FINRA to File Rule Proposal Regarding Expungement for Unnamed Persons in Arbitration Claims

FINRA’s Board of Governors met recently and authorized FINRA to file with the SEC a total of five proposed rules covering a variety of topics. One of the authorized filings relates to the proposed new procedure for expunging the records of “unnamed persons” in customer-initiated arbitrations — registered persons who, although the “subject of” the allegations in the underlying case, are not named as respondents. If approved, the new rules, which were initially outlined in RN 12-18,¹ would permit unnamed persons to seek expungement of their CRD record through one of the following three avenues:

• Requesting, pursuant to proposed Rule 12805, that a party to the arbitration seek expungement on behalf of the unnamed person;
• Commencing an In re proceeding under proposed Rule 13807 at the conclusion of the arbitration; or
• At the conclusion of the arbitration, asking the panel to render a decision on expungement based on the record developed in the case.

According to the Board, the rule proposal will “provide unnamed persons with a remedy to seek redress concerning allegations that could impact their livelihoods,” but also will “maintain[] the protections of FINRA’s expungement rules to ensure the integrity of the CRD issues.”²  

The Board noted that the rule proposal takes into account the public comments on RN 12-18 provided to FINRA. Those comments focused largely on procedural aspects of the In re proceeding, primarily on the 180-day notice filing required by proposed Rule 13807(c) to be made by a registered person seeking expungement in an In re proceeding. While it remains to be seen whether and how the rule proposal addresses those concerns, it seems that FINRA intends to accede to the commenters’ request for a remedy to the apparent inequities that could result from requiring an unnamed person to seek expungement from a single, public-chair-qualified arbitrator in an In re proceeding. As noted above, the Board’s summary states that the proposal will include a provision that allows unnamed persons to seek, at the close of a hearing, expungement by asking the panel that heard the underlying case to grant the request based on the record developed at the hearing. No such reference appears in RN-18 or in the proposed rules cited therein. Thus, while the rule proposal is likely to retain the single, public-chair-arbitrator provision in the In re proceeding, it appears as if FINRA will provide unnamed persons with the seemingly more palatable option of seeking expungement from the full panel who, importantly, will have the benefit of having heard all of the relevant evidence in the case.

Although FINRA has yet to file the rule proposal with the SEC, it seems likely that in the very near future, unnamed persons that are the “subject of” claims in arbitration proceedings will have at their disposal several more reasonable options to consider pursuing in their efforts to expunge from their record what ultimately prove to be meritless accusations. 

It is worth noting, however, that the rule proposal does not cover individuals who must report written customer complaints that are not arbitrations, under Form U4 Question 14I(3) or Form U5 Question 7E(3).

*This alert was co-authored by Robert Buhlman, W. Hardy Callcott and Todd Beaton, Jr.

Contacts

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¹ For a more detailed discussion of RN-18 and the proposed rules discussed therein, please refer to our earlier alert, “FINRA Seeks Comment on Proposed ‘In Re Expungement Rule’ Applicable to Unnamed Parties in Arbitration  Proceedings,” available at http://www.bingham.com/Alerts/2012/04/FINRA-Seeks-Comment-on-Proposed-In-re-Expungement-Rule-Applicable-to-Unnamed-Parties (Apr. 16, 2012).

² See “Update: FINRA Board of Governors Meeting,” available at http://www.finra.org/Industry/Regulation/Guidance/CommunicationstoFirms/P197425 (Dec. 7, 2012).