costs if, for example, the deadline to
request expungement during a non-simplified customer arbitration causes
them to incur costs to expedite the filing of the expungement request
or constrains their ability to engage in other activities (i.e., incur
opportunity costs).
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    \173\ Under the proposed rule change, a party that does not file
or serve an expungement request at least 30 days before the first
scheduled hearing begins could file a motion seeking an extension.
The motion, however, may be opposed by another party and denied.
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ii. Expungement Requests During a Non-Simplified Customer Arbitration
That Close Other Than by Award or by Award Without a Hearing
    Associated persons who request expungement during a non-simplified
customer arbitration (either as a named party or as an unnamed party
that consents to an on-behalf-of request) that closes other than by
award or by award without a hearing (and would have otherwise had their
expungement request decided as part of the customer arbitration) would
incur additional costs to file a straight-in request.\174\ Associated
persons may incur delays in receiving a decision on the request, and
may incur additional legal fees and forum fees to resolve the straight-
in request. The member firms with which the associated persons were
associated at the time the customer dispute arose would also incur
additional legal and forum fees. These costs would be imposed by the
proposed rule change if the expungement requests would have otherwise
been decided as part of the non-simplified customer arbitration. These
costs would not be imposed by the proposed rule change, however, if
regardless of the proposed rule change associated persons would have
filed a straight-in request after the close of the non-simplified
customer arbitration.
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    \174\ Associated persons who would otherwise request expungement
as a counterclaim during an industry arbitration, which is rare, or
who would otherwise intervene in a customer arbitration and have an
expungement request decided during the arbitration, would instead be
required to file a straight-in request under proposed Rule 13805.
These associated persons and member firms with which the associated
persons were associated would incur similar costs.
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    The additional costs for an associated person to resolve a
straight-in request after the close of a non-simplified customer
arbitration (that closes other than by award or by award without a
hearing) may reduce the likelihood that the parties settle a customer
arbitration.\175\ In particular, the associated person may factor the
cost to resolve a separate straight-in request into the decision
regarding whether to settle the arbitration or have the case decided by
the arbitrator or panel to the arbitration. In addition, even if the
parties continue to settle the dispute, the associated person may
subtract the cost to resolve a separate straight-in request from the
potential settlement amount.
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    \175\ FINRA notes, however, that the determination regarding
whether to settle a customer arbitration can depend on a number of
factors, including the parties' respective estimates of the
additional costs they would incur to continue the customer
arbitration, the value that the associated person places on
expungement, the associated person's estimate of the likelihood that
he or she could obtain expungement in the customer case compared to
in a straight-in request and the cost that they estimate the
associated person would incur to pursue the straight-in request.
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    An associated person (or a party on behalf of an associated person)
who files a straight-in request would incur the minimum hearing session
fee of $1,125 for each session the panel conducts to decide the
expungement request.\176\ The member firm at which the broker was
associated at the time the customer dispute arose would also be
assessed a minimum surcharge fee of $1,900 and a minimum process fee of
$3,750. The fees associated with non-monetary claims would help ensure
that costs to the forum for administering expungement requests are
allocated as intended to the party or parties requesting expungement
and, as applicable, the member firms at which the broker was associated
at the time the customer dispute arose.
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    \176\ The associated person would not, however, incur an
additional filing fee to file the straight-in expungement request.
See infra Item II.C.8.
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iii. Expungement Requests by Unnamed Persons in Non-Simplified Customer
Arbitrations and by Named and Unnamed Persons in Simplified Customer
Arbitrations
    The proposed rule change would not require an unnamed person in a
non-simplified customer arbitration, an associated person named in a
simplified customer arbitration, or an unnamed person in a simplified
customer arbitration to request expungement of the customer dispute
information during the customer arbitration. Instead, similar to today,
these associated persons may wait until after the customer arbitration
has concluded to request expungement as a straight-in request.\177\
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    \177\ This requirement would help ensure that the panel from the
Special Arbitrator Roster is aware of the outcome of the arbitration
when deciding the request.
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    The option to wait until after the customer arbitration has
concluded to request expungement is not a benefit created by the
proposed rule change, but is instead currently permitted under the
Codes. FINRA believes that an associated person who is not named in a
non-simplified customer arbitration, or an associated person who is
either named or not named in a simplified customer arbitration, should
be able to seek expungement as a straight-in request and have their
request decided by a panel from the Special Arbitrator Roster.
    Associated persons who are not required and choose not to request
expungement during the customer arbitration may also incur additional
costs. Any incremental costs from not filing an expungement request
during a customer arbitration, however, are not imposed by the proposed
rule change. Instead, they are borne at the discretion of the parties
who make the determination of when to request expungement, and are
similar to the costs they would incur under the Codes today.
iv. Time Limit for Requesting Expungement in Simplified and Non-
Simplified Customer Arbitrations
    A named associated person or a party on-behalf-of an unnamed person
would be required to request expungement in a simplified customer
arbitration within 30 days of the date that FINRA provides notice of
arbitrator appointment.\178\ A named associated person or a party
requesting expungement on-behalf-of an unnamed person in a non-
simplified customer arbitration would be required to request
expungement no later than 30 days before the first scheduled
hearing.\179\
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    \178\ The proposed rule change would require that if the named
associated person or party on-behalf-of an unnamed person requests
expungement in a pleading other than an answer, the request must be
filed within 30 days after the date FINRA provides the associated
person with notice of arbitrator appointment, which is the last
deadline provided to the parties in a simplified arbitration to
submit additional documents before the case is submitted to the
arbitrator. See proposed Rules 12800(d)(1)(B)(i) and
12800(d)(2)(B)(i).
    \179\ See proposed Rules 12805(a)(1)(C)(i) and
12805(a)(2)(C)(iii). The proposed rule change also provides that
FINRA would notify state securities regulators, in the manner
determined by FINRA, of an expungement request within 30 days of
receiving a complete request for expungement. See proposed Rule
12805(b). State securities regulators would, therefore, have
additional time to review the request and decide whether to oppose
expungement if confirmation of an expungement recommendation is
later sought in court.

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    Associated persons who do not request expungement within these time
limits may incur additional costs that may include costs arising from
delays in receiving a decision on the request and legal and forum fees.
The member firms with which the brokers were associated at the time the
customer dispute arose would also incur additional legal and forum
fees. These costs would be imposed by the proposed rule change.
C. Time Limits for Filing Straight-In Requests
    The proposed rule change would also set forth requirements for an
associated person to file a straight-in request. For customer dispute
information reported to the CRD system after the effective date of the
proposed rule change, the proposed rule change would require an
associated person to file a straight-in request within two years of a
customer arbitration or civil litigation closing, or, if no customer
arbitration or civil litigation, within six years from the initial
reporting of the customer complaint to the CRD system.\180\
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    \180\ See proposed Rules 13805(a)(2)(A)(iv) and
13805(a)(2)(A)(v).
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    The proposed rule change would also require a two-year time limit
for requests to expunge customer dispute information that arose from a
customer arbitration or civil litigation that closed on or prior to the
effective date of the proposed rule change or a six-year time limit to
request expungement of customer dispute information arising from a
customer complaint initially reported to the CRD system on or prior to
the effective date of the proposed rule change.\181\ These time limits
would begin from the effective date of the proposed rule change.
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    \181\ See proposed Rules 13805(a)(2)(B)(i) and
13805(a)(2)(B)(ii).
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    Arbitrators on the Special Arbitrator Roster would have the
experience, qualifications and training necessary to decide straight-in
requests. These time limits may increase customer participation in the
proceedings and the likelihood that the panel from the Special
Arbitrator Roster receives the relevant evidence and testimony to
decide an expungement request. The time limits would help ensure that
the expungement hearing is held close in time to the customer
arbitration or civil litigation, or the events that led to the customer
dispute information disclosure, and foreclose the option of an
associated person to choose the timing of a straight-in request to
potentially reduce the likelihood of customer participation. Similar to
other amendments proposed herein, an increase in customer participation
may provide a panel from the Special Arbitrator Roster with additional
information to decide an expungement request and help ensure the
accuracy of the customer dispute information contained in the CRD
system and displayed through BrokerCheck.
    These time limits, however, may constrain an associated person from
filing a straight-in request.\182\ Associated persons who would
otherwise delay the filing of a straight-in request may incur
additional costs to file a straight-in request within the required time
limits (e.g., opportunity costs, as described above). These time limits
may also constrain an associated person from filing more than one
expungement request in the same straight-in request. For example,
associated persons may lose the ability to delay the filing of a
straight-in request to expunge a complaint from a particular customer
until other customers make additional complaints, if the filing of the
straight-in request to expunge the complaint of the first customer
would be time barred. Instead, an associated person may be required (as
a result of the time limits) to file more than one straight-in request.
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    \182\ If the Commission approves the proposed rule change, FINRA
expects that a number of associated persons would file a straight-in
request to expunge customer dispute information reported to the CRD
system prior to or soon after the effective date of the proposed
rule change to help ensure that they are not constrained from
seeking expungement because of the proposed time limitations.
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    Associated persons who are restricted from including more than one
request to expunge customer dispute information in the same straight-in
request would incur additional legal and forum fees for each straight-
in request or not seek expungement for all of the disclosures. The
member firm at which the associated person was associated at the time
the customer disputes arose would incur additional legal and forum fees
if the associated person were to file multiple, separate straight-in
requests.
D. Time Limits for Straight-In Requests--Quantitative Description
    As discussed as part of the Economic Baseline, 3,725 expungement
requests were filed as straight-in requests during the sample period.
The following estimates demonstrate that the majority of these
straight-in requests would not have been permitted under the proposed
time limits, and associated persons may not have been able to include
more than one expungement request in the same straight-in request. The
estimates, however, do not take into account the potential change in
the behavior of associated persons; associated persons would have
incentive under the proposed amendments to file the straight-in
requests within the time limits or otherwise lose the ability to make
or file a request.\183\
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    \183\ The following estimates also do not take into account the
number of straight-in requests of customer dispute information
arising from a previous (non-simplified or simplified) customer
arbitration which, under the proposed rule change, may have been
decided as part of the customer arbitration.
---------------------------------------------------------------------------

