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5. Review of Settlement Documents
    Current FINRA Rules 12805(b) and 13805(b) provide that, in the
event a customer dispute is resolved by settlement, the panel
considering the expungement request must review the settlement
documents and consider the amount of payments made to any party and any
other terms and conditions of the settlement.\152\ The proposed rule

change would retain this requirement.\153\
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    \152\ The panel must review settlement documents that are
related to the customer dispute information that is the subject of
the expungement request, regardless of whether the associated person
was a party to the settlement.
    \153\ See proposed Rules 12805(c)(7) and 13805(c)(8). FINRA Rule
2081 provides that no member firm or associated person shall
condition or seek to condition settlement of a dispute with a
customer on, or to otherwise compensate the customer for, the
customer's agreement to consent to, or not to oppose, the member's
or associated person's request to expunge such customer dispute
information from the CRD system. See also Prohibited Conditions
Relating to Expungement of Customer Dispute Information FAQ, https://www.finra.org/arbitration-mediation/faq/prohibited-conditions-relating-expungement-customer-dispute-information.
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    In addition, the Guidance encourages arbitrators to inquire and
fully consider whether a party conditioned a settlement of a customer
dispute upon an agreement not to oppose the request for expungement in
cases in which the customer does not attend or participate in the
expungement hearing or the requesting party states that a customer has
indicated that the customer will not oppose the expungement request.
Because conditioned settlements violate FINRA Rule 2081 and may be
grounds to deny an expungement request, the proposed rule change would
codify the language in the Guidance.\154\
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    \154\ See proposed Rules 12805(c)(7) and 13805(c)(8).
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6. Unanimous Decision To Issue an Award Containing Expungement Relief
    Current FINRA Rules 12805 and 13805 require that, in order to issue
an award containing expungement of customer dispute information, the
panel must indicate in the arbitration award which of the FINRA Rule
2080 grounds for expungement serves as the basis for its expungement
order. Consistent with arbitration cases generally, the panel may award
expungement based on a majority decision of the arbitrators.\155\
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    \155\ See FINRA Rules 12410 and 13414.
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    The proposed rule change would require that the arbitrators agree
unanimously to issue an award containing expungement relief.\156\
Although the vast majority of expungement decisions are already
unanimous,\157\ FINRA believes that this change would help protect the
integrity of the information in the CRD system and help ensure that the
expungement process operates as intended--as a remedy that is
appropriate only in limited circumstances in accordance with the narrow
standards in FINRA rules.\158\
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    \156\ See proposed Rules 12805(c)(8)(A) and 13805(c)(9)(A).
FINRA notes that when deciding a customer's claims, a majority
decision of the arbitrators would continue to be sufficient.
    \157\ During the sample period, in arbitrations decided by a
three-person arbitration panel and involving an expungement request,
the panel decision was unanimous (not unanimous) in 98 percent (two
percent) of arbitrations. In one percent of the arbitrations, the
decision awarding expungement was not unanimous and would not have
been permitted under the proposed change.
    \158\ See supra note 27 and accompanying text.
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    To further protect the integrity of the information in the CRD
system, the proposed amendments would also provide that in order to
issue an award containing expungement relief, the unanimous finding
must be that one or more of the grounds for expungement enumerated in
the proposed rule has been established: (1) the claim, allegation or
information is factually impossible or clearly erroneous; (2) the
associated person was not involved in the alleged investment-related
sales practice violation, forgery, theft, misappropriation or
conversion of funds; or (3) the claim, allegation or information is
false.\159\ To help ensure there is no confusion as to which standard
the arbitrators must apply, the proposed rule change would also state
that the panel shall not issue, and the Director shall not serve, an
award containing expungement relief based on any other grounds.\160\
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    \159\ See proposed Rules 12805(c)(8)(A)(i) and
13805(c)(9)(A)(i).
    \160\ See proposed Rules 12805(c)(8)(A)(ii) and
13805(c)(9)(A)(ii). FINRA further notes that it would be
inappropriate to award expungement of customer dispute information
that is associated with a customer arbitration or civil litigation
in which the associated person was found liable. In this
circumstance, the liability finding would be inconsistent with a
finding that one of the three grounds has been established to issue
an award containing expungement relief.
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    The Codes, which include FINRA Rules 12805 and 13805, govern the
processes by which all arbitration cases are administered in the DRS
arbitration forum.\161\ Accordingly, the three grounds referenced in
proposed Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i) on which a panel
must unanimously make a finding to issue an award containing
expungement relief would be the exclusive grounds upon which a panel
could award expungement in the DRS arbitration forum.\162\
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    \161\ See FINRA Rules 12101 and 13101 (describing how the Codes
apply to disputes submitted to arbitration).
    \162\ FINRA Rule 2080 is not part of the Codes, and FINRA is not
proposing amendments to FINRA Rule 2080 at this time. With this
proposed rule change, FINRA is proposing to codify the grounds
identified in FINRA Rule 2080(b)(1) as the exclusive grounds upon
which an arbitration panel may issue an award containing expungement
of customer dispute information from the CRD system. See also supra
note 31 (discussing prior statements by the SEC and FINRA that
expungement may occur only after the arbitrators find that one or
more of the grounds in FINRA Rule 2080(b)(1) serves as the basis for
the expungement award). The discretionary standard in FINRA Rule
2080(b)(2) would not be a basis for a panel to award expungement
relief in the DRS arbitration forum. FINRA Rule 2080(b)(2) provides
``FINRA''--not arbitrators in the DRS arbitration forum--the
ability, ``in [FINRA's] sole discretion and under extraordinary
circumstances,'' to waive the obligation to name FINRA as an
additional party to a court proceeding related to expungement of
customer dispute information from CRD if FINRA ``determines that:
(A) the expungement relief and accompanying findings on which it is
based are meritorious; and (B) the expungement would have no
material adverse effect on investor protection, the integrity of the
CRD system or regulatory requirements.''
    Although FINRA is not proposing to amend FINRA Rule 2080 at this
time, it is considering whether enhancements to the current
expungement process through changes to FINRA Rule 2080 may be
warranted. See Discussion Paper, supra note 13 (exploring potential
alternatives to the current expungement process, including potential
changes to FINRA Rule 2080).
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7. Contents of the Expungement Award
    The panel is currently required to provide a ``brief'' written
explanation of the reasons for its finding that one or more of the
grounds for expungement applies to the facts of the case.\163\ The
proposed rule change would retain the requirement to provide the
written explanation, but would remove the word ``brief'' such that the
panel would be required to provide enough detail in the award to
explain its rationale for awarding expungement relief.\164\ As the
Guidance suggests, the panel's explanation must be complete and not
solely a recitation of one of the FINRA Rule 2080(b)(1) grounds or
language provided in the expungement request. For the same reason, the
proposed rule change would incorporate language from the Guidance that
the panel's explanation should identify any specific documentary,
testimonial or other evidence on which the panel relied in awarding
expungement relief.\165\
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    \163\ See FINRA Rules 12805(c) and 13805(c).
    \164\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B).
    \165\ See proposed Rules 12805(c)(8)(B) and 13805(c)(9)(B).
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8. Evidentiary Weight of Decision of Customer or Authorized
Representative Not To Attend or Participate
    The proposed amendments would also instruct the panel that the
decision of a customer or an authorized representative of state
securities regulators (``authorized representative'') not to attend or
participate in the expungement hearing shall not be material to the
determination of whether expungement is appropriate.\166\ FINRA is
aware that some panels have indicated in expungement awards that a
customer did not appear at the

expungement hearing. A customer or an authorized representative may not
attend, participate in or appear at an expungement hearing for a
variety of reasons that may be unrelated to the merits of the
expungement request. Accordingly, FINRA believes that a customer's or
an authorized representative's decision not to attend or participate
should not be given any evidentiary weight by the panel when making the
expungement determination.
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    \166\ See proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C); see
also infra Item II.A.1.II.F., ``Attendance and Participation of an
Authorized Representative of State Securities Regulators in
Straight-in Requests'' (discussing the attendance and participation
in straight-in requests of an authorized representative of state
securities regulators).
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9. Forum Fees
    The proposed rule change would retain the current requirements in
FINRA Rules 12805(d) and 13805(d) that address how DRS arbitration
forum fees are assessed in expungement hearings. Specifically, the
panel must assess against the parties requesting expungement all DRS
arbitration forum fees for each hearing session in which the sole topic
is the determination of the appropriateness of expungement.\167\
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    \167\ See proposed Rules 12805(c)(9) and 13805(c)(10).
---------------------------------------------------------------------------

E. Notifications to Customers and to State Securities Regulators
Regarding Expungement Requests
1. Notification to Customers by the Associated Person
    The Guidance suggests that when a straight-in request is filed
against a firm, arbitrators order the associated person to provide a
copy of the statement of claim to the customers involved in the
customer dispute that gave rise to the customer dispute information
maintained in the CRD system. This helps ensure that the customers know
about the expungement request and have an opportunity to attend and
participate in the expungement hearing or provide a position in writing
on the associated person's request. The proposed rule change would
codify this practice in the Industry Code by requiring that the
associated person serve all customers whose customer arbitrations,
civil litigations or customer complaints are a subject of the
expungement request with a copy of the statement of claim requesting
expungement and any answer.\168\ The associated person would be
required to serve a copy of the statement of claim and a copy of any
answer within 10 days of filing.\169\ The panel would be authorized to
decide whether extraordinary circumstances exist that make service on
the customers impracticable.\170\
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    \168\ See proposed Rule 13805(b)(1)(A)(i) and (ii). This
requirement would apply to straight-in requests filed under the
Industry Code; notice to customers would not be necessary for
requests filed under proposed Rule 12805 of the Customer Code as the
customer would be a named party.
    \169\ See proposed Rule 13805(b)(1)(A)(ii).
    \170\ See proposed Rule 13805(b)(1)(A)(i).
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    Given the associated person's personal interest in obtaining
expungement, FINRA believes that the panel should review all documents
that the associated person used to inform the customers about the
expungement request as well as any customer responses received.
Accordingly, the proposed rule change would require the associated
person to file with the panel proof of service for the statement of
claim and any answers, copies of all documents provided by the
associated person to the customers, and copies of all communications
sent by the associated person to the customers and any responses
received from the customers.\171\ The proposed requirement would also
help ensure that the associated person does not attempt to dissuade a
customer from attending or participating in the expungement hearing.
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    \171\ See proposed Rule 13805(b)(1)(A)(iv).
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2. Notifications to the Customer by the Director
    Customer attendance and participation in expungement hearings helps
the panel fully develop a record on which to decide the expungement
request. Accordingly, the proposed rule change would require the
Director to notify all customers whose customer arbitrations, civil
litigations or customer complaints are a subject of the expungement
request, of the time, date and place of any prehearing conferences and
the expungement hearing.\172\
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    \172\ See proposed Rule 13805(b)(1)(B)(i). This requirement
would apply to straight-in requests filed under the Industry Code;
notice to customers would not be necessary for requests filed under
proposed Rule 12805 of the Customer Code as the customer would be a
named party. See also infra Item II.A.1.II.G.3., ``Customer
Notification of Expungement Hearings during Simplified
Arbitrations'' (discussing customer notification of expungement
hearings in connection with simplified arbitrations).
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    The Director would include language in the notice to encourage the
customer to attend and participate in the expungement hearing. The
associated person would be required to provide a current address for
the customer,\173\ or the expungement request would be considered
deficient and would not be served.\174\ The Director's notice to the
customer would serve as a reminder of the expungement request and would
provide the customer with timely notice of any prehearing conferences
and expungement hearings so that customers may plan and prepare to
attend and participate if they choose.
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    \173\ See proposed Rule 13805(b)(1)(B)(i).
    \174\ See proposed Rule 13307(a)(7).
---------------------------------------------------------------------------

