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

    FINRA stated that requiring the named associated person to request
expungement in the customer arbitration increases the likelihood that a
panel will have input from all parties and access to all of the
evidence, testimony and other documents to make an informed decision on
the expungement request.\239\ FINRA further stated that the potential
costs that would be incurred by associated persons, arbitrators and the
DRS arbitration forum if named associated persons file expungement
requests are appropriate given the potential benefit of having customer
input and a complete factual record for the panel to decide an
expungement request.\240\ Moreover, FINRA stated that requiring the
named associated person requesting expungement to explain whether
expungement of the same customer dispute information was previously
requested and, if so, how it was decided would further link the request
to a specific case and help prevent multiple requests for
expungement.\241\
---------------------------------------------------------------------------

    \239\ See Section II.A.1.a., ``Expungement Requests by a
Respondent Named in a Customer Arbitration.''
    \240\ See Notice at 50175.
    \241\ See id. at 50176.
---------------------------------------------------------------------------

    Finally, FINRA stated the proposed 60-day deadline would provide
adequate time for: (1) the named associated person to assess the
customer's case, the potential merits of an expungement request, and
whether to file the request; and (2) the parties to a customer
arbitration to prepare their expungement-related arguments, since the
expungement issues will overlap with the issues raised by the
customer's claim.\242\
---------------------------------------------------------------------------

    \242\ Id.
---------------------------------------------------------------------------

    Four commenters supported, and there was no opposition to, these
aspects of the proposed rule change.\243\

One commenter stated that requiring an associated person to request
expungement in a customer dispute matter, if the associated person is a
party to the matter, reduces the need for additional hearings, filing
fees, attorney fees, and other arbitration costs concerning the same
parties and the same evidence.\244\ Three commenters supported the
proposed rule change on the basis that it would allow the panel that
heard all of the evidence, including the customer's evidence, to be
best situated to decide the expungement request.\245\ One of these
commenters stated that the requirement would prevent ``arbitrator-
shopping'' (i.e., purposefully not raising, or withdrawing, an
expungement request in an arbitration in order to file a request with a
panel more likely to award expungement).\246\
---------------------------------------------------------------------------

    \243\ See letters from Seth A. Miller, General Counsel,
President, Advocacy & Administration, Cambridge Investment Research,
Inc., to the Commission, dated September 6, 2022 (``Cambridge'') at
1-2; Melanie Senter Lubin, NASAA President and Maryland Securities
Commissioner, North American Securities Administrators Association,
Inc., to the Commission, dated September 6, 2022 (``NASAA September
6 Letter'') at 2-3; Scott Eichhorn, et. al., Acting Director,
University of Miami Investor Rights Clinic, to the Commission, dated
September 6, 2022 (``Miami'') at 2-3; William A. Jacobson, Esq.,
Clinical Professor, Cornell Law School, and Director, Cornell
Securities Law Clinic, et. al., to the Commission, dated September
6, 2022 (``Cornell'') at 2.
    \244\ See Cambridge at 2.
    \245\ See NASAA September 6 Letter at 2-3; Miami at 2-3; Cornell
at 2.
    \246\ See Cornell at 2.
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change should
improve the integrity of the expungement process. Where a customer
arbitration closes by award after a hearing, the panel's experience
with the parties and the dispute, as well as the panel's review of the
documents, testimony, and other evidence in connection with the
arbitration, should leave the panel well positioned to make a decision
regarding the related expungement request. Moreover, requiring the
expungement request to be made within 45 days of receipt of the
customer's statement of claim (if included in the answer) or no later
than 60 days before the first scheduled hearing begins (if included in
a pleading) should allow the requesting party a reasonable amount of
time to make an informed decision about whether to request expungement
while at the same time providing the parties with reasonable case-
preparation time, since the expungement issues will likely overlap with
the issues raised by the customer's claim.
    Further, the content required for an expungement request under the
proposed rule change, including the CRD occurrence number that is the
subject of the request, the case name and docket number associated with
the customer dispute information, and whether expungement of such
information had previously been requested and any resolution thereof,
should improve the expungement process by clearly documenting both the
request and whether it repeats a previous request. The required content
would provide the panel with information sufficient to understand who
is requesting expungement and in connection with which customer
dispute.\247\ In addition, requiring the party requesting expungement
to explain whether expungement of the same customer dispute information
was previously requested and, if so, how it was decided will help
prevent parties from pursuing second requests for expungement,
consistent with the proposed rule change prohibiting repeat requests,
which is discussed in more detail below.\248\
---------------------------------------------------------------------------

    \247\ See Notice at 50176.
    \248\ See Section III.A.5., ``Limitations Applicable to
Straight-in Requests and Expungement Requests during a Customer
Arbitration.''
---------------------------------------------------------------------------

2. Content and Timing of on-Behalf-of Requests in Customer Arbitration
    As with expungement requests made by a named associated person, the
proposed rule change would, in part, govern how and when an on-behalf-
of request may be made during a customer arbitration. For example,
proposed Rule 12805(a)(2)(C)(iii) would require the party making the
request to file it no later than 60 days before the first scheduled
hearing.
    In addition, proposed Rule 12805(a)(2)(C)(ii) would require the
party filing an on-behalf-of request to submit to the Director the Form
signed by the unnamed person and a statement requesting expungement. As
discussed above, by signing the Form the unnamed person would be: (1)
consenting to the on-behalf-of request, (2) agreeing to be bound by the
panel's decision on the on-behalf-of request, and (3) acknowledging
their understanding that if the customer arbitration closes by award
after a hearing, the unnamed person would be barred from filing a
request for expungement for the same customer dispute information in a
subsequent proceeding.\249\
---------------------------------------------------------------------------

    \249\ See Notice at 50177; see also Section II.A.1.b.,
``Expungement Requests by a Party Named in a Customer Arbitration on
Behalf of an Unnamed Person.''
---------------------------------------------------------------------------

    Finally, proposed Rules 12805(a)(1)(C)(ii) and 12805(a)(2)(C)(i)
would require the party requesting expungement on behalf of an unnamed
person to provide: the applicable filing fee; the CRD number of the
unnamed person; each CRD occurrence number that is the subject of the
request; the case name and docket number associated with the customer
dispute information; and an explanation of whether expungement of the
same customer dispute information was previously requested and, if so,
how it was decided.\250\
---------------------------------------------------------------------------

    \250\ See Notice at 50177.
---------------------------------------------------------------------------

    FINRA believes that requiring associated persons to sign and submit
the Form would help address its concern that some associated persons
are filing arbitration claims seeking expungement of the same customer
dispute information that was the subject of a previous denial by a
panel of an on-behalf-of request.\251\ Specifically, requiring
submission of the signed Form would help ensure that an unnamed person
is aware of an on-behalf-of request.\252\ In addition, by signing the
Form, the associated persons would be acknowledging that, if the
customer arbitration closes by award after a hearing and an expungement
decision is made, the unnamed person would be barred from filing a
request for expungement for the same customer dispute information in a
subsequent proceeding.\253\
---------------------------------------------------------------------------

    \251\ See id.
    \252\ See id.
    \253\ See id.
---------------------------------------------------------------------------

    In addition, under the proposed rule change, on-behalf-of requests
would resemble named associated person requests in timing (the proposed
rule would require service on all parties no later than 60 days before
the first scheduled hearing), and in content (an on-behalf-of request
would be required to include the same elements as a named associated
person request).\254\
---------------------------------------------------------------------------

    \254\ See id. at 50176-77; see also Section III.A.1.,
``Expungement Requests by Respondents Named in Customer
Arbitration.'' The proposed rule change would not require that an
on-behalf-of request be included in an answer or pleading requesting
expungement (although it could be) as such requests are made on
behalf of non-parties. See Notice at 50176.
---------------------------------------------------------------------------

    The Commission received no comment letters supporting or opposing
this proposed rule change.
    For reasons similar to those discussed above for expungement
requests made by a named associated person in a customer arbitration,
the Commission believes that these timing and content requirements
should improve the integrity of the expungement process.\255\ In
addition, the panel's decision would preclude the unnamed party from

seeking expungement of the same customer dispute information in another
forum by claiming their interests were inadequately represented in the
hearing under the terms of the Form. Moreover, requiring the
expungement request to be made no later than 60 days before the first
scheduled hearing begins should allow the requesting party a reasonable
amount of time to make an informed decision about whether to request
expungement while at the same time providing the parties with
reasonable case-preparation time, as the expungement issues will
overlap with the issues raised by the customer's claim.
---------------------------------------------------------------------------

    \255\ See Section III.A.1., ``Expungement Requests by
Respondents Named in Customer Arbitration.''
---------------------------------------------------------------------------

    Further, the notice provided to the associated person pursuant to
the requirement to submit the Form with the associated person's written
consent should help ensure that the associated person is made aware of
the on-behalf-of request and will likely help prevent inadvertent
duplicative filings. The requirement that the associated person agree
to be bound by the panel's decision on the request, and be barred from
filing a request for expungement for the same customer dispute
information, will help prevent the associated person from requesting
expungement from a different panel if they are unsatisfied with the
decision issued by the first panel. Such safeguards also help conserve
resources and prevent inconsistent determinations.
3. Deciding Expungement Requests During Customer Arbitrations
    As stated above, the proposed rule change would treat customer
claims that close by award after a hearing differently from customer
claims that close other than by award (e.g., the case settles) or that
close by award without a hearing. Where the customer's claim closes by
award after a hearing, the proposed rule change would require the panel
in a customer arbitration to consider and decide a request for
expungement made during the proceeding. In addition, if the party
requesting expungement withdraws or does not pursue the expungement
request, the panel will be required to deny the expungement request
with prejudice. FINRA stated that this change should make efficient use
of the panel's familiarity with the case-in-chief, and help protect
investors by precluding arbitrator-shopping by associated persons or
those requesting expungement on their behalf.\256\
---------------------------------------------------------------------------

    \256\ See Notice at 50177. FINRA expressed concern that, absent
this change, associated persons (or other requesters) might seek to
withdraw and refile their expungement requests to avoid having the
requests decided by the panel who heard evidence on the customer's
arbitration claim (receiving a new list of arbitrators and a
potentially more favorable decision). See id.
---------------------------------------------------------------------------

    Conversely, where the customer's claim closes other than by award
or closes by award without a hearing, the proposed rule change would
preclude the panel that heard the customer claim from considering the
ongoing expungement request.\257\ In such cases, the efficiency
rationale becomes less compelling, and FINRA believes that such
expungement requests are best considered as straight-in requests by a
panel from the Special Arbitrator Roster, discussed in more detail
below.\258\ These proposed rule changes are intended to protect
investors by reducing opportunities for arbitrator-shopping and by
providing arbitrators with special training and factual-development
tools specific to the expungement context.\259\
---------------------------------------------------------------------------

    \257\ See id. at 50177-78.
    \258\ See Section III.B., ``Straight-in Requests under the
Industry Code and the Special Arbitrator Roster.''
    \259\ See Notice at 50178 and 50194.
---------------------------------------------------------------------------

    Two commenters supported the proposed requirement that the panel in
a customer arbitration decide an expungement request where the customer
arbitration closes by award after a hearing.\260\ These commenters
reasoned that because the panel would have presided over the case-in-
chief, assessing input from all involved parties, it is best situated
to decide the expungement request.\261\ Three commenters further
supported the proposed requirement that, in the event an expungement
request is withdrawn or not pursued, the panel would be required to
deny the request with prejudice, reasoning that the proposed rule
change would prevent arbitrator-shopping by discouraging requesting
parties from withdrawing an expungement request in order to seek a
potentially more favorable panel.\262\
---------------------------------------------------------------------------

    \260\ See letter from Christine Lazaro, Director of the
Securities Arbitration Clinic and Professor of Clinical Legal
Education, et. al., Securities Arbitration Clinic at St. John's
University School of Law, to the Commission, dated September 6, 2022
(``St. John's) at 2; Cornell at 2.
    \261\ See id.
    \262\ See Cornell at 2; Miami at 4; St. John's at 3.
---------------------------------------------------------------------------

