FINRA Implements Stringent Rule Changes Related to Expungement of Customer Complaints Effective October 16, 2023

On August 11, 2023, the Financial Industry Regulatory Authority (“FINRA”) issued a Regulatory Notice [23-12] highlighting key amendments to the Codes of Arbitration Procedure (the “Codes”) concerning expungement of customer dispute information from broker records.

According to FINRA, the amendments address current concerns with the expungement process by providing safeguards for ensuring reported information about investment professionals is accurate and complete.

I. Background of FINRA Reporting.

All information related to customer complaints, arbitration, and litigation are maintained in the Central Registration Depository (CRD) and BrokerCheck. The CRD collects registration information including administrative, regulatory, and criminal history, and a myriad of financial information about FINRA “Associated Persons” (Rule 1011(b): those registered under FINRA) such as investment-related information, customer complaints, arbitrations, and civil litigation information. BrokerCheck is a free FINRA online tool used by investors and other members of the public to gain information related to stockbrokers (referred to in the industry as Associated Persons) and broker-dealer firms. The information listed also includes customer complaints, arbitration and civil litigation information.

Expungement requests may be made through the following: (1) a customer arbitration; or (2) a “straight-in-request” arbitration. See Code §§ 12800; 12805; 13805; 13806. A customer arbitration occurs where an investment-related claim is filed by a customer in a FINRA arbitration seeking broad relief that also results in some adverse disclosure on the Associated Person’s (i.e. FINRA registered individual) record. An expungement request may be made during this arbitration claim by the Associated Person. A straight-in request is a similar FINRA arbitration claim but is initiated directly by the Associated Person seeking relief to remove the adverse disclosure on their record.

The only way to remove an adverse disclosure from CRD or BrokerCheck is by a court-ordered expungement or order confirming an arbitration award directing the removal. The amendments to the Codes effects each type of expungement request.

II. What Changed?

In order to obtain expungement relief, there must be judicial or arbitral findings that: (1) the claim is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged misconduct; or (3) the claim is false. See Code § 2080. This rule has not been amended and remains the standard going forward. That said, under the Codes prior to the current amendments, FINRA initially contemplated that expungements would be “an extraordinary remedy” recommended only under appropriate circumstances. See FINRA Guidance, Attachment B (Sept. 2017 Update).

However, there was growing concern over the effectiveness of the expungement procedure and whether the outcome of such expungement processes resulted in expungement relief being actually treated as an “extraordinary remedy.” The Public Investors Advocate Bar Association (“PIABA”) issued a study concluding that under the current Codes and procedure, arbitrators granted expungement requests 90% of the time. Further, brokers and broker-firms’ expungement requests went largely unopposed because, according to PIABA, the Codes did not provide investors with an interest in the outcome of the expungement request as a result of customers not being permitted to present evidence or otherwise participate in the hearings. See, PIABA Foundation Expungement Study (May 2021).

Having considered this study, the SEC has now approved various amendments addressing the concerns under the old FINRA Codes. While not exhaustive, the below list provides a look at perhaps some of the most notable amendments to the Codes affecting expungement requests:

1. An expungement request cannot be made where it has already been previously denied either by an arbitration panel or a court. This will prevent brokers from “arbitration shopping” and seeking different panels to decide the same issues.
2. If a FINRA registered person (the “Associated Person”) is specifically named in a customer arbitration, the Associated Person must request expungement during the customer arbitration or will forfeit the opportunity to seek expungement in any subsequent proceeding.
3. For straight-in arbitration expungement requests that involve a concluded customer arbitration or civil litigation, the Associated Person has 2 years to initiate the request after arbitration/litigation closes.
4. For straight-in requests that do not involve customer arbitration or civil litigation, the Associated Person has 3 years to initiate the request from the date a complaint is reported on the CRD system.
5. Telephonic appearance is no longer permitted. The Associated Person must appear in-person or by video conference, the method of appearance to be determined by the arbitration panel.
6. Customers are “entitled to attend and participate in all aspects of the expungement hearing” either telephonically, in-person, or by video conference. This includes presentation of evidence, calling witnesses, presenting objections to evidence, and giving opening and closing arguments.
7. The arbitration panel shall contain three, randomly selected arbitrators. These arbitrators must, among other things, complete an “Enhanced Expungement Training” course, an online arbitrator’s training program provided by FINRA Dispute Resolution Services. The parties are not permitted to strike any arbitrator or stipulate to their removal, but may challenge an arbitrator for-cause.
8. The arbitration panel must agree unanimously to an award granting expungement relief. The panel must also provide a written explanation of its grounds for expungement. No weight shall be given to the decision of a customer not to attend or participate in the hearing.

See also, FINRA Regulatory Notice 23-12

III. When Do the Amendments Take Effect?

The Amendments will become effective on October 16, 2023.