    The Director would also provide the notified customers with access
to all documents that are relevant to (a) the expungement request that
are filed in the straight-in request and (b) any prior customer
arbitration brought by the customer that is a subject of the
expungement request.\175\ This would provide the customer with access
to the key documents surrounding the request for expungement prior to
their attendance and participation in the expungement hearing.
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    \175\ See proposed Rule 13805(b)(1)(B)(ii). FINRA would provide
customers with access to the documents through the DR Portal. The DR
Portal has two parts: the DR Neutral Portal is for FINRA neutrals
serving on the Dispute Resolution roster, and the DR Party Portal is
for arbitration and mediation case participants. Once registered on
the DR Portal, parties may use the portal to, among other things,
file an arbitration claim, view case documents, submit documents to
FINRA and send documents to other portal case participants, and
schedule hearing dates. See FINRA Dispute Resolution Services, DR
Portal, https://www.finra.org/arbitration-mediation/dr-portal.
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3. Notifications to State Securities Regulators
    The proposed rule change would require FINRA to notify state
securities regulators, in the manner determined by the Director in
collaboration with state securities regulators, of an expungement
request within 15 days of receiving an expungement request.\176\ The
proposed notification requirement would help ensure that state
securities regulators are timely notified of expungement requests.
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    \176\ See proposed Rules 12800(f)(1), 12805(b) and
13805(b)(2)(A). FINRA would make this notification in connection
with expungement requests under the Customer and Industry Codes.
Such notification could be achieved by notifying NASAA of the
expungement requests.
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F. Attendance and Participation of an Authorized Representative of
State Securities Regulators in Straight-In Requests
    The current expungement process does not include a mechanism to
facilitate state securities regulator involvement in expungement
hearings in the DRS arbitration forum. The proposed rule change would
provide a mechanism for an authorized representative to provide the
state securities regulators' position or positions on an expungement
request in writing or by attending and participating in the expungement
hearing in person or by video conference.\177\ This attendance and
participation by an authorized representative of the state securities
regulators would be limited to straight-

in requests, where the panel may otherwise only hear evidence from the
party requesting expungement.
---------------------------------------------------------------------------

    \177\ See proposed Rule 13805(c)(6)(A).
---------------------------------------------------------------------------

    At the same time as providing notification to state securities
regulators of a straight-in request, the Director would provide state
securities regulators with access to all documents relevant to (a) the
expungement request filed in the arbitration requesting expungement
relief and (b) any other customer arbitration brought under the
Customer Code that is associated with the customer dispute information
that is a subject of the expungement request.\178\ Providing state
securities regulators with these documents would help facilitate a
determination of whether to attend and participate in the expungement
hearing.
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    \178\ See proposed Rule 13805(b)(2)(B). The state securities
regulators' access to the documents would be subject to
confidentiality restrictions. Outside of the DRS arbitration
process, state securities regulators could choose to seek access to
additional documents and information pursuant to their separate
authority.
---------------------------------------------------------------------------

    If the Director receives notification from an authorized
representative no later than 30 days after the last answer is due that
the authorized representative intends to attend and participate in the
expungement hearing, the Director shall notify the authorized
representative of the time, date and place of any prehearing
conferences and the expungement hearing.\179\ At the expungement
hearing, the authorized representative would be permitted to: (1)
introduce documentary, testimonial, or other evidence; (2) cross-
examine witnesses; and (3) present opening and closing arguments if the
panel allows any party to present such arguments.\180\ The other
persons appearing at the expungement hearing could state objections to
the authorized representative's evidence and cross-examine the
authorized representative's witnesses.\181\
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    \179\ See proposed Rule 13805(b)(3).
    \180\ See proposed Rule 13805(c)(6)(B).
    \181\ See proposed Rule 13805(c)(6)(C).
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    The authorized representative would not be considered a party to
the proceeding and their attendance and participation would be limited
to what is authorized by proposed Rule 13805(c)(6).\182\ In addition,
the panel would not be permitted to allow the attendance or
participation of the authorized representative to materially delay the
scheduling of the expungement hearing.\183\
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    \182\ As such, an authorized representative would not be
entitled to seek discovery from the parties through the DRS
arbitration forum, file motions, or seek to postpone a hearing.
    \183\ See proposed Rule 13805(c)(6)(A).
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    Allowing an authorized representative to attend and participate in
straight-in requests may provide meaningful opposition to the
expungement request, which might otherwise be unopposed, and thus help
create a more complete factual record for the panel to rely upon to
decide the expungement request. NASAA and state securities regulators
have a shared interest with FINRA in protecting the integrity of the
information contained in the CRD system, as it is a crucial tool in
their registration and oversight responsibilities. According to NASAA,
``[s]tate securities regulators are often legally obligated to maintain
the information in the CRD system as a state record. Much of the
information in the CRD system is filed with state securities regulators
as part of the registration and qualification process, or filed by
state securities regulators themselves. The Uniform Securities Acts,
which form the basis of most state securities statutes, generally
provide that securities regulators must retain all information filed as
part of a registration application or as an amendment to the
information filed as part of the application.'' \184\ Thus, NASAA has
indicated that expungement of customer dispute information potentially
implicates the public records obligations of state governments.\185\
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    \184\ Brief of Amicus Curiae North American Securities
Administrators Association, Inc. in Support of the Division of
Securities and Retail Franchising, at 6-7, https://www.nasaa.org/wp-content/uploads/2021/06/Brief-of-Amicus-Curiae-NASAA-in-Support-of-the-Div-of-Securities-and-Retail-Franchising-06.23.21.pdf.
    \185\ See supra note 184.
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    The proposal would not allow an authorized representative to attend
or participate in a customer arbitration where expungement has been
requested; such attendance or participation could substantially disrupt
the customer's case and would be less impactful, as the panel hears the
customer's evidence on the merits.
    FINRA believes that the proposed rule change strikes the
appropriate balance between respecting states' interest in the
information in the CRD system and maintaining the integrity of the
arbitration process.
G. Expungement Requests During Simplified Customer Arbitrations
    Customer arbitrations involving $50,000 or less, called simplified
arbitrations, are governed by FINRA Rule 12800. FINRA Rule 12800
provides customers with expedited procedures to make the DRS
arbitration forum economically feasible for these smaller claims.
Simplified arbitrations are decided on the pleadings and other
materials submitted by the parties, unless the customer requests a
hearing.\186\ Further, a single arbitrator from the public chairperson
roster is appointed to consider and decide simplified arbitrations,
unless the parties agree in writing otherwise.\187\
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    \186\ See FINRA Rule 12800(a).
    \187\ See FINRA Rule 12800(b). The parties could agree to have a
three-person panel decide the simplified case. For ease of
reference, when discussing expungement requests in simplified
arbitrations under the proposed rule change, the rule filing uses
the term ``arbitrator,'' unless otherwise specified, to mean either
a panel or single arbitrator.
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    The customer who files a simplified arbitration determines how the
claim will be decided. In particular, the customer has the option of
having the case decided in one of three ways: (1) without a hearing
(referred to as ``on the papers''), where the arbitrator decides the
case on the pleadings or other materials; (2) in an ``Option One'' full
hearing, in which prehearings and hearings on the merits take place
pursuant to the regular provisions of the Code; or (3) in an ``Option
Two'' special proceeding, whereby the parties present their case in a
hearing to the arbitrator in a compressed timeframe, so that the
hearings last no longer than one day.\188\
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    \188\ See FINRA Rule 12800(c). Among the customer arbitrations
that closed in 2021, 14 percent were simplified cases. Among the
simplified customer cases which closed, 23 percent closed on the
papers, four percent closed with a full hearing, and four percent
closed by special proceeding. The remaining 69 percent closed by
other means including by settlement and withdrawal.
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    Currently, named associated persons and parties requesting
expungement on behalf of unnamed persons request expungement during
simplified arbitrations. FINRA Rule 12800 does not, however, expressly
address how an expungement request should be filed or considered during
a simplified arbitration. The proposed rule change would codify an
associated person's ability to request expungement when named as a
respondent in a simplified arbitration, and for other parties to
request expungement on behalf of an unnamed person. The proposed rule
change would also establish procedures for requesting and considering
expungement requests in simplified arbitrations that are consistent
with the expedited nature of these proceedings.\189\
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    \189\ See proposed Rules 12800(d) and (e). Under the proposed
rule change, an associated person would not be permitted to request
expungement in a simplified arbitration administered under the
Industry Code, FINRA Rule 13800. All expungement requests under the
Industry Code must be filed in accordance with proposed Rule 13805.

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1. Requesting Expungement
    The proposed rule change would permit a named associated person to
request expungement, or a party to file an on-behalf-of request, during
a simplified arbitration. As discussed in more detail below, unlike in
a non-simplified arbitration, if expungement is not requested during
the simplified arbitration, the associated person would be permitted to
request it as a straight-in request filed under the Industry Code.\190\
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    \190\ See infra Item II.A.1.II.G.1.c., ``When No Expungement
Request is Filed in a Simplified Arbitration.''
---------------------------------------------------------------------------

a. By a Named Associated Person During the Simplified Arbitration
    Under the proposed rule change, an associated person named as a
respondent in a simplified arbitration could request expungement during
the arbitration of the customer dispute information associated with the
customer's statement of claim, provided the request is eligible for
arbitration.\191\
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    \191\ See proposed Rule 12800(d)(1)(A). The limitations that
apply to expungement requests filed by a named associated person
under proposed Rule 12805(a)(1)(B) would apply to these requests.
See supra Item II.A.1.II.C., ``Limitations on Expungement
Requests.''
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    If a named associated person requests expungement during a
simplified arbitration, the proposed rule change would require the
request to be filed in an answer or a separate pleading requesting
expungement.\192\ If the named associated person requests expungement
in a pleading other than an answer, the request must be filed within 30
days after the date FINRA notifies the parties of the appointment of
the arbitrator.\193\ Given the expedited nature of the simplified
arbitration process, tying the request to these milestones would ensure
that parties receive timely notice of the expungement request so that
they may prepare their cases accordingly. The request would be required
to include the same information as a request filed in a non-simplified
arbitration.\194\
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    \192\ See proposed Rule 12800(d)(1)(B)(i). A respondent's answer
must be submitted within 45 days of receipt of the statement of
claim. See supra note 46.
    \193\ See proposed Rule 12800(d)(1)(B)(i). When FINRA notifies
the parties when an arbitrator has been appointed, FINRA informs the
parties that they have 30 days from the date of notification to
submit additional documents or other information before the case is
submitted to the arbitrator.
    \194\ See proposed Rules 12800(d)(1)(B)(i) and
12805(a)(1)(C)(ii). Thus, the associated person's expungement
request would be required to contain the applicable filing fee; the
CRD number of the party requesting expungement; each CRD occurrence
number that is the subject of the request; the case name and docket
number associated with the customer dispute information; and an
explanation of whether expungement of the same customer dispute
information was previously requested and, if so, how it was decided.
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    To limit arbitrator shopping, the arbitrator would be required to
decide an expungement request once it is filed by the associated
person.\195\ If an associated person withdraws or does not pursue the
request after filing, the arbitrator would be required to deny the
request with prejudice so that it could not be re-filed.\196\
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    \195\ See proposed Rules 12800(d)(1)(B)(ii) and 12800(e)(1).
    \196\ See proposed Rule 12800(d)(1)(C).
---------------------------------------------------------------------------

