B-D Corner: FINRA Proposes Simplified Expungement for Reps Not Named in Arbitration

FINRA announced this week it is requesting comment on proposed express procedures that would permit registered representatives who are the “subject of” allegations of sales practice violations made in arbitration claims (but are not named as actual parties to the arbitration) to seek expungement. So-called “subject of” allegations are reported to FINRA’s Central Registration Depository (“CRD”) system on Forms U4 and U5 in the same way that customer complaints are reported.

Under FINRA’s current code, these “unnamed persons” have three arduous options to have this information expunged from their CRD records:

  • asking their current or former firm that is a party to the arbitration to request expungement on their behalf;
  • seeking to intervene in the arbitration filed by the customer; or
  • initiating a new arbitration case in which the unnamed person requests expungement relief and names the customer or firm as the respondent.

The Regulatory Notice summarizes the difficulties with these options: In many cases: (1) it is unfair to the unnamed person to rely on the current or former firm to request expungement because their interest are not aligned; (2) intervening in the arbitration could unnecessarily expose the unnamed person to liability; and (3) requiring a new arbitration case naming the customer or the firm as respondent results in additional unnecessary expense to the customer or firm.

The proposed rules provide a streamlined option for unnamed persons to seek expungement. Under the proposal, FINRA notifies the unnamed person in writing when a member firm reports to the CRD system that the rep is the subject of the arbitration (though not named) and provides the rep with a copy of the statement of the claim. If the representative wishes to seek expungment she must submit a signed “Notice of Intent to File” form within 180 days. Once the underlying claim has concluded the representative  is again notified by FINRA and has 60 days to file an “In re” statement of claim seeking expungement, as well as a Submission Agreement and nonrefundable fee of $750. The expungement would then proceed before a single public arbitrator (from the underlying action if possible) with limited discovery in the arbitrator’s discretion. Once the proceeding is concluded, the unnamed representative would then petition for a court order directing expungment (and naming FINRA) or confirming the arbitration award pursuant to Rule 2080.

The comment period for the proposed rule expires May 21, 2012. For additional information about the proposal please contact Sarah Weber at sarah.weber@jackolg.com or (619)298-2880.


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