
[Federal Register: November 6, 2008 (Volume 73, Number 216)]
[Notices]               
[Page 66086-66090]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06no08-82]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58886; File No. SR-FINRA-2008-010]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Amending the 
Codes of Arbitration Procedure To Establish Procedures for Arbitrators 
To Follow When Considering Requests for Expungement Relief

October 30, 2008.

I. Introduction

    On March 13, 2008, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt 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 procedures that arbitrators must 
follow when considering requests for expungement relief under Rule 
2130.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published in the Federal Register on 
April 3, 2008.\3\ The Commission received eleven comment letters on the 
proposed rule change.\4\ FINRA responded to the comments on June 11, 
2008.\5\ The Commission received an additional letter from one 
commenter in furtherance of its original comments.\6\ On September 3, 
2008, FINRA submitted a second response to comments.\7\ This order 
approves the proposed rule change.
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    \3\ See Securities Exchange Act Release No. 57572 (March 27, 
2008), 73 FR 18308 (April 3, 2008) (the ``Notice'').
    \4\ See letters to Nancy M. Morris, Secretary, Commission, from 
Seth E. Lipner, Professor of Law, Bernard M. Baruch College, CUNY, 
and Member Deutsch Lipner, dated April 8, 2008 (``Lipner letter''); 
Steven B. Caruso, Maddox Hargett Caruso, P.C., dated April 8, 2008 
(``Caruso letter''); Jill Gross, Director, Pace University, Investor 
Rights Clinic, and Teresa Milano, dated April 15, 2008 (``Gross and 
Milano letter''); Raghavan Sathianathan, dated April 17, 2008 
(``Sathianathan letter''); William A. Jacobson, Associate Clinical 
Professor, Director, Cornell Securities Law Clinic, Cornell Law 
School and Arthur A. Andersen III, dated April 23, 2008 (``Cornell I 
letter''); Barbara Black, Charles Hartsock Professor of Law, 
director of Corporate Law Center, University of Cincinnati dated 
April 24, 2008 (``Black letter''); Karen Tyler, President, North 
American Securities Administrators Association, North Dakota 
Securities Commissioner, dated April 24, 2008 (``NASAA letter''); 
Scott R. Shewan, Born, Pape Shewan, LLP, dated April 24, 2008 
(``Shewan letter''); Barry D. Estell, dated May 7, 2008 (``Estell 
letter''), Brian N. Smiley, Smiley Bishop Porter LLP, dated May 8, 
2008 (``Smiley letter''); and Laurence S. Schultz, President, Public 
Investors Arbitration Bar Association, dated May 16, 2008 (``PIABA 
letter'').
    \5\ See letter to Nancy M. Morris, Secretary, Commission, from 
Margo A. Hassan, Counsel, FINRA, dated June 11, 2008 (``First 
Response'').
    \6\ See letter to Nancy M. Morris, Secretary, Commission, from 
William A. Jacobsen, Associate Clinical Professor, Director, Cornell 
Securities Law Clinic, Cornell Law School, dated June 17, 2008 
(``Cornell II letter'').
    \7\ See letter to Florence Harmon, Deputy Secretary [sic], 
Commission, from Margo A. Hassan, dated September 3, 2008 (``Second 
Response'').

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[[Page 66087]]