    Among the 3,725 expungement requests filed as a straight-in
request, 1,140 requests followed a (non-simplified or simplified)
customer arbitration (of the same underlying dispute). Two-hundred
ninety of the 1,140 requests (25 percent) were filed as a straight-in
request within the two-year time limit and would have been permitted
under the proposed rule change. The remaining 850 requests (75 percent)
were filed as a straight-in request after the two-year time limit and
would not have been permitted. The median time from the close of the
customer arbitration to the filing of the straight-in request was six
years.
    The 3,725 expungement requests filed as a straight-in request also
include 2,585 requests that did not follow a (non-simplified or
simplified) customer arbitration (of the same underlying dispute).
Among the 2,585 requests, 813 requests (31 percent) were filed as a
straight-in request within six years from the initial reporting of the
disclosure to the CRD system and would have been permitted under the
proposed rule change. The remaining 1,772 requests (69 percent) were
filed as a straight-in request after the six-year time limit and would
not have been permitted.
    As discussed above, more than one expungement request can be made
in a single arbitration, and the time limits may limit the ability of
an associated person to include multiple expungement requests in the
same straight-in request. The 3,725 expungement requests filed as a
straight-in request relate to 1,778 arbitrations. Associated persons
included more than one request to expunge customer dispute information
in 810 of the 1,778 arbitrations. Under the proposed time limits,
associated persons would not have been able to include all expungement
requests in at least 225 of the 810 arbitrations.

E. Arbitrators or Panels Deciding Expungement Requests
    The proposed rule change would require that the arbitrator or panel
from a non-simplified customer arbitration decide expungement requests
during the arbitration if the arbitration closes by award after a
hearing.\184\ In addition, the proposed rule change would require the
arbitrator from a simplified customer arbitration to decide expungement
requests if there is a full hearing, or in a separate expungement-only
hearing after the simplified arbitration closes if the arbitration is
decided ``on the papers'' or in a special proceeding.\185\ The proposed
rule change would also require a randomly selected panel from the
Special Arbitrator Roster to decide straight-in requests.\186\
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    \184\ See proposed Rules 12805(a)(1)(D)(i) and
12805(a)(2)(E)(i).
    \185\ See proposed Rule 12800(e)(1).
    \186\ See proposed Rule 13806(b)(1).
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    The proposed rule change is not structured to increase or decrease
the likelihood that an arbitrator or panel recommends expungement in
any individual hearing except as it relates to the merits of the
request. The proposed rule change is structured, however, to place an
arbitrator or panel in a better position to determine whether to
recommend expungement of customer dispute information, and thereby help
ensure the accuracy of the customer dispute information contained in
the CRD system and displayed through BrokerCheck. Under the proposed
rule change and in general, the arbitrator or panel that decides a
request would either hear the full merits of the customer case or have
additional training and qualifications when they are likely to receive
information only from the party requesting expungement. In addition,
panels from the Special Arbitrator Roster would be able to request
evidence from the member firm at which the associated person was
associated at the time the customer dispute arose.
    The proposed rule change is also structured to reduce the potential
influence of associated persons and member firms on the selection of
the arbitrator or panel that decides an expungement request. First, a
panel from the Special Arbitrator Roster would be randomly selected to
decide a straight-in request, thereby decreasing the extent to which an
associated person and member firm with which the associated person was
associated at the time the customer dispute arose may together select
arbitrators who are more likely to recommend expungement.\187\
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    \187\ See supra Item II.A.1.(II)B.2.b., ``Straight-in Requests
and the Special Arbitrator Roster, Composition of the Panel.''
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    Second, the proposed rule change would foreclose the option for an
associated person to withdraw a request and seek expungement of the
same customer dispute information in a subsequent arbitration.\188\
Associated persons may exercise this option if they believe that they
have a higher probability of obtaining an expungement recommendation
with a different arbitrator or panel in another arbitration, and in
particular if the associated person files a straight-in request against
the member firm with which the broker was associated at the time the
customer dispute arose. To the extent that the associated person and
his or her employer's interests are aligned and both seek to increase
the likelihood that expungement is recommended, they would together be
expected to select arbitrators who may be more likely to recommend
expungement.\189\ Though these proposed amendments are consistent with
the regulatory intent to permit expungement in limited circumstances,
it may decrease the likelihood that associated persons are able to
obtain an award recommending expungement.
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    \188\ This includes the requirement for an unnamed person to
provide written consent to an on-behalf-of request for it to
proceed, thereby preventing an unnamed person from subsequently
arguing that they were unaware of an expungement request on their
behalf. See proposed Rule 12805(a)(2)(A). This also includes the
requirement that a case be closed with prejudice if an associated
person withdraws a straight-in request after a panel from the
Special Arbitrator Roster is appointed (unless the panel decides
otherwise). See proposed Rule 13805(a)(4). In the sample period, an
associated person withdrew 155 of the 2,904 straight-in requests
(five percent) filed in cases that closed. The 155 straight-in
requests include 118 requests where an arbitrator or panel was
appointed.
    \189\ A recent academic study finds evidence that suggests
parties can use previous expungement decisions to predict the
potential likelihood that an arbitrator would recommend expungement.
See Colleen Honigsberg & Matthew Jacob, ``Deleting Misconduct: The
Expungement of BrokerCheck Records,'' November 2018, https://www-cdn.law.stanford.edu/wp-content/uploads/2018/11/SSRN-id3284738.pdf.
The study also finds evidence that suggests both successful and
unsuccessful expungement attempts predict future broker misconduct.
An unsuccessful expungement attempt is associated with an
approximately four times higher probability of future misconduct.
Although expungement decisions are based on the information
available at the time of the request, including the facts and
circumstances of the arbitration, this finding suggests that the
decisions being made by arbitrators are related to the potential
future harm posed by the requesting broker.
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    In general, under the proposed rule change, a three-person panel
would consider and decide expungement requests during non-simplified
customer arbitrations that close by award after a hearing and straight-
in requests. Expungement decisions by a three-person panel may differ
from expungement decisions by a single arbitrator. In addition, the
decisions may differ depending on the arbitrators selected and the
interaction among the arbitrators when deciding an expungement request.
The extent to which a three-person panel would decide an expungement
request differently than a single arbitrator, however, is not
known.\190\ As discussed above, expungement requests may be complex to
resolve, particularly straight-in requests where customers typically do
not participate in the expungement hearing. Thus, having three
arbitrators available to ask questions, request evidence and to serve
generally as fact-finders in the absence of customer input would help
ensure that a complete factual record is created to support the
arbitrators' decision in such expungement hearings.
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    \190\ Among the 2,746 expungement requests filed as a straight-
in request where an arbitrator or panel made a decision, a similar
percentage of requests was recommended by a two- or three-person
panel (306 of 360 requests, or 85 percent) as was recommended by a
one-person panel (1,973 of 2,386 requests, or 83 percent). In
addition, among the 976 expungement requests during a non-simplified
or simplified customer arbitration where an arbitrator or panel made
a decision, a similar percentage of requests was recommended by a
two- or three-person panel (422 of 670 requests, or 63 percent) as
was recommended by a one-person panel (173 of 306 requests, or 57
percent).
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F. Arbitrators or Panels Deciding Expungement Requests--Quantitative
Description
    As discussed as part of the Economic Baseline, 5,159 of the 6,928
expungement requests sought during the sample period were filed in an
arbitration that closed. Among the 5,159 expungement requests, 4,521
requests (88 percent) would have required a panel from the Special
Arbitrator Roster. The 4,521 requests include 2,456 expungement
requests made during a non-simplified customer arbitration that closed
by award without a hearing or other than by award, and 2,065 requests
that were filed as a straight-in request but did not relate to a
previous (non-simplified or simplified) customer arbitration.
    An arbitrator or panel from a (non-simplified or simplified)
customer arbitration would have been required to decide 590 of the
5,159 expungement requests (11 percent). The 590 expungement requests
include 292 requests made during a non-simplified customer arbitration
that closed by

