[Federal Register Volume 87, Number 156 (Monday, August 15, 2022)]
[Notices]
[Pages 50170-50200]
[FR Doc No: 2022-17430]

Vol. 87

Monday,

No. 156

August 15, 2022

Part II

 Securities and Exchange Commission

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Self-Regulatory Organizations; Financial Industry Regulatory Authority,
Inc.; Notice of Filing of a Proposed Rule Change To Amend the Codes of
Arbitration Procedure To Modify the Current Process Relating to the
Expungement of Customer Dispute Information; Notice

Federal Register / Vol. 87 , No. 156 / Monday, August 15, 2022 /
Notices

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95455; File No. SR-FINRA-2022-024]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
the Codes of Arbitration Procedure To Modify the Current Process
Relating to the Expungement of Customer Dispute Information

August 9, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on July 29, 2022, the Financial Industry
Regulatory Authority, Inc. (``FINRA'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by FINRA. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    FINRA is proposing to amend the Code of Arbitration Procedure for
Customer Disputes (``Customer Code'') and the Code of Arbitration
Procedure for Industry Disputes (``Industry Code'') (together,
``Codes'') to modify the current process relating to the expungement of
customer dispute information.
    The proposed rule change would amend the Codes to impose
requirements on expungement requests (a) filed by an associated person
during an investment-related, customer-initiated arbitration
(``customer arbitration''), or filed by a party to the customer
arbitration on behalf of an associated person (``on-behalf-of
request''), or (b) filed by an associated person separate from a
customer arbitration (``straight-in request''). Specifically, the
proposed rule change would: (1) require that a straight-in request be
decided by a three-person panel that is randomly selected from a roster
of experienced public arbitrators with enhanced expungement training;
\3\ (2) prohibit parties to a straight-in request from agreeing to
fewer than three arbitrators to consider their expungement requests,
striking any of the selected arbitrators, stipulating to an
arbitrator's removal, or stipulating to the use of pre-selected
arbitrators; (3) provide notification to state securities regulators of
all expungement requests and a mechanism for state securities
regulators to attend and participate in expungement hearings in
straight-in requests; (4) impose strict time limits on the filing of
straight-in requests; (5) codify and update the best practices in the
Notice to Arbitrators and Parties on Expanded Expungement Guidance
(``Guidance'') applicable to all expungement hearings, including
amendments to establish additional requirements for expungement
hearings, to facilitate customer attendance and participation in
expungement hearings and to codify the panel's \4\ ability to request
any evidence relevant to the expungement request; \5\ (6) require the
unanimous agreement of the panel to issue an award containing
expungement relief; and (7) establish procedural requirements for
filing expungement requests, including for on-behalf-of requests. The
proposed rule change would also amend the Customer Code to specify
procedures for requesting expungement of customer dispute information
during simplified arbitrations.
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    \3\ Among other requirements, public arbitrators are not
employed in the securities industry and do not devote 20 percent or
more of their professional work to the securities industry or to
parties in disputes concerning investment accounts or transactions
or employment relationships within the financial industry. See FINRA
Rules 12100(aa) and 13100(x).
    \4\ Under the Codes, the term ``panel'' means the arbitration
panel, whether it consists of one or more arbitrators. See FINRA
Rules 12100(u) and 13100(s). Unless otherwise specified, the rule
filing uses the term ``panel'' to mean either a panel or single
arbitrator.
    \5\ See FINRA Dispute Resolution Services, Notice to Arbitrators
and Parties on Expanded Expungement Guidance, https://www.finra.org/arbitration-and-mediation/notice-arbitrators-and-parties-expanded-expungement-guidance (last updated Sept. 2017).
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    The text of the proposed rule change is available on FINRA's
website at http://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
I. Background and Discussion
A. Overview
    Over the course of many years, FINRA has adopted a number of rules
\6\ governing the use of the arbitration forum administered by FINRA
Dispute Resolution Services (``DRS'') to seek expungement of customer
dispute information.\7\ These rules seek to balance the interests of
securities regulators in having accurate and relevant information to
fulfill their regulatory responsibilities; the interests of investors
in having access to accurate and meaningful information about
associated persons with whom they may entrust their money; the
interests of broker-dealer firms in having accurate information for use
in making informed employment decisions; and the interests of the
brokerage community in having a fair process to address inaccurate
customer dispute information.
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    \6\ A chronology of the steps FINRA has taken to strengthen the
expungement framework is available at https://www.finra.org/rules-guidance/key-topics/expungement.
    \7\ The DRS arbitration forum is operated in accordance with
rules approved by the SEC and is subject to ongoing oversight by the
SEC. Decisions in the DRS arbitration forum are made by independent
arbitrators selected by the parties, not by DRS staff. In almost
every arbitration proceeding seeking expungement of customer dispute
information, all or a majority of the arbitrators reviewing requests
for expungement are public arbitrators (who, among other
requirements, have never been employed in the securities industry).
See also supra note 3. DRS's role in the arbitration process is to
administer cases brought to the DRS arbitration forum in a neutral,
efficient and fair manner.
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    FINRA is concerned, however, that the current expungement process
is not working as intended--as a remedy that is appropriate only in
limited circumstances in accordance with the narrow standards in FINRA
rules. As a result, over the past several years, FINRA has taken
numerous, meaningful steps to address the concerns that FINRA and other
interested parties have identified with the current expungement process
\8\ and to enhance that process, including by:
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    \8\ See infra Item II.A.1.I.D., ``Concerns With the Current
Expungement Process,'' (discussing concerns with the current
expungement process).
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     publishing Regulatory Notice 17-42 to seek comment on
proposed changes

to further enhance the current expungement process; \9\
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    \9\ Regulatory Notice 17-42 (December 2017) (``Notice''),
https://www.finra.org/rules-guidance/notices/17-42. The Notice
requested comment on, among other things: establishing a roster of
public chairpersons with additional training and experience from
which a panel would be selected to decide straight-in requests;
imposing time limits on when an associated person can request
expungement in a straight-in request; limiting an associated person
who is named as a party in a customer arbitration to one opportunity
to request expungement, and that opportunity must be exercised
during the customer arbitration; codifying a party's ability to
request expungement on behalf of an associated person who is the
subject of a customer arbitration, but unnamed, and establishing
procedures for such requests; and applying a minimum fee to
expungement requests.
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     amending FINRA rules to apply minimum fees to requests for
expungement of customer dispute information to address concerns about
practices to avoid fees that were intended to be applicable to
expungement requests; \10\ and
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    \10\ An expungement request is a non-monetary or not specified
claim (``non-monetary claim''). The fees applicable to non-monetary
claims are higher than those applicable to small monetary claims.
See FINRA Rule 13900(a)(1). If an associated person files a
straight-in request and does not add a monetary claim to the
request, the associated person will be assessed the filing fee
associated with a non-monetary claim. The Codes require that non-
monetary claims are decided by a three-person panel unless the
parties agree in writing to one arbitrator. See FINRA Rules 12401
and 13401. FINRA amended the Codes to apply minimum fees to
expungement requests, whether the request is made as part of the
customer arbitration or the associated person files a straight-in
request. As a result of the amendments, parties requesting
expungement can no longer avoid the fees intended for such requests
under the Codes or automatically qualify for a single arbitrator.
The amendments also apply a minimum process fee and member surcharge
to straight-in requests, as well as a minimum hearing session fee to
expungement-only hearings. See Securities Exchange Act Release No.
88945 (May 26, 2020), 85 FR 33212 (June 1, 2020) (Order Approving
File No. SR-FINRA-2020-005); see also Regulatory Notice 20-25 (July
20, 2020) (announcing a September 14, 2020 effective date), https://www.finra.org/rules-guidance/notices/20-25.
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     in September 2020, filing with the SEC a rule filing to
make several significant enhancements to the current expungement
process by establishing special arbitration procedures for expungement
requests (``2020 Rule Filing'').\11\
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    \11\ See infra note 263. The 2020 Rule Filing, comments received
in response to the filing and FINRA's responses to the comments are
discussed below in Item II.C.
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    On May 28, 2021, following discussions with SEC staff, FINRA
withdrew the 2020 Rule Filing from the SEC in order to consider whether
modifications to the filing were appropriate in response to concerns
raised by SEC staff and commenters.\12\ At that time, FINRA indicated
its intent to continue pursuing enhancements to the current expungement
process, while also continuing discussions with the North American
Securities Administrators Association (``NASAA'') and other interested
parties regarding a more fundamental redesign of the current
expungement process, separate from and in addition to the changes
included in the 2020 Rule Filing.\13\
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    \12\ See FINRA Statement on Temporary Withdrawal of Specialized
Arbitrator Roster Rule Filing (May 28, 2021), https://www.finra.org/media-center/newsreleases/2021/finra-statement-temporary-withdrawal-specialized-arbitrator-roster.
    \13\ See supra note 12. In addition, FINRA recently published a
Discussion Paper on Expungement of Customer Dispute Information
(April 2022) (``Discussion Paper''), https://www.finra.org/sites/default/files/2022-04/Expungement_Discussion_Paper.pdf. The
Discussion Paper provides background and data regarding expungement
of customer dispute information and explores potential alternatives
to the current expungement process. The Discussion Paper also
explains how the proposed changes in the 2020 Rule Filing would
address key concerns with the current expungement process and that
FINRA's Board of Governors was continuing to consider further
changes to enhance the 2020 Rule Filing.
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    FINRA believes the proposed amendments discussed below are
responsive to the concerns that have been identified with the current
expungement process and would help protect the integrity of the Central
Registration Depository (``CRD[supreg]''), the central licensing and
registration system used by the U.S. securities industry and its
regulators,\14\ by making substantial improvements to the current
expungement process. Key proposed changes include:
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    \14\ See infra note 18 and accompanying text (discussing the CRD
system).
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    [rtarr8] For All Requests for Expungement of Customer Dispute
Information:
     Requiring that the panel deciding the expungement request
issue an award containing expungement relief only if the panel
unanimously finds that the information to be expunged is factually
impossible, clearly erroneous or false, or that the associated person
was not involved in the alleged misconduct.
     Providing state securities regulators with notification of
all expungement requests.
     Requiring associated persons to appear at the expungement
hearing in person or by video conference.
     Facilitating customer attendance and participation by
notifying customers of the time, date and place of any prehearing
conferences and the expungement hearing; codifying that customers are
entitled to attend and participate in prehearing conferences and the
expungement hearing and to be represented, if they choose; and
providing customers with access to all relevant documents filed in the
arbitration.
     Specifically authorizing the panel to request any
documentary, testimonial or other evidence that it deems relevant from
the broker-dealer firm or associated person seeking expungement.
     Requiring that the panel provide enough detail in the
award to explain its rationale for including expungement relief in the
award.
     Precluding an associated person from requesting
expungement of customer dispute information if a panel previously
considered the merits of, or a court previously denied, a request to
expunge the same customer dispute information.
     Prohibiting an associated person who withdraws an
expungement request from refiling the request at a later date, thereby
preventing ``arbitrator shopping.''
    [rtarr8] For Straight-in Requests: \15\
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    \15\ As discussed in more detail below, under the proposed
amendments, a straight-in request would include a request to expunge
customer dispute information from the CRD system filed under the
Industry Code: (1) by an associated person named in a customer
arbitration after the customer arbitration closes other than by
award or by award without a hearing; (2) arising from a customer
complaint or civil litigation rather than a customer arbitration; or
(3) by an associated person who was the subject of a customer
arbitration, but unnamed, and where a named party in the customer
arbitration did not request expungement on behalf of the unnamed
associated person, or where a named party made an on-behalf-of
request, but the customer arbitration closed other than by award or
by award without a hearing.
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     Imposing strict time limits within which associated
persons may request expungement--DRS would deny the DRS arbitration
forum if the expungement request is made:
    [ssquf] more than three years after the date the customer complaint
was initially reported in the CRD system (if the customer complaint
does not evolve into a customer-initiated arbitration or civil
litigation); or
    [ssquf] more than two years after the close of the customer-
initiated arbitration or civil litigation associated with the customer
dispute information.
     Requiring that straight-in requests be filed under the
Industry Code against the broker-dealer firm at which the associated
person was associated at the time of the events giving rise to the
customer dispute.
     Permitting an authorized representative of state
securities regulators to attend and participate as a non-party in
prehearing conferences and the expungement hearing to the same extent
as customers could attend and participate.
     Requiring that all straight-in requests be decided by a
three-person panel, randomly selected from a roster of experienced
public arbitrators with enhanced expungement training and with no
significant ties to the industry (``Special Arbitrator Roster'').

