Document ID: SEC-2008-0508-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-04-03T04:00Z

[Federal Register: April 3, 2008 (Volume 73, Number 65)]
[Notices]               
[Page 18308-18310]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03ap08-92]                         

[[Page 18308]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57572; File No. SR-FINRA-2008-010]

 
Self-Regulatory Organizations: Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Amendments to the Codes of Arbitration Procedure To Establish New 
Procedures for Arbitrators To Follow When Considering Requests for 
Expungement Relief

March 27, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 13, 2008, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing Rule 12805 of the Code of Arbitration Procedure 
for Customer Disputes (``Customer Code'') and Rule 13805 of the Code of 
Arbitration Procedure for Industry Disputes (``Industry Code'') to 
establish new procedures that arbitrators must follow when considering 
requests for expungement relief under Rule 2130.
    Below is the text of the proposed rule change. All the text is new.
* * * * *
12805. Expungement of Customer Dispute Information Under Rule 2130
    In order to grant expungement of customer dispute information under 
Rule 2130, the panel must:
    (a) Hold a recorded hearing session (by telephone or in person) 
regarding the appropriateness of expungement. This paragraph will apply 
to cases administered under Rule 12800 even if a customer did not 
request a hearing on the merits.
    (b) In cases involving settlements, review settlement documents and 
consider the amount of payments made to any party and any other terms 
and conditions of a settlement.
    (c) Indicate in the arbitration award which of the Rule 2130 
grounds for expungement serve(s) as the basis for its expungement order 
and provide a brief written explanation of the reason(s) for its 
finding that one or more Rule 2130 grounds for expungement applies to 
the facts of the case.
    (d) Assess all forum fees for hearing sessions in which the sole 
topic is the determination of the appropriateness of expungement 
against the parties requesting expungement relief. 13805. Expungement 
of Customer Dispute Information under Rule 2130
    In order to grant expungement of customer dispute information under 
Rule 2130, the panel must:
    (a) Hold a recorded hearing session (by telephone or in person) 
regarding the appropriateness of expungement. This paragraph will apply 
to cases administered under Rule 13800 even if a claimant did not 
request a hearing on the merits.
    (b) In cases involving settlements, review settlement documents and 
consider the amount of payments made to any party and any other terms 
and conditions of a settlement.
    (c) Indicate in the arbitration award which of the Rule 2130 
grounds for expungement serve(s) as the basis for its expungement order 
and provide a brief written explanation of the reason(s) for its 
finding that one or more Rule 2130 grounds for expungement applies to 
the facts of the case.
    (d) Assess all forum fees for hearing sessions in which the sole 
topic is the determination of the appropriateness of expungement 
against the parties requesting expungement relief.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA is proposing to amend its Customer Code and Industry Code to 
establish new procedures that arbitrators must follow when considering 
requests for expungement relief under Rule 2130. The procedures are 
designed to: (1) Make sure that arbitrators have the opportunity to 
consider the facts that support or weigh against a decision to grant 
expungement; and (2) ensure that expungement occurs only when the 
arbitrators find and document one of the narrow grounds specified in 
Rule 2130.
    Proposed Rules 12805 and 13805 would require arbitrators 
considering an expungement request to hold a recorded hearing session 
by telephone or in person, provide a brief written explanation of the 
reasons for ordering expungement, and, in cases involving a settlement, 
review the settlement documents to examine the amount paid to any party 
and any other terms and conditions of the settlement that might raise 
concerns about the associated person's involvement in the alleged 
misconduct before awarding expungement. The proposed rule change would 
provide that the panel must assess forum fees for hearing sessions held 
solely for the purpose of considering expungement against the parties 
requesting the relief.
    The proposed rule change would not affect FINRA's current practice 
of permitting expungement, without judicial intervention, of 
information from the Central Registration Depository (``CRD'') system 
as directed by arbitrators in intra-industry arbitration awards that 
involve associated persons and firms based on the defamatory nature of 
the information ordered expunged.\3\
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    \3\ In its original filing with the Commission proposing Rule 
2130 (see SR-NASD-2002-168), FINRA (then known as NASD) explained in 
Footnote 2 that ``NASD may execute, without a court order, 
arbitration awards rendered in disputes between registered 
representatives and firms that contain expungement directives in 
which the arbitration panel states that expungement relief is being 
granted because of the defamatory nature of the information. These 
expungements are not covered by the moratorium and will not be 
covered by the proposed rules and policies.'' In Amendment No. 1 to 
that filing (at page five), FINRA reiterated this point by stating 
``NASD may execute, without a court order, an arbitration award 
rendered in a dispute between a member and a current or former 
associated person that contains an expungement directive in which 
the arbitration panel states that expungement relief is being 
granted based on the defamatory nature of the information.'' See 
also NASD Notice to Members 04-16 (March 2004) n. 4.
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Background
    The CRD system, an online registration and licensing system, 
contains information regarding broker-dealers and their associated 
persons. It contains administrative information (e.g., personal, 
educational, and