award after a hearing, 240 expungement requests made during a
simplified customer arbitration, and 58 requests filed as a straight-in
request to expunge customer dispute information arising from a previous
non-simplified customer arbitration that closed by award after a
hearing.
    Finally, a panel from the Special Arbitrator Roster, or an
arbitrator from a simplified customer arbitration, would have been
required to decide the remaining 48 arbitration requests that relate to
customer dispute information arising from a previous simplified
customer arbitration. The arbitrator or panel that would have decided
the request is dependent on whether an associated person, or a party
on-behalf-of an associated person, would have requested expungement
during the simplified arbitration.
G. Participation in Expungement Hearings
    The proposed rule change would require an associated person to
appear personally at an expungement hearing.\191\ This requirement
would provide the arbitrator or panel the opportunity to ask questions
of an associated person to better assess his or her credibility. An
associated person would be permitted to cross-examine and seek
information from customers who testify.\192\ This may provide
associated persons with the opportunity to substantiate their arguments
in support of their expungement request.
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    \191\ See proposed Rules 12805(c)(2) and 13805(c)(2).
    \192\ See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).
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    Associated persons may incur additional costs to appear at an
expungement hearing. The additional costs may depend on the method of
appearance (i.e., by telephone, videoconference, or in person), which,
under the proposed rule change, would be determined by the arbitrator
or panel. For example, associated persons who would otherwise not
appear in person may incur additional costs under the proposed rule
change if they are so required. The additional costs include the time
and expense to appear, and other direct and indirect costs (e.g.,
opportunity costs) associated with the associated person's appearance.
    The proposed rule change would also help encourage customer
participation in an expungement hearing. As noted above, the proposed
rule change would require that a named associated person request
expungement during a non-simplified customer arbitration and that the
arbitrator or panel decide the expungement request if the arbitration
closes by award after a hearing. In addition, an expungement request
during a non-simplified customer arbitration would be considered and
decided by the arbitrator or panel from that arbitration.
    Further, the proposed time limits for filing straight-in requests
may increase customer participation during these arbitrations. The
proposed rule change would also provide customers the option to appear
at an expungement hearing using whichever method is convenient for
them. The proposed rule change would also codify elements of the
Guidance that permit the customer to testify, cross-examine the
associated person and other witnesses, present evidence at the hearing
and make opening and closing arguments.\193\
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    \193\ Other amendments to the proposed rule change would also
help encourage customer participation. For example, the proposed
rule change would allow customers to be represented at an
expungement hearing and thereby mitigate any potential concern they
may have regarding a direct confrontation with the associated
person. In addition, the proposed rule change provides that FINRA
would notify the customer of the time and place of the expungement
hearing. Customers would still retain the option to participate in
the expungement hearing or provide their position on the expungement
request in writing. The costs to participate would therefore be
borne at the customers' discretion.
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H. Impact on Business and Professional Opportunities
    As a result of the proposed rule change, associated persons may
determine that the additional costs to seek expungement relief are
higher than the anticipated benefits. In addition, although the
proposed rule change is intended to help ensure arbitrators recommend
expungement when appropriate as it relates to the merits of the
request, an arbitrator or panel may be less likely to recommend
expungement depending on the information that becomes available for the
reasons described above. This may cause associated persons not to seek
expungement where expungement is likely (or unlikely) to be
recommended.
    Associated persons who no longer seek, or are not able to expunge
customer dispute information from the CRD system and its display
through BrokerCheck, or are delayed in doing so, may experience a loss
of business and professional opportunities. The loss of business and
professional opportunities by one associated person, however, may be
the gain of another. Associated persons who may benefit in this regard
include those who still determine that the additional costs to seek
expungement relief under the proposed rule change is less than the
anticipated benefits and continue to seek expungement of customer
dispute information, and other associated persons who do not have
similar disclosures.
    A firm or associated person can also initiate an expungement
proceeding directly in a court of competent jurisdiction without first
going through any arbitration proceeding. The proposed rule change may
incent firms or associated persons to initiate an expungement
proceeding directly in a court of competent jurisdiction without first
going through any arbitration proceeding. For some firms and associated
persons, the anticipated costs to first go through arbitration may be
greater than the similar costs to proceed directly in a court of
competent jurisdiction. Firms and associated persons who would
otherwise first go through arbitration as a result of the proposed rule
change may incur additional costs to seek expungement relief.
    The number of firms or associated persons who would instead
initiate an expungement proceeding directly in a court of competent
jurisdiction is dependent not only on the additional costs under the
proposed rule change, but the costs a firm or associated person would
expect to incur in the different forums to initiate an expungement
proceeding. This information is generally not available, and
accordingly the potential effect of the proposed rule change on direct-
to-court expungement requests is uncertain.
I. Other Economic Effects
    Finally, the proposed rule change may have other marginal economic
effects. First, the prohibition of a subsequent expungement request
would decrease the potential inefficient allocation of resources
resulting from a subsequent request that would have resulted in the
same decision (i.e., denial) as the first. The resources of the forum
allocated to the additional expungement request could instead be used
for other claims or requests that were not previously adjudicated or
for other purposes.\194\
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    \194\ The resources relate to the specific costs to administer
the claim, as well as the overall attendant costs to administer the
forum.
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    Second, the proposed rule change may increase the efficiency of the
forum by requiring that a party provide certain information when filing
an expungement request. The information includes identification of the
customer dispute information that is the subject of the request, and
whether expungement of the same customer dispute information was
previously requested

and, if so, how it was decided. This would increase the efficiency of
the forum by enabling FINRA to identify and track a request through the
expungement process, and by alerting arbitrators and FINRA to another
expungement request of the same customer dispute information. The
efficiency of the forum would also increase by requiring an unnamed
person to consent to an on-behalf-of expungement request in writing.
This would help ensure that an unnamed person is aware of the request
and prevent another expungement request by the unnamed person of the
same customer dispute information.
    In addition, the proposed rule change may affect the value of the
customer dispute information to describe the conduct of associated
persons. The change in the value of the information depends on the
merit of the disclosures that would have otherwise been expunged. The
merit of these disclosures also depends on many factors which are
difficult to predict. These factors include the incentive of parties to
file an expungement request under the proposed rule change, the
decisions by the arbitrator or panel to recommend expungement dependent
on the information that is available, and the merit of the customer
dispute information that would have otherwise been sought to be
expunged.
    As stated above, the proposed rule change is not structured to
increase or decrease the likelihood that an arbitrator or panel
recommends expungement in any individual hearing except as it relates
to the merits of the request. The proposed rule change may, however,
reduce the incentive for an associated person to request expungement
even when warranted. The effect of the proposed rule change on the
extent to which the customer dispute information available in the CRD
system (and its public display through BrokerCheck) accurately
describes the conduct of associated persons is, therefore, uncertain.
4. Alternatives Considered
    Alternatives to the proposed rule change include amendments that
were proposed in Notice 17-42. Notice 17-42 proposed to restrict when a
party can file or serve an expungement request during a customer
arbitration to 60 days before the first hearing session begins.
Although 60 days would provide a customer with more time to address an
expungement request, 60 days may further restrict a party from seeking
expungement during a customer arbitration relative to the 30 days
before the first scheduled hearing begins in the proposed rule change.
FINRA believes that the proposed 30-day period would provide customers
with enough time to address an expungement request, and FINRA with
sufficient time to notify the states of the request. FINRA also
believes that 30 days would reduce the potential that parties would
lose their ability to file an expungement request during an
arbitration.
    Notice 17-42 also proposed that an arbitrator or panel find that
the customer dispute information has ``no investor protection or
regulatory value,'' and that there must be a unanimous rather than a
majority decision by a panel to recommend expungement. These proposed
amendments may increase the difficulty for an associated person to
receive an expungement recommendation, and thereby deter an associated
person from seeking expungement. After considering the comments, FINRA
has determined not to propose that the panel must find ``no investor
protection or regulatory value'' to recommend expungement. FINRA agrees
with some commenters that the standard may, if codified into rule
language, create confusion among arbitrators and the potential for
inconsistent application among different arbitrators and panels.\195\ A
majority decision is also consistent with what is required for other
decisions in customer and industry arbitrations. FINRA also believes
that the overall proposal, coupled with the existing standards in FINRA
Rule 2080, would be sufficient to help preserve in the CRD system
information that is valuable to investors and regulators, while
allowing associated persons to remove information that is inaccurate.
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    \195\ FINRA notes that in its Order approving NASD Rule 2130
(now FINRA Rule 2080), which describes the current findings that
arbitrators must make to recommend expungement, the SEC stated that
``it believes the proposal strikes the appropriate balance between
permitting members and associated persons to remove information from
the CRD system that holds no regulatory value, while at the same
time preserving information on the CRD system that is valuable to
investors and regulators.'' See Securities Exchange Act Release No.
48933 (December 16, 2003) 68 FR 74667, 74672 (December 24, 2003)
(Order Approving File No. SR-NASD-2002-168).
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    Another alternative to the proposed rule change includes different
time limits for an associated person to file a straight-in request.
Although shorter (longer) time limits may increase (decrease) customer
participation in the proceedings and the likelihood that the panel from
the Special Arbitrator Roster receives the relevant evidence and
testimony to decide an expungement request, shorter (longer) time
limits may further (less) constrain an associated person from filing a
straight-in request or including more than one expungement request in
the same straight-in request. FINRA believes that the time limits
proposed herein would facilitate customer participation but also
provide associated persons sufficient opportunity to file a straight-in
request.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    In December 2017, FINRA published Notice 17-42, requesting comment
on proposed amendments to the expungement process including
establishing a roster of arbitrators with additional training and
specific backgrounds or experience from which a panel would be selected
to decide an associated person's request for expungement of customer
dispute information. The arbitrators from this roster would decide
expungement requests where the customer arbitration is not resolved on
the merits or the associated person files a straight-in request to
expunge customer dispute information. FINRA received 70 comments in
response to Notice 17-42.\196\ A copy of Notice 17-42 is attached [sic]
as Exhibit 2a. A list of comment letters received in response to Notice
17-42 is attached [sic] as Exhibit 2b and copies of the comment letters
are attached [sic] as Exhibit 2c.
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    \196\ All references to commenters are to the comment letters as
listed in Exhibit 2b.
---------------------------------------------------------------------------