    Three commenters, however, suggested that associated persons should
be able to voluntarily withdraw expungement requests without
prejudice.\263\ One of these commenters stated that customers are free
to withdraw claims without prejudice,\264\ while another argued that
there is no evidence to support the claim that a person that withdraws
an expungement request is doing so in the hopes of finding a more
favorable panel.\265\ A third commenter stated that there are a number
of valid and practical reasons for why a non-party associated person's
request for expungement may be withdrawn prior to final hearing (e.g.,
time and costs), and thus that it is inappropriate to penalize an
associated person for withdrawing their expungement request.\266\
---------------------------------------------------------------------------

    \263\ See letters from Dochtor D. Kennedy, President & Founder,
AdvisorLaw, LLC, to the Commission, dated August 9, 2022
(``AdvisorLaw'') at 2-3; Jennifer W. Burke, Esq., Hennion & Walsh,
Inc., to the Commission, dated September 6, 2022 (``Hennion'') at 6;
Russell Del Toro, Esq., TCM, P.S.C., to the Commission, dated
December 21, 2022 (``Del Toro'').
    \264\ See Hennion at 6.
    \265\ See Advisorlaw at 2-3.
    \266\ See Del Toro.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change in response to
comments. FINRA expressed concern that arbitrator-shopping and repeated
attempts to seek expungement of the same customer dispute information
are inconsistent with the arbitration process and threaten the
integrity of the information in the CRD system because they permit
parties to request expungement until they get a favorable
response.\267\ FINRA highlighted the extent of its concern by pointing
out that among the requests to expunge customer dispute information in
arbitration from January 2016 through December 2021, FINRA identified
282 disclosures that were the subject of a previously withdrawn or
denied requests to expunge.\268\ FINRA further stated, in response to a
commenter's statement that an associated person may have valid and
practical reasons for withdrawing an expungement request, that it is
not in a position to determine or assess, on a case-by-case basis, the
legitimacy of an associated person's reason for withdrawing an
expungement request during a customer arbitration.\269\
---------------------------------------------------------------------------

    \267\ See FINRA November 10 Letter at 28-29.
    \268\ See FINRA November 10 Letter at 29; see also FINRA April 3
Letter at 5.
    \269\ See FINRA April 3 Letter at 5.
---------------------------------------------------------------------------

    Two commenters also supported the proposed requirement that
expungement requests made during customer arbitrations that close other
than by award or close by award without a hearing, be heard by a panel
from the Special Arbitrator Roster.\270\ One of these commenters
reasoned that the original arbitration panels do not get to hear the
full presentation of the evidence on the merits of the underlying

customer case and that customers or their representatives have little
incentive to attend and participate in an expungement hearing once
their case has settled.\271\
---------------------------------------------------------------------------

    \270\ See letter from Michael S. Edmiston, PIABA President,
Public Investors Advocate Bar Association, to the Commission, dated
September 6, 2022 (``PIABA September 6 Letter'' at 3 and St. John's
at 2.
    \271\ See PIABA September 6 Letter at 3.
---------------------------------------------------------------------------

    One commenter, however, contended that a named associated person
who requests expungement during a customer arbitration that closes
other than by award or that closes by award without a hearing should
continue to be allowed to request an expungement-only hearing before
the same panel from the customer arbitration.\272\ Specifically, this
commenter stated that, even in cases that are settled or dismissed, the
panel has often had an opportunity to review the pleadings, participate
in the disposition of discovery and other prehearing motions, and
otherwise familiarize itself with the facts of the case.\273\
Furthermore, according to the commenter, permitting the same panel to
decide an expungement hearing may be more efficient because, in many
cases, the parties will have already researched and ranked the panel
members and the expungement hearing will have been scheduled for the
same day as the hearing on the merits.\274\ According to the commenter,
already-scheduled expungement hearings would reduce scheduling issues
and increase the likelihood of customer participation, as customers
will have already set aside the time.\275\
---------------------------------------------------------------------------

    \272\ See letter from Kevin M. Carroll, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, to the Commission, dated September 2, 2022 (``SIFMA
September 2 Letter'') at 8.
    \273\ See id.
    \274\ See id.
    \275\ See id.
---------------------------------------------------------------------------

    FINRA considered these comments but declined to amend the proposed
rule change.\276\ FINRA stated that, when a customer arbitration closes
other than by award or by award without a hearing, the panel may not
have heard the presentation of the evidence on the merits of the case.
In addition, FINRA stated that customers or their representatives have
little incentive to attend and provide their interpretation of the
facts in a subsequent expungement hearing once their case has
settled.\277\ Because a customer arbitration that closes other than by
award, or by award without a hearing, has the potential for an
inadequately developed, or nonexistent, record, FINRA contended that
the integrity of information in the CRD system would be better
maintained by requiring a panel randomly selected from the Special
Arbitrator Roster to hear and decide such expungement requests.\278\
Furthermore, FINRA stated that requiring an associated person to file
such an expungement request as a straight-in request under the Industry
Code would strengthen the expungement process because the Special
Arbitrator Roster panel deciding the request would have the experience,
qualifications, and training necessary to help ensure the development
of a more complete factual record; \279\ in addition, FINRA stated that
the proposed rule change would make it easier for customers to
participate in the expungement proceeding, further helping the panel
establish a more complete factual record.\280\
---------------------------------------------------------------------------

    \276\ See FINRA November 10 Letter at 24.
    \277\ See id. FINRA formed its Dispute Resolution Task Force
(``Task Force''), whose members included representatives from the
industry and the public with a broad range of interests in
securities dispute resolution, to consider possible enhancements to
the DRS arbitration and mediation forum. In 2015, the Task Force
stated that ``the majority of issues that arise in the expungement
process are those involving settled cases that do not go to final
resolution because in such cases: (1) the panel selected by the
parties may not have heard the full merits of the customer dispute
and, therefore, may not bring to bear any special insights in
determining whether to grant an expungement request and (2)
claimants or their counsel have little incentive to participate in
an expungement hearing once their dispute has been settled.'' See
Notice at 50174 n.37; see also Final Report and Recommendations of
the FINRA Dispute Resolution Task Force (Dec. 16, 2015), available
at http://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf.
    \278\ See FINRA November 10 Letter at 24.
    \279\ See Notice at 50178, 80; see also Section III.B.3.,
``Straight-in Requests under the Industry Code and the Special
Arbitrator Roster, The Special Arbitrator Roster.''
    \280\ See Notice at 50183; see also Section III.D.3.,
``Customer's Attendance and Participation During the Expungement
Hearing.''
---------------------------------------------------------------------------

    The Commission believes the proposed rule changes are aimed at
enhancing FINRA's expungement framework. On the one hand, they require
a panel of arbitrators that has decided the merits of a case to
leverage their understanding of the case to decide any related
expungement requests; the panel would be required to decide the request
even if the requesting party withdraws or fails to present a case in
support of the request--in which case the panel would deny the
expungement request with prejudice. This is both efficient and helps
protect investors by preventing those requesting expungement from
withdrawing and refiling their request to obtain new arbitrators when
unsatisfied with the original panel. On the other hand, when a case
closes other than by award or closes by award without a hearing, the
efficiency benefits of having the same panel decide the request (while
not eliminated) are diminished. Moreover, the risk that the expungement
hearing will not benefit from either a fully developed record or the
adversarial process increases. For example, a case may settle before
the record has had a chance to develop and a customer who has settled
their claims may have little incentive to commit more time and
resources in a subsequent expungement hearing. Rather than leave it to
arbitrators in individual cases to decide whether they have enough
information to proceed to hear an expungement request, FINRA has
established uniform, separate procedures to help ensure the development
of an adequate factual record in connection with every expungement
request. The proposed rule changes also aim to help ensure that
arbitrators deciding straight-in expungement requests have the training
and tools to develop an adequate factual record, particularly in the
absence of customer participation. Finally, the proposed rule change
allows for the effective administration of the expungement process and
provides certainty to the parties about when requests for expungement
may be made.
    The Commission recognizes that in some cases the arbitrators from a
customer arbitration could bring to a related standalone expungement
hearing insights gleaned from their engagement with a well-developed
factual record. Nevertheless, the proposed rule changes help ensure
that every expungement request benefits from an adequate factual
record. Moreover, it arms arbitrators on the Special Arbitrator Roster
with the expungement-specific training and procedural tools necessary
to develop and understand the factual record, regardless of both the
state of the record prior to their involvement and the presence or
absence of customers at the expungement hearing. Finally, it makes
procedural improvements to facilitate customer participation in
expungement hearings.
4. No Straight-In Requests Against Customers or Intervening in Customer
Arbitrations To Request Expungement
    The proposed rule changes would prohibit an associated person from
filing a straight-in request against a customer, and would prohibit
unnamed persons from intervening in a customer arbitration and
requesting expungement. FINRA stated that the proposed rule would help
protect investors by preventing associated persons from interrupting,
and thus delaying,

customer cases, thereby safeguarding customer time and resources.\281\
---------------------------------------------------------------------------

    \281\ See Notice at 50178; see also Section II.A.2., ``No
Intervening in Customer Arbitrations to Request Expungement.''
---------------------------------------------------------------------------

    One commenter opposed the proposed prohibition against an
associated person filing a straight-in request against a customer.\282\
This commenter argued that permitting straight-in requests against
customers would solve many of the issues addressed in the proposed rule
change, including customer notice and participation.\283\
---------------------------------------------------------------------------

    \282\ See Del Toro.
    \283\ See id.
---------------------------------------------------------------------------

    Two commenters objected to the proposed prohibition against
expungement interventions by unnamed persons in customer
arbitrations.\284\ One of these commenters stated that prohibiting an
unnamed person from intervening to clear their name results in
potentially false allegations remaining in the CRD for upwards of a
year (i.e., until expungement can be awarded in the straight-in request
and confirmed by a court).\285\ The other commenter stated that the
rules should allow for the most fair, speedy, and inexpensive
resolution of the matters and recommended that the proposed rule change
allow for a sub-proceeding between the intervening affected associated
person and the parties where a separate award on the matter of
expungement is issued by the same panel without affecting the
resolution of the main award.\286\
---------------------------------------------------------------------------

    \284\ See AdvisorLaw at 4 and Del Toro.
    \285\ See AdvisorLaw at 4.
    \286\ See Del Toro.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change in response to
comments. In the Notice and in response to comments, FINRA stated that
in circumstances where an associated person is neither a named party
nor the subject of an on-behalf-of request, the associated person's
conduct is unlikely to be fully addressed by the parties during the
customer arbitration, and permitting the unnamed person's intervention
could unnecessarily interrupt or delay resolution of the case.\287\
FINRA further stated that it does not believe that customers should be
compelled to attend or participate in a separate proceeding to decide
an expungement request after the customer has resolved their
arbitration claim or civil litigation.\288\ FINRA also stated that the
requirement that an associated person file a straight-in request
against the member firm at which the person was associated at the time
the customer dispute arose would help ensure that there is a connection
between the respondent firm and the subject matter of the expungement
request.\289\
---------------------------------------------------------------------------

    \287\ See FINRA November 10 Letter at 29; see also FINRA April 3
Letter at 5; see also Notice at 50178.
    \288\ See FINRA April 3 Letter at 6.
    \289\ See id. at 7.
---------------------------------------------------------------------------