b. By a Party on Behalf of an Unnamed Person
    Under the proposed amendments, the requirements for a party to file
an on-behalf-of request during a simplified arbitration would be the
same as the requirements for a named associated person filing an
expungement request during a simplified arbitration. A named party
would only be able to file an on-behalf-of request during a simplified
arbitration with the consent of the unnamed person.\197\ As with on-
behalf-of requests filed in customer arbitrations under proposed Rule
12805(a)(2), the unnamed person who would benefit from the expungement
request must consent to such filing by signing the Form.\198\
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    \197\ See proposed Rule 12800(d)(2)(A).
    \198\ See proposed Rule 12800(d)(2). The request must also meet
the same requirements as an on-behalf-of request filed under
proposed Rule 12805(a)(2). See proposed Rules 12805(a)(1)(C)(ii),
12805(a)(2)(C)(ii) and 12805(a)(2)(D); see also supra Item
II.A.1.II.A.1.b., ``Expungement Requests By a Party Named in the
Customer Arbitration On Behalf Of an Unnamed Person.''
---------------------------------------------------------------------------

    To limit arbitrator shopping, the arbitrator would be required to
decide an on-behalf-of request once it is filed by the requesting
party.\199\ If the requesting party withdraws or does not pursue the
on-behalf-of request after filing, the arbitrator would be required to
deny the request with prejudice so that it could not be re-filed.\200\
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    \199\ See proposed Rules 12800(d)(2)(B)(ii) and 12800(e)(1).
    \200\ See proposed Rule 12800(d)(2)(C).
---------------------------------------------------------------------------

c. When No Expungement Request Is Filed in a Simplified Arbitration
    If expungement is not requested during the simplified arbitration
under proposed Rule 12800(d), the associated person would be able to
file a straight-in request under proposed Rule 13805 and have the
request decided by a three-person panel randomly selected from the
Special Arbitrator Roster.\201\ The request would be subject to the
limitations on whether and when such requests may be filed under the
Industry Code.\202\
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    \201\ See proposed Rules 12800(e)(2), 13805(a)(1) and 13806.
    \202\ See proposed Rule 13805(a)(2); see also supra Item
II.A.1.II.C., ``Limitations on Expungement Requests.''
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    Due to the expedited nature of simplified arbitrations, FINRA
believes that fairness dictates that the associated person have the
option to seek expungement separately under the Industry Code and have
the expungement request decided by a panel randomly selected from the
Special Arbitrator Roster. In simplified arbitrations, there may be
less discovery, and the customer can dictate the extent of the evidence
presented to the arbitrator. The customer may, for example, determine
to have the arbitration decided on the papers. Because there may be
less information available for the arbitrator to evaluate an
expungement request during a simplified arbitration--even when the
simplified arbitration results in an award--the associated person would
retain the ability to choose to file the request as a straight-in
request under the Industry Code.\203\
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    \203\ This would allow the associated person to obtain and
present evidence from the member firm at which they were associated
at the time the customer dispute arose without interfering with the
simplified customer arbitration process. See proposed Rule
13805(a)(1) and FINRA Rule 13506.
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2. Deciding Expungement Requests During Simplified Arbitrations
    If a named associated person or party on behalf of an unnamed
person requests expungement during a simplified arbitration, the
arbitrator would be required to decide the expungement request,
regardless of how the simplified arbitration closes (e.g., even if the
arbitration settles).\204\ As discussed in more detail below,
arbitrators deciding expungement requests in simplified arbitrations
would be experienced public arbitrators who would be required to
evidence successful completion of, and agreement with, the enhanced
expungement training provided by DRS prior to considering and deciding
the expungement request.
---------------------------------------------------------------------------

    \204\ See proposed Rule 12800(e)(1).
---------------------------------------------------------------------------

    Under the proposed rule change, how and when the expungement
request is decided would depend on which option the customer selects to
decide the simplified arbitration.
a. No Hearing or Option Two Special Proceeding
    If the customer opts not to have a hearing or chooses an Option Two
special proceeding, the arbitrator would decide the customer's dispute
first and

issue an award.\205\ After the customer's dispute is decided, the
arbitrator must hold a separate expungement-only hearing to consider
and decide the expungement request and issue a separate, subsequent
award.\206\
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    \205\ See proposed FINRA Rule 12800(e)(1)(A).
    \206\ See proposed Rule 12800(e)(1)(A). The arbitrator must
conduct the expungement hearing pursuant to proposed Rule 12805(c).
The expungement award must meet the requirements of proposed Rule
12805(c)(8), and the DRS arbitration forum fees would be assessed
pursuant to proposed Rule 12805(c)(9).
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    The arbitrator would decide the customer's dispute first and issue
an award to minimize any delays in resolving the customer arbitration
and any delays in potential recovery that a customer may be awarded.
Further, because the customer arbitration may not be as fully developed
when an ``on the papers'' or special proceeding is requested, the
arbitrator would conduct a separate expungement-only hearing to develop
the factual record and make a fully informed decision on the
expungement request, and could request any documentary, testimonial or
other evidence it deems relevant to the expungement request.
b. Option One Hearing
    If the customer chooses to have a full ``Option One'' hearing on
his or her claim and it closes by award, the arbitrator would be
required to consider and decide the expungement request during the
customer arbitration and include the decision on the expungement
request in the same award as the decision on the customer
arbitration.\207\ This process would be the same as deciding an
expungement request during a non-simplified customer arbitration that
closes by award after a hearing, where the customer's claim and
expungement request are addressed during the customer arbitration.
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    \207\ See proposed Rule 12800(e)(1)(B)(i).
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    If the customer arbitration closes other than by award or by award
without a hearing, the arbitrator would be required to hold a separate
expungement-only hearing to consider and decide the expungement request
and issue a separate award containing the decision on the expungement
request.\208\ The arbitrator would conduct a separate expungement-only
hearing to develop the factual record and make a fully informed
decision on the expungement request.
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    \208\ See proposed Rule 12800(e)(1)(B)(ii).
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    FINRA does not believe that it is necessary for a panel from the
Special Arbitrator Roster to decide an expungement request if a
simplified customer arbitration is decided on the papers, in an Option
Two special proceeding, or if the simplified customer arbitration
closes other than by award or by award without a hearing. FINRA
believes that the public chairpersons who decide simplified
arbitrations would be fully capable of making appropriate expungement
decisions on the basis of their experience.\209\ In addition, the
public chairperson would be required to evidence successful completion
of, and agreement with, the enhanced expungement training provided by
DRS prior to considering and deciding the expungement request and,
therefore, would have the same enhanced expungement training as the
arbitrators on the Special Arbitrator Roster.
---------------------------------------------------------------------------

    \209\ See supra note 102 and accompanying text.
---------------------------------------------------------------------------

    If the Commission approves the proposed rule change, FINRA notes,
however, that it will continue to monitor expungement requests and
decisions in simplified arbitrations to determine if such requests
should be decided by the Special Arbitrator Roster.
3. Customer Notification of Expungement Hearings During Simplified
Arbitrations
    The Director would notify all customers from the simplified
arbitration of the separate expungement-only hearing.\210\ The
Director's notice would serve as a reminder of the expungement request
and would provide the customers with timely notice of the expungement
hearing so that the customers and their representatives may plan and
prepare to attend and participate if they choose.
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    \210\ See proposed Rule 12800(f)(2).
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H. Non-Substantive Changes
    FINRA is also proposing to amend the Codes to make non-substantive,
technical changes to the rules impacted by the proposed rule change.
For example, the proposed rule change would require the renumbering of
paragraphs and the updating of cross-references in the rules impacted
by the proposed rule change. In addition, the title of Part VIII of the
Customer Code would be amended to add a reference to ``Expungement
Proceedings.'' Similarly, the title of Part VIII of the Industry Code
would be amended to add a reference to ``Expungement Proceedings'' and
``Promissory Note Proceedings.'' FINRA believes the proposed changes to
the titles would more accurately reflect the contents of Part VIII of
the Customer and Industry Codes. FINRA is also proposing to re-number
current FINRA Rule 13806 (Promissory Note Proceedings) as new FINRA
Rule 13807, without substantive change to the current rule language and
to amend FINRA Rule 13214 to change the cross references from Rules
13806(d)(1) and 13806(f) to Rules 13807(d)(1) and 13807(f),
respectively. Finally, FINRA would also amend FINRA Rule 13600 to
change the cross reference from Rule 13806(e)(1) to Rule 13807(e)(1).
    If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\211\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------

    \211\ 15 U.S.C. 78o.
---------------------------------------------------------------------------

    The proposed rule change seeks 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 member 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. The proposed rule change will help ensure
that the expungement process works as intended--as a remedy that is
appropriate only in limited circumstances in accordance with the narrow
standards in FINRA rules.
    The current expungement framework has limitations that can make
deciding straight-in requests more challenging, particularly if the
customer or customer's representative does not attend and participate
in the hearing. By having three specially trained and randomly selected
arbitrators available to ask questions, request evidence and generally
to serve as fact-finders in the absence of customer input, the proposed
rule change will help ensure that a more complete factual record is
created to support the arbitrators' expungement decision. In addition,
the proposed rule change will specifically authorize all panels that
consider expungement requests to request any documentary,