    In general, individual commenters supported some aspects of the
proposal and raised concerns with others. A summary of the comments and
FINRA's responses are discussed below.
1. Requirement To Request Expungement During a Customer Arbitration
    In Notice 17-42, FINRA proposed that an associated person who is
named as a party in a customer arbitration must request expungement
during the arbitration or be prohibited from seeking to expunge the
customer dispute information arising from the customer's statement of
claim during any subsequent proceeding under the Codes.
    NASAA and PIABA supported the proposed limitation. NASAA stated
that the limitation would help ensure timelier expungement requests and
help avoid requests made years after the underlying customer
arbitration has closed. PIABA stated that it did not believe that
requiring associated persons to request expungement during the customer
arbitration would result in more expungement requests because the

rule proposal contained ``heightened standards applicable to
expungement requests'' and a ``clear process for requesting expungement
following the close of the customer case,'' which may cause
``associated persons [to] be more deliberate in making expungement
requests.''
    Some commenters opposed the limitation for a variety of
reasons.\197\ Cornell stated that it ``could lead associated persons to
request expungement in every dispute in order to preserve the right to
request expungement.'' Keesal stated that these additional expungement
requests could result in increased expenses to associated persons and
member firms and ``could impede the goals of protecting investors and
ensuring that FINRA arbitration remains an expedient and cost-effective
forum.'' Herskovits expressed a concern that an associated person ``may
be unaware of the important rights he is waiving by failing to file a
request for expungement in the underlying arbitration.'' Saretsky,
responding to FINRA's concern that customers and documents may be
unavailable when an associated person files a separate expungement
request years after the customer arbitration closed, stated that
customers can be located through counsel or internet searches, and that
securities industry rules mandate the retention of important customer
and account records for several years. JonesBell and Behr stated that
the requirement to request expungement during the customer arbitration
should apply only to named associated persons who have also appeared in
the arbitration.
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    \197\ See Behr, Cornell, Herskovits, JonesBell, Keesal and
Saretsky.
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    FINRA believes that requiring an associated person who is named in
a customer arbitration to request expungement during that arbitration
or be prohibited from doing so should help limit expungement requests
filed years after the customer arbitration concludes, facilitate
customer participation in expungement hearings and help ensure that
relevant evidence does not become stale or unavailable.\198\ The
proposed requirement would also help ensure that the panel that has
heard the merits of the customer's claim at a hearing would decide the
expungement request. Accordingly, FINRA believes that all associated
persons who are named in non-simplified arbitrations should be required
to request expungement during the arbitration, and that the requirement
should not depend on whether the associated person has chosen to enter
an appearance in response to the complaint. In addition, FINRA notes
that if the named associated person requests expungement, under the
proposed rule change, the associated person would be required to appear
at the expungement hearing.
---------------------------------------------------------------------------

    \198\ See supra Item II.B.3.D., ``Time Limits for Straight-in
Requests--Quantitative Description.''
---------------------------------------------------------------------------

    The proposed amendments would also provide a detailed framework
governing the expungement process, which should help ensure that both
associated persons and customers are aware of their rights.
    FINRA acknowledges commenters' concerns that the proposed
limitation could potentially result in an increase in the number of
expungement requests and their associated costs. To address this
concern, as well as the related concern that the requirement could
result in expungement requests by associated persons simply to preserve
their right to request expungement, FINRA has modified the proposed
rule to allow the associated person to make the request 30 days before
the hearing in the customer arbitration.\199\ This should provide
sufficient time during the customer arbitration for the associated
person to evaluate whether an expungement request is warranted and help
avoid unnecessary expungement requests.
---------------------------------------------------------------------------

    \199\ See supra Item II.A.1.(II)A.1.a.i., ``Method of Requesting
Expungement.''
---------------------------------------------------------------------------

2. Deadline To File Expungement Request During a Customer Arbitration
    In Notice 17-42, FINRA proposed that an expungement request made in
a pleading during a customer arbitration must be made no later than 60
days before the first hearing session begins. Three commenters opposed
the proposal, stating that the 60-day filing deadline was an
impractical or unnecessary restriction that could cause an associated
person to miss the deadline and, therefore, an opportunity to file a
request.\200\ These commenters suggested that the proposal retain the
status quo, which allows an associated person to request expungement up
to and during any hearing. One commenter, Keesal, supported a deadline
of 60 days before the first scheduled hearing date, provided, however,
that the associated person ``has appeared in [the] Underlying Customer
Case.'' Keesal stated that this would ``ensure[ ] that all
participants'' were ``on notice of the issues to be addressed and
determined at the evidentiary hearing.'' SIFMA stated that the proposed
requirement ``to file for expungement 60 days prior to the first
scheduled hearing date'' was impractical and would require the payment
of expungement fees even though a large portion of cases settle within
60 days of the hearing.
---------------------------------------------------------------------------

    \200\ See Behr, JonesBell and SIFMA.
---------------------------------------------------------------------------

    After considering the comments, FINRA does not believe that it is
necessary to require a 60-day filing deadline. Instead, the proposed
rule change would require that an expungement request be filed no later
than 30 days before the first scheduled hearing.\201\ This should
provide the parties with sufficient case preparation time, as the
expungement issues will overlap with the issues raised by the
customer's claim. If a named associated person seeks to request
expungement after the 30-day filing deadline, the panel would be
required to decide whether to grant an extension and permit the
request.\202\ The purpose of the deadline is to provide the parties
other than the associated person with sufficient notice that
expungement will be addressed at the hearing.
---------------------------------------------------------------------------

    \201\ See supra Item II.A.1.(II)A.1.a.i., ``Method of Requesting
Expungement.''
    \202\ See supra note 37.
---------------------------------------------------------------------------

    In addition, FINRA has determined that requiring the party to
request expungement at least 30 days before the first ``hearing
session,'' which is typically the initial pre-hearing conference
(``IPHC'') rather than the first hearing on the merits, may not provide
the requesting party with sufficient time to make an informed decision
about whether to request expungement.\203\ Therefore, FINRA has
modified the proposal to require that an expungement request must be
made 30 days before the first scheduled ``hearing'' begins to provide
time for the requesting party to make a better-informed decision.\204\
---------------------------------------------------------------------------

    \203\ The term ``hearing session'' means any meeting between the
parties and arbitrator(s) of four hours or less, including a hearing
or a prehearing conference. See FINRA Rules 12100(p) and 13100(p).
The IPHC is scheduled after the panel is appointed. During the IPHC,
the panel will set discovery, briefing, and motions deadlines,
schedule subsequent hearing sessions, and address other preliminary
matters. The parties may agree, however, to forgo the IPHC. See
generally FINRA Rules 12500 and 13500.
    \204\ Under the Codes, a ``hearing'' means a hearing on the
merits. See supra note 21.
---------------------------------------------------------------------------

