January 2, 2018

Securities Alert: It Will Soon Be More Difficult to Obtain Expungements

FINRA

FINRA is in the process of making substantial changes to the process by which a registered representative can obtain an expungement of customer dispute information from the Central Registration Depository (CRD) system.  FINRA has issued Regulatory Notice 17-42 outlining these anticipated changes.  Comments on the Notice are due February 5, 2018.  It is unclear when the changes will take effect.

The proposed changes are tailored to address concerns that expungement requests are granted without arbitration panels hearing the merits of the underlying customer case.  The proposed amendments make no substantive changes to Rule 2080, which sets forth the grounds on which arbitrators can grant expungements.  But, the proposed amendments call for other drastic changes, including increasing the cost for expungements, shortening the time period for requesting such relief, and requiring a unanimous decision by three arbitrators.  The changes include:

  1. An associated person who is named as a party in an underlying customer case must request expungement during the customer case.  The request must be made no later than 60 days before the first scheduled hearing session.
  2. In addition to the expungement request, the associated person will be required to pay a filing fee of $1,425 or the applicable filing fee provided in Rule 12900(a)(1), whichever is greater.
  3. If the underlying customer case in which the associated person is named closes by award on the merits, the originally-appointed arbitration panel must consider and decide the expungement request during the case.
  4. If the underlying customer case in which the associated person is named closes other than by award (but rather by settlement, voluntary dismissal, or otherwise), the associated person has one year from the date that FINRA closes the customer case to file an expungement request.
  5. The associated person will not be permitted to file a new expungement request against the customer.  Instead, the associated person will be required to name the firm at which he or she was associated at the time of the events giving rise to the customer dispute.
  6. An unnamed person will not be permitted to intervene in an underlying customer case.  A party to the underlying customer case (such as a member firm) can request expungement relief on behalf of the unnamed person but must do so no later than 60 days before the first scheduled hearing session.
  7. If a party to the underlying customer case requests expungement relief on behalf of an unnamed person and the case closes other than by award, FINRA will notify the unnamed person in writing that the case closed.  The associated person has one year from the date of FINRA’s notification to file an expungement request.
  8. If a party to the underlying customer case does not request expungement relief on behalf of the unnamed person, the person has one year from the date FINRA closes the customer case to file an expungement request.
  9. An expungement request will not be permitted in simplified arbitrations.  Instead, an associated person or unnamed person must wait until the conclusion of a customer’s simplified arbitration case to file an expungement request.
  10. For customer complaints that do not result in an arbitration claim, the associated person has one year from the date the member firm initially reported the customer complaint to CRD to file an expungement request.
  11. The associated person seeking expungement must appear at the expungement hearing, either in person or by videoconference, depending on the method permitted by the arbitration panel.  Appearance by telephone will no longer be an option.
  12. For all expungement requests, a three-person panel of arbitrators must unanimously agree expungement is appropriate under Rule 2080(b)(1) and find that the customer dispute information has no investor protection or regulatory value.  Note, however, in deciding the merits of the customer’s claims, a majority agreement of the panel will continue to be sufficient.
  13. The proposed amendments will establish a roster of arbitrators with additional training and specific background or experience, to be called the “Expungement Arbitrator Roster.”  A three-person panel will be randomly selected from the Expungement Arbitrator Roster by the Neutral List Selection System to decide requests for expungement cases.  These panels of rostered arbitrators will only be used if an expungement request is not decided during the underlying customer case.
  14. In order to be listed on the Expungement Arbitrator Roster, the public chairpersons will be required to have the following additional qualifications: (1) completed enhanced expungement training; (2) admitted to practice law in at least one jurisdiction; and (3) five years’ experience in any one of the following disciplines: (a) litigation; (b) federal or state securities regulation; (c) administrative law; (d) service as a securities regulator; or (e) service as a judge.

If you have any questions on any of these changes or how you can obtain an expungement before these changes go into effect, please contact any member of our Securities Group.

Keesal, Young & Logan Securities Group

This information has been prepared by Keesal, Young & Logan for informational purposes only and is not legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between you and Keesal, Young & Logan. You should not act upon this information without seeking professional counsel.

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