Rule 2130 Frequently Asked Questions

The following questions and answers provide guidance regarding the operation of Rule 2130. FINRA may provide additional guidance as it gains experience with the Rule.

 

1. What type of information can be expunged under Rule 2130?

 

Rule 2130 pertains to customer dispute information. This is typically information involving disputes between customers and member firms or their associated persons that has been reported on Forms U4 or U5 in response to the Customer Complaint/Arbitration/Civil Litigation Disclosure question(s) and associated disclosure reporting page(s). The requirements of Rule 2130 do not apply to information concerning intra-industry disputes between firms and associated persons with no customer party that typically has been reported on Form U5 in response to the Reason for Termination question or the Internal Review or Termination Disclosure questions and associated disclosure reporting page(s). Under existing CRD policy, and consistent with the 1999 moratorium, FINRA may execute, without a court order, arbitration awards rendered in disputes between firms and associated persons that contain directives to expunge information other than customer dispute information, provided that the arbitration panel states that expungement relief is being granted because of the defamatory nature of the information. See Notice to Members 99-09. These expungements are not covered by Rule 2130.

 

2. Under the moratorium in effect from January 19, 1999 through April 11, 2004 (Notice to Members 99-09), respondents were required to obtain court confirmation of an expungement. Is it still necessary under Rule 2130 to obtain court confirmation of an expungement?

 

Yes. Rule 2130 continues the requirement started with the January 1999 moratorium that a court of competent jurisdiction must order or confirm all expungement directives before FINRA will expunge customer dispute information from the CRD system. This includes arbitration awards issued after a decision on the merits and arbitration awards in which the parties have agreed to expunge customer dispute information as part of the settlement and then presented the settlement to the arbitration panel for inclusion in a stipulated award.

 

3. How do the requirements of Rule 2130 differ from the procedures used to request expungement under the moratorium?

 

As more fully described below, Rule 2130 requires the party seeking expungement to ask for expungement in his or her prayer for relief, either before an arbitration panel or the court. Arbitrators will determine whether to grant expungement on the basis of one or more of the standards in Rule 2130. The next step is to obtain a court order. Members and associated persons seeking a court order for expungement must name FINRA as an additional party and serve FINRA with all appropriate documents unless FINRA waives that requirement. To obtain FINRA's waiver, the party seeking expungement must send a waiver request, the arbitration award, and any other relevant documents (such as the settlement document and any related affidavits) to FINRA. FINRA staff will examine the basis on which the fact finder ordered expungement to determine whether the expungement was based on one or more of the standards in Rule 2130. FINRA will waive the obligation to be named as a party if FINRA determines that the expungement relief is based on an affirmative finding that the expungement meets one or more of the standards in the Rule. See Notice to Members 04-16.

 

4. What steps should a respondent in an arbitration proceeding take to seek expungement under Rule 2130?

 

In brief, a party seeking expungement, but no other relief, would include a request for expungement and the necessary affirmative findings in his or her answer. A party seeking monetary damages or any other form of relief would request expungement as part of his or her counterclaim. In either case, the arbitrators would then decide whether to grant expungement by determining whether the facts meet one or more of the standards in Rule 2130.

 

5. What affirmative finding(s) must arbitrators make for FINRA to determine not to oppose expungement relief in the court confirmation process?

 

The arbitrator must make an affirmative finding that the subject matter of the claim or the information in the CRD system meets one or more of the following three standards, as set forth in Rule 2130. Without such an affirmative finding, FINRA would have no basis under Rule 2130 to waive the requirement that it be named as a party in the court confirmation process.

 

(1) The claim, allegation, or information is factually impossible or clearly erroneous. This standard, for example, would provide a basis for expungement for an individual who was named in an arbitration claim but was not employed or associated with the member firm during the relevant time.

 

(2) The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. This is an objective standard based on CRD reporting requirements. This standard would require an affirmative arbitral finding that the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. Under this standard, dismissal of a claim, by itself, would not be a sufficient basis for ordering expungement.