    The Commission believes that prohibiting straight-in requests
against customers, and prohibiting expungement interventions by unnamed
persons in customer arbitrations, as proposed, will protect investors
by conserving their time, resources, and ability to make their case
efficiently and without interruption. The Commission appreciates that
this will require the associated person to wait until the customer
claim has been resolved to initiate a straight-in expungement
proceeding, but believes such a delay is reasonable to help ensure that
the related customer arbitration can be resolved as expeditiously as
possible. Moreover, the panel selected from the Special Arbitrator
Roster deciding the expungement request would have the benefit of any
final factual record from the related customer dispute.
5. Limitations Applicable to Straight-in Requests and Expungement
Requests During a Customer Arbitration
    The proposed rule change would provide that an associated person
may not file a request for expungement of customer dispute information
if: (1) a panel held a hearing to consider the merits of the associated
person's expungement request for the same customer dispute information;
or (2) a court of competent jurisdiction previously denied the
associated person's request to expunge the same customer dispute
information.\290\
---------------------------------------------------------------------------

    \290\ See proposed Rule 12805(a)(1)(B).
---------------------------------------------------------------------------

    FINRA stated that the proposed rule changes would prevent an
associated person from forum shopping, or seeking to return to the DRS
arbitration forum to garner a favorable outcome on their expungement
request.\291\ The Commission received no comment letters supporting or
opposing this proposed rule change.
---------------------------------------------------------------------------

    \291\ See Notice at 50180.
---------------------------------------------------------------------------

    The proposed rule changes should help prevent an associated person,
or firm seeking expungement on their behalf, from forum-shopping to
garner a more favorable outcome on an expungement request. As such, the
proposed rule change should help protect the integrity of the
information in the CRD system.\292\ In addition, the proposed rule
change should promote more efficient use of resources by precluding
duplicative claims.
---------------------------------------------------------------------------

    \292\ The proposed rule change would give unnamed persons the
authority to reject the on-behalf-of request to preserve their
ability to request expungement on their own if they believe their
interests would be insufficiently represented by the named firm
requesting expungement on their behalf. See proposed Rule
12805(a)(2)(C) and (D).
---------------------------------------------------------------------------

B. Straight-In Requests Under the Industry Code and the Special
Arbitrator Roster

1. Filing a Straight-In Request
a. Form of a Straight-In Request
    Proposed Rule 13805 would require an associated person to make any
request to expunge disclosures of customer dispute information (other
than requests made in a customer arbitration itself) as a straight-in
request, and would limit the circumstances in which an associated
person could request expungement.\293\ Specifically, proposed Rule
13805(a)(1) would require an associated person to make such an
expungement request against the member firm with which they were
associated at the time the customer dispute arose.\294\ FINRA stated
that this requirement would help ensure that there is a connection
between the respondent firm and the subject matter of the expungement
request and that the panel selected from the Special Arbitrator Roster
would be able to request evidence from the member firm with information
that is relevant to the expungement request.\295\
---------------------------------------------------------------------------

    \293\ See Section II.B.1., ``Filing a Straight-in Request Under
the Industry Code.''
    \294\ Proposed Rule 13805(a)(2) would bar an associated person
from filing a straight-in request against a member firm where the
request has previously been heard or denied, the relevant customer
dispute has not been resolved, specified temporal limitations have
passed, the associated person is prohibited from seeking expungement
under Rule 12805(a)(1)(A) (for example, by failing to seek
expungement in the customer arbitration), or a panel or court of
competent jurisdiction previously found the associated person liable
or the customer dispute information involves the same conduct that
is the basis of a final regulatory action taken by a securities
regulator or self-regulatory organization. See Section III.B.6.,
``Limitations Applicable to Straight-in Requests Only.''
    \295\ See Notice at 50179.
---------------------------------------------------------------------------

    Two commenters recommended that FINRA adopt an alternative for
unnamed parties to request expungement other than by straight-in
requests.\296\ For example, one of these commenters recommended that
FINRA establish a method for unnamed parties who ``had no say in
whether the [underlying] case should be settled.'' \297\ Similarly, the
other commenter expressed concern that an unnamed

person may not be aware of a customer arbitration (or have input in the
resolution of customer's case) and thus may not be aware they need to
make a straight-in request.\298\
---------------------------------------------------------------------------

    \296\ See letter from Robin M. Traxler, Senior Vice President,
Policy & Deputy General Counsel, Financial Services Institute, to
the Commission, dated September 6, 2022 (``FSI'') at 5-6; letter
from Josh Barber to the Commission, dated August 24, 2022
(``Barber'').
    \297\ See Barber.
    \298\ See FSI at 5-6.
---------------------------------------------------------------------------

    FINRA responded that its existing rules help ensure that associated
persons are aware of arbitration disclosures on their Forms U4 and
U5.\299\ In addition, if a party to a customer arbitration is unwilling
to file an on-behalf-of request or if a party files an on-behalf-of
request and the arbitration settles, the proposed rule change would
allow the associated person to seek expungement by filing a request to
expunge the same customer dispute information as a straight-in
request.\300\
---------------------------------------------------------------------------

    \299\ See FINRA November 10 Letter at 30; see, e.g., FINRA Rule
1010(c)(2)(A)-(B) and FINRA By-Laws, Article V, Sections 3(a) and
3(b).
    \300\ See FINRA November 10 Letter at 30.
---------------------------------------------------------------------------

    Two commenters supported the proposed rule change regarding
straight-in requests, but recommended that FINRA prohibit associated
persons from filing a straight-in request to expunge multiple,
unrelated requests in one arbitration claim.\301\ According to one of
these commenters, the practice of bundling expungement requests permits
``gaming the system'' by having such claims heard by ``expungement-
friendly arbitrators.'' \302\ One of these commenters further suggested
that FINRA require a nexus between the hearing location and the conduct
at issue so that customers and state regulators would have more of an
incentive to participate.\303\ These commenters reasoned that these
changes would prevent unnecessary complications for the panel
considering the expungement request and provide a common set of facts
for the panel to consider.\304\
---------------------------------------------------------------------------

    \301\ See PIABA September 6 Letter at 4-5; Miami at 4-5.
    \302\ See Miami at 4-5.
    \303\ See id. at 6.
    \304\ See PIABA September 6 Letter at 5; Miami at 5-6.
---------------------------------------------------------------------------

    FINRA responded that the proposed time limits for filing a request
\305\ may curtail the common practice of bundling unrelated and aged
expungement requests in one straight-in request; and the requirement
under the proposed rule change that an associated person would be
required to file a straight-in request against the member firm at which
the person was associated at the time the customer dispute arose would
help ensure that there is a connection between the respondent firm and
the subject matter of the straight-in request. With respect to
requiring a locational nexus, FINRA stated that the ability for a
customer to attend and participate in an expungement hearing by
telephone or by video conference should help address concerns about
there being a connection between the hearing location and the
allegation at issue.\306\ FINRA further stated that concerns about
expungement requests being brought before expungement-friendly
arbitrators should be mitigated by several proposed requirements to
minimize the potential for associated person or broker-dealer influence
in the arbitrator selection process for straight-in requests. For
example, the proposed change would require FINRA's list selection
algorithm to randomly select a three-person panel from the Special
Arbitrator Roster and the parties would not be able to agree to fewer
than three arbitrators, strike any arbitrators selected by the list
selection algorithm or stipulate to their removal, or be permitted to
stipulate to the use of pre-selected arbitrators.\307\ According to
FINRA, ``these requirements would help ensure that arbitrators on the
Special Arbitrator Roster have the qualifications and training to
decide straight-in requests and that the arbitrators conducting the
expungement hearings are impartial and experienced in managing and
conducting arbitration hearings in the DRS arbitration forum.'' \308\
---------------------------------------------------------------------------

    \305\ See Section III.B.6., ``Limitations Applicable to
Straight-in Requests Only.''
    \306\ See FINRA November 10 Letter at 20.
    \307\ See id. at 20-21.
    \308\ See id. at 21.
---------------------------------------------------------------------------

    The Commission believes the requirements set forth in the proposed
rule change are designed to promote investor protection because it
should enhance the integrity of the CRD system. The firm with which the
person requesting expungement was associated at the time the dispute
arose should have knowledge of the dispute and access to relevant
documentary or other evidence.\309\ Thus, requiring that a straight-in
request be filed against the member firm with which the person was
associated at the time of the conduct would increase the likelihood
that the firm would be in a position to contribute to the development
of any record, including at the request of the panel.\310\
---------------------------------------------------------------------------

    \309\ See Notice at 50179.
    \310\ Proposed Rule 13203(b) would provide the Director
authority to deny the use of the forum to decide the request if the
requisite connection between the associated person and the firm is
not present. See Notice at 50179. In addition, proposed Rule
13805(a)(2) would impose limitations on when such requests may be
made. See Section III.B.6., ``Limitations Applicable to Straight-in
Requests Only.''
---------------------------------------------------------------------------

    Also, the practice of bundling multiple, unrelated claims should be
largely curtailed by the proposed time limits and requirement that
claims be filed against the member firm at which the person was
associated at the time the customer dispute arose; and that the
constraints on parties' ability to influence the composition of the
panel should minimize the use of pre-selected, expungement-friendly
arbitrators.
    Finally, associated persons should be aware of arbitration
disclosures on their Forms U4 and U5.\311\ To the extent they are not,
the proposed time limits (discussed below) provide associated persons a
reasonable amount of time to become aware and seek expungement by
filing a request to expunge the same customer dispute information as a
straight-in request.\312\ Thus, seeking expungement via a straight-in
request, with the procedural safeguards discussed herein, should not
unduly burden an associated person seeking expungement.
---------------------------------------------------------------------------

    \311\ See supra note 299.
    \312\ See supra note 300; see also Section III.B.6.b.,
``Limitations Applicable to Straight-in Requests Only, Time Limits
for Expungement Requests.''
---------------------------------------------------------------------------

b. Content of a Straight-In Request
    In addition, as with named associated person requests, the proposed
rule change also would establish content requirements for straight-in
expungement requests.\313\ The required content of a straight-in
request would be the same as those required for expungement requests
filed under proposed Rule 12805.\314\ Specifically, an associated
person would be required to include the following in a straight-in
request: 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, if applicable; and an explanation of
whether expungement of the same customer dispute information was
previously requested and, if so, how it was decided.\315\
---------------------------------------------------------------------------

    \313\ See Notice at 50179.
    \314\ See proposed Rule 13805(a)(3); see also Notice at 50179;
see also Section III.A.1., ``Expungement Requests by Respondents
Named in Customer Arbitration.''
    \315\ See proposed Rule 13805(a)(3); see also Notice at 50179.
---------------------------------------------------------------------------

    The Commission received no comment letters supporting or opposing
this proposed rule change.
    The proposed form and content requirements are reasonable for
straight-in requests. In particular, requiring an associated person to
file their expungement request against the

member firm with which they were associated at the time the customer
dispute arose should provide the panel deciding the expungement request
with another source of documents potentially pertinent to its
consideration of the request. As such, it could help a panel establish
a more complete factual record upon which to base an award. In
addition, as discussed in more detail above, the content required for
an expungement request under the proposed rule change, including the
CRD occurrence number that is the subject of the request, the case name
and docket number associated with the customer dispute information, and
whether expungement of such information had previously been requested
and any resolution thereof, should improve the expungement process by
clearly documenting both the request and whether it repeats a previous
request. The required content would provide the panel with information
sufficient to know who is requesting expungement and the customer
dispute with which it is connected. In addition, requiring the party
requesting expungement to explain whether expungement of the same
customer dispute information was previously requested and, if so, how
it was decided will help prevent parties from pursuing second requests
for expungement, consistent with the proposed prohibition against
repeat requests.\316\
---------------------------------------------------------------------------

    \316\ See Section III.A.2., ``Content and Timing of On-Behalf-of
Requests in Customer Arbitration.''
---------------------------------------------------------------------------

2. Deciding Straight-In Expungement Requests
    The proposed rule change would establish a new framework for
arbitrators hearing straight-in expungement requests. The proposed rule
change would require a three-person panel \317\ to hold an expungement
hearing, decide the expungement request, and issue an award in response
to a straight-in request filed in accordance with proposed Rule
13805.\318\ As with expungement requests decided in customer
arbitration, the panel would be required to deny an expungement request
with prejudice in cases in which an associated person withdraws or does
not pursue the request. FINRA stated that requiring a panel to deny a
request that is withdrawn or not pursued would protect investors by
preventing associated persons from withdrawing and refiling expungement
requests until they obtain a panel whose composition they believe is
more likely to deliver a favorable recommendation.\319\
---------------------------------------------------------------------------