     Prohibiting the parties from: (1) agreeing to fewer than
three arbitrators to consider their expungement requests; (2) striking
any of the selected arbitrators; (3) stipulating to an arbitrator's
removal; or (4) stipulating to the use of pre-selected arbitrators.\16\
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    \16\ Under the Codes, the DRS arbitrator selection process uses
the Neutral List Selection System (``NLSS''), a computer algorithm,
to generate lists of arbitrators on a random basis from DRS's
rosters of arbitrators for the selected hearing location. After the
parties receive the arbitrator lists, the parties select their panel
through a process of striking and ranking the arbitrators on the
lists. Under the proposed amendments, NLSS would randomly select
three arbitrators from the Special Arbitrator Roster to consider the
straight-in request. The parties, whose interests may be aligned,
would not have the ability to select the arbitrators.
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    [rtarr8] For Expungement Requests Considered During a Customer
Arbitration:
     Requiring an associated person named in a customer
arbitration to request expungement during that customer arbitration or
forfeit the opportunity to request expungement in any subsequent
proceeding, thereby ensuring that the panel that hears the full merits
of a customer arbitration also reviews a related expungement request.
     Conditioning and limiting the ability of a party to a
customer arbitration to request expungement during the customer
arbitration on behalf of an associated person who is the subject of a
customer arbitration, but unnamed, so that the associated person cannot
later claim they were not aware of the prior expungement request made
on their behalf.
    Prior to discussing each of the proposed amendments, FINRA provides
below background information regarding the reporting of customer
dispute information to the CRD system and its public disclosure through
BrokerCheck[supreg],\17\ the current process for requesting expungement
through the DRS arbitration forum and concerns regarding the current
process.
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    \17\ See infra note 22 and accompanying text.
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B. Customer Dispute Information in the CRD System
    FINRA is mandated by federal statute to collect and maintain
registration information about broker-dealer firms and their associated
persons. To satisfy this statutory responsibility, FINRA operates the
CRD system, the central licensing and registration system used by
FINRA, the SEC, other self-regulatory organizations (``SROs''), state
securities regulators and broker-dealer firms.\18\ FINRA operates the
CRD system pursuant to policies developed by FINRA and NASAA. FINRA,
state securities regulators and the SEC use the CRD system as an
important source of regulatory information to help inform
registrations, examinations, investigations and disciplinary actions to
protect investors and safeguard the markets. In addition, broker-dealer
firms use information in the CRD system to help them make informed
employment decisions.\19\
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    \18\ The concept for the CRD system was developed by FINRA
jointly with NASAA. The CRD system fulfills FINRA's statutory
obligation to establish and maintain a system to collect and retain
registration information set forth in Section 15A(i) of the Exchange
Act. NASAA and state regulators play a critical role in the ongoing
development and implementation of the CRD system.
    \19\ As of December 31, 2021, over 60 million registrations for
associated persons have been processed through the CRD system over a
period spanning more than 20 years.
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    In general, the information in the CRD system is reported by
registered broker-dealer firms, associated persons and regulatory
authorities in response to questions on the uniform registration
forms.\20\ These forms are used to collect registration information,
which includes, among other things, administrative, regulatory,
criminal history, financial and other information about associated
persons, such as investment-related, customer-initiated arbitrations,
civil litigations or customer complaints (i.e., ``customer dispute
information''). Customer dispute information maintained in the CRD
system is reported through Forms U4 and U5.\21\
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    \20\ The uniform registration forms are Form BD (Uniform
Application for Broker-Dealer Registration), Form BDW (Uniform
Request for Broker-Dealer Withdrawal), Form BR (Uniform Branch
Office Registration Form), Form U4 (Uniform Application for
Securities Industry Registration or Transfer), Form U5 (Uniform
Termination Notice for Securities Industry Registration) and Form U6
(Uniform Disciplinary Action Reporting Form).
    \21\ FINRA, NASAA and state securities regulators developed
Forms U4 and U5. Any amendments to these uniform registration forms
require collaboration with, and agreement between FINRA, NASAA and
state securities regulators before being filed with the SEC for
approval. Several questions on Forms U4 and U5 require associated
persons to disclose certain investment-related, customer-initiated
arbitrations, civil litigations or customer complaints which allege
sales practice violations. See Form U4, Question 14I, https://www.finra.org/sites/default/files/form-u4.pdf and Form U5, Question
7E, https://www.finra.org/sites/default/files/form-u5.pdf.
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    Pursuant to rules approved by the SEC and pursuant to its statutory
mandate, FINRA makes specific CRD information publicly available
through BrokerCheck.\22\ BrokerCheck is a free tool available on
FINRA's website to help investors make informed choices about the
associated persons and broker-dealer firms with whom they may conduct
business.\23\ As part of its statutory obligation, FINRA publishes on
BrokerCheck extensive disclosure information, including customer
dispute information for associated persons who are currently or were
formerly registered with FINRA.\24\
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    \22\ BrokerCheck fulfills FINRA's statutory obligation under
Section 15A(i) of the Exchange Act to establish and maintain a
readily accessible electronic or other process, to receive and
promptly respond to inquiries regarding registration information on,
among others, broker-dealer firms and associated persons. A detailed
description of the information made available through BrokerCheck is
available at http://www.finra.org/investors/about-brokercheck.
    \23\ In 2021 alone, almost 38.3 million searches of firms and
financial professionals were conducted on BrokerCheck.
    \24\ As of December 31, 2021, BrokerCheck disclosed information
about approximately 3,400 broker-dealer firms and approximately
612,000 associated persons. BrokerCheck also disclosed information
about more than 17,000 broker-dealer firms and 548,000 associated
persons formerly registered with FINRA. Formerly registered
associated persons, although no longer in the securities industry in
a registered capacity, may work in other investment-related
industries or may seek to attain other positions of trust with
potential investors. Pursuant to FINRA rules which are approved by
the SEC, records for formerly registered associated persons are
available in BrokerCheck for 10 years after an associated person
leaves the brokerage industry, and associated persons who are the
subject of disciplinary actions and certain other disclosure events
remain on BrokerCheck permanently.
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    The collection of registration information in the CRD system and
the disclosure of the information through BrokerCheck serves three
important purposes: (1) allowing investors to obtain information about
an associated person or broker-dealer firm with whom they may do
business; (2) providing securities regulators with a critical
regulatory tool in overseeing the activities of associated persons and
in detecting regulatory problems; and (3) providing broker-dealer firms
with information for use in making informed employment decisions. The
value of the information is dependent on its completeness and accuracy.
The absence of accurate information, as well as the presence of clearly
inaccurate information, decreases the reliability and hence the value
of the disclosure regime.
    Sometimes, associated persons seek to remove, or ``expunge,''
customer dispute information from the CRD system and, thereby, from
BrokerCheck. To do this, FINRA rules require that an associated person
must obtain an order from a court of competent jurisdiction (1)
directing such expungement or (2) confirming an arbitration award
containing expungement relief.\25\ FINRA will expunge customer dispute
information from the CRD system only pursuant to a court order.
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    \25\ See FINRA Rule 2080.
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    As discussed in more detail below, FINRA rules specify a narrow set
of