3. Panel From the Customer Arbitration Decides Expungement Requests
Where the Customer Arbitration Closes by Award After a Hearing
    In Notice 17-42, FINRA proposed that if the customer arbitration
closes by award, the panel from the customer arbitration would consider
and decide the expungement request during the customer arbitration.
    Some commenters disagreed with this aspect of the proposal and
suggested

that a panel selected from the Special Arbitrator Roster should decide
all expungement requests, even if the customer arbitration was decided
by an award.\205\ For example, PIABA stated that a panel from the
Special Arbitrator Roster should decide the expungement request
separate from the customer's claim because the ``decision a panel is
asked to make with respect to expungement is different than deciding
whether or not to find liability on a customer claim'' and because it
is ``unfair to require a customer to participate in a potentially
lengthy expungement hearing that they did not ask for.'' Grebenik
stated that the expungement request should be evaluated separately by
an independent panel because the arbitrator may ``have bias'' and ``has
heard comments and issues from the customer [about] the actual claim.''
AdvisorLaw stated that all expungement requests should receive the
``same level of review and consideration by a specially trained
arbitration panel.''
---------------------------------------------------------------------------

    \205\ See AdvisorLaw, Georgia State, Grebenik, PIABA, St.
John's, Tinklenberg and UNLV. In addition, St. John's ``strongly
agree[d] with requiring associated or unnamed persons to wait until
the conclusion of a customer's case to file an expungement
request.''
---------------------------------------------------------------------------

    Cornell expressed a concern that the proposed requirement could
``transform hearings designed to determine the merits of a customer
dispute into lengthy expungement hearings.'' Cornell proposed, as an
alternative, that the same panel from the customer arbitration make the
expungement determination, but do so in a separate proceeding to avoid
inconveniencing the customer.
    Keesal questioned whether the proposed requirement that the panel
from the customer arbitration decide the expungement request if the
customer arbitration ``closes by award'' would require the panel to
decide an expungement request if the cases closes as a result of an
order dismissing the case.
    In response to the comments, FINRA is clarifying that the panel
from the customer arbitration would be required to decide the
expungement request and include its decision in the award if the
arbitration ``closes by award after a hearing'' instead of where the
arbitration ``closes by award.'' FINRA believes that where the panel
from the customer arbitration has heard the parties' presentation of
the evidence about the customer's claim, that same panel is best
situated to decide the expungement request. In addition, it would
generally be more efficient and less costly for the panel from the
customer arbitration to decide the expungement request in these
circumstances. Although FINRA Rule 2080(b)(1) requires the panel to
make a separate, different determination than its determination on the
merits of the customer's claim, the evidence offered with respect to
both determinations should generally overlap. Accordingly, FINRA does
not believe that it would overly burden the parties if, when the
customer arbitration closes by award after a hearing, the panel must
also decide the expungement request in addition to the merits of the
customer's claim.
4. Qualifications of Arbitrators on the Special Arbitrator Roster
    In Notice 17-42, FINRA proposed that to qualify for the Special
Arbitrator Roster, a public chairperson would be required to: (i) Have
completed enhanced expungement training; (ii) be admitted to the
practice of law in at least one jurisdiction; and (iii) have five
years' experience in litigation, federal or state securities
litigation, administrative law, service as a securities regulator or
service as a judge. Commenters generally supported the proposed
requirements,\206\ but were split on whether the members of the Special
Arbitrator Roster should be required to be attorneys.\207\ One
commenter, Black, did not oppose the proposed qualifications but
suggested that they would likely result in fewer eligible arbitrators
for straight-in requests. PIABA stated that the Special Arbitrator
Roster should be made up of attorneys because it would be difficult for
FINRA, in some areas of the country, to alternatively fill the Special
Arbitrator Roster with local chair-qualified arbitrators that had
served on three arbitrations through award. PIABA also stated that
arbitrators with legal training may be better equipped to make the
distinction between the FINRA Rule 2080 grounds for expungement and
deciding the merits of the underlying claim. Keesal, in contrast,
stated that there was no rationale for allowing non-attorneys to decide
expungement requests made during the customer arbitration, but not
brought as a stand-alone claim.
---------------------------------------------------------------------------

    \206\ See, e.g., SIFMA (supporting the proposal, and stating
that more highly qualified and trained arbitrators should lead to a
more efficient and fair process); NASAA (supporting the proposal,
and stating that the extent to which the panels truly appreciate the
nuanced regulatory issues related to expungement largely depended on
the content and effectiveness of the proposed enhanced expungement
training).
    \207\ See AdvisorLaw, FSI, Gocek, Keesel, Osiason, Rodriguez and
White (all opposing the requirement that members of the Special
Arbitrator Roster be attorneys). But cf. Cornell, Georgia State,
NASAA, PIABA, Schlein, SIFMA, St. John's and Tinklenberg (all
supporting the requirement).
---------------------------------------------------------------------------

    Some commenters also expressed concerns that the arbitrators on the
Special Arbitrator Roster were not required to have securities industry
experience.\208\ FSI stated that without this background ``it may be
difficult to appreciate whether information has regulatory significance
or investor protection value.'' AdvisorLaw stated that ``[r]equiring
all expungement arbitrators to have a minimum of five years' experience
with the financial services industry [would be] appropriate considering
the complexity of expungement requests in cases involving customer
dispute information.'' In contrast, Public Citizen suggested that at
least one FINRA employee who meets the requirements of the Special
Arbitrator Roster be a member of every three-person panel that
considers an expungement request.
---------------------------------------------------------------------------

    \208\ See AdvisorLaw, Behr, FSI and JonesBell. Behr and
JonesBell also criticized the proposal as allowing claimants'
attorneys ``whose business is the ligation of customer complaints''
to serve on the Special Arbitrator Roster. FINRA notes, however,
that the proposal requires that arbitrators on the Special
Arbitrator Roster be public arbitrators, and that FINRA's definition
of public arbitrators excludes, among other persons, those who
devote 20 percent or more of their professional time to representing
parties in disputes concerning investment accounts or transactions,
or employment relationships within the financial industry. See FINRA
Rules 12100(aa) and 13100(x); see also supra note 8.
---------------------------------------------------------------------------

    After considering the comments, FINRA has determined not to propose
requiring that the members of the Special Arbitrator Roster be
attorneys; instead, they would be required to be public arbitrators who
have evidenced successful completion of, and agreement with, enhanced
expungement training, and have served as an arbitrator through award on
at least four customer-initiated arbitrations.\209\ FINRA believes that
the non-attorneys on its roster who meet these qualifications and
complete enhanced expungement training should be appropriately
knowledgeable and experienced to decide straight-in requests. The
requirement that the arbitrators on the Special Arbitrator Roster be
public arbitrators should help ensure that the arbitrators are free of
bias. The requirement that they have served on four cases through to
award would help ensure that the members of the Special Arbitrator
Roster have the necessary knowledge and experience to conduct hearings
in the forum.
---------------------------------------------------------------------------

    \209\ See proposed Rule 13806(b)(2)(B). In addition, to qualify
for the Special Arbitrator Roster, the arbitrators must be
chairpersons and, therefore, will have completed the training that
arbitrators must complete before they can be added to the
chairperson roster. See also supra note 80.

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

    Although FINRA believes that a sufficient number of arbitrators on
its roster would meet these additional qualifications, if the
Commission approves the proposed rule change, FINRA would engage in
efforts to recruit arbitrators for the Special Arbitrator Roster. FINRA
notes that its Office of Dispute Resolution has embarked on an
aggressive campaign to recruit new arbitrators, with a particular focus
on adding arbitrators from diverse backgrounds, professions and
geographical locations.\210\ FINRA's commitment and focus on this
critical initiative have resulted in increases in under-represented
categories of arbitrators.\211\ FINRA believes its continued commitment
to this important initiative will help the forum improve the quality,
depth and diversity of its public chairperson roster.
---------------------------------------------------------------------------

    \210\ See Our Commitment to Achieving Arbitrator and Mediator
Diversity at FINRA, https://www.finra.org/arbitration-mediation/our-commitment-achieving-arbitrator-and-mediator-diversity-finra.
    \211\ See supra note 210.
---------------------------------------------------------------------------