    \317\ As discussed in more detail below, the three-person panel
would be selected from the Special Arbitrator Roster pursuant to
proposed Rule 13806. See Section III.B.3., ``Straight-in Requests
under the Industry Code and the Special Arbitrator Roster, The
Special Arbitrator Roster.''
    \318\ See proposed Rule 13805(a)(4).
    \319\ See Notice at 50179.
---------------------------------------------------------------------------

    The Commission received no comment letters supporting or opposing
this proposed rule change. However, as discussed above, the Commission
received, and FINRA responded to, comments supporting and opposing
similar procedures for deciding expungement requests during customer
arbitration.\320\
---------------------------------------------------------------------------

    \320\ See Section III.A.3., ``Deciding Expungement Requests
during Customer Arbitrations.''
---------------------------------------------------------------------------

    The Commission believes that requiring a panel selected from the
Special Arbitrator Roster to decide a straight-in expungement request
and deny a claim that is withdrawn or not pursued, would help to
prevent an associated person from undermining the enhanced expungement
framework with this form of arbitrator-shopping.\321\
---------------------------------------------------------------------------

    \321\ See Section III.A.3., ``Deciding Expungement Requests
during Customer Arbitrations'' (discussing comments received
regarding the proposed rule change's treatment of expungement claims
that are withdrawn or not pursued).
---------------------------------------------------------------------------

3. The Special Arbitrator Roster
    The proposed rule change would establish a Special Arbitrator
Roster from which a three-person panel would be drawn to decide all
straight-in expungement requests.\322\ Proposed Rule 13806(b) would
limit the Special Arbitrator Roster to arbitrators with specified
experience and training. Specifically, the proposed rule change would
limit the roster to public arbitrators who are eligible for the
chairperson roster, have completed FINRA's enhanced expungement
training, and have served as an arbitrator through award on at least
four customer-initiated arbitrations administered by FINRA or by
another SRO in which a hearing was held.\323\ In proposing the rule,
FINRA stated that these requirements would help ensure that arbitrators
on the Special Arbitrator Roster: have the experience, qualifications,
and training to conduct a fair and impartial expungement hearing;
appreciate the unique, distinct role they play as expungement hearing
arbitrators; and understand the limited circumstances in which
expungement should be awarded.\324\
---------------------------------------------------------------------------

    \322\ See proposed Rule 13806.
    \323\ See id.; see also Notice at 50179-80.
    \324\ See Notice at 50179-80.
---------------------------------------------------------------------------

    Once the Special Arbitrator Roster has been established, the
proposed rule change would require that three members of that roster be
selected at random to decide each expungement request filed under
proposed Rule 13805.\325\ In addition, the first arbitrator selected
would be the chair of the panel,\326\ the parties would not be
permitted to agree to fewer than three arbitrators,\327\ and the
parties would not be permitted to strike any arbitrators or to
stipulate to their removal, but would be permitted to challenge an
arbitrator selected for cause.\328\ In proposing the rule, FINRA stated
that this process would minimize the potential for influence in the
arbitrator selection process by the associated person and member firm,
whose interests may be aligned.\329\
---------------------------------------------------------------------------

    \325\ See proposed Rule 13806(b).
    \326\ See proposed Rule 13806(b)(3).
    \327\ See proposed Rule 13806(b)(5).
    \328\ See proposed Rule 13806(b)(4).
    \329\ See Notice at 50180.
---------------------------------------------------------------------------

    Four commenters supported the proposed rule change's establishment
of a Special Arbitrator Roster, the selection of a panel from this
roster for expungement requests under the Industry Code, and the
restrictions on parties' ability to influence the panel's
composition.\330\ Three of these four commenters supported the proposed
rule change on the basis that the three-person panel would minimize the
impact of unopposed expungement requests, facilitate expanded fact-
finding during the expungement request, and that the prohibition on
ranking and striking, or agreeing to arbitrators would reduce both the
prevalence of arbitrator-shopping and repeat-player incentives for
arbitrators (i.e., from choosing arbitrators who are historically more
likely to award expungements).\331\ The fourth commenter further stated
that the proposed rule change would increase efficiency and decrease
costs for all parties to the expungement matter, since the parties will
no longer need to spend hours researching and ranking arbitrators to
find the individuals most experienced at handling these issues.\332\ In
addition, one commenter also stated that the enhanced training to be
received by the Special Arbitrator Roster would give associated persons
fewer causes for removal of an arbitrator for cause.\333\
---------------------------------------------------------------------------

    \330\ See Cambridge at 2; Cornell at 1-2; PIABA September 6
Letter at 3; St. John's at 2-3.
    \331\ See Cornell at 1-2; PIABA September 6 Letter at 3; St.
John's at 2-3.
    \332\ See Cambridge at 2.
    \333\ See Cornell at 2.
---------------------------------------------------------------------------

    Five commenters, however, objected to the proposed rule change's
limitations on ranking and striking

arbitrators.\334\ One of these commenters stated that ranking and
striking is ``enjoyed by all other participants in FINRA arbitration
proceedings'' \335\ while another commenter similarly stated that
customers have the ability to rank and strike arbitrators.\336\ A third
commenter argued that because different arbitrators approach issues
differently, there is a benefit to starting with a large pool of
potential panelists and then letting the parties ``winnow the pool.''
\337\
---------------------------------------------------------------------------

    \334\ See letter from Tosh Grebenik to the Commission, dated
November 21, 2022 (``Grebenik''); letter from Ronald Beckner to the
Commission, dated October 12, 2022 (``Beckner''); Del Toro;
Advisorlaw at 2; Hennion at 6.
    \335\ See AdvisorLaw at 2-3.
    \336\ See Hennion at 6.
    \337\ See Grebenik.
---------------------------------------------------------------------------

    FINRA stated that currently, based on its experience with straight-
in requests filed in the DRS arbitration forum, associated persons
typically file straight-in request for expungement against the broker-
dealer firm at which the associated person is currently employed.\338\
In such instances, the proceeding is less likely to be adversarial in
nature than if the associated person files an expungement request
against a customer.\339\ For example, FINRA stated that a respondent
firm may support the request for expungement because it has an interest
in removing negative information from the associated person's CRD
record.\340\ Accordingly, FINRA stated that it would not be appropriate
to continue to use the current process for selecting arbitrators--
striking and combining ranked lists--to select arbitrators to decide
straight-in requests.\341\ FINRA reasoned that in arbitrations that
occur outside of the expungement context, the parties are typically
adverse, which means that during arbitrator selection, each side may
rank arbitrators on the lists whom they believe may be favorable to
their case.\342\ Therefore, the adversarial nature of the proceedings
serves to minimize the impact of each party's influence in arbitrator
selection.\343\ An adversarial proceeding is less likely to occur in
straight-in requests.\344\ Thus, the proposed rule change would prevent
associated persons and member firms from collaboratively seeking to
influence the outcome of the expungement request through arbitrator
selection.\345\
---------------------------------------------------------------------------

    \338\ See Notice at 50174 n.41; FINRA April 3 Letter at 6.
    \339\ See FINRA November 10 Letter at 26-27; FINRA April 3
Letter at 5; Notice at 50180.
    \340\ See id. at 50174.
    \341\ See FINRA November 10 Letter at 26; FINRA April 3 Letter
at 5; Notice at 50180.
    \342\ See FINRA November 10 Letter at 26; FINRA April 3 Letter
at 5; Notice at 50180.
    \343\ See FINRA November 10 Letter at 26; FINRA April 3 Letter
at 5; Notice at 50180.
    \344\ See FINRA November 10 Letter at 26-27; FINRA April 3
Letter at 5; Notice at 50180.
    \345\ See FINRA November 10 Letter at 27; FINRA April 3 Letter
at 5; Notice at 50180.
---------------------------------------------------------------------------

    FINRA also recognized the potential for the proposed rule change to
limit the associated person's and member firm's input on arbitrator
selection for reasons that may be unrelated to whether the arbitrator
would potentially be sympathetic to the expungement request, such as
their perception of the arbitrator's competence or efficiency.\346\
However, FINRA stated that the higher standards that the arbitrators
would be required to meet to serve on the Special Arbitrator Roster
should mitigate the impact of the absence of party input on the
selection of arbitrators.\347\ In addition, associated persons and
member firms would still be permitted to challenge any arbitrator for
cause.\348\
---------------------------------------------------------------------------

    \346\ See FINRA November 10 Letter at 27; FINRA April 3 Letter
at 5; Notice at 50180.
    \347\ See FINRA November 10 Letter at 27; FINRA April 3 Letter
at 5.
    \348\ See FINRA November 10 Letter at 27; FINRA April 3 Letter
at 5.
---------------------------------------------------------------------------

    Given the potential lack of adverse parties in straight-in
expungement requests, FINRA reasonably determined that the random
selection of a set number of arbitrators is appropriate. Random
arbitrator selection, along with other aspects of the proposed rule
change (e.g., the requirement that a panel decide an expungement
request that is filed by an associated person, and the prohibition on
an associated person withdrawing and re-filing their expungement
request), should help eliminate arbitrator-shopping and serve to
protect investors and the integrity of information in the CRD system.
In addition, parties would continue to be able to challenge and remove
arbitrators for cause.
    Several commenters also recommended that FINRA expand the pool of
arbitrators eligible to serve on the Special Arbitrator Roster, in
particular to allow for non-public arbitrators, stating that such a
change would bring securities industry expertise to deciding
expungement requests.\349\ One commenter suggested that industry
participants who have worked as a general securities principal for a
least five consecutive years, in the prior seven-year period, be
eligible for inclusion on the Special Arbitrator Roster.\350\ This
commenter also suggested that at least one person on each three-person
panel be required to have securities industry experience either as a
general securities principal or as an attorney who has the requisite
five years' experience in state or federal securities regulation or as
a securities regulator.\351\ Another commenter likewise recommended
including the ability to have an industry arbitrator on any expungement
panel where more than one arbitrator was required.\352\ A third
commenter argued that requiring one public arbitrator, one non-public
arbitrator, and a chairperson that can either be public or non-public,
would help create a diverse knowledge base and would help the panel
make better, more informed decisions.\353\
---------------------------------------------------------------------------

    \349\ See FSI at 4; Hennion at 6; Grebenik.
    \350\ See FSI at 4.
    \351\ Id.
    \352\ See Hennion at 6. Hennion further suggested that
arbitrators should be required to pay for the training. See id. at
5. FINRA responded that it does not now, and will not in the future,
charge arbitrators for any arbitrator training. See FINRA November
10 Letter at 25.
    \353\ See Grebenik. This commenter further suggested that the
enhanced expungement training should be made public and be neutral
rather than ``persuasive'' in an attempt to prevent panels from
granting expungement. Id. FINRA responded that like other arbitrator
training provided by DRS, the proposed training will be neutral and
informative and it will be publicly available on FINRA's website.
See FINRA April 3 Letter at 4 n.10. The Commission believes that
FINRA has addressed the commenter's suggestion.
---------------------------------------------------------------------------

    Another commenter suggested not limiting the Special Arbitrator
Roster to chair-qualified public arbitrators.\354\ This commenter
stated that experience in understanding and appreciating the regulatory
value of a customer complaint should be the most important
qualification, thus concluding that the Special Arbitrator Roster
should be expanded to include current and former state, federal and SRO
securities regulators. This commenter further suggested that the most
experienced arbitrators should not be on the Special Arbitrator Roster
as they have exhibited bias in favor of granting expungements in the
past.\355\
---------------------------------------------------------------------------