testimonial or other evidence that they deem relevant to the
expungement request from a member firm or associated person.
    To further support the development of a more complete factual
record, the proposed rule change will require that the associated
person appear at the expungement hearing in person or by video
conference. The proposed rule change will also codify the Guidance as
rules that arbitrators and parties must follow and facilitate the
attendance and participation of customers in all expungement hearings,
and by state securities regulators, through an authorized
representative, in expungement hearings in straight-in requests. If
they attend and participate, customer and authorized representative
attendance and participation will provide arbitrators with additional
insight to make more informed decisions on expungement requests. In the
absence of such input, however, the proposal will clarify that a
customer or authorized representative's decision not to attend or
participate in the expungement hearing is not evidence that is material
to the determination of whether expungement is appropriate.
    The proposed rule change will also maintain the integrity of the
information in the CRD system by imposing strict time limits on the
filing of straight-in requests. The DRS arbitration forum will be
denied if the expungement request is made more than two years after the
close of the customer arbitration or civil litigation associated with
the customer dispute information or three years after the date the
customer complaint was initially reported in the CRD system. These
changes will ensure that expungement requests are timely filed and will
curtail the bundling of multiple aged, and often unrelated, disclosures
in a single arbitration.
    The proposed rule change will also protect investors and the public
interest by requiring arbitrators to unanimously agree to issue an
award containing expungement relief, to make their finding for
expungement relief based on one or more of three grounds specified in
the proposed rule change, to identify the specific grounds on which
that relief is based and to provide a more detailed explanation in the
award of those grounds.
    In addition, the proposed rule change will foreclose a practice
that has emerged in the existing expungement process where parties seek
expungement after a prior denial by a court or arbitration panel of a
request to expunge the same customer dispute information, or where
parties withdraw or do not pursue an expungement request and then make
another request for expungement of the same customer dispute
information before a potentially more favorable fact finder. The
proposed rule change imposes procedures and requirements around when
and how a party may request expungement, and expressly provides that
omission of certain of the requirements will make the expungement
request deficient. Further, the proposed rule change provides the
Director with express authority to deny the DRS arbitration forum if an
expungement request is ineligible for arbitration under the proposed
rules or if a request to expunge customer dispute information is not
filed under, or considered in accordance with, the requirements of the
proposed rules. Thus, FINRA believes the proposed rule change will add
tighter controls, additional safeguards and more transparency to the
expungement process.
    In addition, the process of requesting expungement during a
simplified arbitration will be codified to help ensure that customers
are aware they can attend and participate in the expungement hearing
and how an expungement request will affect (and not affect) their
arbitration claims. By expressly incorporating the practice of
requesting expungement during simplified proceedings, the proposed
amendments add consistency and transparency to the rules and provide
more guidance to the arbitrators and the parties requesting
expungement.
    For these reasons, the proposed rule change represents a
significant step towards addressing concerns with the current
expungement framework. FINRA believes that these changes will help to
maintain the accuracy and integrity of the information in the CRD
system and BrokerCheck, while also protecting associated persons from
the publication of inaccurate information about them.

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

    FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment to analyze the
regulatory need for the proposed rule change, its potential economic
impacts, including anticipated costs, benefits and distributional and
competitive effects, relative to the current baseline, and the
alternatives FINRA considered in assessing how best to meet FINRA's
regulatory objectives.
1. Regulatory Need
    The proposed rule change would address concerns relating to the
expungement process that are not consistent with the regulatory intent
to permit expungement in limited circumstances in accordance with the
narrow standards in FINRA rules. The concerns include the timing of
expungement requests, the resulting impact on customer attendance and
participation in expungement hearings, and the ultimate impact on
expungement decisions made when customers do not attend or participate
and the panel receives information only from the associated person
requesting expungement. The concerns also include the selection of
arbitrators to hear straight-in requests when the associated person
files a statement of claim against a member firm whose interest in
expungement might be aligned with the associated person, and requests
to expunge the same customer dispute information in multiple
proceedings. The proposed rule change would also codify and expand upon
the provisions of the Guidance to help ensure that arbitrators and
parties are adhering to these procedures for all expungement requests.
2. Economic Baseline
    The economic baseline for the proposed rule change includes the
current provisions under the Codes that address the process for parties
to seek expungement relief. The economic baseline includes the recent
amendments to the Codes to apply minimum fees to expungement
requests.\212\ In addition, because arbitrators are generally believed
to be adhering to the best practices and recommendations that are a
part of the Guidance, the economic baseline also includes the
Guidance.\213\ The proposed rule change is expected to affect
associated persons and other parties to expungement requests including
member firms, customers, state securities regulators, and arbitrators.
The proposed rule change is also expected to affect users of customer
dispute information contained in the CRD system and displayed through
BrokerCheck.\214\
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    \212\ See supra note 10.
    \213\ See Guidance, supra note 5.
    \214\ Users of customer dispute information include investors,
member firms and other companies in the financial services industry;
associated persons or individuals seeking employment in the
brokerage industry; and FINRA, state securities regulators, and
other regulators.

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

    The customer dispute information contained in the CRD system is
submitted by registered securities firms in response to questions on
the uniform registration forms.\215\ The customer dispute information
must be reported regardless of the merit of the allegations. FINRA
makes specific CRD information disclosed by firms publicly available
through BrokerCheck.\216\
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    \215\ See supra notes 20 and 21 and accompanying text for
additional discussion of the uniform registration forms and the
information contained in the CRD system. Some of the information may
involve pending actions or allegations that have not been resolved
or proven.
    \216\ See supra note 22 and accompanying text.
---------------------------------------------------------------------------

    The information in BrokerCheck can be valuable to current and
prospective customers to learn about the conduct of associated
persons.\217\ Current and prospective customers may not select or
remain engaged with an associated person or a member firm that employs
an associated person with a record of customer disputes. Similarly,
member firms and other companies in the financial services industry may
use the information when making employment decisions. In this manner,
the customer dispute information contained in the CRD system (and
displayed through BrokerCheck) may positively or negatively affect the
business and professional opportunities of associated persons. Where
the information is reliable, it also provides for customer protections
and information useful for member firms.\218\
---------------------------------------------------------------------------

    \217\ Recent academic studies provide evidence that the past
disciplinary and other regulatory events associated with a firm or
individual can be predictive of similar future events. See Hammad
Qureshi & Jonathan Sokobin, Do Investors Have Valuable Information
About Brokers? FINRA Office of the Chief Economist Working Paper,
Aug. 2015; see also Mark Egan, Gregor Matvos, & Amit Seru, The
Market for Financial Adviser Misconduct, 127(1) Journal of Political
Economy 233-295 (2019).
    \218\ FINRA, state securities regulators, and other regulators
also use customer dispute information submitted to the CRD system to
regulate associated persons. See supra Item II.A.1.I.B., ``Customer
Dispute Information in the CRD System.''
---------------------------------------------------------------------------

    A negative impact on the business and professional opportunities of
associated persons may be appropriate and consistent with investor
protection, such as when the customer dispute information has merit. A
negative impact may be inappropriate, however, if, for example, the
customer dispute information is factually impossible, clearly erroneous
or false, or the associated person was not involved in the alleged
misconduct. Regardless of the merit, associated persons have an
incentive to remove customer dispute information from the CRD system
and its public display through BrokerCheck.
    An associated person, or a party on-behalf-of an unnamed person,
typically begins the process to remove customer dispute information
from the CRD system by filing an expungement request in the DRS
arbitration forum. During the sample period (January 2016 through
December 2021), FINRA is able to identify requests to expunge 11,619
customer dispute information disclosures in the DRS arbitration
forum.\219\ More than one customer dispute information disclosure may
be sought to be expunged in a single arbitration, and multiple
expungement requests may relate to the same arbitration, civil
litigation, or complaint if the dispute relates to more than one
associated person.
---------------------------------------------------------------------------

    \219\ The 11,619 requests to expunge customer dispute
information disclosures include some requests to expunge the same
customer dispute information disclosure in more than one
arbitration.
---------------------------------------------------------------------------

    The 11,619 customer dispute information disclosures consist of
5,143 disclosures (44 percent) that were sought to be expunged during a
customer arbitration, and 6,476 disclosures (56 percent) that were
sought to be expunged in a straight-in request.\220\ The 5,143
disclosures sought to be expunged during a customer arbitration include
4,714 sought to be expunged during a non-simplified customer
arbitration and 429 sought to be expunged during a simplified customer
arbitration. The associated person was a named party for 2,322 of the
5,143 disclosures (45 percent), and an unnamed party for 2,821 of the
5,143 disclosures (55 percent). The 6,476 customer dispute information
disclosures sought to be expunged in a straight-in request include 116
disclosures where the associated person named the customer as a
respondent.
---------------------------------------------------------------------------

    \220\ Fifty requests to expunge customer dispute information
were made during industry arbitrations that were not straight-in
requests. To simplify the analysis, FINRA excludes these 50 requests
from the sample.
---------------------------------------------------------------------------

    Associated persons often file a straight-in request long after the
close of the customer arbitration or civil litigation or the initial
reporting of the customer complaint to the CRD system. For example,
approximately three-fifths of customer dispute information disclosures
that were sought to be expunged in straight-in requests were filed more
than six years after the close of a customer arbitration or the initial
reporting of the customer complaint.\221\
---------------------------------------------------------------------------

    \221\ A six-year time-period from the time-period start date
reflects the six-year eligibility rule which applies to all
arbitration claims, including those claims requesting expungement of
customer dispute information. See supra note 38.
---------------------------------------------------------------------------

    As of December 2021, 10,156 of the 11,619 customer dispute
information disclosures were sought to be expunged in an arbitration
that closed.\222\ The 10,156 disclosures consist of 4,346 disclosures
(43 percent) sought to be expunged during a customer arbitration and
5,810 disclosures (57 percent) sought to be expunged in a straight-in
request. A panel made a decision in arbitrations relating to 6,997 of
the 10,156 disclosures in arbitrations that closed and made no decision
in arbitrations relating to the remaining 3,159 disclosures. A single
arbitrator made a decision in arbitrations relating to 5,311 of the
6,997 disclosures, and a (two- or) three-person panel made a decision
in arbitrations relating to the remaining 1,686 disclosures. For the
customer arbitrations, the decision by a panel may relate to the
arbitration, an expungement request, or both. For the straight-in
requests, the decision would relate to the expungement request only. In
arbitrations where no decision on the merits of the customer case or an
expungement request was made, the requests were either not eligible,
withdrawn, or otherwise not pursued by the associated person or party
that filed the request.
---------------------------------------------------------------------------

    \222\ In order to focus on the rate at which panels award
expungement under different scenarios, the remaining discussion
considers only arbitrations in the sample period that closed.
---------------------------------------------------------------------------

    Overall, 5,443 of the customer dispute information disclosures
sought to be expunged resulted in a panel issuing an award containing
expungement relief. The 5,443 disclosures reflect 54 percent of the
10,156 disclosures sought to be expunged in arbitrations that closed,
and 78 percent of the 6,997 disclosures sought to be expunged in
arbitrations where a panel made a decision.\223\ The percentage of
expungement requests that are awarded is higher when the panel receives
information only from the associated person or other party requesting
expungement. The panel is likely to receive information only from the
party requesting expungement when (1) the customer arbitration is
resolved without a hearing on the merits (e.g., settles), or (2) an
associated person files a straight-in request against a member firm. In
both circumstances, the customer has little incentive to attend or
participate in an expungement hearing and, in the experience of FINRA
staff, generally does not.
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    \223\ Another recent academic study provides evidence that
associated persons who receive an award containing expungement
relief in the DRS arbitration forum are ``3.3 times as likely to
engage in new misconduct as the average broker.'' See Colleen
Honigsberg & Matthew Jacob, Deleting Misconduct: The Expungement of
BrokerCheck Records, 139(3) Journal of Financial Economics 800-831
(2021): 800-831.