5. Special Arbitrator Roster Decides Expungement Requests if the
Customer Arbitration Closes Other Than by Award or by Award Without a
Hearing
    In Notice 17-42, FINRA proposed that if the customer arbitration
closes other than by award (e.g., the parties settle the arbitration),
the panel in that arbitration would not decide the associated person's
expungement request. Instead, the associated person would be permitted
to file an expungement request as a new claim under the Industry Code
against the member firm at which he or she was associated at the time
of the events giving rise to the customer dispute.
    The SEC Investor Advocate supported the proposal because FINRA's
data showed that where the arbitration case was not decided on the
merits, the expungement rate was ``simply too high for an extraordinary
remedy.'' (emphasis in original). NASAA also supported the proposal,
stating that ``post-settlement expungement hearings often consist of a
one-sided presentation of the facts'' because ``investors and their
counsel have little incentive to participate after the customer's
concerns have been resolved.''
    Some commenters disagreed with the proposal to require the
associated person to file a new arbitration under the Industry Code if
the customer arbitration closes other than by award, as inefficient or
burdensome on associated persons.\212\ As an alternative, SIFMA
suggested that the panel from the customer arbitration decide the
request; but, to address FINRA's concern for greater training and
increased qualifications for those arbitrators determining expungement,
SIFMA suggested that the proposed rule change require that at least one
arbitrator on every three-person panel be selected from the Special
Arbitrator Roster at the inception of each customer arbitration.
---------------------------------------------------------------------------

    \212\ See Behr, Herskovits, JonesBell, Saretsky and SIFMA.
Herskovits also stated that ``[financial advisors] will respond to
the proposed rule by filing a counterclaim or cross claim for
expungement in the customer arbitration, thus preventing the
customer arbitration from closing before a hearing is held on
expungement or the [financial advisors'] other claims for relief.''
FINRA notes, however, that under the proposed rule change, a request
for expungement relief would not prevent a customer arbitration from
closing.
---------------------------------------------------------------------------

    Saretsky stated that associated persons should be able to name the
customer, and that the ``minor inconvenience'' to the customer was
outweighed by the harm to the associated person. PIABA stated that it
would be ``inappropriate'' to name customers. St. John's ``support[ed]
allowing the proposed expungement process to proceed without the
customer having to be named a party to the request.''
    Schlein expressed concerns that a former employing member firm may
have ``little or no economic incentive to cooperate in an expungement
proceeding,'' and that it ``would also be difficult for the panel to
elicit potentially relevant facts'' where the ``economic and
reputational interests of the associated person and the employer are
aligned.'' Schlein also stated that an ``aggrieved customer has no
economic incentive to participate in an expungement proceeding that
occurs only after the underlying case has concluded.'' Schlein also
expressed concern that expungement requests would be referred to the
Special Arbitrator Roster even if the matter settled on the eve of
hearing, when it may be more efficient and promote investor protection
to require the existing panel to hear the expungement request. Schlein
stated that ``FINRA could ameliorate the possibility that a panel might
receive one-sided information'' by (i) providing the expungement panel
with significant filings from the underlying customer dispute, (ii)
permitting the panel to review the parties' settlement papers and (iii)
giving the associated person, firm, and the customer the right to
provide the panel with transcripts of the underlying customer
proceeding.
    FINRA believes that where there has not been a hearing on the
merits of the customer's claim, the members of the Special Arbitrator
Roster, who would be public chairpersons who have served on at least
four customer arbitrations in which a hearing was held and received
enhanced expungement training, would be better situated to decide
expungement requests than the panel from the customer arbitration.
FINRA does not believe that requiring the associated person to file a
new arbitration under the Industry Code would unduly burden the
associated person--instead of presenting evidence related to the
expungement request to the arbitrators in the customer arbitration in a
separate expungement hearing, they would instead present the evidence
supporting the expungement request to a panel randomly selected from
the Special Arbitrator Roster.
    FINRA shares commenters' concerns that the factual record could be
less well-developed where a straight-in request is filed against a
member firm and the associated person or member firm's interests are
aligned, or where the customer does not participate. FINRA does not
believe, however, that the customer should be named as a respondent or
be required to participate in an expungement proceeding after the
customer's claim has been resolved (e.g., after the claim is settled).
Instead, the proposed rule change addresses concerns that straight-in
requests filed against the member firm may be non-adversarial or lack
customer participation by, among other things (i) requiring that
straight-in requests be decided by three randomly selected public
chairpersons with enhanced training and experience,\213\ (ii) requiring
the panel to review the settlement documents,\214\ (iii) granting the
panel the explicit authority to request from the associated person, the
member firm at which he or she was associated at the time the customer
dispute arose or other party requesting expungement, any documentary,
testimonial or other evidence that it deems relevant to the expungement
request,\215\ and (iv) including provisions to encourage and facilitate
customer participation in expungement hearings.\216\
---------------------------------------------------------------------------

    \213\ See supra Item II.A.1.(II)B.2.b., ``Straight-in Requests
and the Special Arbitrator Roster, Composition of the Panel.''
    \214\ See proposed Rules 12805(c)(7) and 13805(c)(7).
    \215\ See proposed Rules 12805(c)(6) and 13805(c)(6).
    \216\ See supra Item II.A.1.(II)D.3., ``Customer's Participation
during the Expungement Hearing.''
---------------------------------------------------------------------------

    In response to commenters' concerns, FINRA has modified the
language in the proposed rule change to require that a straight-in
request be filed against the

member firm at which he or she was associated ``at the time the
customer dispute arose,'' consistent with the language used in other
FINRA rules, instead of ``at the time of the events giving rise to the
customer dispute.'' \217\
---------------------------------------------------------------------------

    \217\ See, e.g., FINRA Rules 12901(a)(1)(C) and 13903(b); see
also Kessal.
---------------------------------------------------------------------------

6. Three Randomly Selected Arbitrators Decide Straight-In Requests
    In Notice 17-42, FINRA proposed that the NLSS would randomly select
three public chairpersons to serve on the Special Arbitrator Roster who
would decide the request for expungement, and that the first arbitrator
selected would be the chairperson. The parties would not be permitted
to agree to fewer than three arbitrators or to the use of pre-selected
arbitrators. The associated person seeking expungement would not be
permitted to strike any arbitrators, but would be able to challenge a
selected arbitrator for cause.
    PIABA and AdvisorLaw supported the proposed random selection of
three arbitrators. PIABA stated that the random selection of three
arbitrators would ``reduce the risk of arbitrators being concerned
about ruling against an associated person for fear they may not be
selected for another panel.''
    Other commenters opposed the proposed rule change. SIFMA expressed
concerns that not permitting parties to rank and strike arbitrators
would remove the parties' involvement and input.\218\ SIFMA also stated
that there was no compelling need to use three rather than a single
arbitrator, and that the proposal would increase the financial burden
on registered representatives seeking expungement. Walter stated that a
single FINRA-qualified arbitrator with the special qualifications would
be ``more than qualified to make a determination as to expungement''
and that ``[h]aving to coordinate the schedules of three arbitrators
will delay the processing and will impose unnecessarily high additional
costs on all parties involved.'' \219\ Tinklenberg opposed the three-
person panel requirement because of the associated costs. Baritz stated
that the three-person panel requirement would increase expenses to
associated persons and the ``time necessary to rank and choose a
panel,'' and ``significantly delay the process.''
---------------------------------------------------------------------------

    \218\ SIFMA also proposed that ``to preserve arbitrator
neutrality and foster greater transparency,'' FINRA make publicly
available all training materials, communications with arbitrators
regarding expungement, and documents related to the addition,
removal or exclusion of any arbitrators from the roster. FINRA notes
that making such communications and documents publicly available
could have a chilling effect on arbitrator recruitment and
communications. FINRA does, however, make expungement training
materials publicly available. See supra note 82.
    \219\ See also Saretsky.
---------------------------------------------------------------------------

    Keesal opposed the random selection of three arbitrators as unfair
to associated persons, and suggested that FINRA ``randomly select a
minimum of 12 proposed arbitrators to serve on an expungement case,
from which the associated person and anyone else involved in the case
can rank and strike the proposed panelists.''
    FINRA notes that since straight-in requests may be complex, may not
be actively opposed by another party and the customer or customer's
representative typically does not appear at the hearing, having three
arbitrators from the Special Arbitrator Roster available to ask
questions and request evidence would help ensure that a complete
factual record is developed to support the arbitrators' decision. In
addition, FINRA believes that requiring two out of three randomly
selected public chairpersons with enhanced training and qualifications
to agree that expungement is appropriate in straight-in requests should
help FINRA maintain the integrity of its CRD records and ensure that
expungement is recommended in limited circumstances and only when one
of the FINRA Rule 2080(b)(1) grounds applies.
    FINRA does not believe that selecting three rather than one
arbitrator would overly burden the parties during the proceeding or
result in undue delay. As the parties would not be permitted to rank or
strike these arbitrators, this should shorten the average length of the
proceeding.\220\ In addition, pursuant to FINRA Rule 13403, FINRA would
send the lists generated by the NLSS to all parties at the same time,
within approximately 30 days after the last answer is due, regardless
of the parties' agreement to extend any answer due date.
---------------------------------------------------------------------------