    \354\ See letter from Celiza Braganca, President, et. al., The
PIABA Foundation, to the Commission, dated September 6, 2022
(``PIABA Foundation September 6 Letter'') at 2-3.
    \355\ See id.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change in response to
these comments. FINRA stated that it ``believes that having experienced
public arbitrators, without significant ties to the financial industry,
deciding straight-in requests would help achieve the goal of balancing
the competing interests in the expungement process of providing a fair
process and ensuring that information about associated persons that is
available to investors is accurate.'' \356\ Such arbitrators would be
provided training that is neutral and

informative and the training would be made publicly available on
FINRA's website. Moreover, FINRA stated that the enhanced training that
arbitrators on the Special Arbitrator Roster would be required to take
(as well as the other eligibility requirements) would help ensure that
arbitrators on the Special Arbitrator Roster have the qualifications
and training to appropriately decide straight-in requests and that the
persons conducting the expungement hearings are impartial and
experienced in managing and conducting arbitration hearings in the DRS
arbitration forum.\357\
---------------------------------------------------------------------------

    \356\ FINRA November 10 Letter at 25.
    \357\ See FINRA November 10 Letter at 25-26; see also FINRA
April 3 Letter at 4-5.
---------------------------------------------------------------------------

    The Commission believes that FINRA reasonably determined which
arbitrators would be eligible to serve on the Special Arbitrator
Roster. Specifically, limiting eligibility to public arbitrators
reasonably balances the competing interests in the expungement process
of providing a fair process and ensuring the integrity of the
information in the CRD system. This approach should also enhance the
public's perception that the expungement process and rules are fair,
which, in turn, should enhance the perception of the integrity of the
information on the CRD system. In addition, the proposed eligibility
requirements should help ensure that experienced arbitrators are
deciding expungement requests in light of the public interest in the
integrity of the information in the CRD system.
4. State Attendance and Participation in Straight-In Expungement
Requests
    The proposed rule change would provide a mechanism for an
authorized representative of a state securities regulator to present
the state securities regulator's position on an expungement request in
writing or by attending and participating in the expungement hearing in
person or by video conference.\358\ The proposed rule change would
limit the authorized representative's ability to attend and participate
to only straight-in requests, where the panel may otherwise only hear
evidence from the party requesting expungement.\359\ To facilitate
attendance and participation, the Director would notify the applicable
state securities regulator (in a manner determined by the Director in
collaboration with state securities regulators) and provide applicable
information and documents related to the associated customer
arbitration.\360\ In addition, under the proposed rule change, the
panel would not be permitted to allow the attendance or participation
of the authorized representative to materially delay the scheduling of
an expungement hearing.\361\
---------------------------------------------------------------------------

    \358\ See proposed Rule 13805(c)(6)(A).
    \359\ See Notice at 50185-86.
    \360\ See proposed Rules 13805(b)(2)(A) and (B).
    \361\ See proposed Rule 13805(c)(6)(A).
---------------------------------------------------------------------------

    While an authorized representative of a state securities regulator
would not be a party to 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.\362\ 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.\363\
---------------------------------------------------------------------------

    \362\ See proposed Rule 13805(c)(6)(B).
    \363\ See proposed Rule 13805(c)(6)(C).
---------------------------------------------------------------------------

    In the Notice, FINRA stated that allowing an authorized
representative to attend and participate in straight-in requests may
provide meaningful opposition to the expungement request, which might
otherwise be unopposed, and thus help create a more complete factual
record for the panel to rely upon to decide the expungement
request.\364\ Moreover, FINRA believes that state participation in
straight-in requests is important in light of the importance of the CRD
to state registration and oversight responsibilities.\365\
---------------------------------------------------------------------------

    \364\ See Notice at 50186.
    \365\ See id.; see also NASAA September 6 Letter at 1 (stating
that securities regulators depend on accurate information to make
regulatory decisions).
---------------------------------------------------------------------------

    Seven commenters supported the proposed rule change's inclusion of
state securities regulators in the expungement process.\366\ These
commenters supported including a representative of a state securities
regulator in straight-in expungement requests on the basis that such
participation would serve to counterbalance a potentially unopposed
expungement request since customers are less likely to participate in
straight-in requests,\367\ and would therefore help protect the
integrity of the information in the CRD system needed for the
performance of state regulatory obligations.\368\ One commenter stated
that while it appreciates the opportunity to appear for arbitration
proceedings hearing expungement requests, state participation in such
proceedings would be limited by resources and state-specific procedural
hurdles that could inhibit the ability to appear.\369\
---------------------------------------------------------------------------

    \366\ See letter from Benjamin P. Edwards, Associate Professor
of Law, University of Nevada, Las Vegas William S. Boyd School of
Law, to the Commission, dated September 6, 2022 (``Edwards'') at 1-
2; Miami at 6-7; PIABA September 6 Letter at 2; Cornell at 3; NASAA
September 6 Letter at 3-4; PIABA Foundation September 6 Letter at 2;
St. John's at 3-4.
    \367\ See PIABA Foundation September 6 Letter at 2; Miami at 6-
7; Cornell at 3; Edwards at 1-2.
    \368\ See PIABA September 6 Letter at 3; NASAA September 6
Letter at 3-4; Cornell at 3; St. John's at 3-4.
    \369\ See NASAA September 6 Letter at 3.
---------------------------------------------------------------------------

    Five commenters expressed concern about permitting state securities
regulator participation in straight-in expungement hearings.\370\ One
of these commenters suggested that notification to state securities
regulators should instead occur at the point FINRA seeks to obtain an
order from a court of competent jurisdiction confirming an award
containing expungement.\371\ Another commenter objected to a non-party
participating in an expungement proceeding without being subject to the
forum's jurisdiction because: (1) a panel could not sanction a non-
party for perjury, and (2) ``increasing the barriers'' to expungement
would decrease the proceeding's efficiency.\372\ A third commenter
argued that participation of state securities regulators would increase
costs.\373\
---------------------------------------------------------------------------

    \370\ See letter from Michael Neal, Financial Advisor, M. A.
NEAL Financial Services, to the Commission, dated August 31, 2022
(``Neal''); Hennion at 6; AdvisorLaw at 3; Beckner; Grebenik
(supporting notification and attendance of state regulators, but
opposing participation).
    \371\ See Hennion at 6; see also supra notes 28-30.
    \372\ See AdvisorLaw at 3.
    \373\ See Neal.
---------------------------------------------------------------------------

    FINRA responded that state securities regulators are already
notified about, and can participate in, proceedings at the state court
confirmation level. FINRA Rule 2080 requires that FINRA be named as a
party in such proceedings, unless this requirement is waived by FINRA.
Upon receipt of a complaint naming FINRA or a request for a waiver from
the requirement to name FINRA as an additional party, FINRA will notify
NASAA of the complaint or waiver request. NASAA, in turn, will notify
the appropriate state securities regulator.\374\ FINRA stated that
under the proposed rule change FINRA would notify state securities
regulators within 15 days of receiving a request for expungement,
giving them time to review and decide whether to participate in a
straight-in request, including in any prehearing conference.\375\
---------------------------------------------------------------------------

    \374\ See FINRA November 10 Letter at 8 n.33.
    \375\ See Notice at 50196 n.251 and accompanying text.
---------------------------------------------------------------------------

    FINRA also responded that the arbitrators who would decide
straight-in

requests would have the experience, qualifications and training
necessary to conduct a fair and impartial expungement hearing in
accordance with the proposed rules and that the proposed rule change
would provide an associated person requesting expungement the
opportunity to cross-examine any witness called by a state securities
regulator's authorized representative. FINRA stated that these
mechanisms should be sufficient to help ensure that a non-party's
testimony or documentary information presented is appropriately
scrutinized.\376\ FINRA responded further by stating that concerns
about state participation increasing costs to file an expungement
request may be overstated, as under the proposed rule change the
authorized representative would not be a party to the request, and
thus, would not be permitted to take actions that could delay the
proceeding or add to the parties' costs.\377\
---------------------------------------------------------------------------

    \376\ See FINRA November 10 Letter at 9-10.
    \377\ See id. at 9; see also FINRA April 3 Letter at 8.
---------------------------------------------------------------------------

    FINRA acknowledged that in person attendance and participation by
an authorized state representative may be limited given state resource
constraints. FINRA pointed out that the proposed rule change provides
low-cost options to help facilitate state participation; specifically,
that it would permit the authorized representative to attend and
participate via video conference or submit a state's position in
writing.\378\
---------------------------------------------------------------------------

    \378\ See FINRA November 10 Letter at 8; see also proposed Rule
13805(c)(6)(A).
---------------------------------------------------------------------------

    The Commission believes that permitting attendance and
participation by state securities regulators in straight-in expungement
proceedings, which have a higher likelihood of proceeding unopposed,
and providing state regulators low-cost options to do so, will enhance
the straight-in expungement process. Specifically, including state
securities regulators and providing them with access to documents
relevant to the expungement request provides them the opportunity to
fulfill their own regulatory obligations, while at the same time
increasing the likelihood that the panel in an expungement proceeding
will hear evidence from multiple viewpoints, thus allowing the panel to
make more informed decisions. At the same time, the conditions
applicable to state securities regulator participation are designed so
that they do not delay the resolution of an expungement request and
allow the claimants the opportunity to challenge any information
presented in the forum by the state's representative. As such, the
proposed rule change appropriately balances the interests of state
regulators in the expungement process, as well as their need to
allocate and preserve resources, with the importance of maintaining an
efficient and cost effective process for associated persons requesting
expungement.
    Two commenters recommended that FINRA extend the option for a state
regulator's representative to participate in other expungement
requests, including those in customer arbitration,\379\ and simplified
arbitration.\380\ These commenters considered state participation in
other contexts as providing a similar counterbalance as in a straight-
in request because expungement requests in both customer arbitrations,
whether standard or simplified, are similarly often unopposed because
customers do not participate in that aspect of the proceeding.\381\
---------------------------------------------------------------------------

    \379\ See Edwards at 1-2.
    \380\ See Miami at 6-7.
    \381\ See Edwards 1-2; see also Miami at 6-7.
---------------------------------------------------------------------------

    FINRA declined to amend the proposed rule change in response to
these comments. FINRA stated that attendance or participation in a
customer arbitration could substantially disrupt the customer's case
and would likely be less impactful, as the panel from the customer
arbitration hears the customer's evidence on the merits.\382\
Furthermore, in simplified arbitration the expungement-only hearing
would likely be scheduled shortly after the customer's dispute is
decided or closes, increasing the likelihood of customer attendance and
participation. Thus, FINRA does not believe that it is necessary for
state securities regulators to also attend and participate in
expungement-only hearings in simplified arbitrations.\383\
---------------------------------------------------------------------------

    \382\ See FINRA November 10 Letter at 8.
    \383\ See id. at 22.
---------------------------------------------------------------------------

    The Commission believes that it is reasonable for FINRA to limit
state securities regulator participation to straight-in requests where
there is a higher likelihood of proceeding without meaningful
opposition and state participation may provide the greatest benefit. In
customer arbitration, the panel will have the benefit of a balanced
presentation of the merits of the case that should allow it to make an
informed decision on the expungement request. Moreover, in simplified
arbitration it is more likely that a customer will participate,
providing their version of events, in an expungement hearing when it
occurs soon after the panel makes an award based on the merits of the
claim. Finally, FINRA stated it will continue to evaluate whether there
are other ways to further strengthen the current expungement process,
including whether to allow state securities regulators to attend and
participate in separate expungement-only hearings in simplified
arbitrations.\384\
---------------------------------------------------------------------------

    \384\ See FINRA April 3 Letter at 18-19.
---------------------------------------------------------------------------

5. Alternatives to Deciding Expungement Requests Through Arbitration
    While expressing support for the proposed rule change, three
commenters contended that expungement determinations are more
appropriately a regulatory decision not properly adjudicated by FINRA's
arbitration process.\385\ One of these commenters argued that the
degree to which such records are preserved in CRD and BrokerCheck for
all stakeholders should not turn on the varying abilities of any
party--state securities regulator, authorized representative or
customer--to appear to make an argument. According to the commenter,
doing so would continue to lead to inconsistent results that have no
relationship to the importance of this information.\386\
---------------------------------------------------------------------------

