On the last day for SEC review of FINRA’s latest proposal for improving the expungement process, the Authority temporarily withdraws the rule filing.
In SAA 2021-20 (May 27) we provided above an extensive review of this long-running rule proposal -- SR-FINRA-2020-030 -- which has its origins in the Dispute Resolution Task Force and its Final Report and Recommendations. We won’t repeat here our exhaustive review, but we move right to this proposed rule’s status.
FINRA Posts a “Temporary Withdrawal”
May 28 brought a Press Release, FINRA Statement on Temporary Withdrawal of Specialized Arbitrator Roster Rule Filing, announcing: “Following consultations with the SEC staff, we temporarily withdrew from SEC consideration our rule filing establishing specialized arbitration panels for expungement requests so that we can further consider whether modifications to the filing are appropriate.” The two-page regulatory filing provides no further insights. As for what’s next, FINRA states that it: “remains committed to working with the SEC and other stakeholders who share a common interest in revising the process for reviewing the information on a broker’s record in the Central Record Depository (CRD®).”
New Webpage on Expungement
Included in the Release is a link to a new dedicated Webpage, Expungement of Customer Dispute Information, that provides an exhaustive review of the contentious expungement issue. This link and chart-rich page has these main sections: How it Works; Recent Key Rule Filings; and Expungement Initiatives Chronology. The page offers refutations of past criticisms, or puts them in perspective.
Chart to Illustrate the Point: Scope of Expungements
FINRA also provides charts and graphics to illustrate key points. The pie chart below shows that: “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.”
Chart to Illustrate the Point: Impact of Fee Increase
Another chart demonstrates that expungement requests plummeted after the September 14, 2020, effective date of a rule change amending 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).”
(Source: FINRA. Both charts published with FINRA’s permission, and bear a legend noting: “*FINRA is working to provide additional data and analysis regarding expungements.”
What’s Next?
FINRA will keep working with constituent groups to improve the proposal, which we imagine will include PIABA, NASAA, and SIFMA, and then go back to the NAMC, FINRA Board, and SEC. The “temporary” nature of the withdrawal is a clear signal to us that in some iteration, this proposal will be back. Such an approach is not unprecedented. In 2008 FINRA withdrew its 2005 explained award rule filing, and ultimately replaced it with current Rule 12904(g). See our blog post, Explained Arbitration Awards and Goldilocks and the Three Bears – Is the Third Try Just Right? (June 9, 2016).
(ed: *We said in SAA 2021-20 (May 27): “Where this leads remains to be seen.” Now, we know. **We see this as evidence that the 19b process worked: the rule was filed and published; comments from a wide swath of constituents pointed out areas needing improvement; and FINRA pulled back to regroup and consider changes. ***This Squib was published as a special blog post on June 1. ****As our publisher and Editor-in-Chief said recently: ““This is a monumentally important rule, so going back to the drawing board was a better option. Better right than rushed.”)
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