circumstances in which expungement of customer dispute information from
the CRD system is appropriate. An arbitrator considering an expungement
request in the DRS arbitration forum must make a finding that the
information to be expunged is factually impossible, clearly erroneous
or false, or that the associated person was not involved in the alleged
misconduct.\26\ When these standards were approved by the SEC, it was
contemplated that expungement would be an extraordinary remedy that
would be allowed only in these limited circumstances.\27\
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    \26\ See FINRA Rules 2080, 12805 and 13805.
    \27\ See Securities Exchange Act Release No. 58886 (October 30,
2008), 73 FR 66086 (November 6, 2008) (Order Approving File No. SR-
FINRA-2008-010).
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C. Requesting Expungement Through the DRS Arbitration Forum
    The process of seeking expungement through the DRS arbitration
forum originally developed when associated persons who were not found
liable in a customer arbitration asked the panel in that same case to
expunge the underlying customer dispute from the CRD system. Use of the
DRS arbitration forum for expungement subsequently expanded when
associated persons began requesting expungement through straight-in
requests. Typically, these straight-in requests for expungement are
filed after the customer arbitration settles or where a customer
complaint has not evolved into a customer arbitration. Straight-in
requests present inherent difficulties and panels deciding straight-in
requests issue awards containing expungement relief more often than
panels deciding expungement requests made in customer arbitrations.\28\
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    \28\ From January 2016 to December 2021 (the ``sample period''),
an arbitrator or panel issued awards containing expungement relief
in response to 58 percent of requests made during a customer
arbitration but issued awards containing expungement relief in
response to 84 percent of straight-in requests. See infra Item
II.B.2., ``Economic Baseline,'' for further discussion.
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    For either type of expungement request initiated in the DRS
arbitration forum, an independent arbitrator or a panel of independent
arbitrators decides whether the party requesting expungement has
established one of the Rule 2080(b)(1) grounds for expungement.\29\
Pursuant to FINRA rules, in order to issue an award containing
expungement relief, the panel shall first hold a recorded hearing
session regarding the appropriateness of expungement of the customer
dispute information, and in cases involving settlements, review
settlement documents and consider the amount of payments made to any
party and any other terms and conditions of the settlement.\30\
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    \29\ See infra note 31 and accompanying text (discussing the
grounds for issuing an award containing expungement relief).
    \30\ See FINRA Rules 12805 and 13805.
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    FINRA rules also require the panel to specify in the award which of
the Rule 2080(b)(1) grounds serves as a basis for the expungement order
and provide a brief written explanation of the reasons for its finding
that one or more of the Rule 2080(b)(1) grounds applies to the facts of
the case.\31\ Thus, to include expungement relief in an award, the
panel must find that: (1) the claim, allegation or information is
factually impossible or clearly erroneous; (2) the associated person
was not involved in the alleged investment-related sales practice
violation, forgery, theft, misappropriation or conversion of funds; or
(3) the claim, allegation or information is false.\32\ Arbitration
awards are final and binding unless vacated based on one of the limited
grounds set forth in applicable state or federal statutes.\33\
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    \31\ See supra note 30; see also Securities Exchange Act Release
No. 58886 (October 30, 2008), 73 FR 66086, 66087 (November 6, 2008)
(Order Approving File No. SR-FINRA-2008-010) (stating that new Rules
12805 and 13805 require the arbitration panel to indicate ``which of
the grounds for expungement in Rule [2080](b)(1)(A)-(C) serves as
the basis for the expungement . . . ''); Regulatory Notice 08-79
(December 2008) (stating that ``[t]he arbitration panel must
indicate which of the grounds for expungement under Rule
[2080](b)(1)(A)-(C) serve as the basis for their expungement order,
and provide a brief written explanation of the reasons for ordering
expungement''); FINRA Dispute Resolution Services Arbitrators Guide,
p. 74, https://www.finra.org/sites/default/files/arbitrators-ref-guide.pdf (explaining that ``FINRA Rule 2080 establishes procedures
to ensure that expungement occurs only when the arbitrators find and
document one of [the three grounds that are listed in FINRA Rule
2080(b)]''); Guidance, supra note 5. DRS's Basic Arbitrator Training
Program also explains that expungement may occur only after the
arbitrators find and document one of these three grounds. See also
infra note 162.
    \32\ See FINRA Rules 2080(b)(1), 12805 and 13805.
    \33\ Arbitration awards are subject to very limited judicial
review under the Federal Arbitration Act and state arbitration
statutes. A court of competent jurisdiction will typically confirm
an award unless it is vacated or modified. Generally, an award that
contains expungement of customer dispute information will not be
vacated unless there is evidence that the panel exceeded its
authority, was biased, or engaged in misconduct. See 9 U.S.C. 10
(providing grounds for vacatur of an arbitration award under the
Federal Arbitration Act).
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    These FINRA rules are supplemented with extensive guidance and
training provided to DRS's independent arbitrators. DRS has enhanced
its expungement training for arbitrators to emphasize the importance of
the information in the CRD system and BrokerCheck, and to underscore
the arbitrator's important role in maintaining the relevancy and
integrity of the information in those systems. DRS requires arbitrators
to take mandatory online training on expungement to be eligible to
serve as an arbitrator. The training includes materials that
arbitrators should review when considering expungement requests, with a
particular focus on the Guidance, first published in 2013 and expanded
further periodically thereafter.\34\ The Guidance explains the
requirements of FINRA Rules 12805 and 13805 and provides arbitrators
with best practices and recommendations to follow when deciding
expungement requests.\35\
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    \34\ See Guidance, supra note 5.
    \35\ See Guidance, supra note 5. DRS also periodically provides
additional materials to arbitrators to keep them informed about any
changes to the expungement rules or DRS arbitration forum practices.
DRS offers an updated online ``Neutral Workshop'' on expungement,
which further emphasizes the best practices described in the
Guidance. A Neutral Workshop is an online discussion between or
among experienced arbitrators on a specific arbitration topic, with
a DRS staff member as a moderator. The discussions are posted on
FINRA's website as a free, educational tool. Additional information
about expungement rules and DRS arbitration forum practices have
been provided to arbitrators via a number of articles in a DRS staff
quarterly newsletter, The Neutral Corner, which provides arbitrators
and mediators with updates on important rules and procedures within
the DRS arbitration forum and is distributed to FINRA neutrals
(arbitrators and mediators) and published on FINRA's website. See,
e.g., The Neutral Corner Volume 1-2016 (Changes to Expungement
Requests), https://www.finra.org/sites/default/files/The_Neutral_Corner_Volume_1_2016_0.pdf; The Neutral Corner Volume 4-
2015 (Questions and Answers: Parties Making Second Expungement
Requests After Previous Denial), https://www.finra.org/sites/default/files/The_Neutral%20Corner_Volume_4_2015.pdf; The Neutral
Corner Volume 1-2015 (Updated Expungement Guidance), https://www.finra.org/sites/default/files/Neutral_Corner_Volume.1_2015.pdf;
and The Neutral Corner Volume 3-2014 (Prohibited Conditions Relating
to Expungement of Customer Dispute Information; Expanded Expungement
Guidance; Questions and Answers: Expungement; Expungement Training:
Updated to Include Rule 2081), https://www.finra.org/sites/default/files/Neutral%20Corner_Volume%203_0.pdf.
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    As stated above, FINRA will expunge customer dispute information
from the CRD system only pursuant to a court order. FINRA Rule 2080,
which was developed in close consultation with representatives of NASAA
and state securities regulators, provides that associated persons
seeking expungement of customer dispute information from the CRD system
must obtain an order from a court of competent jurisdiction directing
expungement relief or confirming an arbitration award that contains
expungement relief.\36\ If a court directs

expungement or confirms an arbitration award containing expungement,
the customer dispute information is removed from the CRD system, and is
no longer made public through BrokerCheck.
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    \36\ FINRA Rule 2080(a). FINRA Rule 2080 also requires that
FINRA be named as an additional party in any court proceeding
related to the expungement of customer dispute information, unless
FINRA waives being named. See FINRA Rule 2080(b).
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D. Concerns With the Current Expungement Process
    While commenters have raised concerns generally about associated
persons' use of the DRS arbitration forum to seek expungement, their
concerns have been particularly focused on straight-in requests. Some
of these concerns, however, also apply to expungement requests filed in
customer arbitrations that settle, where the panel from the customer
arbitration then holds a hearing to consider the expungement
request.\37\
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    \37\ Concerns with the expungement process were previously
considered by the FINRA Dispute Resolution Task Force (``Task
Force''), whose members included representatives from the industry
and the public with a broad range of interests in securities dispute
resolution. See FINRA Dispute Resolution Task Force, https://www.finra.org/arbitration-mediation/finra-dispute-resolution-task-force. FINRA formed the Task Force to consider possible enhancements
to the DRS arbitration and mediation forum. At the time, the Task
Force noted that the majority of issues that arise in the
expungement process are those involving settled cases that do not go
to final resolution because in such cases: (1) the panel selected by
the parties may not have heard the full merits of the customer
dispute and, therefore, may not bring to bear any special insights
in determining whether to grant an expungement request and (2)
claimants or their counsel have little incentive to participate in
an expungement hearing once their dispute has been settled. The Task
Force unanimously recommended, in its final report, the creation of
a special arbitration panel consisting of experienced arbitrators
from the chairperson roster who have received enhanced training on
expungement to decide expungement requests in settled customer
arbitrations. See Final Report and Recommendations of the FINRA
Dispute Resolution Task Force (Dec. 16, 2015), http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf. The Task Force
issued its final report with 51 recommendations. DRS has taken
action on all of the 51 recommendations. See FINRA Dispute
Resolution Task Force Recommendations Final Status Report (Jan. 15,
2019), https://www.finra.org/sites/default/files/DR_task_report_status_011519.pdf.
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    First, straight-in requests often involve aged customer dispute
information reported on the associated person's CRD record a number of
years prior to the expungement request.\38\ As a result, documents or
information relating to the dispute may no longer be available.\39\
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    \38\ FINRA rules provide that no claim shall be eligible for
submission to arbitration under the Codes where six years have
elapsed from the occurrence or event giving rise to the claim. See
FINRA Rules 12206(a) and 13206(a). This six-year eligibility rule
applies to all arbitration claims, including those requesting
expungement of customer dispute information. The issue of
eligibility may be raised in a motion by the parties or sua sponte
by the arbitrators. See Horst v. FINRA, No. A-18-777960-C (Dist. Ct.
Nevada Oct. 25, 2018) (Order Denying Motion to Vacate Arbitration
Award). In addition, FINRA Rules 12409 and 13413 provide that the
arbitrators have the authority to interpret and determine the
applicability of all provisions under the Codes. Thus, the decision
of whether to dismiss a claim pursuant to this six-year eligibility
rule is within the sole discretion of the panel. See Howsam v. Dean
Witter Reynolds, 537 U.S. 79, 85-86 (2002) (finding that an
arbitrator properly decides issues of eligibility). Such
interpretations and decisions are final and binding upon the
parties.
    \39\ For example, during the sample period, approximately three-
fifths of the 6,476 customer dispute information disclosures were
sought to be expunged in straight-in requests that were filed six
years or longer after the close of a customer arbitration or the
initial reporting of the customer complaint.
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    Second, although the Guidance provides that an arbitrator must
ensure the customer has notice and an opportunity to participate in the
expungement hearing, customers and their representatives typically do
not participate in hearings in straight-in requests and, therefore, the
panel may receive information only from the associated person
requesting expungement.\40\
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    \40\ See also supra note 37 (discussing similar concerns with
expungement hearings in settled customer arbitrations).
---------------------------------------------------------------------------

    Third, the broker-dealer firm named in the straight-in request by
the associated person may not have any relevant documents pertaining to
the customer dispute because the event occurred while the associated
person was employed at a different firm, or the respondent firm may
support the expungement request because it has an interest in removing
negative information from the associated person's CRD record.\41\
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    \41\ FINRA rules do not currently specify who associated persons
must name when filing a straight-in request. Typically, associated
persons file their straight-in requests against the broker-dealer
firm at which the associated person is currently employed. On rare
occasions, straight-in requests are filed against a customer. As
discussed below, the proposed amendments would prohibit these
filings against the customer. See proposed Rule 12805(a)(3).
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    Fourth, associated persons are also making repeated attempts to
seek expungement of the same customer dispute information. For example,
some associated persons make requests for expungement (by filing
straight-in requests) after withdrawing or deciding not to pursue an
expungement request made in the customer arbitration, presumably
believing that another panel that has not heard the merits of the
customer's claim may be more likely to decide expungement in their
favor. FINRA is concerned about this practice of ``arbitrator
shopping,'' particularly when associated persons withdraw an original
expungement request after the panel has been made aware of evidence
that could result in the denial of the expungement request.
    FINRA has also observed that persons who are not named as a party
in a customer arbitration may attempt to seek expungement (using
straight-in requests) after expungement was denied in the customer
arbitration to which they were not a party, claiming they were not
aware of the expungement request in the customer arbitration.\42\ In
addition, FINRA has observed that associated persons are moving to
vacate arbitration awards that deny expungement relief and then seeking
expungement in a new proceeding.\43\
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    \42\ In these circumstances, the customer arbitration is filed
against the broker-dealer firm, without formally naming the
associated person, but alleging that the associated person was
involved in the alleged violation. In 2009, the SEC approved
amendments to Forms U4 and U5 to require a broker-dealer firm to
report allegations of sales practice violations made against an
associated person in an arbitration or a civil litigation even when
the associated person is not a named party in the proceeding. The
information reported about such disputes is now maintained in the
CRD system as part of the associated person's record and is
disclosed through BrokerCheck. See Securities Exchange Act Release
No. 59916 (May 13, 2009), 74 FR 23750 (May 20, 2009) (Order
Approving File No. SR-FINRA-2009-008).
    These ``unnamed persons'' may seek to expunge customer dispute
information from the CRD system by: (1) asking a party to the
customer arbitration, usually the firm, to request expungement on
their behalf; (2) seeking to intervene in the customer arbitration;
(3) initiating a new arbitration in which the unnamed person
requests expungement and names the customer or firm as the
respondent; or (4) seeking expungement in a court of competent
jurisdiction.
    \43\ If an award denying expungement is vacated and the
associated person then seeks expungement in court, FINRA may oppose
expungement in court if FINRA was not provided notice or an
opportunity to be heard in the proceeding to vacate the award.
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    As discussed in detail below, the proposed amendments would make
significant enhancements to the current expungement process. These
enhancements would address the concerns identified by FINRA, the Task
Force and other interested parties and provide additional safeguards
for ensuring that the information maintained in the CRD system and
disclosed through BrokerCheck is accurate and complete.\44\
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    \44\ The proposed rule change would apply to all members,
including members that are funding portals or have elected to be
treated as capital acquisition brokers (``CABs''), given that the
funding portal and CAB rule sets incorporate the impacted FINRA
rules by reference.
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II. Proposed Rule Change
    Under the proposed rule change, an associated person would only be
permitted to seek expungement of customer dispute information in the