 

(3) The claim, allegation, or information is false. Under this standard, the adjudicator will assess the evidence in the case, make an affirmative finding that the claim, allegation, or information is false, and order expungement relief. (The terms "sales practice violation," "investment-related," and "involved" as used in these three standards have the same meaning as the definitions of these terms in the Form U4 in effect at the time the expungement order is issued.) In addition, if the expungement relief is based on judicial or arbitral findings other than those described above, FINRA, in its sole discretion and under extraordinary circumstances, may waive the obligation to name FINRA as a party if it determines that:

 

(1) The expungement relief and accompanying findings on which it is based are meritorious; and

(2) The expungement would have no material adverse effect on investor protection, the integrity of the CRD system, or regulatory requirements.

 

6. Do the standards described above apply to court proceedings in addition to arbitrations?

 

Yes. Although persons who have been sued in court may seek expungement relief from the court, they will not be able to avail themselves of the Rule's waiver provision and will be required to name FINRA as a party. FINRA will determine whether to oppose the expungement based on the ground(s) on which the person is seeking the expungement.

 

7. If the arbitrators award expungement, what is the next step for the member or associated person seeking expungement?

 

If the award grants expungement, it should also state on what basis the expungement was granted. The party seeking expungement would then send the necessary documents (i.e., the waiver request and copies of the arbitration award containing the affirmative finding and, if a settlement is involved, copies of all settlement documents and any related affidavits) to FINRA at the following address:

 

Rule 2130 - Expungement Notice/Waiver Request
FINRA Registration and Disclosure Department - 2nd Floor
9509 Key West Ave.
Rockville, MD 20850

 

FINRA staff will review the waiver request and, provided the award contains an affirmative finding that expungement relief was granted on the basis of one or more of the standards identified in the Rule, FINRA will generally grant the waiver.

 

8. What happens after FINRA staff receives a request for a waiver?

 

Upon receipt of a request for a waiver, FINRA staff will notify the States where the individual is, or is seeking to be, registered of the expungement notice/waiver request. With respect to an arbitration proceeding, FINRA staff will examine the basis on which the fact finder ordered expungement to determine whether the expungement was based on at least one of the standards in Rule 2130 and to determine if granting a waiver is appropriate under the specific circumstances of the case. If FINRA staff determines that a waiver is appropriate under Rule 2130, it will advise the parties that FINRA is waiving the requirement to be named as a party in the court confirmation process. If FINRA staff determines that the expungement is not appropriate under Rule 2130, it will advise the parties that FINRA will not waive the requirement to be named as a party in the court confirmation process. If the party still wishes to proceed, he or she would then name FINRA as a party, and FINRA would appear in court to oppose the expungement. The court would then determine whether to order expungement. States that are notified by FINRA will make their own determination on whether to oppose the expungement.

 

If the party is seeking expungement as part of a court proceeding, FINRA must be named as a party and, based on the reasons given for requesting expungement, FINRA will determine whether to oppose.

 

9. What is the reason for FINRA, and possibly State, participation in court confirmation proceedings?

 

FINRA and State participation in the court confirmation proceeding is an additional safeguard to ensure that courts are aware of the standards of Rule 2130 and relevant regulatory and investor protection interests. There is currently no procedure in place to ensure that courts are made aware of the investor protection, public policy, and regulatory considerations implicated by expungement of customer dispute information. Although courts are not obligated to adhere to the standards enunciated in Rule 2130, the Rule gives FINRA and the States the opportunity to participate in the court confirmation process and make courts fully aware of investor protection and regulatory concerns relating to inappropriate expungements.

 

10. What is the role of arbitrators or other fact finders in the expungement process?

 

A critical element in this process is FINRA's reliance on the fact finders (i.e., arbitrators and courts) in deciding the underlying dispute to determine whether the expungement relief is based on at least one of the standards in Rule 2130. Fact finders are expected to carefully evaluate the evidence and award expungement relief only in appropriate cases. Under Rule 2130, FINRA will rely on arbitrators' findings and waive participation in the court confirmation process if arbitrators have awarded expungement based on one or more of the standards in the Rule. Arbitrators considering expungement relief will be required to complete training provided by FINRA Dispute Resolution regarding these standards and the requirement to make specific findings if they decide that expungement is appropriate.

 

11. If FINRA tells the party seeking expungement that FINRA must be named as a party in the court confirmation process, where should FINRA be served with the court papers?

 

FINRA should be served through Corporate Creations in the State in which the party is seeking expungement.

