Expungement of Customer Dispute Information

Expungement, as an extraordinary remedy, should be recommended only in circumstances in accordance with FINRA rules to remove clearly inaccurate customer dispute information from the record of an individual broker that is associated with a broker-dealer firm. These records are part of the Central Registration Depository (CRD^®) system, which is the source of the information provided to the public through BrokerCheck^®—a free tool to provide investors with information regarding a broker’s employment history, regulatory actions, investment-related licensing information, arbitrations and complaints.

BrokerCheck is an important tool for investors seeking information about the broker-dealer firms and brokers with which the investor may conduct business. In addition, FINRA and its fellow regulators depend on the CRD system as a critical source of regulatory information to help inform examinations, investigations, and disciplinary actions to protect investors and safeguard markets.

There are broad and inclusive reporting requirements for broker-customer disputes. Information about broker-customer disputes must be reported to the CRD system regardless of whether the firm or the broker believes the allegations are false, irrelevant or malicious. There is no proof required before these disputes are reported. In addition, there is no regulatory review of the merits of a reported dispute before it is recorded in the CRD system or disclosed through BrokerCheck.

The expungement framework seeks to balance the important benefits of disclosing information about customer disputes to investors and regulators with the goal of protecting brokers from the publication of inaccurate allegations against them. FINRA is committed to ensuring that investors and regulators have the information they need regarding brokers doing business with the public. We continue to work to balance the important investor protection objectives of the CRD system and BrokerCheck with the interests of brokers and firms in the fairness and accuracy of the disclosures contained in those systems, including through our ongoing work to improve the expungement framework.

 

How it Works

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Customer dispute information is expunged from CRD only after FINRA receives a court order to execute the expungement. In general, court orders compelling FINRA to expunge customer dispute information may result from one of two separate procedures:

• A firm or a broker may initiate a request for such expungement in the arbitration forum administered by FINRA, often as part of adjudicating the dispute underlying the customer complaint. In this scenario, a panel of independent arbitrators decide whether to recommend expungement in the award. FINRA has no part in the decision. Even if the arbitration panel recommends expungement, the firm or broker must still obtain an order from a court of competent jurisdiction confirming the arbitration award, and then serve the confirmed award on FINRA. 

• A firm or a broker seeking expungement may initiate a proceeding directly in a court of competent jurisdiction, without first going through any arbitration proceeding.

A court order confirming an arbitration award recommending expungement or compelling expungement would be binding on FINRA.

FINRA may oppose requests that a court confirm an arbitration award for expungement or requests for expungement initiated directly in court if FINRA determines that such expungement is not consistent with FINRA rules.

Of the approximately 35,000 customer dispute information disclosures in the CRD system entered between 2015-2020, approximately 1,550 or 4% have been expunged pursuant to a court order as of May 25, 2021. 

* FINRA is working to provide additional data and analysis regarding expungements.

During this same time period, there were, on average, 632,500 brokers registered with FINRA about whom a customer dispute could have been reported in the CRD system. 

* FINRA is working to provide additional data and analysis regarding expungements.

Recent Key Rule Filings

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FINRA Amends Arbitration Codes to Apply Minimum Fees to Expungement Requests

Effective September 14, 2020, FINRA amended the Codes to apply minimum fees to requests for expungement of customer dispute information, whether the request is made as part of the customer arbitration or the broker files an expungement request in a separate arbitration (straight-in request).

FINRA amended the Codes due to concerns about practices to avoid fees applicable to expungement requests, particularly straight-in requests. For example, brokers filing straight-in requests were often adding a small monetary claim (typically, one dollar) to the expungement request to reduce the fees assessed against the broker and qualify for an arbitration heard by a single arbitrator. As a result of the amendment, parties requesting expungement can no longer avoid the fees intended for such requests under the Codes or automatically qualify for a single arbitrator to review their request. The amendments also apply a minimum process fee and member surcharge to straight-in requests, as well as a minimum hearing session fee to expungement-only hearings.

Just prior to the effective date of this amendment, there was a material increase in the number of straight-in requests. Following the effective date, the number of straight-in requests has decreased significantly:

* FINRA is working to provide additional data and analysis regarding expungements.

Proposed Amendments to Establish a Roster of Specialized Arbitrators to Review Expungement Requests

The FINRA Dispute Resolution Task Force recommended in its Final Report and Recommendations that an arbitration panel consisting of specially trained arbitrators decide proceedings where brokers seek to expunge customer dispute information separately from the arbitration of the underlying dispute – i.e., when brokers file straight-in requests. These requests typically do not involve the customer that had the dispute, and can occur years after the dispute was arbitrated or reported to the CRD system, resulting in the panel receiving information only from the broker requesting expungement. FINRA research has shown that when arbitrators hear the full merits of the case and customers participate, the expungement recommendation rate is much lower than in straight-in requests if customers do not participate. 