    \220\ Under the Codes, the lists of ranked arbitrators must be
completed and returned to the Director no more than 20 days after
the date the Director sends the lists to the parties. See., e.g.,
FINRA Rules 12403(c)(3) and 13404. However, the parties may agree to
extend the due date. See FINRA Rules 12105 and 13105.
---------------------------------------------------------------------------

    FINRA recognizes that the proposed random arbitrator selection
process would limit party input on arbitrator selection. However, the
arbitrators on the Special Arbitrator Roster would have the experience,
qualifications and training necessary to conduct a fair and impartial
expungement hearing in accordance with the proposed rules, and to
render a recommendation based on a complete factual record developed
during the expungement hearing. FINRA believes that the higher
standards that the arbitrators must meet to serve on the Special
Arbitrator Roster should mitigate the impact of the absence of party
input on the selection of arbitrators. In addition, associated persons
and member firms would still be permitted to challenge any arbitrator
for cause.\221\
---------------------------------------------------------------------------

    \221\ See proposed Rule 13806(b)(4).
---------------------------------------------------------------------------

7. Simplified Arbitrations
    In Notice 17-42, FINRA proposed to require that an associated
person or unnamed person wait until the conclusion of a customer's
simplified arbitration case to file an expungement request, which would
be filed under the Industry Code against the member firm at which he or
she was associated at the time the customer dispute rose and would be
heard by a panel selected from the Special Arbitrator Roster.
    Some commenters supported the proposal.\222\ PIABA stated that it
would address a flaw in the current process, whereby a hearing is held
to consider expungement even if the customer has not requested a
hearing under FINRA Rule 12800, and that it would eliminate delays in
securing an award because the arbitrator is considering the request for
expungement. PIABA also stated that a single arbitrator should not be
permitted to decide an expungement request in a simplified arbitration
because the goals of the proposed amendments should not be affected
simply because the misconduct involved $50,000 or less.\223\ The SEC
Investor Advocate stated that it would be easier for a broker to
convince one arbitrator to recommend expungement. St. John's stated
that ``separating the expungement request from the underlying customer
case'' should result in ``faster decisions in simplified cases.''
---------------------------------------------------------------------------

    \222\ See NASAA, PIABA, The SEC Investor Advocate, St. John's
and UNLV.
    \223\ See also UNLV.
---------------------------------------------------------------------------

    Some commenters opposed the proposed change and stated that the
arbitrator who heard the evidence in the underlying simplified customer
arbitration would be most qualified to determine an expungement
request, and that it was unfair to impose the burden of a subsequent
arbitration on the associated person in this circumstance.\224\
---------------------------------------------------------------------------

    \224\ See Behr, JonesBell and Keesal.
---------------------------------------------------------------------------

    After considering the comments, FINRA has revised the proposed rule
change to provide that if a party requests expungement during a
simplified arbitration, the single arbitrator from the simplified
arbitration would be required to decide the

expungement request, regardless of how the simplified arbitration case
closes (e.g., even if the case settles).\225\ FINRA believes that it is
appropriate for the single arbitrator in a simplified arbitration case
to decide expungement requests, regardless of how the underlying case
closes, due to the lower monetary requirement and generally less
complex nature of these cases. To address concerns that customers
should not be required to participate in a hearing addressing
expungement requests in simplified arbitrations, the proposed rule
change would require arbitrators to hold a separate expungement-only
hearing after the customer's dispute is decided to consider the
expungement request if the customer elects to have his or her claim
decided on the papers or through an Option Two special proceeding. The
arbitrator would be required to issue a subsequent, separate award in
connection with the expungement-only hearing.\226\
---------------------------------------------------------------------------

    \225\ See proposed Rule 12800(e)(1).
    \226\ See proposed Rule 12800(e)(1)(A).
---------------------------------------------------------------------------

8. Fees That Parties Will Incur To File a New Claim Under the Industry
Code To Request Expungement
    Some commenters expressed concerns that if an associated person
were required to file a separate claim under the Industry Code to
request expungement after the customer arbitration closes other than by
award, the member firm and associated person would be assessed the
filing fee, member surcharge and process fees twice, in both the
underlying customer arbitration and the separate straight-in
request.\227\ SIFMA stated that this could increase the costs of
expungement and have the ``indirect effect of increasing the costs of
settlement, potentially discouraging settlement in smaller cases due to
the increased costs associated with expungement.''
---------------------------------------------------------------------------

    \227\ See Janney, Keesal and SIFMA.
---------------------------------------------------------------------------

    FINRA believes that it is appropriate to assess the member
surcharge and process fee for straight-in requests because they are
separate arbitrations before a separate panel of specially trained
arbitrators. The member firm, having not previously paid a member
surcharge and process fee for the expungement request, would be
assessed these fees when and if a straight-in request is filed. FINRA
would not, however, assess a second filing fee when an associated
person files a straight-in request if the associated person, or the
requesting party if it is an on-behalf-of request, has previously paid
the filing fee to request expungement of the same customer dispute
information during a customer arbitration.
9. Arbitrators ``Recommend'' Rather Than ``Grant'' Expungement
    In Notice 17-42, FINRA requested comment on whether to revise FINRA
Rules 12805 and 13805 to state that the panel may ``recommend'' rather
than ``grant'' expungement if the FINRA Rule 2080 standards are
satisfied. Several commenters supported the revision as a clarifying
change that would more accurately reflect the panel's role in the
expungement process.\228\ For example, PIABA stated that after the
panel recommends expungement, under FINRA Rule 2080 the member or
associated person ``must obtain an order from a court of competent
jurisdiction confirming the arbitration award containing expungement
relief.'' AdvisorLaw and Tinklenberg opposed the proposed rule change,
with AdvisorLaw stating that ``grant'' should be retained because
``[i]t has long been established that the decisions made in arbitration
are final and binding upon the parties,'' and that ``[c]hanging the
language of the Rule from the word `grant' to `recommend' may lessen
the perceived binding effect of the decision.'' \229\
---------------------------------------------------------------------------

    \228\ See Black, Cornell, Georgia State, Gocek, Keesal and
PIABA.
    \229\ See also Wellington.
---------------------------------------------------------------------------

    FINRA believes that ``recommend'' more accurately captures the
panel's authority in the expungement process. Pursuant to FINRA Rule
2080, FINRA will only expunge customer dispute information after a
court of competent jurisdiction enters an order requiring it to do so.
Accordingly, the proposed rule change would change the word ``grant''
to ``recommend'' in proposed Rules 12805 and 13805.\230\
---------------------------------------------------------------------------

    \230\ See supra note 10.
---------------------------------------------------------------------------

10. Unanimity of Decision
    In Notice 17-42, FINRA proposed that to recommend expungement, a
three-person panel of arbitrators would be required to agree
unanimously to recommend expungement. Some commenters opposed the
unanimity requirement as making it too difficult to obtain expungement
or because it was inconsistent with the ability of a customer to
prevail by a majority decision.\231\ SIFMA, for example, stated that
the unanimity requirement would ``impinge upon the fundamental fairness
of the expungement process in providing an effective balance to the
allegation-based complaint reporting regime and will have a significant
impact on registered representatives' ability to protect their
livelihoods and reputations.'' JonesBell and Behr stated that ``t[o]
require a unanimous decision on any expungement request obviously would
give a single individual sitting on a three-member panel the power to
prevent, for improper reason or no good reason at all, a meritorious
request that a false or erroneous claim be removed from a
representative's CRD record.''
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    \231\ See AdvisorLaw, Behr, Gocek, Hagenstein, Higgenbotham,
Janney, JonesBell, Keesal, Leven, Mahoney, Saretsky, SIFMA, Smart,
Speicher, Tinklenberg and White.
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    Other commenters supported requiring a unanimous decision to
recommend expungement.\232\ For example, PIABA stated that the
unanimity requirement would help ensure that expungement was an
extraordinary remedy that is only granted when it has no meaningful
investor protection or regulatory value. The SEC Investor Advocate
stated that the requirement would provide greater ``assurance that only
meritless complaints are expunged,'' and expressed hope ``that this
requirement will encourage brokers to only seek expungement when the
underlying customer dispute information is meritless.'' Cornell stated
that the ``unanimity requirement protects public investors by ensuring
that the threshold for expungement is high,'' and that, ``given the
history of abuse of the expungement process,'' would ``help[ ] to
ensure that when expungement is granted, the expungement is
legitimate.''
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    \232\ See Black, Cornell, Georgia State, Liebrader, NASAA,
PIABA, Public Citizen, The SEC Investor Advocate and UNLV. In
addition, Wellington stated that if an expungement was endorsed
unanimously, the term ``grant'' should be retained, there should be
little or no cost to the requesting party, and the associated person
should not have to obtain a court order directing the expungement.
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    After considering the comments, FINRA has determined to allow
arbitrators to recommend expungement through a majority decision,
consistent with what is required for other decisions in customer and
industry arbitrations.\233\ FINRA believes that requiring a majority of
arbitrators to agree that expungement is appropriate should be
sufficient to help preserve in the CRD system information that is
valuable to investors and regulators, while allowing associated persons
a reasonable mechanism to remove information that is inaccurate. FINRA
notes, however, that if the SEC approves the proposed rule change,
FINRA will continue to monitor the expungement process to determine if
additional changes are needed.
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    \233\ See FINRA Rules 12904(a) and 13904(a).