[[Page 18309]]

employment history) and disclosure information (e.g., criminal matters, 
regulatory and disciplinary actions, civil judicial actions, and 
information relating to customer disputes). Members of the securities 
industry, state and federal regulators, and self-regulatory 
organizations use the CRD system. Although public investors do not have 
access to the CRD system, much of the information in that system is 
available to investors through FINRA BrokerCheck and individual state 
disclosure programs.\4\ FINRA recognizes that accurate and complete 
reporting in the CRD system is an important aspect of investor 
protection.
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    \4\ FINRA BrokerCheck is a free online tool to help investors 
check the background of current and former FINRA-registered 
securities firms and brokers.
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    FINRA operates the CRD system pursuant to policies developed 
jointly with the North American Securities Administrators Association 
(NASAA). FINRA works with the SEC, NASAA, other members of the 
regulatory community, and broker-dealer firms to establish policies and 
procedures reasonably designed to ensure that information submitted to 
and maintained in the CRD system is accurate and complete. These 
procedures, among other things, cover expungement of information from 
the CRD system.
    In December 2003, the SEC approved NASD Rule 2130, which contains 
procedures for expungement of customer dispute information from the CRD 
System.\5\ It requires that FINRA members or associated persons name 
FINRA as an additional party in any court proceeding in which they seek 
an order to expunge customer dispute information or request 
confirmation of an award containing an order of expungement.
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    \5\ Securities Exchange Act Release No. 48933 (December 16, 
2003), 68 FR 74667 (December 24, 2003). Rules 2130 applies to all 
cases filed on or after April 12, 2004; see NASD Notice to Members 
04-16 (March 2004).
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    Under Rule 2130, FINRA may waive the requirement to be named as a 
party if it determines that the expungement relief is based on an 
affirmative judicial or arbitral finding that: (i) The claim, 
allegation, or information is factually impossible or clearly 
erroneous; (ii) the registered person was not involved in the alleged 
investment-related sales practice violation, forgery, theft, 
misappropriation, or conversion of funds; or (iii) the claim, 
allegation, or information is false. If expungement relief is based on 
a judicial or arbitral finding other than as enumerated immediately 
above, FINRA may also waive the requirement to be named as a party if 
it determines that the expungement relief and accompanying findings on 
which it is based are meritorious and that expungement would not have a 
material adverse effect on investor protection, the integrity of the 
CRD system, or regulatory requirements.
    Proposed new Rules 12805 and 13805 would set forth procedures that 
arbitrators must follow before recommending expungement of information 
related to arbitration cases from an associated person's CRD record. If 
the arbitrators do not fully adhere to these procedures, FINRA may 
determine not to waive the obligation under Rule 2130 to be named as a 
party to an expungement proceeding.
    Sometimes, arbitrators will order expungement at the conclusion of 
an evidentiary hearing on the merits of the case. More often, however, 
arbitrators will order expungement at the request of a party to 
facilitate settlement of the dispute. For example, customers may 
receive monetary compensation as part of a settlement, the terms of 
which require the customer to consent to (or not oppose) the entry of a 
stipulated award containing an order of expungement. In such cases, 
FINRA expected that arbitrators would examine the amount paid to any 
party and any other terms and conditions of the settlement that might 
raise concerns about the associated person's behavior before awarding 
expungement.\6\ Contrary to this expectation, however, arbitrators 
often did not inquire into the terms of settlement agreements.
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    \6\ See NASD Notice to Members 04-43 (June 2004).
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    In order for arbitrators to perform the critical fact finding 
necessary before granting expungement, the proposed rule change would 
require arbitrators to hold a recorded hearing session by telephone or 
in person. The requirement of a hearing session would ensure that 
arbitrators consider the facts that support or weigh against a decision 