In response to the Task Force recommendation, as well to address other concerns that FINRA and stakeholders have with the current expungement process, FINRA filed with the SEC proposed changes to FINRA rules to make several significant enhancements to the current expungement process. These proposed changes adopt the recommendation of the Task Force and provide additional safeguards for ensuring that information in the CRD system and disclosed through BrokerCheck is accurate and complete.

Key proposed changes to the current expungement process include:

• Imposing strict time limits within which brokers may request expungement, which would prevent brokers from requesting expungement many years – sometimes as many as 15 or 20 years – after customer dispute information was reported to the CRD system or bundling together multiple aged disputes into one expungement request.
• Requiring that all straight-in requests be decided by a three-person panel, randomly selected from a roster of experienced public arbitrators, with no significant ties to the industry and with enhanced expungement training (Special Arbitrator Roster).
• Prohibiting the parties to a straight-in request from agreeing to fewer than three arbitrators to review their expungement requests, striking any of the selected arbitrators, stipulating to an arbitrator’s removal or stipulating to the use of pre-selected arbitrators.
• Requiring that the arbitrators agree to the enhanced expungement training to be included on the Special Arbitrator Roster.

Other important changes include:

• Requiring a broker named in a customer arbitration to request expungement during the customer arbitration or forfeit the ability to request expungement of that same information in any subsequent proceeding, ensuring that a panel that hears the full merits of a customer arbitration also reviews the expungement request.
• No longer allowing a broker who withdraws an expungement request to re-file the same request at a later date, thereby preventing “arbitrator shopping.”
• Explicitly providing that a broker cannot request expungement of customer dispute information if a panel or court previously denied a request to expunge the same customer dispute information.
• Requiring that a broker requesting expungement appear personally at the expungement hearing.
• Facilitating customer participation in straight-in requests by notifying customers of the time, date and place of any prehearing conferences and the expungement hearing, and making clear that customers are entitled to appear at prehearing conferences and the expungement hearing (including providing testimony).
• Providing customers who seek to participate in straight-in requests with access to all documents filed in the arbitration that are relevant to the expungement request.
• Specifically authorizing the panel to request any documentary, testimonial or other evidence that it deems relevant to the expungement request from member firms and the broker seeking expungement.
• Specifying conditions and limitations around when and how a named party from a customer arbitration may request expungement during the customer arbitration on-behalf-of an unnamed person to prevent unnamed persons from getting “two bites at the apple” by re-filing the expungement request at a later date by claiming that they were not aware of the expungement request during the customer arbitration.
• Providing state securities regulators with notification of all properly filed expungement requests.

Status of Special Roster Rule Filing

• December 2017 – FINRA published Regulatory Notice 17-42 seeking comment on a proposal that, among other things, would establish a roster of arbitrators with additional training and specific backgrounds or experience from which a panel would be randomly selected to decide a broker's request for expungement of customer dispute information. The arbitrators from this roster would decide expungement requests where the underlying customer-initiated arbitration is not resolved on the merits or the broker files a separate claim requesting expungement of customer dispute information. In addition, the Notice sought comment on additional enhancements to the current expungement process that would apply to all expungement requests.

• February 2020 – FINRA submitted a draft rule filing to SEC staff proposing amendments to the Codes of Arbitration Procedure Relating to Requests to Expunge Customer Dispute Information, Including Creating a Special Arbitrator Roster to Decide Certain Expungement Requests (Special Roster Rule Filing).

• September 2020 – FINRA filed with the SEC the Special Roster Rule Filing.

• October 2020 – SEC published for comment in the Federal Register the Special Roster Rule Filing.

• November 2020 – FINRA filed a letter with the SEC extending the time for SEC action on the Special Roster Rule Filing to December 30, 2020.

• December 2020 – FINRA filed with the SEC its first response to comments, and Amendment No. 1, on the Special Roster Rule Filing.

• December 2020 – SEC published for comment in the Federal Register its Notice of Filing of Amendment No. 1 and Order Instituting Proceedings to Determine Whether to Approve or Disapprove the Special Roster Rule Filing.

• March 2021 – At the request of SEC staff, FINRA filed a letter with the SEC extending the time for SEC action on the Special Roster Rule Filing to May 28, 2020.

• April 2021 – FINRA filed with the SEC its second response to comments, and Amendment No. 2, on the Special Roster Rule Filing.

• May 2021 – At the request of SEC staff, FINRA filed a third response to comments on the Special Roster Rule Filing. 

 

Expungement Initiatives Chronology

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FINRA first adopted a rule governing expungement in 2003. FINRA Rule 2080 sets forth the criteria applicable to the expungement of customer dispute information from the CRD system. Rule 2080 codified FINRA’s practice of only expunging customer dispute information from the CRD system if a court of competent jurisdiction ordered expungement or confirmed an arbitration award recommending expungement. Since the adoption of Rule 2080, FINRA has continued to work on several initiatives to improve the expungement process.