DRS arbitration forum by complying with the requirements of proposed
Rules 12805 (expungement requests in a customer arbitration), 13805
(straight-in requests under the Industry Code) or 12800(d) (expungement
requests in a simplified customer arbitration). The discussion below of
the proposed rule change is divided into seven areas: (A) requests for
expungement under the Customer Code; (B) straight-in requests under the
Industry Code and the Special Arbitrator Roster; (C) limitations on
expungement requests; (D) requirements relating to all expungement
hearings; (E) notifications to customers and to state securities
regulators regarding expungement requests; (F) attendance and
participation of an authorized representative of state securities
regulators in straight-in requests; and (G) expungement requests during
simplified customer arbitrations.
A. Requests for Expungement Under the Customer Code
    FINRA Rule 12805 sets forth requirements that arbitrators must meet
in order to issue an award containing expungement of customer dispute
information under the Customer Code.\45\ The rule does not, however,
provide guidance for associated persons on how and when they may
request expungement during the customer arbitration, or on when
arbitrators must make expungement determinations. The proposed rule
change would amend FINRA Rule 12805 to set forth requirements for
expungement requests filed by an associated person during a customer
arbitration.
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    \45\ FINRA Rule 12805 provides that a panel must comply with the
following requirements in order to grant expungement: (a) hold a
recorded hearing session (by telephone or in person) regarding the
appropriateness of expungement; (b) in cases involving settlements,
review settlement documents and consider the amount of payments made
to any party and any other terms and conditions of a settlement; (c)
indicate in the arbitration award which of the Rule 2080 grounds for
expungement serve(s) as the basis for its expungement order and
provide a brief written explanation of the reason(s) for its finding
that one or more Rule 2080 grounds for expungement applies to the
facts of the case; and (d) assess all DRS arbitration forum fees for
hearing sessions in which the sole topic is the determination of the
appropriateness of expungement against the parties requesting
expungement relief. See also FINRA Rule 13805.
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1. Expungement Requests During the Customer Arbitration
a. By a Respondent Named in a Customer Arbitration
    Under current practice, an associated person who is named as a
respondent in a customer arbitration (``named associated person'') may
request expungement at any time during the customer arbitration or
separately from the customer arbitration in a straight-in request.\46\
If a named associated person requests expungement during the customer
arbitration, does not withdraw the request and the case goes to hearing
and closes by award, the panel in the customer arbitration will also
decide the expungement request and include the decision as part of the
award. If the customer arbitration does not close by award after a
hearing (e.g., settles) and the associated person continues to pursue
the expungement request, the panel from the customer arbitration will
hold a hearing regarding the appropriateness of expungement.\47\
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    \46\ There are several ways in which a named associated person
may request expungement during a customer arbitration. The request
may be included in the answer to the statement of claim that must be
submitted within 45 days of receipt of the statement of claim, and
may include other claims and remedies requested. See FINRA Rules
12303(a) and (b); see also FINRA Rules 13303(a) and (b). The
expungement request may also be included in other pleadings (e.g., a
counterclaim, a cross claim, or a third party claim) and must be
filed with the Director. See FINRA Rule 12100(x). The associated
person may also request at any time during the case (outside of a
pleading) that the panel consider the person's expungement request
during the hearing. Under FINRA Rule 12503, such a request is
treated like a motion, which gives the other parties an opportunity
to state objections. If there is an objection, the panel must decide
the motion pursuant to FINRA Rule 12503(d)(5). See also FINRA Rules
13503 and 13503(d)(5).
    \47\ See FINRA Rule 12805.
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    Under the proposed rule change, if a named associated person seeks
to expunge customer dispute information associated with the customer's
statement of claim, the named associated person must make the
expungement request during the customer arbitration.\48\ As discussed
below, these requests would be subject to limitations on how and when
the requests may be made.\49\ If the associated person does not request
expungement of the customer dispute information associated with the
customer's statement of claim during the customer arbitration, the
associated person would forfeit the opportunity to seek expungement of
the same customer dispute information in any subsequent proceeding.\50\
The Director would be authorized to deny the DRS arbitration forum to
requests made during a customer arbitration to expunge customer dispute
information that is not associated with the customer's statement of
claim.\51\ The Director would also be authorized to deny the forum if a
named associated person does not request expungement of the customer
dispute information associated with the customer's statement of claim
during the customer arbitration but then seeks expungement of the same
customer dispute information in a subsequent proceeding.\52\
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    \48\ See proposed Rule 12805(a)(1)(A). The customer dispute
information associated with a customer's statement of claim would
include a written customer complaint or civil litigation brought by
the same customer that addresses the same allegations.
    \49\ See proposed Rule 12805(a)(1)(B); see also infra Item
II.A.1.II.C., ``Limitations on Expungement Requests.''
    \50\ See proposed Rule 12805(a)(1)(A).
    \51\ See proposed Rule 12203(b); see also infra Item
II.A.1.II.C.3., ``Director's Authority to Deny the Forum.''
    \52\ See proposed Rules 12805(a)(1)(A), 13203(b) and
13805(a)(2)(A)(vi); see also infra Item II.A.1.II.C.3., ``Director's
Authority to Deny the Forum.''
---------------------------------------------------------------------------

    FINRA is proposing to require that a named associated person
request expungement of customer dispute information associated with a
customer's statement of claim during the customer arbitration because,
if the arbitration closes by award after a hearing, the panel from the
customer arbitration will be best situated to decide the related issue
of expungement. Requiring the named associated person to request
expungement in the customer arbitration increases the likelihood that a
panel will have input from all parties and access to all of the
evidence, testimony and other documents to make an informed decision on
the expungement request.
    FINRA recognizes that this requirement could result in some named
associated persons filing expungement requests to preserve their
ability to make an expungement request, regardless of the potential
outcome. FINRA believes, however, that the potential costs that would
be incurred by associated persons, arbitrators and the DRS arbitration
forum if named associated persons file expungement requests to preserve
the ability to request expungement are appropriate given the potential
benefit of having customer input and a complete factual record for the
panel to decide an expungement request.
i. Method of Requesting Expungement
    The proposed rule change would limit how and when expungement
requests may be made during the customer arbitration. Under the
proposed rule change, if a named associated person requests expungement
during the customer arbitration, the request must be included in the
answer or a separate pleading requesting expungement.\53\ If the
request is included in the answer, it must be filed within 45 days of
receipt

of the customer's statement of claim in accordance with existing
requirements under the Codes.\54\ If the named associated person
requests expungement in a separate pleading requesting expungement,
rather than the answer, the request must be filed no later than 60 days
before the first scheduled hearing begins.\55\ The proposed deadline
should provide the named associated person with enough time to assess
the customer's case and the potential merits of an expungement request
and decide whether to file the request. The 60-day timeframe would also
provide the parties to the customer arbitration with reasonable case
preparation time, since 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 60-day filing deadline, the
associated person would be required to file a motion requesting an
extension, which would be decided by the panel.\56\
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    \53\ See proposed Rule 12805(a)(1)(C)(i). FINRA Rules 12100(x)
and 13100(v) would be amended to define a ``separate document
requesting expungement'' as a pleading under the Codes.
    \54\ See supra note 46.
    \55\ See proposed Rule 12805(a)(1)(C)(i).
    \56\ See proposed Rule 12805(a)(1)(C)(i). Pursuant to FINRA Rule
12503, if an associated person files a motion seeking an extension
of the 60-day deadline, the opposing parties may state objections to
extending the deadline, and the panel would decide the motion.
---------------------------------------------------------------------------

ii. Required Contents of an Expungement Request
    Under the proposed rule change, a request for expungement by a
named associated person in a customer arbitration must include the
applicable filing fee under the Code.\57\ In addition, a named
associated person would be required to provide the CRD number of the
party requesting expungement, each CRD occurrence number that is the
subject of the request and the case name and docket number associated
with the customer dispute information.\58\ These requirements would
help ensure that FINRA, the panel, and the parties understand who is
requesting expungement and which customer dispute information is the
subject of the request.
---------------------------------------------------------------------------

    \57\ See proposed Rule 12805(a)(1)(C)(ii)a.
    \58\ See proposed Rule 12805(a)(1)(C)(ii)b. through d. An
occurrence is a disclosure event that is reported to the CRD system
via one or more Disclosure Reporting Pages. Each occurrence contains
details regarding a specific disclosure event. An occurrence can
have as many as three sources reporting the same event: Forms U4, U5
and U6.
---------------------------------------------------------------------------

    The proposed rule change would also require the named associated
person requesting expungement to explain whether expungement of the
same customer dispute information was (i) previously requested and, if
so (ii) how it was decided.\59\ This requirement would assist with
implementation of the proposed prohibition on parties making second
requests for expungement, discussed in more detail below.\60\ This
proposed requirement is also consistent with language in the existing
Guidance stating that arbitrators should ask a party requesting
expungement whether an arbitration panel or a court previously denied
expungement of the customer dispute information at issue and, if there
was a prior denial, the expungement request should be denied.\61\
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    \59\ See proposed Rule 12805(a)(1)(C)(ii)e.
    \60\ See infra Item II.A.1.II.A.1.b.i., ``Method of Requesting
Expungement On Behalf Of an Unnamed Person.''
    \61\ See Guidance, supra note 5.
---------------------------------------------------------------------------

    Under the proposed rule change, if an expungement request fails to
include any of the proposed requirements for requesting expungement,
the request would be considered deficient and would not be served
unless the deficiency is corrected.\62\
---------------------------------------------------------------------------

    \62\ See proposed Rules 12307(a)(8) through (11) and
12805(a)(1)(C)(ii).
---------------------------------------------------------------------------

    FINRA believes these proposed requirements for named associated
persons requesting expungement are necessary for the timely
consideration and orderly administration of expungement requests as
well as to maintain the integrity of the CRD system.
b. Expungement Requests by a Party Named in the Customer Arbitration On
Behalf Of an Unnamed Person
    The Codes do not specifically address on-behalf-of requests, i.e.,
expungement requests made by a party named in a customer arbitration on
behalf of an unnamed person.\63\ Under current practice, a party to a
customer arbitration may file an on-behalf-of request for expungement
during the customer arbitration. If the party (typically, a firm) files
the request and the customer arbitration closes by award after a
hearing, the panel will decide the expungement request and include the
decision in the award. If the customer arbitration does not close by
award after a hearing (e.g., settles), either the requesting party or
the unnamed person could ask the panel to consider and decide the
expungement request before it disbands. In this circumstance, the panel
from the customer arbitration will hold a hearing regarding the
appropriateness of expungement.\64\
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    \63\ The proposed rule change would define an unnamed person as
``an associated person, including a formerly associated person, who
is identified in a Form U4, Form U5, or Form U6, as having been the
subject of an investment-related, customer-initiated arbitration
claim that alleged that the associated person or formerly associated
person was involved in one or more sales practice violations, but
who is not named as a respondent in the arbitration.'' See proposed
Rule 12100(ff).
    \64\ See FINRA Rule 12805.
---------------------------------------------------------------------------

