RIA Compliance Blog
The Financial Industry Regulatory Authority (FINRA) has proposed a rule which would allow individuals who are not named as parties to a customer-initiated arbitration case to seek expungement relief by initiating “In re” expungement proceedings. Currently, unnamed persons do not have a prescribed way to seek these types of expungements, and must seek relief by:
- 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 respondent.
According to Regulatory Notice 12-8, “FINRA believes that the current options do not always adequately address a number of issues that can arise in connection with expungement requests.”
The proposed rule creates two different categories of representatives: 1) a representative who is named as a party to the arbitration; 2) a representative who is not a named party but is nevertheless someone whose conduct is the subject of the arbitration. This latter category is known as “unnamed persons,” even though their names may appear in the arbitration of the claim.
The proposed rule provides that an unnamed person can only seek expungement relief after the underlying customer arbitration has concluded. This rule will not apply if the unnamed person decides to pursue other claims in addition to expungement.
Under the proposed rule, after FINRA receives notice via Form U-4 that the unnamed person was the subject of a customer arbitration claim, FINRA notifies the unnamed person. The unnamed person would then have 180 days from the date FINRA sent the written notice to notify FINRA of his or her intent to file for expungement relief. This Notice of Intent is intended as a mechanism for the unnamed person to preserve the right to file an “In re” expungement claim in the future. After the arbitration case is concluded, FINRA would inform the unnamed person, and he or she would then have 60 days to file an “In re” claim with FINRA. FINRA believes it is reasonable to wait until the end of the customer arbitration because “it is unlikely that the arbitration panel could determine that expungement is appropriate without reaching a conclusion in the underlying case.”
At the time the unnamed person files a statement of claim, he or she is required to file an “In re” Submission Agreement. This agreement states that the person agrees to arbitrate the request for expungement relief in accordance with FINRA’s rules and procedures. The unnamed person is also required to pay a nonrefundable fee of $750 which includes one hearing session with an arbitrator.
The proposed rule has certain limitations regarding “In re” proceedings including:
- The unnamed person may not name the customer, firm or any other party as respondents;
- The unnamed person is only permitted to request expungement relief;
- The arbitrator may not award monetary damages or other relief besides expungement;
- The proceedings may commence only when the customer arbitration is concluded; and
- The unnamed person is excluded from seeking expungement relief by intervening in the arbitration filed by the customer.
An “In re” proceeding would not be used if the unnamed person decides to pursue claims in addition to expungement such as a defamation claim against the firm. One area of ambiguity in the proposed rule is that the limitations of the proposal seem to only pertain to “In re” proceedings. However, it appears to be FINRA’s intent that the limitations apply to all situations, including when an unnamed person does not file a Notice of Intent or an “In re” Submission Agreement.
This rule is not intended to apply to persons who are specifically named as a respondent in an investment-related customer initiated arbitration. Under the proposal, if individuals named wish to seek expungement, they must seek relief during the initial arbitration proceeding. Once the arbitration proceeding is complete, the named associated person cannot later seek expungement, either under the new proposed rule or in a separate arbitration proceeding.
FINRA is requesting comments on the proposed rule until May 21, 2012. Comments can be sent via email to pubcom@finra.org or mailed to Marcia E. Asquith, Office of the Corporate Secretary, FINRA, 1735 K Street NW, Washington DC 20006-1506.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.