Key Milestones in Expungement:

• December 2003 – NASD adopted new Rule 2130 (now FINRA Rule 2080) to govern expungements. The new rule applied to all requests to expunge customer dispute information from the CRD system filed in arbitration on or after April 12, 2004. The rule was developed in close consultation with the North American Securities Administrators Association (“NASAA”) and state regulators. Among other things, the rule requires: (i) members or brokers seeking to expunge from the CRD system information arising from disputes with customers to obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing an expungement award and (ii) members or brokers petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief to name FINRA as an additional party and serve FINRA with all appropriate documents unless FINRA waives being named.
• November 2008 – FINRA adopted new Rules 12805 and 13805 governing arbitrators’ consideration of expungement requests. Specifically, the rules require arbitrators to hold a recorded hearing session and to review settlement documents and the amount of payments made to any party before recommending expungement relief and to provide transparency in the award by indicating which of the grounds in FINRA Rule 2080(b)(1) are the basis for their expungement recommendation.
• May 2009 – FINRA amended Forms U4 and U5 as well as FINRA Rule 8312 to change the disclosure questions on the Forms, including adding new questions that require firms to report allegations of sales practice violations made by customers against a broker in an arbitration or litigation in which the broker is not a named party in the arbitration or litigation. This change resulted in a sharp increase in the number of expungement requests.
• April 2012 – FINRA published Regulatory Notice 12-18 requesting comment on a proposal that would permit persons who are the "subject of" allegations of sales practice violations made in arbitration claims, but who are not named as parties to the arbitration (unnamed persons), to seek expungement relief by initiating In re expungement proceedings at the conclusion of the underlying customer-initiated arbitration case. This was the first in a series of initiatives FINRA began to consider to address concerns with the number of expungement requests recommended after the underlying customer arbitration case settles.
• October 2013 – FINRA published the Notice to Arbitrators and Parties on Expanded Expungement Guidance (“Guidance”) to address concerns that arbitrators may not be considering all relevant factors in determining whether to recommend expungement relief after the underlying customer arbitration case settles. The Guidance: (i) advises arbitrators to consider the importance of CRD information to regulators, firms, and investors (through BrokerCheck) when considering requests for expungement; (ii) recommends that arbitrators identify in the award the specific evidence that they relied upon when recommending expungement; (iii) encourages arbitrators to ask the broker requesting expungement to provide a current copy of his or her BrokerCheck report when determining the appropriateness of expungement; and (iv) encourages arbitrators to request documentary or other evidence they believe is relevant to the expungement request.
  • In December 2014, the Guidance was amended to remind arbitrators of the importance of customer and counsel participation in expungement hearings.
  • In September 2015, the Guidance was further amended to make clear that when an arbitration panel has issued an award denying a broker’s expungement request, the broker may not request expungement in another arbitration case.
  • In September 2017, the Guidance was further amended to state 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.
• July 2014 – FINRA adopted new Rule 2081 prohibiting conditioned settlements. The rule prohibits firms and brokers from conditioning or seeking to condition settlements of customer disputes on, or otherwise compensating customers for, an agreement to consent to, or not to oppose, a request to expunge customer dispute information from the CRD system.

• December 2017 – FINRA published Regulatory Notice 17-42 seeking comment on a proposal that, among other things, would establish a roster of arbitrators with additional training and specific backgrounds or experience from which a panel would be randomly selected to decide a broker's request for expungement of customer dispute information. The arbitrators from this roster would decide expungement requests where the underlying customer-initiated arbitration is not resolved on the merits or the broker files a separate claim requesting expungement of customer dispute information. In addition, the Notice requested comment on additional enhancements to the current expungement process that would apply to all expungement requests.
• November 2019 – FINRA published an FAQ on Prohibited Conditions Relating to Expungement of Customer Dispute Information stating that FINRA Rule 2081 does not apply only to settlements; a violation of the rule does not depend on if money or other consideration is provided to the customer; and an agreement reached at any time to release the customer from claims in exchange for the customer’s agreement to consent to, or not to oppose, an expungement request violates the rule.
• July 2020 – FINRA amended its Codes of Arbitration Procedure for Customer and Industry Disputes to apply minimum fees to requests for expungement of customer dispute information, whether the request is made as part of the customer arbitration or the broker files an expungement request in a separate arbitration (straight-in request). The amendments also apply a minimum process fee and member surcharge to straight-in requests, as well as a minimum hearing session fee to expungement-only hearings.
• September 2020 – FINRA filed with the SEC proposed amendments to the Codes of Arbitration Procedure Relating to Requests to Expunge Customer Dispute Information, Including Creating a Special Arbitrator Roster to Decide Certain Expungement Requests.
• April 2022 - FINRA issued Discussion Paper - Expungement of Customer Dispute Information.
• July 2022 - FINRA filed with the SEC proposed amendments to the Codes of Arbitration Procedure to modify the current process relating to the expungement of customer dispute information.