    The proposed rule change would codify the ability of a party to the
customer arbitration to file an on-behalf-of request during a customer
arbitration.\65\ Under the proposed rule change, a party to a customer
arbitration may file an on-behalf-of request that seeks to expunge
customer dispute information associated with the customer's statement
of claim, provided the request is eligible for arbitration under
proposed Rule 12805.\66\ Filing an on-behalf-of request would be
permissive, not mandatory.\67\ However, as discussed below, if the
named party and the unnamed person agree to such a request, FINRA would
require them to sign a form consenting to the on-behalf-of request
which would help ensure that the unnamed person is fully aware of the
request and that the firm is agreeing to represent the unnamed person
for the purpose of requesting expungement during the customer
arbitration.
---------------------------------------------------------------------------

    \65\ See proposed Rule 12805(a)(2).
    \66\ See proposed Rule 12805(a)(2)(B).
    \67\ See proposed Rule 12805(a)(2)(A).
---------------------------------------------------------------------------

i. Method of Requesting Expungement On Behalf Of an Unnamed Person
    The unnamed person would be required to consent to the on-behalf-of
request in writing.\68\ In particular, the party filing an on-behalf-of
request would be required to submit a signed Form Requesting
Expungement on Behalf of an Unnamed Person (``Form'') and a statement
requesting expungement with the Director.\69\ The proposed rule change
would not require that an on-behalf-of request be included in an answer
or a separate pleading requesting expungement (although it could be),
since the request seeks relief on behalf of a person who is not a party
to the arbitration. However, the party making the request would be
required to file the request, which would include the Form, no later
than 60 days before the first scheduled hearing.\70\ By filing and
serving the expungement request on behalf of the unnamed person, the
requesting party would be agreeing to represent the unnamed person and
the unnamed person's interests and to pursue the request for
expungement on

behalf of the unnamed person during the customer arbitration.\71\
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    \68\ See proposed Rule 12805(a)(2)(A).
    \69\ See proposed Rule 12805(a)(2)(C)(i) and (ii). The unnamed
person whose CRD record would be expunged and the party requesting
expungement on the unnamed person's behalf must sign the Form.
    \70\ See proposed Rule 12805(a)(2)(C)(iii). The 60-day deadline
is the same as the proposed deadline for a named associated person
to request expungement through a separate pleading requesting
expungement in a customer arbitration.
    \71\ See proposed Rule 12805(a)(2)(D)(iii).
---------------------------------------------------------------------------

    FINRA believes that requiring the submission of the Form would help
address the issue of an unnamed person not being made aware of the on-
behalf-of request. As discussed above, FINRA is concerned that some
associated persons are filing arbitration claims seeking expungement of
the same customer dispute information that was the subject of a
previous denial by a panel of an on-behalf-of request.\72\ By signing
the Form, the unnamed person would be consenting to the on-behalf-of
request and agreeing to be bound by the panel's decision on the
request.\73\ In addition, the Form would provide that, if the customer
arbitration closes by award after a hearing, the unnamed person would
be barred from filing a request for expungement for the same customer
dispute information in a subsequent proceeding. The unnamed person's
signature would serve as acknowledgement of this consequence.
---------------------------------------------------------------------------

    \72\ See supra note 42 and accompanying text.
    \73\ See proposed Rule 12805(a)(2)(D)(i). By signing the Form,
the unnamed person would also be agreeing to maintain the
confidentiality of documents and information from the customer
arbitration to which the unnamed person is given access and to
adhere to any confidentiality agreements or orders associated with
the customer arbitration. See proposed Rule 12805(a)(2)(D)(ii). The
breach of this provision by the unnamed person could potentially
subject the unnamed person to a claim for damages by an aggrieved
party.
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ii. Required Contents of an On-Behalf-Of Expungement Request
    Under the proposed rule change, an on-behalf-of request would be
required to include the same elements as a request for expungement by a
named associated person during a customer arbitration.\74\ Thus, the
party requesting expungement on behalf of an unnamed person (typically,
the firm) would be required to provide the applicable filing fee; the
CRD number of the unnamed person; each CRD occurrence number that is
the subject of the request; the case name and docket number associated
with the customer dispute information; and an explanation of whether
expungement of the same customer dispute information was (i) previously
requested and, if so (ii) how it was decided. In addition, as discussed
above, the party requesting expungement would be required to include
the Form, signed by the unnamed person whose CRD record is the subject
of the expungement request and the party filing the request.
---------------------------------------------------------------------------

    \74\ See proposed Rule 12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i);
see also supra Item II.A.1.II.A.1.a.ii., ``Required Contents of an
Expungement Request.''
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c. Deciding Expungement Requests during Customer Arbitrations
    The proposed amendments would require that if a named associated
person or a party on behalf of an unnamed person has requested
expungement during a customer arbitration and the case closes by award
after a hearing, the panel from the customer arbitration must decide
the expungement request during the customer arbitration in accordance
with Rule 12805(c) and issue its decision on the request in the same
award.\75\ If the customer arbitration closes other than by award
(e.g., settles) or by award without a hearing, the panel would not
consider the expungement request.\76\ Instead, to seek expungement
relief, the associated person would need to file a straight-in request
to expunge the customer dispute information associated with the
customer arbitration as a new claim under proposed Rule 13805 against
the member firm at which the associated person was associated at the
time the customer dispute arose.\77\ A panel from the Special
Arbitrator Roster would decide the straight-in request, as discussed in
more detail below.\78\
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    \75\ See proposed Rules 12805(a)(1)(D)(i) and (a)(2)(E)(i).
    \76\ See proposed Rules 12805(a)(1)(D)(ii) and (a)(2)(E)(ii).
    \77\ Under the Codes, a ``member'' includes any broker or dealer
admitted to membership in FINRA, whether or not the membership has
been terminated, suspended, cancelled, revoked, the member has been
expelled or barred from FINRA or the member is otherwise defunct.
See FINRA Rules 12100(s) and 13100(q); see also Securities Exchange
Act Release No. 88254 (February 20, 2020), 85 FR 11157 (February 26,
2020) (Order Approving File No. SR-FINRA-2019-027).
    \78\ See infra Item II.A.1.II.B.2., ``Panel from the Special
Arbitrator Roster Decides Requests Filed Under the Industry Code.''
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i. Panel Decides the Expungement Request if the Customer's Arbitration
Closes by Award After a Hearing
    Currently, if a named associated person requests expungement, or a
party files an on-behalf-of request, and the customer's claim closes by
award after a hearing, the panel may consider and decide the
expungement request during the customer arbitration and issue its
decision in the award. If, however, the party requesting expungement
does not raise the issue of expungement during the hearing, the panel
may not decide the request and may deem it withdrawn.\79\ In this
instance, the associated person may seek to file the request again at a
later date.
---------------------------------------------------------------------------

    \79\ See FINRA Rules 12702 and 13702.
---------------------------------------------------------------------------

    Under the proposed rule change, if a named associated person
requests expungement or a party files an on-behalf-of request during a
customer arbitration and the customer's claim closes by award after a
hearing, the panel in the customer arbitration would be required to
consider and decide the expungement request and issue its decision in
the same award.\80\ This would help ensure that the panel from the
customer's arbitration--which has received input from all parties,
reviewed the pleadings, and considered the evidence on the merits--
would decide the expungement request.\81\
---------------------------------------------------------------------------

    \80\ See proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i).
    \81\ See proposed Rules 12805(a)(1)(D) and 12805(a)(2)(E).
---------------------------------------------------------------------------

    The proposed rule change would require the panel to decide the
request even if the requesting party withdraws or fails to pursue the
request. In this instance, the panel would deny the expungement request
with prejudice.\82\ This would prevent associated persons from
withdrawing expungement requests to avoid having their requests decided
by the panel that heard the evidence on the customer's arbitration
claim, then seeking to re-file the request and receiving a potentially
more favorable decision from a different set of arbitrators.
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    \82\ See proposed Rules 12805(a)(1)(D)(i) and 12805(a)(2)(E)(i).
---------------------------------------------------------------------------

ii. Panel Does Not Decide Expungement if the Customer's Arbitration
Closes Other Than by Award or by Award Without a Hearing
    Currently, if a named associated person requests expungement or a
party files an on-behalf-of request, the customer arbitration does not
close by award after a hearing (e.g., settles) and the requesting party
continues to pursue the expungement request, the panel from the
customer arbitration will hold a hearing regarding the appropriateness
of expungement.\83\ If the named associated person or party requesting
expungement does not request that the panel hold a separate hearing to
decide the expungement request, the panel may deem the request
withdrawn, and the associated person may seek to file the request again
at a later date.
---------------------------------------------------------------------------

    \83\ See FINRA Rule 12805.
---------------------------------------------------------------------------

    The proposed rule change would provide that if, during a customer
arbitration, a named associated person requests expungement or a party
files an on-behalf-of request and the customer arbitration closes other
than by award or by award without a hearing, the panel from the
customer arbitration would not be permitted to decide the expungement

request.\84\ Instead, the associated person would be required to seek
expungement by filing a request to expunge the same customer dispute
information as a straight-in request against the member firm at which
the person was associated at the time the customer dispute arose under
proposed Rule 13805, where a panel that is randomly selected from the
Special Arbitrator Roster would decide the request.\85\
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    \84\ See proposed Rules 12805(a)(1)(D)(ii)a. and
12805(a)(2)(E)(ii)a.
    \85\ See proposed Rules 12805(a)(1)(D)(ii)b. and
12805(a)(2)(E)(ii)b.; see also infra Item II.A.1.II.B.2., ``Panel
from the Special Arbitrator Roster Decides Requests Filed Under the
Industry Code.''
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    FINRA believes this approach reflects the importance of maintaining
the integrity of information in the CRD system. When the customer
arbitration closes other than by award or by award without a hearing,
the panel selected by the parties in the customer arbitration may not
have heard the presentation of the evidence on the merits of the case
and, therefore, may not bring to bear any special insights in
determining whether to issue an award containing expungement relief. In
addition, customers or their representatives have little incentive to
attend and participate in an expungement hearing once their case has
settled. Requiring that an associated person file the expungement
request as a straight-in request under the Industry Code to be heard
and decided by a three-person panel that is randomly selected from the
Special Arbitrator Roster would strengthen the expungement framework.
As discussed in more detail below, while keeping in mind the importance
of maintaining the integrity of information in the CRD system, this
corps of experienced and specially trained arbitrators would follow the
procedures set forth in proposed Rule 13805 to decide whether one or
more of three grounds--the same three grounds contained in FINRA Rule
2080(b)(1)--exist in order to issue an award containing expungement
relief.
2. No Intervening in Customer Arbitrations To Request Expungement
    The proposed amendments would prohibit unnamed persons from
intervening in a customer arbitration and requesting expungement.\86\
If the associated person is neither a party to the arbitration nor the
subject of an on-behalf-of request by another party to the arbitration,
the associated person should not be able to intervene in the customers'
arbitration to request expungement. In these circumstances, the
associated person's conduct is unlikely to be fully addressed by the
parties during the customer arbitration, and FINRA does not believe
that the customer should have the presentation of their case
interrupted or delayed by an associated person's intervention to
request expungement. In addition, there have been instances in customer
arbitrations in which the unnamed person learns that the customer's
arbitration case is nearing conclusion. The associated person then
files a motion to intervene in the case to ask the panel to consider an
expungement request. As an unnamed person, the individual is not a
party to the case and, therefore, has not made any arguments in support
of the expungement request. Further, if the motion is granted, the
parties to the case will be required to wait for a decision on the
expungement request (which may necessitate another hearing) before
their dispute is resolved, causing delay and additional cost to the
parties.
---------------------------------------------------------------------------

