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SEC Approves FINRA’s Request to Alter Expungement Requirements

The Securities and Exchange Commission approved the modification of a FINRA rule that alters “straight-in expungement” requests, making expungements more difficult.

“FINRA is concerned… that the current expungement process is not working as intended—as a remedy that is appropriate only in limited circumstances in accordance with the narrow standards in FINRA rules,” reported FINRA in August 2022 when it promulgated the new rule.

In May 2021, a Public Investors Advocate Bar Association study outlined that FINRA arbitrators grant 90% of expungement requests.

Prior to changing the rule, straight-in expungements could be requested by a registered representative against their current or prior firm without notifying the client or state regulators.

The new modification was originally requested by FINRA in August 2022 and will set requirements on expungement requests either filed during an investment-related, customer-initiated arbitration by an associated person, or by a party to the customer.

For instance, state regulators and clients would be informed of an expungement request. Registered reps will also have to appear in person or by video conference at the expungement hearing and the new rule eliminates phone-based appearances. Reps will no longer be able to file a straight-in expungement request more than three years after the date the customer complaint was initially reported.

FINRA says the new rule will also establish a roster of experienced public arbitrators from which a three-person panel will be randomly selected to decide straight-in.

According to FINRA, the new rule will establish procedural requirements for expungement hearings and codify and update FINRA’s notice to arbitrators and parties on expanded expungement guidance that they would be required to follow.

In addition, the new rule change will amend the customer code to specify procedures for requesting expungement of customer dispute information arising from simplified arbitrations.

The rule change will also amend the codes to establish requirements for notifying state securities regulators and customers of expungement requests and allow participation of state securities regulators in straight-in requests.

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