Thursday, May 31, 2012

NASAA Suggests Improvements to Expungement Process

NASAA recently offered suggestions to the Financial Industry Regulatory Authority (FINRA) on ways to improve the expungement process by providing a clear procedure for unnamed persons to seek expungements of customer dispute information from the Central Registration Depository (CRD). In a comment letter in response to FINRA Regulatory Notice 12-18, NASAA wrote that it is important to ensure that customers in underlying arbitration cases have notice of expungement requests and the opportunity to object. FINRA had requested comments on proposed new rules 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, to seek expungement relief by initiating "In re" proceedings at the conclusion of the arbitration.

NASAA encouraged FINRA to codify a procedure for mandatory customer notification of an unnamed person’s request for expungement. NASAA suggested that FINRA should send a notice to the complainant once the unnamed person has filed the submission agreement. The notice should explain that the unnamed person is seeking to expunge the reportable event and provide the customer-complainant with sufficient information to appear and object if the complainant wishes to do so. Complainants should have at least 30 days to object to the expungement request, and no presumptions should be made or conclusions drawn based on a customer’s absence from a hearing.

Additionally, NASAA believes that the issue of whether or not a customer complaint should be deleted from an associated person’s CRD record is of such importance that it should be fully considered by a panel of arbitrators who are familiar with the underlying case. Furthermore, NASAA believes that whether a person seeking expungement was a named party or remained unnamed should not determine the number of arbitrators making the decision to expunge a person’s record. In NASAA’s view, the proceeding should be considered a part of the arbitration process, even if procedurally it occurs after the customer’s case in chief has been concluded. Accordingly, the standard option for In re proceedings should be a hearing by the entire panel that heard the underlying case.

NASAA observed that, under proposed Rule 13807(h), FINRA would appoint a single public arbitrator who was the public chairperson of the panel, if willing and available. NASAA believes, however, that it is in the public interest and the interest of the unnamed party that the arbitrators most familiar with the intricacies of the dispute be charged with deciding the appropriateness of expungement. If the full panel is unavailable to hear the case, NASAA suggested that the next option would be for the other remaining panel members to be appointed to hear the In re expungement proceeding. Although understanding that the entire panel may always not be willing or available to serve in the In re expungement proceeding, NASAA believes that such instances should be minimal if FINRA makes it clear to the panel at the onset of the arbitration that it may be called on to address an expungement request after the customer’s case in chief has been concluded.

If FINRA requires the original panel to hear the In re expungement, NASAA recommended that FINRA Rule 12213, which requires consideration of the customer’s location when choosing a hearing location, also apply to In re proceedings. If, however, FINRA does not require the original panel to determine the In re hearing outcome, NASAA urged that additional procedures be put into place to consider the customer’s location when choosing the hearing location and that these procedures reflect FINRA Rule 12213.

NASAA wrote that it is important that FINRA clarify that all provisions of Rule 2080, which contains the standards and procedures for expungement of customer dispute information from the CRD, will apply to the new In re expungement proceedings. NASAA believes that these provisions provide safeguard procedures that serve to uphold the integrity of the CRD system and strengthen investor protection by providing an accurate record of an associated person’s customer dispute history.

Finally, NASAA urged FINRA to use this opportunity to take two additional steps to further improve the expungement process. First, NASAA urged FINRA to provide additional guidance to arbitrators by clarifying that a decision to deny relief to customers is not a sufficient reason to grant an expungement request. As one of the grounds for granting expungement is a finding that the claim is “false," NASAA suggested that arbitrators should be reminded that a decision in favor of the associated person does not equate to a finding that the claim is false. Second, NASAA suggested that FINRA codify a process whereby state regulators who may want to object to expungement are provided notice, even when FINRA intends to grant a waiver request. NASAA stated that FINRA and the states have differing statutory requirements for registration and licensing of associated persons and disclosure of arbitration proceedings in public records. Therefore, NASAA urges that states be notified regarding court confirmation proceedings involving expungements, even when FINRA waives its role as a party.

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