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

    Among the 6,997 disclosures sought to be expunged in arbitrations
where a panel made a decision, 1,632 disclosures were sought to be
expunged during a non-simplified or simplified customer arbitration,
and 5,365 disclosures were sought to be expunged in a straight-in
request. A panel awarded expungement for 943 of the 1,632 disclosures
(58 percent) sought to be expunged during a customer arbitration. This
includes 267 of the 632 disclosures (42 percent) sought to be expunged
during a customer arbitration that resolved after a hearing on the
merits, and 676 of the 1,000 disclosures (68 percent) sought to be
expunged during a customer arbitration not resolved after a hearing on
the merits. A panel awarded expungement for 4,500 of the 5,365
disclosures sought to be expunged in a straight-in request (84
percent).
    In general, whether an associated person obtains an award
containing expungement relief does not appear to be significantly
impacted by the number of arbitrators deciding the request. For
example, among the 1,632 disclosures sought to be expunged during a
non-simplified or simplified customer arbitration, a similar percentage
of requests were awarded by a one-person panel (279 of 490 disclosures,
or 57 percent) as were awarded by a three-person panel (664 of 1,142
disclosures, or 58 percent). In addition, among the 5,365 disclosures
sought to be expunged in straight-in requests, a similar percentage of
requests were awarded by a one-person panel (4,035 of 4,821
disclosures, or 84 percent) as were awarded by a three-person panel
(465 of 544 disclosures, or 85 percent).
    Requests to expunge older customer dispute information also are
awarded at a similar rate to requests to expunge more recent customer
dispute information. FINRA measures the age of customer dispute
information from either the close of the customer arbitration or civil
litigation, or, if no customer arbitration or civil litigation, from
the initial reporting of the customer complaint to the CRD system
(i.e., time limit start date). Among the 5,365 customer dispute
information disclosures sought to be expunged in straight-in requests,
a similar percentage resulted in an award that were filed less than six
years from the time limit start date (1,673 of 1,984 disclosures, or 84
percent) as were filed more than six years from the time limit start
date (2,827 of 3,381 disclosures, or 84 percent).
    Factors other than, or in combination with, the number of
arbitrators deciding the expungement request or the timing of the
expungement request, however, may affect whether an associated person
receives an award containing expungement relief. These factors include
the merits of the request, the attendance and participation by
customers or the availability of documents or information relating to
the dispute, and the potential influence of associated persons and
member firms on the selection of the panel who decides the request.
    As stated above, FINRA will expunge customer dispute information
from the CRD system only pursuant to a court order. If the panel awards
expungement, then the firm or associated person must confirm the
arbitration award in a court of competent jurisdiction and serve the
confirmed award on FINRA.\224\ As of December 2021, FINRA had removed
4,717 customer dispute information disclosures from the CRD system from
the possible 5,443 disclosures (87 percent) for which a panel issued an
award containing expungement relief. Firms or associated persons may
have not yet sought or obtained a court order for the remaining
disputes. There also may be instances where expungement was sought and
awarded by a panel, but a court order was never obtained.
---------------------------------------------------------------------------

    \224\ See supra note 25 and accompanying text.
---------------------------------------------------------------------------

    During the sample period, approximately one-third of the 4,717
customer dispute information disclosures (1,447, or 31 percent) that
were expunged were submitted to the CRD system. The 1,447 customer
dispute information disclosures reflect five percent of the total
number of customer dispute information disclosures submitted to the CRD
system during the sample period (approximately 31,900). The remaining
3,270 customer dispute information disclosures were submitted to the
CRD system prior to the sample period. The number of customer dispute
information disclosures expunged during the sample period that were
submitted to the CRD system prior to 2016 suggests that associated
persons may yet still expunge customer dispute information disclosures
submitted to the CRD system during the sample period. The five percent
of expunged customer dispute information disclosures should therefore
be considered a lower bound for the share of customer dispute
information disclosures submitted during the sample period that may
ultimately be expunged.
    An associated person may seek a court order directing expungement
of customer dispute information without first seeking expungement
through arbitration (``direct-to-court expungement cases''). During the
sample period, associated persons sought expungement of 194 customer
dispute information disclosures in direct-to-court expungement cases,
or less than 2 percent of the customer dispute information disclosures
that were sought to be expunged in the DRS arbitration forum. As of
December 2021, court proceedings had concluded for 173 of those
disclosures and proceedings remained ongoing for 21 disclosures. One
hundred seven of the 173 disclosures (62 percent) were ordered expunged
by a court and 66 disclosures (38 percent) were not ordered to be
expunged.
3. Economic Impact
A. Overview
    The proposed rule change would codify the best practices described
in the Guidance.\225\ Codifying the best practices in the Guidance
should clarify among parties how the practices should be applied,
including what is permitted during the expungement hearing and the
responsibilities of the parties and the panel when expungement is
requested.\226\ In addition, parties may incur fewer costs from the
codification of the practices, including the costs from actions or
decisions (e.g., requesting expungement of customer dispute information
that was previously denied in another arbitration or court) that would
be denied by an arbitration panel pursuant to the Guidance. Based on
FINRA staff observations, arbitrators are generally believed to be
adhering to these best practices and, therefore, codifying them should
not result in new material economic impacts. To the extent that some
arbitrators currently do not adhere to these best practices, codifying
them should increase the consistency of the forum and may impact
associated persons, customers, and member firms.
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    \225\ See Guidance, supra note 5.
    \226\ Codifying the Guidance may also help inform customers more
generally of the practices that the forum has implemented to
encourage and facilitate customer attendance and participation in
expungement hearings.
---------------------------------------------------------------------------

    The proposed rule change would also introduce other changes to the
Codes that expand upon or that are not a part of the Guidance. The
proposed rule change would restrict when an associated person is
permitted to request expungement in the DRS arbitration forum. In
general, the proposed rule change would also require a panel from a
customer arbitration who decides the underlying customer dispute or a
panel from the Special Arbitrator Roster to decide an

expungement request. Three-person arbitration panels would also be
required to unanimously agree to issuing an award containing
expungement relief. Finally, the proposed rule change would address the
participation by associated persons, customers, and state securities
regulators in expungement hearings. These changes may result in new
material economic benefits and costs to associated persons, customers,
and member firms. FINRA discusses these impacts below and quantifies
them when doing so is feasible and informative.
B. Expungement Requests During Customer Arbitrations
    The proposed rule change would set forth requirements for
expungement requests made during customer arbitrations. The proposed
rule change would establish different requirements for non-simplified
customer arbitrations and simplified customer arbitrations, and for
associated persons named or unnamed to a (non-simplified or simplified)
customer arbitration.
i. Expungement Requests by Named Associated Persons During Non-
Simplified Customer Arbitrations
    The proposed rule change would require an associated person named
in a non-simplified customer arbitration to request expungement during
the customer arbitration of the customer dispute information in the CRD
system that is associated with the customer's statement of claim.\227\
During the sample period, associated persons named in a non-simplified
customer arbitration sought to expunge 1,622 of the 4,346 disclosures
that associated persons sought to expunge in a customer arbitration
that closed. Otherwise, the associated person would forfeit the
opportunity to seek expungement of the same customer dispute
information in any subsequent proceeding. The panel from a non-
simplified customer arbitration would decide the request if the
arbitration closes by award after a hearing.\228\
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    \227\ See proposed Rule 12805(a)(1)(A).
    \228\ See proposed Rule 12805(a)(1)(D)(i).
---------------------------------------------------------------------------

    The proposed rule change would help ensure that, if possible, the
panel that decides a non-simplified customer arbitration, with input
from all parties and access to all evidence, testimony and documents,
would also decide an expungement request relating to the same
underlying dispute. These arbitrators or panels would be best situated
to decide the related issue of expungement, and thereby help ensure
that expungement awards and the customer dispute information contained
in the CRD system reflect the conduct of associated persons.
    The proposed rule change would impose time limits on when an
expungement request can be filed during a non-simplified customer
arbitration.\229\ The proposed time limits may increase the ability of
customers to address the expungement request during the customer
arbitration. The proposed time limits, however, may cause a named
associated person to lose the ability to assess the additional
information that arises during a customer arbitration within sixty days
of the hearing on the merits. In this case, the associated person must
either incur the costs of filing a request for expungement based on
potentially more limited information about whether the request will be
successful or lose their ability to seek expungement in the DRS
arbitration forum. Consequently, associated persons may incur costs to
preserve their ability to request expungement in the DRS arbitration
forum.\230\
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    \229\ See proposed Rule 12805(a)(1)(C)(i).
    \230\ Under the proposed rule change, a party that does not file
an expungement request at least 60 days before the first scheduled
hearing begins could file a motion seeking an extension. See supra
note 229. The motion, however, may be opposed by another party and
denied by the panel.
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ii. Expungement Requests During a Non-Simplified Customer Arbitration
That Closes Other Than by Award or by Award Without a Hearing
    As described above, during the sample period, associated persons
named in a non-simplified customer arbitration sought to expunge 1,622
of the 4,346 disclosures that associated persons sought to expunge in a
customer arbitration that closed. The 1,622 disclosures include 1,285
disclosures that were sought to be expunged in a non-simplified
customer arbitration that closed other than by award or by award
without a hearing. Associated persons who request expungement during a
non-simplified customer arbitration (either as a named party or as an
unnamed party that consents to an on-behalf-of request) that closes
other than by award or by award without a hearing (and would not have
their expungement request decided as part of the customer arbitration)
would incur additional costs to file and resolve a straight-in request
(e.g., legal fees).\231\ Associated persons would also incur a delay in
receiving a decision on the request. The member firm with which the
associated person was associated at the time the customer dispute arose
would also incur the legal and forum fees corresponding to the
straight-in request.\232\
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    \231\ Associated persons who would otherwise request expungement
as a counterclaim during an industry arbitration, which is rare,
would instead be required to file a straight-in request under
proposed Rule 13805. These associated persons and member firms with
which the associated persons were associated would incur similar
costs.
    \232\ Associated persons would not incur an additional filing
fee to file the straight-in expungement request. See supra note 95.
Consistent with the fees associated with non-monetary claims, the
parties to a straight-in request would incur the minimum hearing
session fee of $1,150 for each session the panel conducts to decide
the expungement request. The member firm at which the individuals
were associated at the time the customer dispute arose would also be
assessed a minimum surcharge fee of $2,000 and a minimum process fee
of $3,850. See FINRA Rules 13901, 13902, and 13903 for the fee
amounts related to non-monetary claims in the DRS arbitration forum.
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    The costs to file and resolve a straight-in request following the
conclusion of the customer arbitration would be imposed by the proposed
rule change if the requests would have otherwise been decided as part
of the non-simplified customer arbitration. The costs would not be
imposed by the proposed rule change, however, if associated persons
would have filed a straight-in request after the close of the non-
simplified customer arbitration regardless of the proposed
restrictions.
    The additional costs for an associated person to file and resolve a
straight-in request after the close of a non-simplified customer
arbitration (that closes other than by award or by award without a
hearing) may reduce the likelihood that parties settle a customer
arbitration or the amount for which parties settle. For example,
associated persons may factor the cost to resolve a separate straight-
in request into the decision to settle or arbitrate. In addition, even
if the parties settle the dispute, associated persons may consider the
cost to file and resolve a separate straight-in request when
determining the amount at which they are willing to settle. The
customers to an arbitration which does not settle may incur additional
costs to instead arbitrate the claim.\233\
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    \233\ FINRA notes, however, that the determination regarding
whether to settle a customer arbitration can depend on a number of
factors, including the parties' respective estimates of the
additional costs they would incur to continue the customer
arbitration, the value that the associated person places on
expungement, the associated person's estimate of the likelihood that
the associated person could obtain expungement in the customer
arbitration compared to in a straight-in request, and the estimated
cost to pursue the straight-in request. Other proposed amendments
may similarly factor into the decision to settle, such as the
potential for customer or state securities regulator attendance and
participation in expungement hearings in straight-in requests.