    \385\ See PIABA September 6 Letter at 3-4; PIABA Foundation
September 6 Letter at 2; NASAA September 6 Letter at 3-4.
    \386\ See NASAA September 6 Letter at 3.
---------------------------------------------------------------------------

    FINRA did not amend the proposed rule change in response to these
comments. FINRA stated that it believes it is important to pursue a
two-track approach to improving the expungement process. In the near
term, FINRA stated the integrity of the information in the CRD system
should be better protected by adopting the ``substantial improvements''
to the current expungement process that can be achieved with the
proposed rule change.\387\ Concurrently, FINRA stated that it would
continue working with NASAA and other interested parties to consider a
redesign of the current expungement process.\388\
---------------------------------------------------------------------------

    \387\ See FINRA November 10 Letter at 6.
    \388\ See id. at 6-7.
---------------------------------------------------------------------------

    The proposed rule change is designed to strengthen the current
expungement framework and to protect investors and the public interest.
The proposed rule change's establishment of a special roster of
specially qualified and trained arbitrators to decide certain
expungement requests should help mitigate the potentially non-
adversarial nature of straight-in expungement requests. In particular,
the Commission believes that having three specially qualified and
trained arbitrators available to ask questions and

empowered to request evidence, along with the proposed rule change's
inclusion of state securities regulators in straight-in requests where
there may otherwise be no opposing viewpoint, should help ensure that a
complete factual record is created upon which the arbitrators can base
a decision in such expungement hearings. The proposed rule change also
updates the Codes to incorporate provisions from FINRA Guidance that,
among other things, facilitate customer attendance and participation in
expungement hearings, permit panels to request additional documents or
evidence relevant to an expungement request, and codify the grounds for
awarding expungement.\389\ In addition, the Commission believes that
continuing dialogue among FINRA, state regulators, industry
participants, consumer advocates, and other stakeholders in the
expungement process will lead to future improvements as the expungement
process continues to evolve.
---------------------------------------------------------------------------

    \389\ See Section III.D., ``Procedural Requirements Relating to
All Expungement Hearings.''
---------------------------------------------------------------------------

6. Limitations Applicable to Straight-In Requests Only
    The proposed rule change also would codify and expand upon other
aspects of the Guidance applicable to straight-in requests, in
particular those related to eligibility to file the request. For
example, the proposed rule change would: prohibit an associated person
from filing a straight-in request if the customer arbitration, civil
litigation, or customer complaint that gave rise to the customer
dispute information has not closed; establish time limits for
expungement requests that are specifically tied to the close of
customer arbitrations and civil litigations, or the reporting of
customer complaints in the CRD system; and, prevent an associated
person from filing an expungement request if (1) a panel or court of
competent jurisdiction previously found the associated person liable in
a customer arbitration or civil litigation associated with the same
customer dispute information or (2) the customer dispute information
involves the same conduct that is the basis of a final regulatory
action \390\ taken by a securities regulator or SRO.\391\
---------------------------------------------------------------------------

    \390\ FINRA stated that a ``final regulatory action'' includes
any final action, including any action that is on appeal, by a
securities regulator or SRO. See FINRA Rule 8312(c); see also
Regulatory Notice 09-66 (November 2009) (stating that ``actions that
are delineated in current Form U4 Questions 14C, 14D or 14E will be
considered `final regulatory actions.' Similarly, actions that are
detailed in current Form U5 Question 7D, and have a status of
`final' or `on appeal,' will be considered `final regulatory
actions' as such actions are also addressed in Form U4.''). For
example, a Letter of Acceptance, Waiver, and Consent and an accepted
Offer of Settlement are two examples, among others, of final
regulatory actions taken by FINRA. See FINRA Rule 9216(a)(4) and
Rule 9270(g). A ``final regulatory action'' may also include a final
action reported by a regulator on Form U6. See Regulatory Notice 09-
66 (November 2009). See FINRA April 3 Letter at 14 n.49. For
purposes of this proposed rule, a ``final regulatory action'' would
not include a final action by a securities regulator or SRO that is
dismissed, vacated or withdrawn. If, after dismissal, vacatur, or
withdrawal of the final regulatory action, the associated person's
expungement request in the DRS arbitration forum would be ineligible
pursuant to Rule 13805(a)(2) (e.g., because the request is time
barred), the associated person could seek a court order directing
expungement of the customer dispute information. See FINRA April 3
Letter at 14 n.52.
    \391\ See Amendment No. 2; see also infra note 430 and
accompanying text.
---------------------------------------------------------------------------

a. No Expungement Request Until Underlying Case Closes
    The proposed rule change would codify and expand upon the Guidance
by providing that an associated person may not file a straight-in
request if the customer arbitration, civil litigation, or customer
complaint that gave rise to the customer dispute information has not
closed, a limitation that is designed to prevent an associated person
from obtaining a decision on an expungement request while the related
customer dispute is ongoing.\392\ FINRA stated this change would
prevent potentially inconsistent expungement decisions on related
customer dispute information and help ensure that the panel that would
decide the straight-in request is able to consider the final factual
record from the customer arbitration or civil litigation.\393\ The
Commission received no comment letters supporting or opposing this
proposed rule change.
---------------------------------------------------------------------------

    \392\ See proposed Rule 13805(a)(2)(A)(iii); see also Notice at
50180.
    \393\ See Notice at 50180.
---------------------------------------------------------------------------

    The proposed rule change would help maintain the integrity of the
information in the CRD system by helping to prevent inconsistent
expungement decisions on related customer dispute information. The
proposed rule change would also help ensure that the panel deciding the
straight-in request is able to consider the final factual record from
the customer arbitration or civil litigation.
b. Time Limits for Expungement Requests
    Currently, FINRA Rules 12206(a) and 13206(a) require an associated
person to submit an arbitration claim, including requests for
expungement of customer dispute information, within six years from the
occurrence or event giving rise to the claim.\394\ The proposed rule
change would eliminate this six-year eligibility rule and instead
establish shorter time limits for expungement requests that are
specifically tied to the close of customer arbitrations and civil
litigations, or the reporting of customer complaints in the CRD system,
as applicable.\395\ FINRA stated that the time periods provided for in
the proposed rule changes for each situation would provide a sufficient
amount of time for associated persons and their firms to, among other
things, gather the documents, information, and other resources required
to file the expungement request.\396\
---------------------------------------------------------------------------

    \394\ See supra note 125 and 127 and accompanying text.
    \395\ See Notice at 50181. As described above, the proposed rule
change would prescribe different time limits in connection with
customer arbitrations or civil litigations and customer complaints.
In the case of a customer arbitration or civil litigation that gave
rise to the customer dispute information in question, proposed Rule
13805(a)(2)(A)(iv) would require an associated person to file a
straight-in request within two years of such matters closing. In the
case of customer complaints, proposed Rule 13805(a)(2)(A)(v) would
prohibit an associated person from filing a straight-in request
where more than three years has elapsed from the time the complaint
was first reported to the CRD system and there was no customer
arbitration or civil litigation that gave rise to the customer
dispute information. The proposed rule change would also establish
similar time limits for requests to expunge customer dispute
information arising from customer arbitrations and civil litigations
that close, and for customer complaints that were initially reported
to the CRD system, on or prior to the effective date of the proposed
rule change. See Notice at 50181-82; see also Section II.C.2.d.,
``Time Limits Applicable to Disclosures Arising After the Effective
Date of the Proposed Rule Change.''
    \396\ See Notice at 50181.
---------------------------------------------------------------------------

    With respect to customer arbitrations and civil litigations, FINRA
stated that it believes the two-year period would help ensure that
expungement hearings are held close enough in time to the customer
arbitration or civil litigation such that information regarding the
dispute is available and in a timeframe that could increase the
likelihood of customer participation where a customer so chooses. The
shorter timeframe, FINRA believes, should help encourage customer
attendance and participation in expungement proceedings and help ensure
that straight-in requests are brought before relevant evidence and
testimony

becomes stale or unavailable.\397\ Accordingly, FINRA believes the
proposed time limit would help provide panels with more complete
factual records on which to base their expungement decisions, while at
the same time allowing the associated person adequate time to determine
whether to seek expungement.\398\
---------------------------------------------------------------------------

    \397\ See id.
    \398\ See id.
---------------------------------------------------------------------------

    With respect to customer complaints where there was no customer
arbitration or civil litigation associated with the customer dispute
information, FINRA stated that it believes that the three-year period
would help ensure that the expungement hearing is held close in time to
the events that gave rise to the customer dispute and increase the
likelihood of customer attendance and participation. The three-year
time limitation should also provide sufficient time for firms to
complete their investigation of the complaint, for associated persons
to develop a sense of whether the complaint may evolve into an
arbitration or civil litigation, and for the associated person to
gather the necessary resources and determine whether to seek
expungement. FINRA also believes that the three-year time limitation
may curtail requests to expunge customer complaints that are filed many
years after first being reported to the CRD system and the bundling of
multiple unrelated and aged disclosures in a single expungement
request.\399\
---------------------------------------------------------------------------

    \399\ See id.
---------------------------------------------------------------------------

    Six commenters supported the proposed time limitations.\400\ Two of
these commenters stated that the time limitations will make it more
likely that customers will participate \401\ and one of these
commenters stated that the timeframes provide enough time for
associated persons to determine whether to file an expungement request
and gather the relevant information to support their request.\402\
Another commenter stated that the time limitations would increase the
efficiency of the expungement process and decrease the cost to member
firms because when expungement requests are filed ``four or five or
even ten years'' after the event giving rise to the request, a party's
ability to respond to discovery requests and produce relevant
information becomes much more difficult and time consuming.\403\
---------------------------------------------------------------------------

    \400\ See Miami at 5; Cambridge at 2; Cornell at 3-4; NASAA at
2; St. John's at 3; PIABA September 6 Letter at 4.
    \401\ See Cornell at 4; St. John's at 3.
    \402\ See Cornell at 3-4.
    \403\ See Cambridge at 2.
---------------------------------------------------------------------------

    Seven commenters objected to the time period limitations.\404\ One
commenter stated that time limits for filing an expungement request
should mirror those provided to customers (a six-year period of
eligibility with expansion for good cause).\405\ This commenter argued
that providing the associated person the opportunity to file for
expungement within a six-year time frame--regardless of whether there
was a customer-filed arbitration--recognizes that representatives may
not have been meaningfully involved in the underlying arbitration for a
variety of reasons (e.g., separation from the firm).\406\ Two other
commenters stated that the amount of time that passes has no bearing on
the merits of the expungement request.\407\ Another commenter stated
that time limits may preclude expungement requests because associated
persons are not aware of the expungement process and suggested
grandfathering in associated persons with existing disclosures or
sending notifications to such persons.\408\ Two other commenters stated
that associated persons may lack the resources to seek expungement
within the proposed two-year time limit.\409\ One of these commenters
added that associated persons may not consider expungement important at
the time only to change their minds later on in their careers; however,
the commenter recommended that if FINRA moved forward with the two-year
time limit, it should ensure all associated persons affected by a given
arbitration claim are given proper notice of the case's closure, as
well as a description of any applicable time limits for making an
expungement request.\410\ Finally, one commenter that otherwise
supported the proposed rule change argued that less time was necessary
and urged FINRA to adopt a shorter, one-year time period for all
straight-in expungement requests.\411\
---------------------------------------------------------------------------