    \86\ See proposed Rules 12805(a)(2)(E)(iii) and 12800(d)(2)(D).
---------------------------------------------------------------------------

    Accordingly, under the proposed rule change, unnamed persons would
be prohibited from intervening in a customer arbitration and requesting
expungement. Instead, the unnamed person would be able to file the
request as a new claim against the member firm at which the person was
associated at the time the customer dispute arose under proposed Rule
13805, where a panel from the Special Arbitrator Roster would decide
the request.\87\
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    \87\ See proposed Rule 12805(a)(2)(E)(iii)b.
---------------------------------------------------------------------------

3. No Straight-In Requests Against Customers
    The proposed amendments would also prohibit an associated person
from filing a straight-in request against a customer.\88\ Currently,
straight-in requests are rarely filed against a customer.\89\ FINRA
does not believe that customers should be compelled to attend or
participate in a separate proceeding to decide an expungement request
after the customer has resolved their arbitration claim or civil
litigation. Accordingly, the proposed amendments would prohibit an
associated person from filing a straight-in request against a customer.
As discussed below, however, under the proposed rule change, customers
would have the option to attend and participate in expungement hearings
in straight-in requests, and the proposed rule change would include
provisions to facilitate such attendance and participation.
---------------------------------------------------------------------------

    \88\ See proposed Rule 12805(a)(3).
    \89\ During the sample period, FINRA is able to identify
requests to expunge 11,619 customer dispute information disclosures
from the CRD system. Of those, 6,476 were sought to be expunged in
straight-in requests; 116 were sought to be expunged in straight-in
requests filed against a customer. See infra Item II.B.2.,
``Economic Baseline,'' for further discussion.
---------------------------------------------------------------------------

B. Straight-In Requests Under the Industry Code and the Special
Arbitrator Roster
    Under the proposed rule change, all requests to expunge customer
dispute information that is not associated with a customer arbitration
would be required to be filed as a straight-in request under proposed
Rule 13805.\90\ In addition, an associated person could request
expungement of customer dispute information associated with a customer
arbitration under proposed Rule 13805 if: (1) the associated person is
named in the arbitration or is the subject of an on-behalf-of request
and the customer arbitration closes other than by award or by award
without a hearing; or (2) the associated person is the subject of a
customer arbitration, but is neither named in the arbitration nor the
subject of an on-behalf-of request, and the customer arbitration closes
for any reason. If an associated person requests expungement under
proposed Rule 13805, a three-person panel randomly selected from the
Special Arbitrator Roster in accordance with proposed Rule 13806 would
decide the expungement request.\91\
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    \90\ See proposed Rules 12805(a)(1)(A) and 13805(a)(1). As
discussed above, under proposed Rule 12805, an associated person may
request expungement in a customer arbitration of a customer
complaint or civil litigation associated with a customer's statement
of claim. See supra note 48 and accompanying text.
    \91\ See infra Item II.A.1.II.B.2.a. and b. (discussing
eligibility requirements for and composition of the Special
Arbitrator Roster).
---------------------------------------------------------------------------

1. Filing a Straight-In Request Under the Industry Code
a. Applicability
    Under the proposed rule change, an associated person requesting
expungement of customer dispute information as a straight-in request
under the Industry Code must file a statement of claim in accordance
with FINRA Rule 13302 against the member firm at which the person was
associated at the time the customer dispute arose, unless the request
is ineligible for arbitration under proposed Rule 13805(a)(2).\92\ The
only way to request expungement of customer dispute information under
the Industry Code

would be to file the request under proposed Rule 13805.
---------------------------------------------------------------------------

    \92\ See proposed Rule 13805(a)(1). FINRA Rule 13302 provides,
in relevant part, that to initiate an arbitration, a claimant must
file with the Director a signed and dated Submission Agreement, and
a statement of claim specifying the relevant facts and remedies
requested.
---------------------------------------------------------------------------

    The requirement that the associated person file the straight-in
request against the member firm at which the person was associated at
the time the customer dispute arose would help ensure that there is a
connection between the respondent firm and the subject matter of the
expungement request. For example, the firm at which the person
requesting expungement was associated at the time the dispute arose
should have knowledge of the dispute and access to documents or other
evidence relating to the dispute. In addition, the proposed requirement
would help ensure that the panel from the Special Arbitrator Roster
would be able to request evidence from the member firm with information
that is relevant to the expungement request. If the requisite
connection is not present, the Director would be authorized to deny the
use of the DRS arbitration forum for the request.\93\
---------------------------------------------------------------------------

    \93\ See proposed Rule 13203(b).
---------------------------------------------------------------------------

b. Required Contents of Straight-In Requests
    The required contents of a straight-in request would be the same as
those required for expungement requests filed under proposed Rule
12805.\94\ Thus, the associated person's straight-in request would be
required to contain the applicable filing fee; \95\ the CRD number of
the party requesting expungement; each CRD occurrence number that is
the subject of the request; the case name and docket number associated
with the customer dispute information, if applicable; and an
explanation of whether expungement of the same customer dispute
information was previously requested and, if so, how it was
decided.\96\ In addition, as discussed below, the proposed rule change
would impose limitations on when such requests may be made.\97\
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    \94\ See proposed Rule 13805(a)(3); see also supra Item
II.A.1.II.A.1.a.ii., ``Required Contents of an Expungement
Request.''
    \95\ FINRA would not assess a second filing fee when an
associated person files a straight-in request if the associated
person, or the requesting party in the case of an on-behalf-of
request, had previously paid the filing fee to request expungement
of the same customer dispute information during a customer
arbitration.
    \96\ See proposed Rule 13805(a)(3). If an expungement request
under the Industry Code fails to include any of the proposed
requirements for requesting expungement, the request would be
considered deficient and would not be served unless the deficiency
is corrected. See proposed Rules 13307(a)(7) through (11).
    \97\ See infra Item II.A.1.II.C., ``Limitations on Expungement
Requests.'' As discussed in more detail below, the straight-in
request would be ineligible for arbitration under the Industry Code
if: (1) a panel held a hearing to consider the merits of the
associated person's request for expungement of the same customer
dispute information; (2) a court of competent jurisdiction
previously denied the associated person's request to expunge the
same customer dispute information; (3) the customer arbitration or
civil litigation or customer complaint associated with the customer
dispute information is not closed; (4) more than two years have
elapsed since the customer arbitration or civil litigation
associated with the customer dispute information has closed; (5)
there was no customer arbitration or civil litigation associated
with the customer dispute information and more than three years have
elapsed since the date that the customer complaint was initially
reported to the CRD system; or (6) a named associated person is
prohibited from seeking expungement because they did not request
expungement in the associated customer arbitration under proposed
Rule 12805(a)(1)(A). See proposed Rule 13805(a)(2).
---------------------------------------------------------------------------

2. Panel From the Special Arbitrator Roster Decides Requests Filed
Under the Industry Code
    If a straight-in request is filed in accordance with proposed Rule
13805, a three-person panel randomly selected from the Special
Arbitrator Roster pursuant to proposed Rule 13806 would be required to
hold an expungement hearing, decide the expungement request and issue
an award.\98\ The proposed amendments would also provide that if the
associated person withdraws or does not pursue the request, the panel
would be required to deny the expungement request with prejudice.\99\
This requirement would foreclose the ability of associated persons to
withdraw expungement requests to avoid having their requests decided by
a panel that they believe does not favor their request, and then seek
to re-file the request with the hope of obtaining a potentially more
favorable decision from a different panel.
---------------------------------------------------------------------------

    \98\ See proposed Rule 13805(a)(4).
    \99\ See proposed Rule 13805(a)(4).
---------------------------------------------------------------------------

a. Eligibility Requirements for the Special Arbitrator Roster
    The proposed rule change would include several requirements to help
ensure that arbitrators on the Special Arbitrator Roster have the
qualifications and training to decide straight-in requests.
    First, arbitrators on the Special Arbitrator Roster would be public
arbitrators who are eligible for the chairperson roster.\100\ Public
arbitrators are not employed in the securities industry and do not
devote 20 percent or more of their professional work to the securities
industry or to parties in disputes concerning investment accounts or
transactions or employment relationships within the financial
industry.\101\ Arbitrators are eligible for the chairperson roster if
they have completed chairperson training provided by FINRA and: (1)
have a law degree and are a member of a bar of at least one
jurisdiction and have served as an arbitrator through award on at least
one arbitration administered by an SRO in which hearings were held; or
(2) have served as an arbitrator through award on at least three
arbitrations administered by an SRO in which hearings were held.\102\
These requirements would help ensure that the persons conducting the
expungement hearing are impartial and experienced in managing and
conducting arbitration hearings in the DRS arbitration forum.\103\
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    \100\ See proposed Rule 13806(b).
    \101\ See supra note 3.
    \102\ See FINRA Rules 12400(c) and 13400(c). For purposes of
this proposed rule change, public arbitrators who are eligible for
the chairperson roster would include those arbitrators who have met
the chairperson eligibility requirements of FINRA Rules 12400(c) or
13400(c), regardless of whether they have already served as a chair
on an arbitration case.
    \103\ The Task Force suggested that the arbitrators on its
recommended special arbitration panel be chair-qualified, in part
because of the training that arbitrators must complete before they
can be added to the chairperson roster. See FINRA, Advanced
Arbitrator Training, https://www.finra.org/arbitration-mediation/advanced-arbitrator-training; see also supra note 37.
---------------------------------------------------------------------------

    Second, the public chairpersons must have evidenced successful
completion of, and agreement with, enhanced expungement training
provided by FINRA.\104\ FINRA currently provides an Expungement
Training module for arbitrators.\105\ This training, however, would be
expanded for arbitrators seeking to qualify for the Special Arbitrator
Roster. This would allow FINRA to further emphasize with the
arbitrators on the Special Arbitrator Roster the unique, distinct role
they play in determining whether to issue an award containing
expungement relief, and that expungement should be issued in limited
circumstances and only if the arbitrators unanimously find that the
information to be expunged is factually impossible, clearly erroneous
or false, or that the associated person was not involved in the alleged
misconduct.
---------------------------------------------------------------------------

    \104\ See proposed Rule 13806(b)(2)(A).
    \105\ See supra note 35 and accompanying text.
---------------------------------------------------------------------------

    Third, arbitrators on the Special Arbitrator Roster would also be
required to have served as an arbitrator through award on at least four
customer arbitrations administered by FINRA or by another SRO in which
a hearing was held.\106\ FINRA believes that if an arbitrator has
served on four arbitrations through to award, it would indicate that
the arbitrator has gained the knowledge

and experience in the DRS arbitration forum to conduct hearings.\107\
---------------------------------------------------------------------------

