Expungement under FINRA’s Rules: Notice to Arbitrators Relating to Expungement

By Dylan Donley, Spring 2014 Graduate Research Assistant

Last week, we discussed some of the reasons why expungements are being granted. This week, our focus is on FINRA’s response to PIABA’s findings. After the PIABA Expungement study was published, on October 16, 2013, FINRA released a statement indicating the next steps it would be taking in order to resolve the concerns raised about the prevalence of expungement relief being granted.

Specifically, FINRA released its “Notice to Arbitrators and Parties on Expanded Expungement Guidance” in order to “assist arbitrators in the proper performance of their responsibilities with respect to expungement.” FINRA has also stated that it was working to enhance its arbitrator training to add emphasis on the importance of the integrity of the information in the CRD system, which is reflected in the Notice to Arbitrators and Parties on Expanded Expungement Guidance.

The Notice, available on FINRA’s website, targets many of the issues raised by the PIABA study, such as emphasizing the “extraordinary nature” of the relief, describing the role of arbitrators in expungement cases, explaining what inquiries the arbitrators should be making and what information the arbitrators should be asking for in expungement hearings, as well as emphasizing the importance of having the arbitrators provide an explanation for the decision to grant expungement in a given case.

Relating to the “extraordinary nature” of expungement relief, FINRA states affirmatively that expungement should only be granted when “it has no meaningful investor protection or regulatory value,” because “[o]nce information is expunged from the CRD system, it is permanently deleted and thus no longer available to the investing public, regulators or prospective broker-dealer employers,” stressing the importance of ensuring expungement relief is not granted in every case in order to protect the regulators, employers, and the general investing public.

FINRA provides additional guidance on the role of arbitrators in expungement cases, stating that arbitrators have the responsibility of determining whether to grant a request to expunge information from a broker’s CRD record. In making such a determination, FINRA states that the arbitrator should take into consideration the importance of “maintaining the integrity of the information in the CRD system” because the records are of critical importance to investors when they make decisions about who to trust to handle their investments, to regulators who use the CRD system to fulfill their regulatory responsibilities, and to prospective broker-dealers in making employment decisions.

Because the arbitrators do have such a significant role in expungement cases, FINRA provides a non-exhaustive list of the types of inquiries arbitrators should be making while determining whether it is appropriate to grant expungement relief in a given case:

(1) request any documentary or other evidence believed to be relevant to the expungement request (particularly where the cases settle before an evidentiary hearing occurs or where the requesting party is the only party participating in the hearing);

(2) request a current copy of the BrokerCheck report from the broker seeking expungement; and

(3) where the investor does not participate in the expungement hearing or where the requesting party states the investor has indicated he or she would not oppose the expungement request, inquire and fully consider whether a party conditioned settlement of the arbitration upon an agreement not to oppose expungement relief.

In recent months, FINRA has gone even further. Be sure to check in next week when we discuss FINRA’s proposed rule changes relating to expungement.