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iii. Expungement Requests by Unnamed Persons in Non-Simplified Customer
Arbitrations and by Named and Unnamed Persons in Simplified Customer
Arbitrations
    The proposed rule change would not require an unnamed person in a
non-simplified customer arbitration, an associated person named in a
simplified customer arbitration, or an unnamed person in a simplified
customer arbitration to request expungement of the customer dispute
information during the arbitration.\234\ Instead, like today, these
associated persons may wait until after the conclusion of the
arbitration to request expungement as a straight-in request.\235\
During the sample period, unnamed persons in non-simplified customer
arbitrations, associated persons named in simplified customer
arbitrations, and unnamed persons in simplified customer arbitrations
sought to expunge 2,724 of the 4,346 disclosures that associated
persons sought to expunge in a customer arbitration that closed.
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    \234\ See proposed Rules 12805(a)(2)(A), 12800(d)(1)(A), and
12800(d)(2)(A). Unnamed persons would also be prohibited from
intervening in a non-simplified or simplified customer arbitration
and requesting expungement. See proposed Rules
12805(a)(2)(E)(iii)(a) and 12800(d)(2)(D).
    \235\ The requirement to wait until after the close of the
customer arbitration would help ensure that the panel from the
Special Arbitrator Roster is aware of the outcome of the customer
arbitration when deciding the request.
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    The option to wait until after the customer arbitration has
concluded to request expungement is not a new benefit created by the
proposed rule change, but is instead currently permitted under the
Codes. FINRA believes that an unnamed person in a non-simplified
customer arbitration, an associated person named to a simplified
customer arbitration, or an unnamed person in a simplified customer
arbitration should have the option to seek expungement as a straight-in
request and have their request decided by a panel from the Special
Arbitrator Roster.
    Associated persons (or parties on behalf of unnamed persons) who
are not required and choose not to request expungement during a
customer arbitration may incur additional costs to file and resolve a
straight-in request. The member firms with which the associated persons
were associated at the time the customer dispute arose would also incur
additional costs. Any incremental costs from not filing an expungement
request during a customer arbitration, however, are not imposed by the
proposed rule change. Instead, they are borne at the discretion of the
parties who make the determination of when to request expungement, and
are similar to the costs they incur under the Codes today.
    The proposed time limits to request expungement during a customer
arbitration may impose costs on associated persons (or parties on
behalf of unnamed persons) who are not required but choose to request
expungement.\236\ Associated persons who are not able to have their
expungement request decided during a customer arbitration (e.g.,
because the case settles) and instead file a straight-in request as a
result of the proposed time limits would incur a delay in receiving a
decision on the expungement request. Similar to today, associated
persons would incur the legal and forum fees associated with the
request, and the member firms with which the associated persons were
associated at the time the customer dispute arose would also incur
legal and forum fees associated with the straight-in request.
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    \236\ Under the proposed rule change, a party on-behalf-of an
unnamed person would be required to request expungement during a
non-simplified arbitration no later than 60 days before the first
scheduled hearing, and a named associated person or a party on-
behalf-of an unnamed person would be required to request expungement
during a simplified arbitration within 30 days of the date that
FINRA provides notice of arbitrator appointment. See proposed Rules
12805(a)(2)(C)(iii) and 12800(d)(1)(B)(i).
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C. Time Limits for Filing Straight-In Requests
    For customer dispute information reported to the CRD system after
the effective date of the proposed rule change, the proposed rule
change would require an associated person to file a straight-in request
within two years of a customer arbitration or civil litigation closing,
or, if there is no customer arbitration or civil litigation, within
three years from the initial reporting of the customer complaint to the
CRD system.\237\
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    \237\ See proposed Rules 13805(a)(2)(A)(iv) and
13805(a)(2)(A)(v). The proposed rule change would also impose a two-
year time limit for requests to expunge customer dispute information
that arose from a customer arbitration or civil litigation that
closed on or prior to the effective date of the proposed rule
change, or, if no customer arbitration or civil litigation, a three-
year time limit to request expungement of customer dispute
information arising from a customer complaint initially reported to
the CRD system on or prior to the effective date of the proposed
rule change. See proposed Rules 13805(a)(2)(B)(i) and
13805(a)(2)(B)(ii). These time limits would run from the effective
date of the proposed rule change.
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    The proposed time limits may better facilitate customer attendance
and participation in the proceedings and the likelihood that the panel
from the Special Arbitrator Roster receives testimony and other
evidence relevant to deciding an expungement request. In addition, the
time limits would help ensure that the expungement hearing is held
close in time to the customer arbitration or civil litigation, or the
events that led to the customer dispute information disclosure, and
foreclose the option of an associated person to choose the timing of a
straight-in request to potentially reduce the likelihood of customer
attendance and participation. Similar to the other amendments proposed
herein, an increase in customer attendance and participation may
provide a panel from the Special Arbitrator Roster with additional
information to decide an expungement request and help ensure the
accuracy of the customer dispute information contained in the CRD
system and displayed through BrokerCheck.
    The proposed time limits, however, may constrain an associated
person from filing a straight-in request. Associated persons who would
otherwise delay the filing of a straight-in request may incur
additional costs to file a straight-in request within the required time
limits. Similar to the costs which may result from the proposed time
limits to request expungement during a customer arbitration, associated
persons who become constrained to file a straight-in request within the
proposed time limits may incur indirect costs (as described above).
    The proposed time limits to file a straight-in request may also
constrain an associated person from seeking expungement of multiple
customer dispute information disclosures in the same straight-in
request (i.e., in the same arbitration). Associated persons who may
become constrained include those waiting for additional customers to
make complaints or for a customer arbitration or civil litigation to
close. The disclosures associated persons may want to include in the
same straight-in request may relate to the provision of similar
investment advice or services or market events resulting in multiple
customer losses.
    Associated persons who become constrained from seeking to expunge
multiple customer dispute information disclosures in the same straight-
in request because of the proposed time limits and who still seek
expungement of all customer dispute information disclosures would be
required to file the requests in more than one arbitration. These
associated persons would incur additional legal and forum fees for each
additional arbitration. The member firm

at which the individual was associated at the time the customer
disputes arose would also incur additional legal and forum fees for
each additional arbitration. Associated persons who seek to expunge
customer dispute information disclosures from a longer time period may
be more likely to become constrained and incur these additional costs
than associated persons who seek to expunge customer dispute
information disclosures from a shorter time period.
    Associated persons who are waiting until the close of a customer
arbitration or civil litigation to seek to expunge multiple customer
dispute information disclosures in the same arbitration may consider
the anticipated costs to file an additional straight-in request when
offering a settlement amount to customers. Associated persons could
offer a higher settlement amount reflective of these anticipated costs,
and customers may similarly seek to negotiate a higher settlement
amount.\238\
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    \238\ Other factors may influence the decision of parties to
settle or arbitrate the dispute. See supra note 233.
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    Finally, the three-year time limit may increase the likelihood that
an associated person seeks expungement of a customer complaint only for
the customer then to file a related claim in arbitration. If the
associated person were to seek expungement of a customer dispute
information disclosure associated with the subsequent customer
arbitration, either during the customer arbitration or as a straight-in
request, then the associated person would incur the additional costs of
the second request. If the associated person seeks expungement as a
straight-in request, then the member firm with which the associated
person was associated at the time the customer dispute arose would also
incur costs associated with the request.
D. Time Limits for Filing Straight-In Requests--Quantitative
Description
    As discussed as part of the Economic Baseline, 6,476 customer
dispute information disclosures were sought to be expunged in straight-
in requests during the sample period. The following estimates
demonstrate that for the majority of these straight-in requests, the
request would not have been permitted under the proposed time limits
and associated persons would not have been able to include more than
one customer dispute information disclosure in the same straight-in
request. The estimates, however, do not account for the potential
change in the behavior of associated persons--associated persons would
have incentive under the proposed amendments to file the straight-in
requests within the proposed time limits or otherwise lose the ability
to file a request in the forum.\239\
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    \239\ The following estimates also do not account for the number
of straight-in requests of customer dispute information arising from
a previous (non-simplified or simplified) customer arbitration
which, under the proposed rule change, would have been decided as
part of the customer arbitration.
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    Among the 6,476 customer dispute information disclosures that
associated persons sought to expunge in straight-in requests, 2,135 of
the disclosures related to a previous (non-simplified or simplified)
customer arbitration (of the same underlying dispute). Six-hundred ten
of the disclosures (29 percent) were sought to be expunged in straight-
in requests filed within the two-year time limit and would have been
permitted under the proposed rule change. The remaining 4,341 of the
6,476 disclosures did not relate to a previous (non-simplified or
simplified) customer arbitration (of the same underlying dispute).
Seven-hundred ninety-eight of the disclosures (18 percent) were sought
to be expunged in straight-in requests within three years from the
initial reporting of the disclosure to the CRD system and would have
been permitted under the proposed rule change.
    As discussed above, the expungement of more than one customer
dispute information disclosure can be sought in a single arbitration,
and the proposed time limits may limit the ability of an associated
person to seek expungement of multiple customer dispute information
disclosures in the same straight-in request. The 6,476 customer dispute
information disclosures sought to be expunged in straight-in requests
were made in 3,177 arbitrations. Associated persons included more than
one customer dispute information disclosure in 1,384 of the 3,177
straight-in requests (44 percent). In total, associated persons sought
the expungement of 4,683 customer dispute information disclosures (72
percent of the 6,476 customer dispute disclosures) in the 1,384
straight-in requests.
    Under the proposed time limits, associated persons would not have
been able to include all of the customer dispute information
disclosures in at least 614 of the 1,384 straight-in requests (44
percent). In 556 of the 614 straight-in requests (91 percent), the
associated person included at least one customer dispute information
disclosure that was six years or longer from its respective time limit
start date. Also, in 374 of the 614 straight-in requests (61 percent),
the associated person would not have been able to include in the same
straight-in request one or more customer dispute information
disclosures that related to a customer arbitration.
E. Arbitrators or Panels Deciding Expungement Requests
    The proposed rule change would require that the panel from a non-
simplified customer arbitration decide expungement requests during the
arbitration if the arbitration closes by award after a hearing.\240\ In
addition, the proposed rule change would require the arbitrator from a
simplified customer arbitration to decide an expungement request if it
is requested--at a full hearing, in a separate expungement-only hearing
after the simplified arbitration closes if the arbitration is decided
``on the papers,'' or in a special proceeding.\241\ The proposed rule
change would also require that a randomly selected three-person
arbitration panel from the Special Arbitrator Roster decide straight-in
requests.\242\ Finally, the proposed rule change would require that a
three-person arbitration panel unanimously agree to issue an award
containing expungement relief.\243\
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    \240\ See proposed Rules 12805(a)(1)(D)(i) and
12805(a)(2)(E)(i).
    \241\ See proposed Rules 12800(e)(1)(A) and 12800(e)(1)(B)(ii).
    \242\ See proposed Rule 13806(b)(1).
    \243\ See proposed Rules 12805(c)(8)(A)(i) and
13805(c)(9)(A)(i).
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    The proposed rule change may place a panel in a better position to
determine whether to award expungement of customer dispute information,
and thereby help ensure the accuracy of the customer dispute
information contained in the CRD system. In general, the panel that
decides a request would either hear the full merits of the customer
arbitration or have additional training and qualifications when they
may receive information only from the party requesting expungement.
Panels from the Special Arbitrator Roster would also be able to request
any evidence that they deem relevant from the associated person and
member firm at which the associated person was associated at the time
the customer dispute arose.
    As discussed above, straight-in requests where customers typically
do not attend or participate in the expungement hearing often lack
appreciable opposition. A panel from the Special Arbitrator Roster,
with three arbitrators to ask questions, request evidence, and serve
generally as fact finders in the absence of customer input, may help
ensure that a complete factual record is created to support a