    \106\ See proposed Rule 13806(b)(2)(B). This requirement would
not be satisfied by serving on arbitrations administered under the
special proceeding option of the simplified arbitration rules. See
FINRA Rule 12800(c)(3)(B).
    \107\ In 2021, 87 percent of FINRA customer arbitrations closed
other than by award.
---------------------------------------------------------------------------

b. Composition of the Panel
    To minimize the potential for influence in the arbitrator selection
process by the associated person and member firm, whose interests may
be aligned, and to help ensure the development of a more complete
factual record, the proposed rule change would require NLSS to select
randomly the three public chairpersons from the Special Arbitrator
Roster to decide a straight-in request filed by an associated
person.\108\ The parties would not be permitted to agree to fewer than
three arbitrators. The parties also would not be permitted to strike
any arbitrators selected by NLSS nor stipulate to their removal,\109\
but would be permitted to challenge an arbitrator selected for
cause.\110\ If an arbitrator is removed, NLSS would randomly select a
replacement.\111\
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    \108\ See proposed Rule 13806(b)(1). The first arbitrator
selected would be the chair of the panel. See proposed Rule
13806(b)(3).
    \109\ The parties also would not be permitted to stipulate to
the use of pre-selected arbitrators (i.e., arbitrators that the
parties find on their own to use in their cases). See proposed Rule
13806(b)(1).
    \110\ See proposed Rule 13806(b)(4).
    \111\ See proposed Rule 13806(b)(4).
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    The current process for selecting arbitrators--striking and
combining ranked lists--would not be appropriate to use to select
arbitrators to decide straight-in requests.\112\ In arbitrations
outside of the expungement context, the parties are typically adverse,
which means that during arbitrator selection, each side may rank
arbitrators on the lists whom they believe may be favorable to their
case. The adversarial nature of the proceedings serves to minimize the
impact of each party's influence in arbitrator selection. In contrast,
a straight-in request filed by an associated person against a firm is
less likely to be adversarial in nature. FINRA believes that the
proposed rule change would prevent the associated person and member
firm from collaboratively seeking to influence the outcome of the
expungement request through arbitrator selection.
---------------------------------------------------------------------------

    \112\ See generally FINRA Rules 13403 and 13404.
---------------------------------------------------------------------------

    FINRA recognizes that the proposed arbitrator selection process for
straight-in requests would also limit the associated person and member
firm's input on arbitrator selection for reasons that may be unrelated
to whether the arbitrator would potentially be sympathetic to the
expungement request, such as their perception of the arbitrator's
competence or efficiency. 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 make their determination
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.\113\
---------------------------------------------------------------------------

    \113\ See proposed Rule 13806(b)(4).
---------------------------------------------------------------------------

C. Limitations on Expungement Requests
    Currently, Rules 12805 and 13805 do not address when a party would
not be permitted to file an expungement request in the DRS arbitration
forum.\114\ The Guidance, however, describes several circumstances in
which an expungement request should be ineligible for arbitration. The
proposed rule change would incorporate the limitations contained in the
Guidance and add time limits to when an associated person may file a
straight-in request.
---------------------------------------------------------------------------

    \114\ But see supra note 38 (describing time limits that apply
to all arbitration claims, including expungement requests).
---------------------------------------------------------------------------

1. Limitations Applicable to Both Straight-In Requests and Expungement
Requests During a Customer Arbitration
    The Guidance provides that if a panel or a court has issued an
award or decision denying an associated person's expungement request,
the associated person may not request expungement of the same customer
dispute information in another arbitration proceeding. In particular,
the Guidance states that arbitrators should ask a party requesting
expungement whether an arbitration panel or a court previously denied
expungement of the customer dispute information at issue and, if there
has been a prior denial, the arbitration panel must deny the
expungement request.\115\
---------------------------------------------------------------------------

    \115\ See Guidance, supra note 5.
---------------------------------------------------------------------------

    The proposed rule change would codify the Guidance by providing
that an associated person may not file a request for expungement of
customer dispute information if (1) a panel held a hearing to consider
the merits of the associated person's expungement request for the same
customer dispute information or (2) a court of competent jurisdiction
previously denied the associated person's request to expunge the same
customer dispute information.\116\ These proposed amendments would
prevent an associated person from forum shopping, or seeking to return
to the DRS arbitration forum to garner a favorable outcome on his or
her expungement request.\117\
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    \116\ See proposed Rules 12805(a)(1)(B)(i) and (ii) and
13805(a)(2)(A)(i) and (ii). The proposed rule change would require
that the requesting party provide information about previous
expungement requests and how such requests were decided. See
proposed Rules 12805(a)(1)(C)(ii)e. and 13805(a)(3)(E).
    \117\ FINRA notes that if a panel holds a hearing that addresses
the merits of an associated person's request for expungement, the
Director would be authorized to deny the DRS arbitration forum to
any subsequent request by the associated person or another party on
behalf of the associated person to expunge the same customer dispute
information. See proposed Rules 12203(b) and 13203(b).
---------------------------------------------------------------------------

2. Limitations Applicable to Straight-In Requests Only
    As discussed below, under the proposed amendments, four additional
limitations would apply to straight-in requests.
a. No Straight-In Request if the Customer Arbitration, Civil Litigation
or Customer Complaint Has Not Closed
    The Guidance provides that an associated person may not file a
separate request for expungement of customer dispute information
arising from a customer arbitration until the customer arbitration has
concluded. The proposed rule change would codify and expand upon this
limitation in the Guidance by providing that an associated person may
not file a straight-in request under proposed Rule 13805 if the
customer arbitration, civil litigation or customer complaint associated
with the customer dispute information has not closed.\118\
---------------------------------------------------------------------------

    \118\ See proposed Rule 13805(a)(2)(A)(iii).
---------------------------------------------------------------------------

    The proposed rule change would prevent an associated person from
filing a straight-in request while a customer arbitration or civil
litigation associated with the customer dispute information that is the
subject of the straight-in request is pending. It would also prevent
potentially inconsistent expungement decisions on related customer
dispute information. The proposed rule change would also help ensure
that the panel which will decide the straight-in request is able to
consider the final factual record from the customer arbitration or
civil litigation.

b. Straight-In Request Prohibited if Named Associated Person Did Not
Request Expungement in Customer Arbitration
    Under the proposed change, an associated person who is named in a
customer arbitration must request expungement during the arbitration or
forfeit the ability to seek to expunge the customer dispute information
associated with the customer's statement of claim in any subsequent
proceeding.\119\ Accordingly, the proposed rule change would prohibit
these associated persons from filing a straight-in request under the
Industry Code seeking to expunge the customer dispute information
associated with the customer's statement of claim.\120\
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    \119\ See supra Item II.A.1.II.A.1.a., ``Expungement Requests
During the Customer Arbitration, By a Respondent Named in a Customer
Arbitration,'' and accompanying text.
    \120\ See proposed Rule 13805(a)(2)(A)(vi).
---------------------------------------------------------------------------

c. Time Limits Applicable to Disclosures Arising After the Effective
Date of the Proposed Rule Change
    FINRA is aware that many straight-in requests are filed many years
after the customer arbitration closes or the customer complaint is
reported in the CRD system.\121\ To encourage prompt filing of
expungement requests, the proposed amendments would establish time
limits for expungement requests that are specifically tied to the
closure of customer arbitrations and civil litigations, or the
reporting of customer complaints in the CRD system, as applicable.\122\
The proposed time limits should help encourage customer attendance and
participation in expungement proceedings and help ensure that straight-
in requests are brought before relevant evidence and testimony becomes
stale or unavailable.\123\ The proposed time limits may also curtail
the common practice of bundling multiple unrelated and aged expungement
requests in one straight-in request.\124\
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    \121\ See supra note 39.
    \122\ FINRA Rules 12206 and 13206 provide that no claim shall be
eligible for submission to arbitration where six years have elapsed
from the occurrence or event giving rise to the claim. Under these
Rules, the panel has discretion to determine if the claim, including
an expungement request, is eligible for arbitration. See supra note
38. As discussed below, if the proposed rule change is approved by
the Commission, this six-year eligibility rule would continue to
apply to requests to expunge customer dispute information that arose
prior to the effective date of the proposed rule change.
    \123\ All customers from a customer arbitration or civil
litigation, and all customers who initiated a customer complaint,
would be notified of the expungement request and encouraged to
attend and provide their input. See proposed Rule 13805(b)(1)(A).
    \124\ For example, under the proposed time limits, associated
persons would not have been able to include all customer dispute
information disclosures in 44 percent of the straight-in requests.
See infra Item II.B.3.D, ``Time Limits for Filing Straight-in
Requests--Quantitative Description.''
---------------------------------------------------------------------------

(i) Two Years From the Close of a Customer Arbitration or Civil
Litigation
    Under the proposed rule change, an associated person would be
permitted to file a straight-in request within two years of the close
of a customer arbitration or a civil litigation associated with the
customer dispute information.\125\ The proposed amendments would allow
an associated person to request expungement of customer dispute
information associated with the customer arbitration or civil
litigation--including any associated customer complaint disclosures--
within two years after the customer arbitration or civil litigation
closes.\126\
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    \125\ See proposed Rule 13805(a)(2)(A)(iv).
    \126\ With respect to requests to expunge customer dispute
information associated with a customer arbitration, an associated
person would be permitted to file a straight-in request under this
two-year time limitation only if expungement of the customer dispute
information was not required to be decided during the customer
arbitration.
---------------------------------------------------------------------------

    A two-year limitation period would allow the associated person
sufficient time to determine whether to seek expungement by filing a
straight-in request and provide a reasonable amount of time for the
associated person to gather the documents, information and other
resources required to file the expungement request. In addition, a two-
year period would help ensure that the expungement hearing is held
close enough in time to the customer arbitration or civil litigation,
when information regarding the customer arbitration or civil litigation
is available and in a timeframe that could increase the likelihood for
the customer to attend and participate if the customer chooses to do
so. The two-year time limit may also curtail the common practice of
bundling multiple unrelated and aged expungement requests in one
straight-in request.
(ii) Three Years From the Date a Customer Complaint Is Reported to the
CRD System
    Under the proposed rule change, an associated person would be
prohibited from filing a straight-in request to expunge a customer
complaint where more than three years have elapsed since the customer
complaint was initially reported to the CRD system and there was no
customer arbitration or civil litigation associated with the customer
dispute information.\127\ This means that if no customer arbitration or
civil litigation associated with the customer complaint is filed, the
associated person would have three years from the date the customer
complaint was initially reported in the CRD system to file the
expungement request.\128\
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    \127\ See proposed Rule 13805(a)(2)(A)(v).
    \128\ A customer complaint can be reported to the CRD system via
a Form U4 or Form U5. Pursuant to FINRA Rule 1010, an associated
person should be made aware of the filing of a Form U4 and any
amendments thereto by the associated person's member firm. In
addition, Article V, Section 3 of the FINRA By-Laws requires that a
member firm provide an associated person a copy of an amended Form
U5, including one reporting a customer complaint involving the
associated person. FINRA also provides several methods for
associated persons and former associated persons to check their
records, including online through BrokerCheck.
---------------------------------------------------------------------------

    The three-year time limitation would help ensure that the
expungement hearing is held close in time to the events that gave rise
to the customer dispute and increase the likelihood of customer
attendance and participation. Three years should also provide
sufficient time for firms to complete their investigation of the
complaint, for associated persons to develop a sense of whether the
complaint may evolve into an arbitration or civil litigation, and for
the associated person to gather the necessary resources and determine
whether to seek expungement. The three-year time limitation may also
curtail requests to expunge customer complaints that are filed many
years after first being reported to the CRD system and the bundling of
multiple unrelated and aged disclosures in a single expungement
request.
    As discussed above, the Codes provide that no claim shall be
eligible for submission to arbitration where six years have elapsed
from the occurrence or event giving rise to the claim.\129\ As a result
of this six-year eligibility rule, a customer arbitration may be filed
after an associated person has filed and received an award in
connection with a customer complaint associated with the customer
arbitration. To avoid unfairly impacting a customer arbitration filed
after a panel has issued an award on a request to expunge a customer
complaint associated with the customer arbitration, the proposed rule
change would provide that a prior expungement award shall not be
admissible in the customer arbitration.\130\
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    \129\ See supra note 38.
    \130\ See proposed Rules 12604(c) and 13604(c).

