The Expert's Examiner

January 12, 2023


We eschew repeating here the extensive history of the proposed rule. Instead, we recommend readers peruse two Alert blog posts: Institutional Comments, Mostly Supportive But with All Suggesting Further Modifications, on FINRA’s Proposed Expungement Changes. Individual Industry Commenters Uniformly Oppose the Rule (Sep. 14); and Expungement Update: FINRA Responds to Comments and Files an Amendment; SEC Seeks Comments on Changes and Disapproval (Nov. 23).

Proposed Changes
We reported in SAA 2022-41 (Nov. 10) that FINRA on November 10 responded to comments in a 35-page, 148 footnote letter. Although FINRA rejected most changes proposed by the commenters, it filed the same day a proposed amendment offering three significant changes. The SEC describes them as follows: “Amendment No. 1 would modify the proposed rule change in three ways. First, it would amend proposed Rules 12805(c)(3)(A) and 13805(c)(3)(A) to state that all customers whose customer arbitrations, civil litigations or customer complaints are a subject of the expungement request are entitled to attend and participate in all aspects of the prehearing conferences and the expungement hearing. Second, it would modify proposed Rules 12805(c)(8)(C) and13805(c)(9)(C) to state that a panel shall not give any evidentiary weight to a decision by a customer or an authorized representative not to attend or participate in an expungement hearing when making a determination of whether expungement is appropriate. Finally, Amendment No.1 would modify the proposed rule change to provide that an associated person shall not file a claim requesting expungement of customer dispute information from the CRD system if the customer dispute information is associated with a customer arbitration or civil litigation in which a panel or court of competent jurisdiction previously found the associated person liable.”

SEC Solicits Comments
We later reported in SAA 2022-44 (Nov. 24) that the Commission on November 10 noticed the proposed amendment, which was published November 16 in the Federal Register (Vol. 87, No. 220, P. 68779) along with an Order Instituting Proceedings to Determine Whether to Approve or Disapprove the Proposed Rule Change. Why the activity on possible disapproval? Says the Order: “The Commission is publishing this order pursuant to Section 19(b)(2)(B) of the Exchange Act to solicit comments on the proposed rule change, as modified by Amendment No.1, and to institute proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1…. The Commission is instituting proceedings to allow for additional analysis and input concerning whether the proposed rule change, as modified by Amendment No. 1, is consistent with the Exchange Act and the rules thereunder” (footnotes omitted). Comments on the amended rule and potential disproval were due December 7. Rebuttals were due by December 21.

Few Comments
As of the deadlines only a handful of comments were posted on the SEC’s Website. We analyze here the institutional comments received from NASAA, PIABA, and SIFMA. We describe them as falling into one of three categories: support fully; support but recommend improvements; and urge disapproval. Footnotes are omitted.

Support Fully
PIABA: “PIABA appreciates FINRA’s continued efforts to examine the expungement problem and attempt to find solutions to the issues PIABA members have previously identified. On September 7, 2022, in response to FINRA’s initial submission of the proposed expungement rules changes, PIABA filed a comment letter largely in support of FINRA’s efforts noting that ‘SR-2022-024 is a significant improvement over current FINRA rules and FINRA’s prior rule proposal concerning expungement, SR-2020-030.” FINRA has now refiled the proposed expungement rules changes, modified by Amendment No. 1, in response to comments made during the review period. FINRA has now refiled the proposed expungement rules changes, modified by Amendment No. 1, in response to comments made during the review period…. PIABA reiterates its support for SR-2022-024 as a significant improvement to existing FINRA rules and further supports the revisions contained in Amendment No. 1 as additional improvements to the existing expungement process.” The PIABA Foundation also submitted a supportive letter.

Support But Recommend Improvements
NASAA: “NASAA supports the first two planks of the proposed amendment and recommends an expansion of the third to further protect the integrity of information in the CRD system.” The letter headlines the proposed change as follows: “NASAA Recommends that the Third Proposed Change be Expanded to Prevent Associated Persons from Seeking Expungement of Customer Dispute Information That Is Made Part of Any Regulatory Finding.”

Urge Disapproval
SIFMA: “… SIFMA finds that the Proposal is not in fact consistent with the requirements of the Exchange Act and the rules thereunder and thus, should be either disapproved, or appropriately amended, by the Commission.” The comment letter explains that the proposal is inconsistent with the Exchange Act because (ed: numbers added by the Alert): 1) it improperly attempts to amend existing rules and strictly limit the grounds for granting expungement without providing adequate notice, opportunity for comment, or due process generally…. 2) it fails to provide any cost-benefit analysis, or other justification, to support limiting the grounds for granting expungement to those under Rule 2080(b)(1)…. Accordingly, the Proposal should be either disapproved, or otherwise amended to restore the status quo and continue to allow the Rule 2080(b)(2) grounds for granting expungement.”

(ed: *Next was the December 21 deadline for submitting rebuttals. Only one was received, from an individual. Thereafter, the SEC will act. **After all this effort, we can’t see the Commission disapproving the proposal. More likely, there will be approval with suggestion for further improvements.)