 

12. Will FINRA participate in every court proceeding to confirm an expungement directive?

 

No. As noted in response to Question No. 8 above, member firms and associated persons may ask FINRA to waive the requirement to name FINRA as a party on the basis that the expungement order meets at least one of the standards for expungement articulated in the Rule. This will save members and FINRA time and expense by enabling FINRA to review the findings of the arbitrators and determine to waive participation in the judicial proceeding if FINRA determines that a waiver is appropriate under Rule 2130.

 

Although FINRA expects that arbitrators will consider the overwhelming majority of expungement requests, a judge may also make the affirmative finding required under Rule 2130. However, as noted in response to Question No. 6 above, member firms or associated persons seeking expungement relief in court (as plaintiff or defendant) will be required to name FINRA as a party. FINRA will determine whether to oppose the expungement request based on the reason(s) for requesting expungement.

 

13. On what basis will FINRA determine to participate in a court confirmation proceeding to oppose an expungement directive?

 

FINRA will generally participate in the court confirmation proceeding and oppose confirmation of the expungement directive if the expungement order does not meet at least one of the specified standards. As a further means to ensure that the court is made aware of the investor protection and regulatory implications of an expungement, States may choose to intervene if they have concerns regarding whether investor protection or regulatory issues will be fairly considered.

 

14. What would happen procedurally if an arbitration panel orders the expungement of customer dispute information from a Form U5 on the basis that it is defamatory?

 

As noted in response to Question 1, consistent with the 1999 moratorium, FINRA may continue to expunge, without a court order, expungement directives contained in arbitration awards rendered in disputes between registered representatives and firms in which the arbitration panel states that expungement relief is being granted because of the defamatory nature of the information. Accordingly, FINRA will expunge this information from the "Termination Disclosure" and "Termination DRP" sections of the Form U5 without requiring court confirmation of the order. If, however, the arbitration panel orders expungement of this information from any other section of the Form U5 or from the Form U4, the order is subject to the requirements of Rule 2130 with respect to the additional expungement relief.

 

15. How does a respondent request expungement if the parties settle the arbitration?

 

In the event of settlement, the parties could jointly request a stipulated award from an arbitration panel that would include a request that the panel make affirmative findings and order expungement based on one or more of the standards in Rule 2130. The arbitrators would determine whether expungement should be granted. Note: The arbitrators may require the submission of documents or a brief evidentiary hearing to gather the information necessary to make such findings.

 

If the arbitrators decide to grant expungement relief, they will indicate the basis for the expungement relief in the award. The party seeking expungement would then send the necessary documents (i.e., the waiver request and copies of the arbitration award containing the affirmative finding and, if a settlement is involved, copies of all settlement documents and any related affidavits) to FINRA at the following address:

 

Rule 2130 - Expungement Notice/Waiver Request
FINRA Registration and Disclosure Department - 2nd Floor
9509 Key West Ave.
Rockville, MD 20850

 

16. How would parties obtain a court order if they reach a settlement outside of the arbitration process that includes an expungement directive?

 

The parties may initiate an arbitration (and pay applicable fees) for the limited purpose of incorporating their settlement and requesting the affirmative findings specified in Rule 2130 in an award. As noted in response to Question No. 5, the arbitrators would need to review sufficient evidence upon which to base their findings. In such cases, parties would still need to obtain a court order confirming the award directing expungement. Alternatively, if parties choose to commence litigation (in lieu of arbitration) to obtain expungement relief, they must name FINRA as a party.

 

17. How should parties proceed if they reach a settlement after the arbitrators issue a decision on the merits?

 

Parties may request the arbitrators to reopen their cases for the limited purpose of considering the expungement request; however, state law may not allow parties to reopen an arbitration, or may limit the time period in which parties may reopen their arbitrations. FINRA will not provide legal advice on applicable state law. Arbitrators retain the discretion to grant or deny a request to reopen a case.

 

18. How did FINRA determine the standards for expungement of customer dispute information?

 

In crafting the standards set forth in Rule 2130, FINRA was guided by the interests of regulators in having accurate and relevant information to fulfill their regulatory responsibilities, the interests of the brokerage community in having a fair process to protect their reputations where appropriate, and the interests of investors in having access to accurate and meaningful information about brokers with whom they now or in the future may engage in business. FINRA recognizes that expungement of a CRD record under any circumstances is an extraordinary remedy and should be used only when the expunged information has no meaningful regulatory or investor protection value. FINRA believes that the criteria enumerated in Rule 2130 meet this standard.