The FINRA Board of Governors (the “Board”’) met in mid-September to discuss rulemaking items and initiatives. Among other issues, the Board authorized FINRA to file with the SEC proposed amendments to FINRA Rules 12805 and 13805 (Expungement of Customer Dispute Information under Rule 2080), codifying best practices from the Expanded Expungement Guidance Document (previously issued as a notice in 2013).
The Expanded Expungement Guidance (“EEG”), a best practices tool for arbitrators, was published as a means to ensure that expungement occurs only pursuant to certain narrow grounds. To that end, the EEG states that expungement is an “extraordinary remedy,” and that customer dispute information should be expunged from the CRD system “only when it has no meaningful investor protection or regulatory value.” By codifying the EEG, the new proposed rule modifications will require arbitration panels to undertake more of an inquiry that in the past before granting an expungement request. Some of the key changes that will be codified include:
(i) requiring that panels receive copies of a BrokerCheck report when deciding an expungement request, and carefully review the report when considering whether expungement is appropriate;
(ii) obligating panels to include more details in their rational for recommending an expungement request;
(iii) requiring procedures ensuring that customer are on notice of, and have an opportunity to participate in, expungement hearings; and
(iv) requiring that panels deny any expungement request if the broker previously received an expungement in another arbitration.
While the overall goal of the proposed rule amendments is to strengthen the expungement regulatory framework, the result will likely be a more rigorous expungement process, more customer involvement and fewer expungements awarded. Nonetheless, the amendments reflect FINRA’s continuing aim to achieve a balance between transparency of prior issues customers should consider when engaging a broker, and providing brokers with a right to obtain expungement in very limited circumstances.