FINRA Approves Creation of Special Roster of Arbitrators for Expungement Cases

Financial Institutions Law Alert

 

FINRA has been virtually silent since announcing plans for a major overhaul of the expungement process in its Notice to Members 17-42 in December 2017. This week, FINRA finally offered some insight into what will happen next.

FINRA’s original proposal included a number of changes, including a heightened standard for granting expungement, increased fees, and the requirement of a unanimous decision by three arbitrators. See https://www.bressler.com/finra-issues-regulatory-notice-1742-requesting-comment-and-proposing-amendments-to-expungement-of-customer-dispute-information-. The proposal also contemplated the creation of a roster of specially trained “expungement-qualified” arbitrators.

On October 3, 2019, FINRA’s Board of Governors issued a News Release announcing that it had approved one piece of FINRA’s original expungement proposal – the creation of a roster of specially trained “expungement-qualified” arbitrators. The News Release states that the Board approved a rule amendment to “create, among other things, a roster of arbitrators with enhanced training and experience from which a panel would be selected in certain instances to decide an associated person’s request to expunge customer dispute information.” The Board also noted that the proposed amendment “will next be filed with the SEC.”

After filing with the SEC, the rule will be reviewed by SEC staff and published in the Federal Register for comment. SEC staff then typically requests that FINRA respond to comments, and it may propose amendments. Once the rule is finalized and approved, it will be published in the Federal Register, and FINRA will issue a Regulatory Notice establishing an effective date.

The last time FINRA submitted an expungement-related rule to the SEC – a rule proposed in 2014 to ban the conditioning of settlement agreements on a customer’s agreement to not oppose an expungement request (FINRA Rule 2081) – the entire process took just over 3 months from FINRA’s initial submission to the SEC until the rule became effective.

While FINRA appears to be taking a measured approach to transforming the expungement process, a number of questions remain unanswered. FINRA has not yet provided the text of proposed rule(s), and the News Release makes no mention of the many other changes that were part of FINRA’s original proposal. While the Board references creating a roster of arbitrators “among other things,” it provides no insight into what those “other things” might be. It also does not identify the “certain instances” in which the expungement roster will be utilized.

Another lingering question is whether FINRA will actually follow through with the Board’s approval. The Board has twice previously approved the codification of other expungement-related rules, but FINRA has not submitted those rules to the SEC for approval. Specifically, in September 2015 and again in December 2018, the Board approved the codification of FINRA’s “Expanded Guidance on Expungement.” See https://www.finra.org/about/governance/finra-board-governors/meetings/update-finra-board-governors-meeting-1 (September 2015) and https://www.finra.org/about/governance/finra-board-governors/meetings/december-2018-email (December 2018). Yet, to this day, FINRA has not sought SEC approval of the Expanded Guidance.

Overall, the creation of a roster of expungement-qualified arbitrators with advanced training should improve the quality of arbitrators, though it may also reduce the number of qualified arbitrators from which the parties may select. Unlike the majority of changes in FINRA’s original proposal, the creation of a special roster of arbitrators does not seem likely to make it more difficult for those seeking expungement.