    \404\ See letter from James P. Galvin, Esq., Galvin Legal PLLC,
to the Commission, dated April 7, 2023 (Galvin) at 2; Hennion at 6;
AdvisorLaw at 3; Grebenik; Beckner; Del Toro; Barber.
    \405\ See Hennion at 6. See also FINRA Rule 12206 (Time Limits)
(stating that no claim shall be eligible for submission to
arbitration under the Customer Code where six years have elapsed
from the occurrence or event giving rise to the claim).
    \406\ See Hennion at 6.
    \407\ See AdvisorLaw at 3; Barber; see also letter from John
O'Bannon, Financial Advisor, Diversified Financial Group, to the
Commission, dated October 11, 2022 (stating that ``[i]f a customer
complaint is truly meritless, then the advisor should not continue
to be potentially harmed by having there [sic] meritless disclosures
continue to be on record.'' And recommending: (1) that
``[d]isclosures that were dropped by clients should be dropped by
FINRA no later than 3 years after filing''; (2) allowing ``[e]diting
of [Form] U4 listings [to] correctly describe the issue and
resolution [in a manner that does not] immediately give the negative
connotation that the advisor is a cheat/liar if it's not accurate'';
and (3) establish ``an expungement process for those convictions
that [are more than 15 years old]''); see also Grebenik (stating
that ``FINRA should evaluate the complaint first to determine a
basic level of legitimacy. Otherwise, the meritless and frivolous
complaints will continue to be filed and will continue to be
expunged at a high rate of success.''). These comments from O'Bannon
and Grebnik are outside the scope of the proposed rule change.
    \408\ See Grebenik.
    \409\ See Galvin at 2; Del Toro.
    \410\ See Del Toro.
    \411\ See PIABA September 6 Letter at 4.
---------------------------------------------------------------------------

    FINRA considered these comments but declined to amend the proposed
rule change. FINRA responded that it believes that the proposed time
limitations appropriately address its concern that a number of
expungement requests are currently filed many years after a customer
arbitration closes or the reporting of a customer complaint in the CRD
system.\412\ FINRA stated that requiring associated persons to file
straight-in requests within three years of the filing of the customer
complaint, rather than six, would help ensure that expungement hearings
are held close in time to the events that led to the customer dispute
information disclosure.\413\ FINRA stated that, in turn, this may: (1)
increase the likelihood of customer participation; (2) ensure that
straight-in requests are filed before relevant evidence and testimony
becomes stale or unavailable; and (3) generally help to develop a more
complete factual record on which to decide an expungement request.\414\
---------------------------------------------------------------------------

    \412\ See FINRA November 10 Letter at 19. In response to a
commenter's request that associated persons with existing disclosure
be ``grandfathered in'' or provide notice, FINRA stated such
``grandfathering'' would be contrary to the purpose of the proposed
rule change to address concerns about expungement requests made many
years after the fact, and further stated that if the proposed rule
change is approved, it would issue a Regulatory Notice that will
provide notice to associated persons of when the time period will
commence for seeking expungement of customer dispute information
already on their records. See Grebenik; FINRA April 3 Letter at 11-
12.
    \413\ See FINRA April 3 Letter at 10-11.
    \414\ See id. FINRA recognized that as a result of the three-
year time limitation, an associated person may be prevented from
filing a request for expungement of customer dispute information
because the member firm's investigation of the customer complaint
has not concluded and, therefore, the customer complaint associated
with the customer dispute information has not closed. However, FINRA
stated that it believes that such instances would occur rarely.
Furthermore, in the event that an associated person is prevented
from filing a request for expungement of customer dispute
information in the DRS arbitration forum because of the three-year
time limitation, the associated person could seek a court order
directing expungement of the customer dispute information. See id.
---------------------------------------------------------------------------

    FINRA also stated that allowing two years from the close of the
customer arbitration or civil litigation to bring an

expungement request would provide a reasonable amount of time for
associated persons and firms to gather the necessary documents,
information and other necessary resources required to file the
expungement request and help ensure that the expungement hearing is
held close enough in time to the customer arbitration. In addition, the
two-year time limitation would reduce the potential for such
information to become stale and increase the likelihood of customer
participation.\415\ Moreover, FINRA stated that it believes the three-
year time period for expungement requests in connection with customer
complaints would: (1) allow firms to complete their investigation of
the customer complaint and close it in the CRD system; (2) allow
associated persons to develop a sense of whether the complaint may
evolve into an arbitration or civil litigation; and (3) allow
associated persons to determine whether to proceed with a request to
expunge the complaint.\416\
---------------------------------------------------------------------------

    \415\ See FINRA November 10 Letter at 19; FINRA April 3 Letter
at 11-12 and n.39.
    \416\ See FINRA November 10 Letter at 19.
---------------------------------------------------------------------------

    FINRA acknowledged that there could be instances when associated
persons may not be aware that a customer arbitration has closed, and
that the two-year time limit for requesting expungement of customer
dispute information has begun to run.\417\ To facilitate an associated
person's awareness of the proposed time limits, FINRA stated that if
the proposed rule change is approved, it would issue a Regulatory
Notice providing notice to associated persons of when the time period
will commence for seeking expungement of customer dispute information
already on their records. FINRA also stated it would update the cover
letter that is provided by DRS to respondents once a statement of claim
has been filed to explain that: (1) an associated person is prohibited
from filing a straight-in request while a customer arbitration or civil
litigation associated with the customer dispute information that is the
subject of the straight-in request is pending; (2) an associated person
is permitted to file a straight-in request within two years of the
close of a customer arbitration or a civil litigation associated with
the customer dispute information, unless such request is barred under
the Industry Code; and (3) associated persons may remain apprised of
the status of the customer arbitration, including case closure, by
contacting the parties to the arbitration or DRS.\418\ FINRA further
stated that the updated cover letter would also encourage member firms
to provide updates about the status of the customer arbitration to
associated persons who are not named parties to the customer
arbitration, including case closure.\419\ Finally, FINRA stated it
would publish guidance on its website about the changes to the Codes
that would include information about how associated persons can remain
apprised of the status of a customer arbitration, including through
contacting DRS.\420\
---------------------------------------------------------------------------

    \417\ See FINRA April 3 Letter at 9.
    \418\ Id.
    \419\ Id. at 9-10.
    \420\ Id. at 10.
---------------------------------------------------------------------------

    FINRA's time limitations seek to balance two competing interests:
(1) promoting customer participation and the availability of evidence
and (2) providing sufficient time for an associated person to determine
whether to seek expungement and, in the case of customer complaints,
for firms to investigate and close a complaint and for the complaint to
evolve, or not, into arbitration or civil litigation. The Commission
believes that the proposed rule change strikes a reasonable balance
between these competing interests. Holding expungement hearings closer
in time to the event that gave rise to the customer dispute information
should promote the availability of evidence and customer participation,
which would help contribute to more informed expungement determinations
and therefore to investor protection and the integrity of information
in the CRD system.\421\
---------------------------------------------------------------------------

    \421\ As stated above, the proposed rule changes would give the
Director the express authority to deny the use of the DRS
arbitration forum to decide expungement requests, including where
the request is ineligible under the proposed time limitations. The
Commission believes that these powers are a reasonable method to
help ensure adherence to the limitations contained in proposed Rules
12805 and 13805.
---------------------------------------------------------------------------

c. Preclusion of Certain Expungement Requests
    The proposed rule change, as modified by Amendments No. 1 and No.
2, would also preclude an associated person from filing an expungement
request if: (1) a panel or court of competent jurisdiction previously
found the associated person liable in a customer arbitration or civil
litigation associated with the same customer dispute information or (2)
the customer dispute information involves the same conduct that is the
basis of a final regulatory action \422\ taken by a securities
regulator or SRO.\423\
---------------------------------------------------------------------------

    \422\ See supra note 390.
    \423\ See proposed Rule 13805(a)(2)(A)(v).
---------------------------------------------------------------------------

    FINRA included the proposed preclusion of expungement requests
where the associated person was previously found liable in a customer
arbitration or civil litigation associated with the same customer
dispute information as an amendment to its proposed rule change in
response, in part, to a commenter's recommendation.\424\ FINRA reasoned
that these expungement requests are in effect a collateral attack on
the binding arbitration award and that a collateral attack is not
contemplated under FINRA rules and is contrary to the Codes.\425\ FINRA
stated that the only avenue for challenging a prior adverse arbitration
award is to file a timely motion with an appropriate court to vacate,
modify, or correct the award.\426\
---------------------------------------------------------------------------

    \424\ See St. John's at 2 (suggesting that associated persons be
prohibited from seeking expungement if there has been a finding of
liability in the underlying customer arbitration). See Amendment No.
1; see also FINRA November 10 Letter at 28.
    \425\ See FINRA November 10 Letter at 28; see also FINRA Rules
12904(b) and 13904(b).
    \426\ See FINRA November 10 Letter at 28.
---------------------------------------------------------------------------

    Two commenters supported the amendment.\427\ These commenters
agreed that an arbitral or judicial finding that a claim is valid
should preclude the ability to have such information expunged.\428\ A
third commenter supported the amendment, but suggested the reason for
the amendment would apply equally in other contexts, and recommended
that associated persons should be prevented from seeking expungement of
customer dispute information that forms the basis for a finding of
liability in all of the contexts in which such information forms part
of a regulatory record, such as state regulatory proceedings,
proceedings brought by the Commission, or self-regulatory
proceedings.\429\
---------------------------------------------------------------------------

    \427\ See letters from Celiza P. Bragan[ccedil]a, Past-President
& Director, et. al., The PIABA Foundation, to the Commission, dated
December 7, 2022 (``PIABA Foundation December 7 Letter'') at 2; see
also Hugh D. Berkson, President, Public Investors Arbitration Bar
Association, to the Commission, dated December 7, 2022 (``PIABA
December 7 Letter'') at 2-3.
    \428\ See id.
    \429\ See letter from Andrew Hartnett, President, North American
Securities Administrators Association, Inc., to the Commission,
dated December 7, 2022 (``NASAA December 7 Letter'') at 3.
---------------------------------------------------------------------------

    After further consideration of the issue, FINRA proposed a
modification to the proposed rule change in Amendment No. 2 to provide
that an associated person shall not file a claim requesting expungement
of customer dispute information from the CRD system against a member
firm at which the person was associated at the time the customer
dispute arose if the customer dispute information involves

the same conduct that is the basis of a final regulatory action taken
by a securities regulator or SRO. If an associated person requests
expungement of such customer dispute information, the Director would
deny the forum to the expungement request.\430\ FINRA stated that
prohibiting an associated person from filing such expungement requests
would promote greater efficiency in the DRS arbitration forum because
it would preclude requests that otherwise would be unsuccessful.\431\
---------------------------------------------------------------------------

    \430\ See FINRA April 3 Letter at 14; Amendment No. 2; see also
proposed Rule 13203(b).
    \431\ See FINRA April 3 Letter at 13-14.
---------------------------------------------------------------------------

    Permitting expungement following a finding of liability in an
arbitration or civil litigation associated with the same customer
dispute information or a final regulatory action based on the same
conduct sought to be expunged would be inconsistent with the specified
grounds that can form the basis for an expungement award under the
proposed rule change (i.e., factual impossibility, mistake, or
falsity). Permitting an expungement claim in these circumstances would,
in addition to constituting a collateral attack on the results of the
underlying dispute, contribute to inefficiencies in the expungement
process by allowing for claims to proceed that could not succeed.

