The FINRA Board of Governors met last week to discuss a number of issues, including several rulemaking items. A summary of one of the more pertinent rulemaking items is included below:
Expungement for Unnamed Persons in Arbitration Claims
The Board authorized FINRA to file a proposal with the SEC that establishes three different procedures that would permit registered persons who are identified for alleged sales practice violations in an arbitration claim, but are not named as parties in that claim (unnamed persons), to seek expungement relief. The unnamed person could seek relief under Rule 12805 by asking a party to the customer-initiated arbitration in writing to seek expungement on his or her behalf. Alternatively, the registered person could initiate In re proceedings under new Rule 13807 at the conclusion of the underlying customer-initiated arbitration case. Finally, the unnamed person could seek expungement relief at the conclusion of the customer’s case by asking the panel for an expungement based on the record compiled in the underlying case. The proposal incorporates many of the comments and suggestions received on Regulatory Notice 12-18, as well as feedback from several FINRA committees. FINRA believes that these proposals provide unnamed persons with a remedy to seek redress concerning allegations that could impact their livelihoods, yet maintains the protections of FINRA’s expungement rules to ensure the integrity of the CRD records.
The authorization to file a proposal with the SEC is interesting and important news for associated persons who are mentioned in but not named as parties to an arbitration. If ultimately approved, this will permit these individuals to seek expungement relief by the three methods mentioned above. Currently, allegations mentioning an associated person must be reported in the same way that customer complaints are reported—to the Central Registration Depository system on Forms U4 or U5. The Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes do not presently provide unnamed persons with express procedures to seek expungement of these types of allegations.