decision and the decision reflects the merits of the request.
    The proposed rule change would also reduce the potential influence
of associated persons and member firms on the selection of the panel
that decides a straight-in request. First, parties to the straight-in
request would not be permitted to strike or rank any arbitrators
randomly selected to create a panel from the Special Arbitrator Roster,
thereby limiting the ability of an associated person and member firm
with which the associated person was associated at the time the
customer dispute arose to together select arbitrators who are more
likely to award expungement. To the extent that the associated person
and the member firm's interests are aligned and both seek to increase
the likelihood that an award containing expungement relief is issued,
they would together be expected to select arbitrators who may be more
likely to award expungement.\244\
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    \244\ Honigsberg and Jacob also find evidence that suggests
parties can use previous expungement decisions to determine the
potential likelihood that an arbitrator will award expungement. See
supra note 223.
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    Second, an associated person would not be permitted to withdraw a
request and seek expungement of the same customer dispute information
in a subsequent arbitration.\245\ Associated persons may exercise this
option if they believe that they have a higher probability of obtaining
an expungement award with a different arbitrator or panel in another
arbitration, and in particular if the associated person files a
straight-in request against the member firm with which the individual
was associated at the time the customer dispute arose.
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    \245\ See proposed Rules 12805(a)(2)(A), Rules 12805(a)(1)(D)(i)
and 12805(a)(2)(E)(i). The inability to withdraw a request also
includes the requirement that a case be closed with prejudice if an
associated person withdraws a straight-in request after a panel from
the Special Arbitrator Roster is appointed. See proposed Rule
13805(a)(4). In the sample period, an associated person withdrew 292
of the 5,810 straight-in requests (five percent) filed in cases that
closed. The 292 straight-in requests include 240 requests where a
panel was appointed.
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    Among the expungement requests during the sample period, FINRA has
identified 282 attempts to expunge a previously withdrawn or denied
request to expunge.\246\ Both the initial request and the subsequent
request were made during the sample period. Additional subsequent
expungement requests may have been filed during the sample period if
the initial expungement request was made prior to the sample period
(i.e., before January 2016). These 282 attempts can therefore be
considered a lower bound for the number of these requests during the
sample period.
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    \246\ The 282 subsequent requests include 261 previous requests
that were withdrawn or otherwise not pursued by the associated
person or party that filed the request, 17 previous requests by a
named person that were denied, one previous request on behalf of an
unnamed person that was denied, and three previous requests
determined by the panel to be ineligible for arbitration. A panel
issued an award containing expungement relief in 167 of the 282
subsequent expungement requests (59 percent) and denied 20 requests
(seven percent). One of the awards containing expungement relief
relates to the previous request on behalf of the unnamed person that
was denied. Another of the awards containing expungement relief
relates to the previous request that was deficient and therefore not
decided. Forty-three subsequent expungement requests were withdrawn
or deficient and, therefore, not decided. Finally, 52 subsequent
expungement requests were still pending as of the end of the sample
period. In 115 of the 282 subsequent expungement requests, the
associated person was an unnamed party in the first arbitration. A
similar measure in the Discussion Paper describes 193 attempts to
expunge the same customer dispute information in more than one
arbitration. See supra note 13. The measure described herein
reflects an updated methodology.
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    Under the proposed rule change, the grounds under which a panel may
award expungement would not change.\247\ The proposed rule change,
however, would likely increase the number of expungement requests
decided by a three-person panel and would require that the panel decide
unanimously whether to issue an award containing expungement relief.
FINRA expects that the unanimity requirement would tend to reduce the
number of awards containing expungement relief with less or less
certain merit.
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    \247\ See supra note 31 and accompanying text; see also proposed
Rules 12805(c)(8)(A)(i) and 13805(c)(9)(A)(i). The proposed rule
change would also instruct the panel not to consider the decision of
the customer or authorized representative not to attend or
participate in an expungement hearing as material to the
determination of whether expungement is appropriate. This may help
ensure expungement decisions are based on the merits of the request.
See proposed Rules 12805(c)(8)(C) and 13805(c)(9)(C).
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F. Arbitrators or Panels Deciding Expungement Requests--Quantitative
Description
    As discussed as part of the Economic Baseline, 10,156 of the 11,619
customer dispute information disclosures sought to be expunged during
the sample period were filed in an arbitration that closed. Among the
10,156 disclosures, 9,030 (89 percent) would have required a panel from
the Special Arbitrator Roster. The 9,030 disclosures include 5,088
disclosures sought to be expunged during a non-simplified customer
arbitration that closed by award without a hearing or other than by
award, and 3,942 sought to be expunged in a straight-in request that
did not relate to a previous (non-simplified or simplified) customer
arbitration.
    A panel from a (non-simplified or simplified) customer arbitration
would have been required to make a decision on the requests to expunge
1,025 of the 10,156 customer dispute information disclosures (10
percent). The 1,025 disclosures include 499 disclosures that were
requested to be expunged during a non-simplified customer arbitration
that closed by award after a hearing, 400 requested to be expunged
during a simplified customer arbitration, and 126 requested to be
expunged in a straight-in request to expunge customer dispute
information arising from a previous non-simplified customer arbitration
that closed by award after a hearing.
    Finally, a panel from the Special Arbitrator Roster, or an
arbitrator from a simplified customer arbitration, would have been
required to make the decision with respect to the remaining 101
disclosures that associated persons sought to expunge in a straight-in
request and that related to customer dispute information arising from a
previous simplified customer arbitration. The panel that would have
decided the request is dependent on whether an associated person, or a
party on-behalf-of an associated person, would have requested
expungement during the simplified arbitration.
    A three-person panel made expungement decisions in 1,051 customer
or industry arbitrations. The panel decision was unanimous in 1,030 of
the 1,051 arbitrations (98 percent), but not unanimous in 21
arbitrations (2 percent). In 11 of the 21 arbitrations, or one percent
of the 1,051 arbitrations, one of the three arbitrators opposed an
expungement decision awarding expungement. These 11 awards would not
have been permitted under the proposed rule change. Since unanimous
agreement is not currently required, however, current data on unanimous
agreement may not reflect the extent to which unanimity would occur
once it is required. The extent to which decisions may differ under the
proposed rule change is therefore not known.
G. Attendance and Participation in Expungement Hearings
    As discussed above, the proposed rule change may facilitate
customer attendance and participation by restricting when a named
associated person, or a party on-behalf-of an unnamed person, may
request expungement. Other proposed amendments may facilitate the
attendance and participation of customers or authorized representatives
of states securities regulators in expungement hearings. Attendance and
participation by customers or

authorized representatives may increase the likelihood that a panel
reviews a more complete factual record when deciding a request, and
ultimately help ensure the accuracy of the customer dispute information
contained in the CRD system.
    The proposed rule change would provide customers the option to
attend and participate in an expungement hearing using whichever method
is convenient for them (i.e., by telephone, by video conference or in
person).\248\ The proposed rule change would also codify elements of
the Guidance that require associated persons to notify a customer of a
straight-in request,\249\ and for the panel to permit the customer to
testify, cross-examine the associated person and other witnesses,
present evidence at the hearing and make opening and closing
arguments.\250\
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    \248\ See proposed Rules 12805(c)(3)(B) and 13805(c)(3)(B).
    \249\ See proposed Rule 13805(b)(1)(A)(i) through (iii). The
proposed rule change would also require the associated person to
file with the panel all documents provided to the customers. This
would help ensure that customers have knowledge of the straight-in
request, and are not dissuaded from attending or participating in
the expungement hearing as a result of the notification from the
associated person. See proposed Rule 13805(b)(1)(A)(iv). The
Director would also provide the notified customers with access to
documents relevant to the expungement request filed in the
arbitration, which may help in their preparation for the expungement
hearing. See proposed Rule 13805(b)(1)(B)(ii).
    \250\ Other amendments to the proposed rule change would also
help encourage customer attendance and participation in simplified
customer arbitrations and straight-in requests. For example, the
proposed rule change would allow customers to be represented at an
expungement hearing and thereby mitigate any potential concern they
may have regarding a direct confrontation with the associated
person. See proposed Rules 12805(c)(4) and 13805(c)(4). In addition,
the proposed rule change provides that the Director would notify the
customer of the time and place of any prehearing conferences and the
expungement hearing of a straight-in request. See proposed Rule
13805(b)(1)(B)(i).
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    An authorized representative of state securities regulators would
similarly be permitted to attend and participate in prehearing
conferences and expungement hearings in straight-in requests.\251\ If
an authorized representative presents additional information at the
expungement hearing, including information that may not otherwise be
available, the panel may receive a more complete factual record on
which to base their decision. The magnitude of these effects would
increase with the likelihood the authorized representative attends,
participates and presents new evidence, such as when concerns arise
regarding the merits of an expungement request.
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    \251\ See proposed Rule 13805(c)(6). The proposed rule change
also provides that FINRA would notify state securities regulators
within 15 days of receiving a request for expungement. See proposed
Rules 12805(b) and 13805(b)(2). State securities regulators would
therefore have the time to review and decide whether to oppose a
straight-in request, or review and decide whether to oppose
confirmation in court of an award from a customer arbitration
containing expungement relief.
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    Customers and authorized representatives of state securities
regulators may incur costs to attend and participate in the expungement
hearings. These costs, however, would be optional and at their own
discretion. Associated persons may factor in the potential for customer
and state securities regulator attendance and participation in a
straight-in request when deciding whether to settle a non-simplified
customer arbitration.\252\
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    \252\ See supra Item II.A.1.II.F., ``Attendance and
Participation of an Authorized Representative of State Securities
Regulators in Straight-in Requests,'' and accompanying text.
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    The proposed rule change would require an associated person (or the
party requesting expungement on behalf of an unnamed person) to appear
by video conference or in-person at an expungement hearing.\253\ This
requirement would help the panel assess the associated person's
credibility and allow them to ask questions of an associated person and
observe their responses. An associated person would also be permitted
to cross-examine and seek information from customers who testify.\254\
This may provide associated persons with the opportunity to
substantiate their arguments in support of their expungement request.
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    \253\ See proposed Rules 12805(c)(2) and 13805(c)(2).
    \254\ See proposed Rules 12805(c)(5)(B) and 13805(c)(5)(B).
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    Associated persons may incur costs to appear at an expungement
hearing. The costs include the time and expense to appear, and other
direct and indirect costs (e.g., opportunity costs) associated with the
associated person's appearance. The costs would depend on the method of
appearance (i.e., by video conference or in-person), which, under the
proposed rule change, would be determined by the panel. Associated
persons who appear in-person would incur the time and expense to travel
to and from the hearing location. Associated persons who live further
away from the hearing location, or are less able to travel, would incur
greater costs to appear in-person. Associated persons who instead
appear by video conference would not incur travel costs. These
associated persons, however, may perceive that they are less able to
provide effective testimony. These perceived costs may be mitigated by
the ability of parties to file a motion seeking to appear in-person.
H. Impact on Business and Professional Opportunities
    As a result of the proposed rule change, associated persons may
determine that the additional costs to seek expungement relief are
higher than the anticipated benefits. In addition, although the
proposed rule change is intended to help ensure arbitrators award
expungement when appropriate as it relates to the merits of the
request, the likelihood that an associated person receives an award
containing expungement relief may decrease because of the likely
increase in the number of three-person panels deciding expungement
requests and the requirement that such decisions be unanimous. This may
lead associated persons not to seek expungement, including in some
instances when expungement is likely to be awarded.
    Associated persons who are not able to seek expungement of customer
dispute information from the CRD system, or are delayed in doing so,
may experience a loss of business and professional opportunities. The
loss of business and professional opportunities by one associated
person, however, may be the gain of another. Associated persons who may
benefit in this regard include those who still determine that the
additional costs to seek expungement relief under the proposed rule
change is less than the anticipated benefits and continue to seek
expungement of customer dispute information, and other associated
persons who do not have similar disclosures.
    An associated person may seek expungement of customer dispute
information in a direct-to-court expungement case. The proposed rule
change may result in associated persons seeking expungement in more
direct-to-court expungement cases. For some associated persons, the
anticipated costs to first go through arbitration under the proposed
rule change may be greater than the similar costs to seek expungement
in a direct-to-court expungement case. Associated persons who would
otherwise first go through arbitration because of the proposed rule
change may incur additional costs relative to today to seek expungement
relief.
    The number of associated persons who would instead seek expungement
in a direct-to-court expungement case is dependent not only on the
additional costs under the proposed rule change, but the costs an
associated person would expect to incur in court to initiate an
expungement proceeding. This information is generally not