C. Expungement Requests During Simplified Arbitrations

1. Filing and Considering Requests During Simplified Arbitration
    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,\432\ and would establish procedures for
requesting and considering expungement requests in simplified
arbitrations that are consistent with the expedited nature of these
proceedings.\433\
---------------------------------------------------------------------------

    \432\ See proposed Rule 12800(d)(1)(A). If the requesting party
requests expungement in a pleading other than an answer, the request
must be filed within 30 days from the date that FINRA notifies the
associated person of arbitrator appointment. See proposed Rule
12800(d)(1)(B). When FINRA notifies the parties that 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.
See Notice at 50187 n.193 and accompanying text. The request would
be required to include the same information as a request filed in a
non-simplified arbitration. See proposed Rules 12800(d)(1)(B)(i) and
12805(a)(1)(C)(ii); see also Notice at 50187.
    \433\ See proposed Rules 12800(d) and (e); see also Notice at
50186. See Section II.A., ``Requests for Expungement under the
Customer Code.''
---------------------------------------------------------------------------

    The proposed rule change would require an arbitrator in a
simplified arbitration to decide an expungement request that is filed
by an associated person or as an on-behalf-of request.\434\ In
addition, as in the proposed rule change governing regular customer
arbitration, under the proposed rule change if the requesting party
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.\435\ FINRA stated that these proposed rule changes
would help eliminate arbitrator-shopping by requiring the panel in
which the request is made to decide the request.\436\ FINRA also stated
that, unlike the proposed amendments to a regular customer arbitration,
FINRA was not proposing that a panel from the Special Arbitrator Roster
decide an expungement request made during a simplified customer
arbitration where the arbitration closes other than by award or closes
by award without a hearing, because the public chairpersons who decide
simplified arbitrations would be fully capable of making appropriate
expungement decisions on the basis of their experience and would have
the same enhanced expungement training as the arbitrators on the
Special Arbitrator Roster.\437\
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    \434\ See proposed Rules 12800(d)(1)(B)(ii) and 12800(e)(1); see
also Notice at 50187.
    \435\ See proposed Rule 12800(d)(1)(C); see also Notice at
50187.
    \436\ See Notice at 50187.
    \437\ See Notice at 50188. Under the proposed rule change, 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. See also proposed Rule 12800(b).
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    In addition, unlike in a regular customer arbitration, if
expungement is not requested during a simplified arbitration, the
proposed rule change would permit the associated person to file a
straight-in expungement request for the same customer dispute
information under the Industry Code and have the request decided by a
three-person panel randomly selected from the Special Arbitrator
Roster.\438\
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    \438\ See proposed Rule 12800(e)(2).
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    One commenter requested that a named associated person should be
required to request expungement during the arbitration of the
customer's claim, as proposed for non-simplified cases.\439\ The
commenter stated that arbitrators in simplified arbitrations are
experienced public arbitrators who have the same enhanced expungement
training as the arbitrators on the Special Arbitrator Roster and would
therefore be able to make an informed decision on the merits of an
expungement request.\440\ The commenter also stated that requiring a
named party to request expungement during the arbitration of the
customer's claim in simplified arbitration would encourage customer
participation because the expungement request would be closer in time
to the complained-about conduct and therefore easier for the customer
to recall the facts.\441\
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    \439\ See Miami at 2-3.
    \440\ See Miami at 3-4. Similarly, Cornell requested that FINRA
add to the proposed rule change that if an expungement is requested
during a simplified arbitration and if the parties agree to have a
specific arbitrator, this arbitrator must be required to undergo the
enhanced expungement training provided to the arbitrators on the
Special Arbitrator Roster prior to considering the expungement
request. See Cornell at 4-5. In response, FINRA stated that the
proposed rule change would require that arbitrators deciding
expungement requests in simplified arbitrations be experienced
public arbitrators who have taken the same expungement training as
arbitrators on the Special Arbitrator Roster, including where the
parties agree to a specific arbitrator. See FINRA November 10 Letter
at 22.
    \441\ See Miami at 3-4.
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    FINRA declined to amend the proposed rule change, referencing the
expedited nature of simplified arbitrations.\442\ FINRA stated that
because there may be less discovery in simplified arbitration and the
customer can dictate the extent of the evidence presented to the
arbitrator, there may be less information available for the arbitrator
to evaluate an expungement request.\443\ Accordingly, FINRA stated that
it is appropriate that an associated person should retain the ability
to choose to file the request as a straight-in request under the
Industry Code.\444\ FINRA also stated, however, that it will continue
to monitor expungement requests and decisions in simplified
arbitrations to determine if additional changes are warranted,
including whether a panel from the Special Arbitrator Roster should be
required to decide an expungement request in simplified
arbitrations.\445\
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    \442\ See FINRA November 10 Letter at 23.
    \443\ See id.; see also Notice at 50187.
    \444\ See Notice at 50187.
    \445\ See id.; see also FINRA April 3 Letter at 18-19.
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    Requiring an arbitrator to decide an expungement request that is
filed in a simplified arbitration, regardless of the outcome of that
arbitration, along with requiring an arbitrator to a reject such a
request with prejudice if it is withdrawn, will help protect the
integrity of the information in the CRD system by limiting an
associated person's ability to request expungement for the same claim
(even if it has been denied in the past) until they find a panel
willing to award it. By allowing an associated person to determine

whether to request expungement in a simplified arbitration or to
instead file the request as a straight-in request under the Industry
Code, the proposed rule change appropriately puts the decision to seek
expungement in the hands of the party most impacted by the outcome.
Because claims in simplified arbitration generally are decided by one
arbitrator based on the documents that are submitted by the parties,
with limited discovery, and without a hearing, there may be less
information available for the arbitrator to evaluate an expungement
request during a simplified arbitration. Therefore, the Commission
believes that associated persons should be given the choice of how they
want to proceed with their request for expungement, while at the same
time balancing customer and regulator interests in the process. The
Commission notes, however, that FINRA has stated it will monitor this
issue and propose changes as warranted.
2. Deciding Requests in Simplified Arbitration
    As stated above, if expungement is requested during a simplified
arbitration, the proposed rule change would require the arbitrator to
decide the expungement request regardless of how the simplified
arbitration case closes, including by settlement, in one of two ways,
depending on the how the customer chooses to have their claim
decided.\446\
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    \446\ See Notice at 50187-88; see also proposed Rules
12800(d)(1)(B)(ii) and 12800(e)(1).
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    If the customer chooses to have their claim decided either (1) ``on
the papers'' (i.e., without a hearing) or (2) in an ``Option Two''
special proceeding, the arbitrator would decide the customer's dispute
first and then issue an award before deciding the expungement
request.\447\ After the customer's dispute is decided, the arbitrator
would hold a separate expungement-only hearing to consider and decide
the expungement request and issue a separate award.\448\ FINRA reasoned
that this requirement would minimize any delays in resolving the
customer arbitration and in determining any potential recovery that a
customer may be awarded.\449\ FINRA further stated that the separate
expungement-only hearing would be necessary to enable the arbitrator to
request any documentary, testimonial, or other evidence it deems
relevant to the expungement request to make a fully informed
decision.\450\
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    \447\ See proposed Rule 12800(e)(1)(A).
    \448\ See proposed Rule 12800(e)(1)(A). The arbitrator would
have to conduct the expungement hearing pursuant to proposed Rule
12805(c); the expungement award would have to meet the requirements
of proposed Rule 12805(c)(8); and forum fees would be assessed
pursuant to proposed Rule 12805(c)(9). See id.; see also Notice at
50188 n.206.
    \449\ See Notice at 50188.
    \450\ See id. FINRA stated that the customer arbitration may not
be as fully developed when a customer has requested an ``on the
papers'' or special proceeding. See id.
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    Alternatively, if the customer chooses to have their claim decided
by an ``Option One'' full hearing and it closes by award, the proposed
rule change would require the arbitrator to consider and decide the
expungement request during the customer arbitration and include the
decision in the award.\451\ This process would be the same as deciding
an expungement request during a regular customer arbitration that
closes by award after a hearing, where the customer's claim and
expungement request are addressed during the customer arbitration.\452\
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    \451\ See proposed Rule 12800(e)(1)(B)(i); see also Section
III.A.3., ``Deciding Expungement Requests during Customer
Arbitrations.''
    \452\ See Notice at 50188.
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    If a simplified arbitration closes other than by award or closes by
award without a hearing, however, the proposed rule change would
require the arbitrator 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.\453\ Under the
proposed rule change, the Director would notify all customers from the
simplified arbitration of the separate expungement-only hearing, if
applicable.\454\ FINRA believes that a separate expungement hearing
would be necessary in these circumstances for the arbitrator to develop
a complete factual record in order to make a fully informed decision on
the expungement request.\455\ FINRA also believes that the Director's
notice would further this objective by providing a timely reminder to
customers of the expungement hearing so that they may plan and prepare
to attend and participate if they choose.\456\ Moreover, FINRA stated
that it would continue to monitor expungement requests and decisions in
simplified arbitrations to determine if additional changes are
warranted.\457\
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    \453\ See proposed Rule 12800(e)(1)(B)(ii).
    \454\ See proposed Rule 12800(f)(2).
    \455\ See Notice at 50188.
    \456\ See id.
    \457\ See id.
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    Three commenters voiced support for the proposed rule change,
specifically identifying the bifurcation of the expungement hearing and
simplified arbitration where the customer's claim is decided ``on the
papers'' or in an ``Option Two'' hearing.\458\ One of these commenters
reasoned that by requiring a separate hearing on the expungement
request following a final decision on the customer's claim, the
proposed rule change would allow for a just resolution of the request
because the arbitrator would have all of the facts and special insights
necessary to decide whether to award expungement, while ensuring the
resolution of the investor's claim is not delayed.\459\ Another
commenter similarly stated that deciding the customer dispute before
the request for expungement would minimize delays in customer recovery
but allow the arbitrator to make a more fully developed record before
deciding the expungement request.\460\
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    \458\ See Miami at 2-3; St. John's at 2; Cornell at 4.
    \459\ See St. John's at 2.
    \460\ See Cornell at 4.
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    Another commenter suggested that FINRA create a simplified process
for expungement with similar fees and an ``on the papers'' option
before a single arbitrator for requests for expungement associated with
customer complaints and customer arbitrations under $50,000.\461\ In
response, FINRA declined to amend the proposed rule change, stating
that an important part of ensuring the expungement process works as
intended is for arbitrators to hold recorded expungement hearings
during which they can hear testimony and assess the credibility of the
associated person requesting expungement and any witnesses.\462\
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    \461\ See Hennion at 6.
    \462\ See FINRA November 10 Letter at 23.
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    The proposed rule change's procedure for determining the order in
which a panel would decide an expungement request in a simplified
arbitration based on the type of proceeding chosen by the customer is
reasonable. For example, where a customer opts to have their claim
decided without a hearing (i.e., ``on the papers'') or chooses an
``Option Two'' special proceeding, the arbitrator would hold a separate
expungement-only hearing to consider and decide the expungement request
after it decides the customer's dispute. The Commission believes that
this process benefits both customers and associated persons. The
customer would avoid any delay in resolving their claim that
consideration of an expungement request would cause; and the associated
person would have a separate hearing to help ensure that the arbitrator
has sufficient evidence upon which to rule on their expungement
request. Alternatively, where the customer chooses to have their claim
decided after a full hearing

(i.e., an ``Option One'' proceeding), it is reasonable to allow the
panel to rule on an expungement request because the request would not
unduly burden the customer or an associated person requesting
expungement in the hearing. By choosing ``Option One'', a customer has
agreed to participate in a more involved and time-consuming process
than having their claim decided ``on the papers.'' Likewise, the
customer has assumed the risk that the resolution of their claim could
be delayed by an associated person's expungement request. In addition,
the associated person gets an opportunity during the hearing to help
the panel fully develop a record on which to decide the expungement
request.

D. Procedural Requirements Relating to All Expungement Hearings

    The proposed rule changes would include certain procedural
provisions that would apply to all expungement hearings. As described
above, these would include procedural requirements relating to: (1)
hearing format; (2) associated person's appearance; (3) customer
attendance and participation; (4) panel requests for additional
documents or evidence; (5) review of settlement documents; (6)
requirement for a unanimous decision to issue an award containing
expungement relief; (7) contents of an expungement award; (8) grounds
for awarding expungement; (9) evidentiary weight of a decision by
customers or authorized representatives not to attend or participate;
and, (10) forum fees.\463\ In addition, the proposed rule change would
expand the authority of the Director to deny the use of the DRS
arbitration forum.\464\
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    \463\ See Section II.D., ``Procedural Requirements Relating to
All Expungement Hearings.''