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11. No Investor Protection or Regulatory Value
    In Notice 17-42, FINRA proposed to require that a panel find that
customer dispute information has ``no investor protection or regulatory
value'' to recommend expungement. Several commenters opposed the
requirement.\234\ For example, Herskovits stated that the standard was
vague and opened the possibility of inconsistent rulings among
different panels. FSI stated that the proposal was ``confusing as it is
difficult to imagine a scenario where information that is false,
clearly erroneous, factually impossible or did not involve the advisor,
would have regulatory or investor protection value.'' SIFMA stated that
the requirement was redundant in light of the current high standards in
FINRA Rule 2080(b)(1), may have the effect of discouraging meritorious
expungement claims, was already incorporated into the Guidance and
would transform the traditional role of arbitrators as fact-finders and
require them to make a policy determination in each case. Keesal stated
that the change would unnecessarily complicate the expungement process
to the detriment of associated persons with no corresponding investor
protection value. Saretsky proposed that arbitrators instead be
required to find that the customer dispute had no ``reasonable''
investor protection or regulatory value.
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    \234\ See Baritz, FSI, Gocek, Herskovits, Janney, Keesal,
Saretsky, SIFMA and White.
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    NASAA expressed a concern with the proposal because it would allow
arbitrators, rather than regulators, to make the finding. The SEC
Investor Advocate expressed the same concern, and suggested that FINRA
provide a framework on how the standard should be interpreted and
applied to avoid disparate interpretations and outcomes. Schlein stated
that arbitrators ``should receive supplemental training on the proposed
new standard,'' and that FINRA should also ``offer training or
instructional materials to judges'' who will be required to confirm an
expungement award.
    Other commenters supported the requirement.\235\ For example, PIABA
suggested that arbitrators should be required to make the finding
because in practice arbitration panels ``often believe that the Rule
2080 standards are easily met'' and ``do not grasp the fact that'' a
claim may not be factually impossible or false even though a customer
has not met his or her burden of proof for purposes of establishing
liability or rebutting an affirmative defense. St. John's stated that
the proposed requirement would ``help strengthen investor protection by
improving confidence in the accuracy of the CRD system and
BrokerCheck.'' Cornell stated that the requirement would allow the
panel to look beyond the claim and at the associated person's record as
a whole, including other customer dispute information, which would
protect public investors. Liebrader stated that ``[t]oo many legitimate
claims disappear from public view in the largely uncontested
expungement process.''
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    \235\ See Cornell, Liebrader, PIABA, St. John's and UNLV.
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    After considering the comments, FINRA has determined not to propose
that the panel must find ``no investor protection or regulatory value''
to recommend expungement. FINRA agrees with some commenters that the
standard may, if codified into rule language, create confusion among
arbitrators and the potential for inconsistent application among
different arbitrators and panels.\236\ FINRA also believes that the
overall proposal, coupled with the existing standards in FINRA Rule
2080, would be sufficient to help preserve in the CRD system
information that is valuable to investors and regulators, while
allowing associated persons to remove information that is inaccurate.
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    \236\ FINRA notes that in its Order approving NASD Rule 2130
(now FINRA Rule 2080), which describes the current findings that
arbitrators must make to recommend expungement, the SEC stated that
``it believes the proposal strikes the appropriate balance between
permitting members and associated persons to remove information from
the CRD system that holds no regulatory value, while at the same
time preserving information on the CRD system that is valuable to
investors and regulators.'' See Securities Exchange Act Release No.
48933 (December 16, 2003) 68 FR 74667, 74672 (December 24, 2003)
(Order Approving File No. SR-NASD-2002-168).
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12. Panel Must Identify One of the FINRA Rule 2080(b)(1) Grounds for
Expungement
    In Notice 17-42, FINRA clarified in proposed Rules 12805 and 13805
that the FINRA Rule 2080 grounds for expungement that the panel must
identify to recommend expungement are the grounds stated in paragraph
(b)(1) of FINRA Rule 2080. In response to Notice 17-42, PIABA supported
clarifying ``that an arbitration panel may not recommend expungement on
grounds other than those set forth in Rule 2080.'' Keesal, however,
viewed FINRA's proposal as ``remov[ing] the arbitrator's ability to
grant expungement relief based on judicial or arbitral findings other
than those listed in Rule 2080(b)(1).'' \237\
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    \237\ See also Baritz; compare SIFMA (stating that ``FINRA
already imposes high standards in order for arbitrators to recommend
expungement,'' and that ``FINRA Rule 2080(b)(1) requires a finding
either that: (i) the claim or allegation is factually impossible or
clearly erroneous; (ii) the registered person was not involved in
the alleged sales practice violation, forgery, theft,
misappropriation or conversion of funds, or (iii) the claim,
allegation, or information is false'').
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    FINRA notes that under current FINRA Rule 12805, arbitrators are
required to base their expungement recommendations on one of the three
grounds listed in FINRA Rule 2080(b)(1).\238\ Accordingly, the proposed
rule change clarifies in proposed Rules 12805 and 13805 that the
grounds for expungement that the panel must indicate in its award are
the grounds in FINRA Rule 2080(b)(1).\239\
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    \238\ See Regulatory Notice 08-79 (December 2008) (stating that
``[t]he arbitration panel must indicate which of the grounds for
expungement under Rule 2130(b)(1)(A)-(C) serve as the basis for
their expungement order, and provide a brief written explanation of
the reasons for ordering expungement'').
    \239\ See proposed Rules 12805(c)(8) and 13805(c)(8).
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13. Time Limits for Straight-In Requests
    In Notice 17-42, FINRA proposed that for customer arbitrations,
associated persons must file straight-in requests within one-year from
the date the customer arbitration closed. For customer complaints,
FINRA proposed that associated persons must file straight-in requests
within one-year from the date that a member firm initially reported the
complaint to the CRD system. For customer arbitrations that close and
customer complaints that are reported prior to the effective date of
the proposed rule change, the associated person would have six months
from the effective date of the rule, if approved by the Commission, to
file the expungement request.
    Some commenters opposed the proposed time limitations as
unwarranted or too short.\240\ For example, SIFMA stated that the one-
year time limitation is unnecessary because the general six-year period
to file all claims also applies to expungement requests. SIFMA also
stated that the one-year time limitation is insufficient for firms to
properly investigate and respond to customer complaints, and would
create inefficiency by requiring the filing of requests to expunge
customer complaints that would then be stayed if they evolved into an
arbitration. SIFMA also requested ``further guidance on the extended
time period that will be afforded registered representatives who have
eligible claims for expungement

that would become ineligible if the rule proposals were implemented.''
\241\ JonesBell and Behr stated that an associated person may be
unaware that a member firm ``has reported a customer complaint on his
or her CRD.'' \242\ FSI stated that associated persons should have
three years to file expungement requests to provide them with time to
assess how the information will impact their business, which may not be
immediately apparent. Keesal stated that because customers may wait up
to six years to file an arbitration claim under FINRA Rule 12206 after
making a customer complaint, the proposed time limits would be unfair
and would increase the frequency of requests, as the associated person
would have to make a second expungement request if the customer
complaint was later the subject of an arbitration claim. Saretksy
stated that the time restriction was unnecessary because arbitrators
are ``free to weigh the evidentiary value (if any) of an associated
person's undue delay.'' Herskovits stated that FINRA's concern about
document retention was ``misplaced'' because SEC and FINRA rules
``generally mandate the preservation of most records for 3 to 6 years
(and many firms preserve documents for longer periods of time).''
Grebenik expressed concerns with the proposed time limits because there
were ``thousands of advisors who have customer disputes and do not know
about the expungement process.''
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    \240\ See AdvisorLaw, Barber, Baritz, Behr, Brookes, FSI, Glenn,
Grebenik, Herskovits, Higgenbotham, JonesBell, Keesal, Leven,
Saretsky, SIFMA, Smart, Speicher, Stephens and Walter.
    \241\ See also AdvisorLaw (stating that providing six months
where the customer arbitration closes on or prior to the effective
date of the proposed rule change was arbitrary and creates an
unjustifiable distinction between cases that close prior to the
rules and those that close after).
    \242\ See supra note 48.
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    Other commenters supported the time limits.\243\ For example, UNLV