publicly available, and accordingly the potential effect of the
proposed rule change on direct-to-court expungement cases is not
measured and is uncertain.
I. Other Economic Effects
    Finally, the proposed rule change may have other marginal economic
effects. First, the prohibition of a subsequent expungement request
would decrease the potential inefficient allocation of resources
resulting from a subsequent request that would have resulted in the
same decision (i.e., denial) as the first. The resources of the forum
allocated to the additional expungement request could instead be used
for other claims or requests that were not previously adjudicated or
for other purposes.\255\
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    \255\ The resources relate to the specific costs to administer
the claim, as well as the overall attendant costs to administer the
forum.
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    Second, the proposed rule change may increase the efficiency of the
forum by requiring that a party provide certain information when filing
an expungement request. The information includes identification of the
customer dispute information that is the subject of the request, and
whether expungement of the same customer dispute information was
previously requested and, if so, how it was decided. This would
increase the efficiency of the forum by enabling FINRA to identify and
track a request through the expungement process, and by alerting
arbitrators and FINRA to another expungement request of the same
customer dispute information. The efficiency of the forum would also
increase by requiring an unnamed person to consent to an on-behalf-of
expungement request in writing. This would help ensure that an unnamed
person is aware of the request and prevent another expungement request
by the unnamed person of the same customer dispute information.
    In addition, the proposed rule change may affect the value of the
customer dispute information to describe the conduct of associated
persons. The change in the value of the information depends on the
merit of the disclosures that would have otherwise been expunged. The
merit of these disclosures also depends on many factors which are
difficult to predict. These factors include the incentive of parties to
file an expungement request under the proposed rule change, the
decisions by the panel to issue an award containing expungement relief
dependent on the information that becomes available, and the merit of
the customer dispute information that would have otherwise been sought
to be expunged. The effect of the proposed rule change on the extent to
which the customer dispute information available in the CRD system
accurately describes the conduct of associated persons is, therefore,
uncertain.
4. Alternatives Considered
    Alternatives to the proposed rule change include amendments that
were proposed in Regulatory Notice 17-42 and the 2020 Rule Filing.\256\
For example, an alternative to the proposed rule change, which was
proposed in the 2020 Rule Filing, could be to limit when a party can
file an expungement request during a non-simplified customer
arbitration to 30 days before the first scheduled hearing session.
Thirty days may reduce the likelihood that an associated person files
an expungement request based on more limited information about whether
the request would be successful. Thirty days, however, may not provide
associated persons adequate time to address any filing deficiencies
before the request is served on the other parties. In addition,
customers would have less time to consider the request before the first
scheduled hearing session.
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    \256\ See supra notes 9 and 11.
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    Another alternative to the proposed rule change could be to include
different time limits for an associated person to file a straight-in
request. In the Notice, FINRA proposed a one-year time limit for
associated persons to file a straight-in request after the close of a
customer arbitration or, if no arbitration or civil litigation, after
the initial reporting of the customer complaint to the CRD system.\257\
In the 2020 Rule Filing, FINRA proposed a two-year time limit for
associated persons to file a straight-in request after the close of a
customer case, or, if no arbitration or civil litigation, a six-year
time limit for associated persons to file a straight-in request after
the initial reporting of the customer complaint.\258\
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    \257\ See supra note 9.
    \258\ See supra note 11.
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    In general, shorter (longer) time limits may further facilitate
(impede) customer attendance and participation in the proceedings and
the likelihood that the panel from the Special Arbitrator Roster
receives evidence and testimony from the customer to consider when
deciding an expungement request. Shorter (longer) time limits, however,
may further (less) constrain an associated person from filing a
straight-in request or including more than one expungement request in
the same straight-in request.
    For example, the percentage of associated persons who would not
have been able to include all customer dispute information disclosures
in the same straight-in request would be lower if the proposed rule
change imposed a six-year rather than three-year time limit on
requesting expungement of customer complaints.\259\ As discussed above,
FINRA believes that the proposed time limits would facilitate customer
attendance and participation while providing associated persons
sufficient opportunity to file a straight-in request.
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    \259\ Under these alternative time limits, associated persons
would not have been able to include all expungement requests in at
least 426 of the 1,384 arbitrations (31 percent). This estimate is
13 percent less than the similar calculation but with the time
limits proposed herein (44 percent). See supra Item II.B.3.D.,
``Time Limits for Filing Straight-in Requests--Quantitative
Description.'' As mentioned above, these estimates do not account
for the potential change in the behavior of associated persons as a
result of the proposed rule change. The estimates also do not
account for the number of straight-in requests of customer dispute
information arising from a previous customer arbitration which,
under the proposed rule change, may have been decided as part of the
customer arbitration.
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    Other alternatives relate to the panel's decision to issue an award
containing expungement relief. In the 2020 Rule Filing, FINRA proposed
allowing a majority decision by a three-person panel, not a unanimous
decision (as proposed herein), to issue an award containing expungement
relief.\260\ A majority decision would be consistent with what is
required for other three-person panel decisions in customer and
industry arbitrations. FINRA determined, however, that a unanimous
decision by a three-person panel would better help protect the
integrity of the information in the CRD system.
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    \260\ See supra note 11.
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    In the Notice, FINRA proposed that a panel find that the customer
dispute information has ``no investor protection or regulatory value''
in order to issue an award containing expungement relief.\261\ This
alternative may increase the difficulty for an associated person to
receive an expungement award, and may cause associated persons not to
seek expungement where expungement is likely (or unlikely) to be
awarded. In addition, some commenters to the Notice raised concerns
that the standard

may, if codified, create confusion among arbitrators and the potential
for inconsistent application among different arbitrators and panels.
After considering the concerns, FINRA determined not to propose that
the panel must find ``no investor protection or regulatory value'' to
issue an award containing expungement relief.
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    \261\ See supra note 9. In its Order approving NASD Rule 2130
(now FINRA Rule 2080), which describes the current findings that
arbitrators must make to issue an award containing expungement
relief, the SEC stated that ``it believes the proposal strikes the
appropriate balance between permitting members and associated
persons to remove information from the CRD system that holds no
regulatory value, while at the same time preserving information on
the CRD system that is valuable to investors and regulators.'' See
Securities Exchange Act Release No. 48933 (December 16, 2003) 68 FR
74667, 74672 (December 24, 2003) (Order Approving File No. SR-NASD-
2002-168).
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    Finally, other alternatives relate to the appearance of parties at
expungement hearings. The proposed rule change could have allowed an
associated person to appear at an expungement hearing by telephone, as
an alternative to appearance in person or by video conference. Although
associated persons may incur fewer costs to appear by telephone, FINRA
believes appearance by telephone may reduce the ability of arbitrators
to assess the credibility of associated persons when deciding an
expungement request.
    The proposed rule change could have provided a mechanism for an
authorized representative of state securities regulators to attend and
participate in expungement hearings when expungement is requested
during a customer arbitration (simplified or non-simplified). FINRA
determined not to propose allowing an authorized representative to
attend or participate in a customer arbitration in which expungement is
requested because such attendance and participation could delay or
disrupt the customer's case and would be less impactful. Unlike many
straight-in requests, customer cases are opposed and the panel would
have the benefit of hearing the customer's evidence on the merits.

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

    In December 2017, FINRA published Regulatory Notice 17-42,
requesting comment on proposed amendments to the current expungement
process.\262\ FINRA received 70 comments in response to the Notice.
FINRA responded to these comments in the 2020 Rule Filing, which it
filed with the Commission on September 22, 2020.\263\
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    \262\ See supra note 9.
    \263\ See Securities Exchange Act Release No. 90000 (September
25, 2020), 85 FR 62142 (October 1, 2020) (Notice of Filing of File
No. SR-FINRA-2020-030).
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    The 2020 Rule Filing proposed several significant enhancements to
the current expungement process, including:
     establishing time limits within which associated persons
may file straight-in requests;
     providing state securities regulators with notification of
expungement requests at the time of filing of the requests;
     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;
     prohibiting parties to straight-in requests from (1)
agreeing to fewer than three arbitrators to review 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;
     requiring an associated person named in a customer
arbitration to request expungement during the customer arbitration;
     preventing an associated person from getting ``two bites
at the apple'' by conditioning and limiting the ability of a party to a
customer arbitration to file an on-behalf-of request and precluding an
associated person from requesting expungement of customer dispute
information if a panel 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 same request at a later date;
     facilitating customer attendance and participation in
straight-in requests by notifying customers of the time, date and place
of any prehearing conferences and the expungement hearing, and making
clear that customers are entitled to appear with representation at
prehearing conferences and the expungement hearing;
     providing customers who seek to attend and participate in
straight-in requests 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;