On December 21, 2018, FINRA issued a News Release and accompanying video summarizing FINRA’s Board of Governors meeting on December 12-13, 2018 at FINRA’s New York offices, during which the Board approved two rule proposals related to the dispute resolution forum. See FINRA News Release here.
The first rule proposal the Board adopted, which will include filing with the SEC proposed amendments to the Codes or Arbitration and Mediation Procedure, prohibits compensated non-attorney representatives from practicing in the arbitration and mediation forums.
The second rule proposal the Board adopted includes proposed amendments to the Codes of Arbitration Procedure for Customer and Industry Disputes to codify the Notice to Arbitrators and Parties on Expanded Expungement Guidance (the “Notice”) and to modify fees for small claim expungement. By way of background, FINRA originally released the Notice in June 2014, That Notice contained a significant number of new procedures and considerations for arbitrators when weighing expungement requests. The Notice noted the “extraordinary” nature of expungement, and clarified that “customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.” It also stated that arbitrators should consider additional factors when weighing expungement, including reviewing BrokerCheck Reports, considering a broker’s contribution to any settlement and analyzing whether the settlement was conditioned upon non-opposition to expungement.
FINRA released an update to the Notice in September 2015 and again in September 2017, which restated the previous guidance, but also addressed requests for expungement prior to the conclusion of an underlying arbitration. FINRA stated in clear terms that a broker may not file a request for expungement of customer dispute information arising from an underlying customer arbitration until the underlying customer arbitration has concluded. Toward this end, the Notice stated that the Director will deny the FINRA forum as to the second expungement-only case to ensure that the underlying customer arbitration is resolved before any subsequent request to expunge that customer dispute is considered. For more details on the September 2017 Notice, see my Securities Law Alert here.
The proposed amendment prohibiting compensated non-attorney representatives from appearing in the practicing in the FINRA forum is anticipated to achieve FINRA’s objective of greater investor protection by barring potentially unqualified representatives who are not subject to ethical and professional conduct rules and preventing them from potentially taking advantage of vulnerable investors unable to secure legal representation.
The proposed codification of the Notice, apart from increasing the fees for small claim expungement, is unlikely to have any significant practical impact on the expungement process. That is because although the Notice was released as additional guidance to arbitrators, FINRA has interpreted the Notice as a de facto expungement rule for the last several years. FINRA has instructed arbitrators to require the implementation of the various factors contained in the Notice before issuing an expungement Award, including requiring notice to the underlying customers, reviewing settlement agreements, reviewing BrokerCheck Reports and requiring the broker to affirm that he/she has not previously requested expungement of the disclosure at issue. That being said, the proposed codification of certain language contained in the Notice, including the “extraordinary” nature of expungement relief and requirement that complaints be expunged only where they have “no meaningful investor protection or regulatory value,” may prove significant and serve to heighten the standards for expungement relief, beyond the existing requirements under FINRA Rule 2080.
Importantly, the proposed codification of the Notice is unrelated to and does not seek to incorporate the proposed rule changes contained in FINRA Regulatory Notice 17-42, which is FINRA’s most far-reaching and expansive proposed codification of the expungement process for customer dispute information since 2012. FINRA Regulatory Notice 17-42, issued in December 2017, proposed numerous substantive, procedural and economic changes to the expungement process that, if codified, would increase the burden for associated persons and FINRA member firms. For more details on FINRA Regulatory Notice 17-42, see my Securities Law Alert here.