to grant expungement. In cases involving settlements, the proposal 
would require arbitrators to review the settlement documents, consider 
the amount paid to any party, and consider any other terms and 
conditions of the settlement that might raise concerns about the 
associated person's involvement in the alleged misconduct before 
awarding expungement.
    The proposed rule change would require arbitrators to indicate 
which of the Rule 2130 grounds for expungement serve as the basis for 
their expungement order, and provide a brief written explanation of the 
reasons for ordering expungement under Rule 2130. This new requirement 
would address issues concerning judicial confirmation of awards 
containing orders of expungement, as demonstrated in a recent state 
court case \7\ in which the court expressed concern that the 
arbitrators did not describe ``a single fact or circumstance'' \8\ for 
their conclusion that the claims were factually impossible or clearly 
erroneous (one of the grounds for expungement enumerated in Rule 2130). 
As a result, the court ordered the arbitrators to conduct a hearing to 
clarify the facts and circumstances that led them to order expungement. 
The proposed requirement of a written explanation would provide 
regulators with additional insight into why arbitrators awarded 
expungement based on what might appear to be questionable facts and 
circumstances (e.g., cases involving payment of significant monetary 
compensation to the customer).\9\
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    \7\ Matter of Sage, Rutty & Co., Inc. v. Salzberg, Index No. 
2007-01942 (N.Y. Sup. Ct. May 30, 2007).
    \8\ Id. at 4.
    \9\ In such cases, the payment may be based on the behavior of 
someone other than the associated person who is seeking expungement.
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    The proposed rule change also would require the arbitrators to 
assess all forum fees for hearing sessions in which the sole topic is 
the determination of the appropriateness of expungement against the 
parties requesting expungement relief. In cases that settle, industry 
parties often seek expungement. In such cases, parties generally 
present arguments solely on the issue of expungement. In these 
circumstances, FINRA believes the fee for that hearing session should 
not be assessed against a customer.\10\
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    \10\ In those situations where the issue of expungement does not 
constitute the sole topic considered by the arbitrators during a 
hearing session, the panel will determine the hearing session fee 
that each party must pay. See Rules 12902(a) and 13902(a).
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    In cases administered under Rule 12800 or Rule 13800 (Simplified 
Arbitration), a hearing on the merits normally is held only at the 
request of a customer or claimant, respectively. The proposed rule 
change would clarify that if parties request expungement relief in such 
cases, a hearing session would be held to determine the appropriateness 
of the request even if a hearing on the merits was not requested. Any 
forum fees for hearing sessions associated with a request for 
expungement would be assessed against the parties making the request.
    As noted above, the proposed rule change would not affect FINRA's 
current practice of permitting

[[Page 18310]]

expungement, without judicial intervention, of information from the CRD 
system as directed by arbitrators in intra-industry arbitration awards 
that involve associated persons and firms based on the defamatory 
nature of the information ordered expunged. In allowing expungement 
relief without judicial intervention under such circumstances, FINRA 
believes that it is fairly balancing the interests of the brokerage 
community and others in expunging defamatory statements with FINRA's 
interests in investor protection and the integrity of the CRD system.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, \11\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. The new procedures would enhance the integrity of the 
information in the CRD system and would ensure that investor protection 
is not compromised when arbitrators order expungement of information 
related to arbitration cases from an associated person's CRD record.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2008-010 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2008-010. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of FINRA.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FINRA-2008-010 
and should be submitted on or before April 24, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-6870 Filed 4-2-08; 8:45 am]

BILLING CODE 8011-01-P