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d. Time Limits Applicable to Disclosures Arising on or Prior to the
Effective Date of the Proposed Rule Change
    The proposed amendments would also establish time limits for
requests to expunge customer dispute information arising from customer
arbitrations and civil litigations that close, and for customer
complaints that were initially reported to the CRD system, on or prior
to the effective date of the proposed rule change.
    Specifically, the proposed amendments would provide that if an
expungement request is otherwise eligible under the six-year limitation
period of FINRA Rule 13206(a), an associated person would be permitted
to file a straight-in request under the Industry Code if: (1) the
request for expungement is made within two years of the effective date
of proposed rule change, and the disclosure to be expunged is
associated with a customer arbitration or civil litigation that closed
on or prior to the effective date; \131\ or (2) the request for
expungement is made within three years of the effective date of the
proposed rule change, and the disclosure to be expunged is associated
with a customer complaint initially reported to the CRD system on or
prior to its effective date.\132\
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    \131\ See proposed Rule 13805(a)(2)(B)(i).
    \132\ See proposed Rule 13805(a)(2)(B)(ii).
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3. Director's Authority To Deny the Forum
    The Codes provide the Director with authority to decline the use of
the DRS arbitration forum if the Director determines that ``given the
purposes of FINRA and the intent of the Code, the subject matter of the
dispute is inappropriate, or that accepting the matter would pose a
risk to the health or safety of arbitrators, staff, or parties or their
representatives.'' \133\
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    \133\ See FINRA Rules 12203 and 13203.
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    To ensure additional safeguards around the expungement process, the
proposed rule change would provide the Director with express authority
to decline the use of the DRS arbitration forum if an associated person
files an expungement request that the Director determines is ineligible
for arbitration under proposed Rules 12805 and 13805.\134\ For example,
the Director would decline the use of the DRS arbitration forum if an
expungement request is ineligible under the proposed time limitations.
The Director would also decline the use of the DRS arbitration forum if
a panel has previously considered the merits of, or a court has
previously decided, an expungement request associated with the same
customer dispute information. The Director would also decline the use
of the DRS arbitration forum if an associated person was named as a
respondent in a customer arbitration but did not request expungement;
if an associated person requested expungement but withdrew or did not
pursue the expungement request; or if a party to a customer arbitration
requested expungement on behalf of an unnamed person but the party
withdrew or did not pursue an expungement request on behalf of the
unnamed person.
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    \134\ See proposed Rules 12203(b) and 13203(b).
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    The proposed rule change would also provide the Director with
express authority to decline the use of the DRS arbitration forum if
the Director determines that the expungement request was not filed
under, or considered in the DRS arbitration forum in accordance with,
proposed Rules 12805 or 13805.\135\ For example, the Director may
decline the use of the DRS arbitration forum if the Director determines
that a panel is proposing to issue an award containing expungement of
customer dispute information other than pursuant to proposed Rules
12805, 12800(d) and (e) or 13805, as applicable. The Director may also
decline the use of the DRS arbitration forum if an associated person
seeks expungement of customer dispute information other than pursuant
to proposed Rules 12805, 12800(d) and (e) or 13805, as applicable.
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    \135\ See proposed Rules 12203(c) and 13203(c).
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D. Requirements Relating to All Expungement Hearings
    FINRA Rules 12805 and 13805 currently provide a list of
requirements panels must follow in order to issue an award containing
expungement relief.\136\ In addition, the Guidance provides best
practices that arbitrators should follow when deciding expungement
requests. To further guide the arbitrators' decision-making, the
proposed rule change would expand the expungement hearing requirements
currently in FINRA Rules 12805 and 13805 and incorporate relevant
provisions from the Guidance. The proposed requirements would apply to
all expungement hearings.\137\
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    \136\ See supra note 45.
    \137\ See proposed Rules 12805(c) and 13805(c). The proposed
requirements for expungement hearings would apply to expungement
hearings held during a customer arbitration under proposed Rule
12805, a simplified customer arbitration under proposed Rule 12800
(see infra Item II.A.1.II.G., ``Expungement Requests During
Simplified Customer Arbitrations'') and a straight-in request under
proposed Rule 13805, unless otherwise specified.
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1. Recorded Hearing Sessions
    The Codes require a panel that is deciding an expungement request
to hold a recorded hearing session (by telephone or in person)
regarding the appropriateness of expungement.\138\ The proposed rule
change would provide that the panel must hold one or more separate
recorded hearing sessions regarding the expungement request, clarifying
that the panel would not be limited in the number of hearing sessions
it should hold to decide the expungement request.\139\ The proposed
amendments would also remove the specific reference to the hearing
being held by telephone or in person because, as discussed below, the
participants in the hearing may appear by different methods.
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    \138\ See FINRA Rules 12805(a) and 13805(a).
    \139\ See proposed Rules 12805(c)(1) and 13805(c)(1).
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2. Associated Person's Appearance
    The proposed rule change would require the associated person whose
information in the CRD system is the subject of the expungement request
to appear in person or by video conference at the expungement
hearing.\140\ A party requesting expungement on behalf of an unnamed
person or the party's representative would also be required to appear
in person or by video conference at the hearing. The panel would
determine the method of appearance.
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    \140\ See proposed Rules 12805(c)(2) and 13805(c)(2).
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    As the associated person is seeking the permanent removal of
information from the CRD system, FINRA believes the associated person
should be required to appear in person or by video conference at the
expungement hearing and be available to respond to questions. Requiring
that the associated person's appearance be in person or by video
conference would help the panel assess the associated person's
credibility, which may be particularly important if the request is
unopposed.
3. Customer's Attendance and Participation During the Expungement
Hearing
    The Guidance states that it is important to allow customers and
their representatives to participate in the expungement hearing if they
wish to do so.\141\ Specifically, the Guidance provides that
arbitrators should:
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    \141\ The Guidance directs arbitrators to permit customers and
their counsel to participate in the expungement hearing. See
Guidance, supra note 5. FINRA Rules 12208 and 13208 permit a party
to be represented pro se, by an attorney or by a person who is not
an attorney. Accordingly, the proposed amendments use the term
``representative'' rather than ``counsel.'' See also Securities
Arbitration--Should You Hire an Attorney? (Jan. 3, 2019), https://www.finra.org/investors/insights/securities-arbitration; How to Find
an Attorney, https://www.finra.org/arbitration-mediation/how-find-attorney; and Resources for Investors Representing Themselves,
https://www.finra.org/arbitration-mediation/resources-investors-representing-themselves.

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     Allow the customer and their representative to appear at
the expungement hearing;
     Allow the customer to testify (telephonically, in person,
or other method) at the expungement hearing;
     Allow the representative for the customer or a pro se
customer to introduce documents and evidence at the expungement
hearing;
     Allow the representative for the customer or a pro se
customer to cross-examine the associated person or other witnesses
called by the party seeking expungement; and
     Allow the representative for the customer or a pro se
customer to present opening and closing arguments if the panel allows
any party to present such arguments.
    The proposed rule change would codify these provisions of the
Guidance. The proposed rule change would make clear that all customers
whose customer arbitrations, civil litigations or customer complaints
are a subject of the expungement request are entitled to representation
and may attend and participate in the expungement hearing.\142\ These
customers would also be entitled to attend and participate in any
prehearing conferences held for straight-in requests.\143\ Because
expungement requests may otherwise be unopposed, FINRA believes that
the customers should be allowed to attend and participate in the
entirety of the expungement hearing and any prehearing conferences.
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    \142\ See proposed Rules 12805(c)(3)(A), 12805(c)(4),
13805(c)(3)(A) and 13805(c)(4). The proposed rule change would make
clear that customers also have the option to provide their position
on the expungement request in writing in lieu of attending the
hearing.
    \143\ See proposed Rule 13805(c)(3)(A). A prehearing conference
is any hearing session, including an Initial Prehearing Conference
(``IPHC''), that takes place before the hearing on the merits
begins. See FINRA Rules 12100(y) and 13100(w); see also FINRA Rules
12500 and 13500. Under the proposal, all customers whose customer
arbitrations, civil litigations or customer complaints are a subject
of the straight-in request would be entitled to representation at
prehearing conferences. See proposed Rule 13805(c)(4).
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    The proposed rule change would provide that the customer could
choose to attend and participate by telephone, in person or by video
conference.\144\ Customer attendance and participation during an
expungement hearing provides the panel with important information and
perspective that it might not otherwise receive. By providing customers
with options for how to attend and participate in hearings, FINRA seeks
to encourage customer attendance and participation by making it easier
for customers to do so.
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    \144\ See proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B).
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    The proposed rule change would also specify ways in which the
customer must be allowed to attend and participate in the expungement
hearing. First, the proposed rule change would provide that customers
or customers' representatives must be allowed to introduce evidence
during the expungement hearing.\145\ If the customer or customer's
representative introduces any evidence at the expungement hearing, a
party could state objections to the introduction of the evidence during
the expungement hearing.\146\
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    \145\ See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).
    \146\ See proposed Rules 12805(c)(5)(A) and 13805(c)(5)(A).
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    Second, the customers and the customers' witnesses would be allowed
to testify at the expungement hearing and be questioned by the customer
or customer's representative.\147\ If customers or their witnesses
testify, the associated person or a party requesting expungement on
behalf of an unnamed person would be allowed to conduct cross-
examination.\148\
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    \147\ See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B).
    \148\ See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B).
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    Third, the customer or customer's representative would be permitted
to state objections to evidence and cross-examine the associated person
or party requesting expungement on behalf of an unnamed person and any
other witnesses called during the expungement hearing.\149\
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    \149\ See proposed Rules 12805(c)(5)(C) and 13805(c)(5)(C).
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    Fourth, the customer or customer's representative would be
permitted to present opening and closing arguments if the panel permits
any party to present such arguments.\150\
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    \150\ See proposed Rules 12805(c)(5)(D) and 13805(c)(5)(D).
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    FINRA believes the proposal strikes the right balance of allowing
the customer to attend and participate in the hearing and giving the
associated person or party requesting expungement on behalf of an
unnamed person the opportunity to substantiate arguments in support of
the expungement request.
4. Panel Requests for Additional Documents or Evidence
    Arbitrators on the panel do not conduct their own research when
hearing an arbitration case; instead, they review the materials
provided by the parties. If they need more information, they can
request it from the parties. In deciding an expungement request,
particularly in cases that settle before an evidentiary hearing or in
cases where the customer does not attend or participate in the
expungement hearing, the panel's role as fact finder is critical. Given
this significant role, the panel must ensure that it has all of the
information necessary to make a fully informed decision on the
expungement request on the basis of a complete factual record.
    Thus, the proposed rule change would codify the ability of the
panel to request from the associated person, the party requesting
expungement on behalf of an unnamed person and the member firm at which
the person was associated at the time the customer dispute arose, as
applicable, any documentary, testimonial or other evidence that the
panel deems relevant to the expungement request.\151\ This would allow
the panel, for example, to require the associated person to produce
documents that the panel deems relevant at the prehearing conference,
to testify in response to questions by the panel at the hearing or to
provide transcripts of previously obtained witness testimony.
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    \151\ See proposed Rules 12805(c)(6) and 13805(c)(7). The
Guidance also suggests that arbitrators should ask the associated
person seeking expungement or the party seeking expungement on an
associated person's behalf to provide a current copy of the
BrokerCheck report for the person whose record would be expunged,
paying particular attention to the ``Disclosure Events'' section of
the report. See Guidance, supra note 5. FINRA continues to encourage
arbitrators to request a current copy of the associated person's
BrokerCheck report.