II. Description of the Proposed Rule Change

Background

    FINRA operates the Central Registration Depository (``CRD'') \8\ 
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 is 
accurate and complete. These procedures, among other things, cover 
expungement of information from the CRD.
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    \8\ The CRD is an online registration and licensing system used 
by members of the securities industry, state and federal regulators, 
and self-regulatory organizations. It contains administrative 
information (e.g., personal, educational, and employment history) 
and disclosure information (e.g., criminal matters, regulatory and 
disciplinary actions, civil judicial actions, and information 
relating to customer disputes) regarding broker-dealers and their 
associated persons.
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    In December 2003, the SEC approved Rule 2130, which contains 
procedures for expungement of customer dispute information regarding 
member firms or associated persons from the CRD.\9\ Under Rule 2130, 
FINRA members or associated persons seeking to expunge information from 
the CRD arising from disputes with customers must obtain an order from 
a court of competent jurisdiction directing expungement of information 
or confirming an arbitration award that contains expungement 
relief.\10\ It also 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.\11\
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    \9\ See Securities Exchange Act Release No. 48933 (December 16, 
2003), 68 FR 74667 (December 24, 2003)(SR-NASD-2002-168) (the 
``Expungement Order''). See also NASD Notice to Members 04-16 (March 
2004) (NASD Adopts Rule 2130 Regarding Expungement of Customer 
Dispute Information From The Central Registration Depository).
    \10\ See NASD Conduct Rule 2130(a).
    \11\ See NASD Conduct Rule 2130(b).
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    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 those 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, or regulatory requirements.\12\
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    \12\ Id.
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    According to FINRA, although arbitrators may order expungement at 
the conclusion of an evidentiary hearing on the merits of a case, it is 
more common for arbitrators to order expungement at the request of a 
party to facilitate settlement of a dispute. For example, as part of a 
settlement in which customers receive monetary compensation, the terms 
of that settlement 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 and any other terms and conditions of the settlement that might 
raise concerns about the associated person's behavior before awarding 
expungement.\13\ Contrary to this expectation, however, arbitrators 
often do not inquire into the terms of settlement agreements. Recently, 
for example, one New York state court expressed concern because 
arbitrators did not describe ``a single fact or circumstance'' for 
their conclusion that the grounds for expungement had been met.\14\ 
Another New York state court acknowledged that it has reservations 
about the existing law on expungement, which resulted in the 
confirmation of an award on which the arbitrator gave no explanation 
for his factual finding.\15\
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    \13\ See NASD Notice to Members 04-43 (June 2004) (Members' Use 
of Affidavits in Connection with Stipulated Awards and Settlements 
to Obtain Expungement of Customer Dispute Information under Rule 
2130).
    \14\ See Matter of Sage, Rutty & Co., Inc. v. Salzberg, Index 
No. 2007-01942 (N.Y. Sup. Ct. May 30, 2007).
    \15\ See Matter of Kay v. Abrams, 853 N.Y.S.2d 862 (N.Y. Sup. 
Ct. February 21, 2008).
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Proposed Rule Change

    Thus, FINRA developed proposed rules 12805 and 13805 which set 
forth procedures that arbitrators must follow before granting 
expungement of information from an associated person's CRD record. 
Specifically, under the proposed rules, in order to grant expungement 
of customer dispute information under Rule 2130, the panel must: (i) 
Hold a recorded hearing session by telephone or in person regarding the 
appropriateness of expungement, even if a claimant did not request a 
hearing on the merits; (ii) for cases involving settlements, 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; (iii) indicate in the arbitration award 
which of the grounds for expungement in Rule 2130(b)(1)(A)-(C) serves 
as the basis for the expungement order and provide a brief written 
explanation of the reason(s) for its finding that one or more grounds 
for expungement exists; and (iv) assess forum fees for hearing sessions 
in which the sole topic is the determination of the appropriateness of 
expungement against the parties requesting expungement.
    The proposed rule change would not affect FINRA's current practice 
of permitting expungement, without judicial intervention, of 
information from the CRD 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.\16\
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    \16\ In its original filing with the Commission proposing Rule 
2130 (see SR-NASD-2002-168), NASD (now known as FINRA) 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), NASD 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) (NASD Adopts Rule 
2130 Regarding Expungement of Customer Dispute Information From The 
Central Registration Depository).
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III. Summary of Comments

    As noted above, the Commission received twelve comment letters from 
a variety of sources. Six comments supported the proposal,\17\ but a 
majority of those six shared a variety of concerns and suggestions for 
how to make the proposal more effective, as discussed in greater detail 
below. Five commenters opposed the proposal, and one of those 
commenters submitted two letters.\18\
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    \17\ See Caruso, Gross and Milano, NASAA, Shewan, Smiley, and 
PIABA letters.
    \18\ See Lipner, Sathianathan, Cornell I (and in furtherance of 
its original comments, Cornell II), Black, and Estell letters.
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    More specifically, the commenters raised the following issues:

[[Page 66088]]

    Argument 1: The proposed rule may enable the party requesting 
expungement to use expungement findings against a customer in a 
subsequent proceeding based on the doctrine of collateral estoppel.\19\
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    \19\ See Cornell I and Cornell II letters.
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    Response: FINRA was not persuaded by the argument and stated it 
does not have the authority to dictate how parties may use an arbitral 
finding after the arbitration is over; other forums are not bound to 
accept FINRA's determination; and expungement findings, in FINRA's 
view, should be treated in the same manner as other arbitral findings.
    An additional comment letter was submitted in rebuttal.\20\ The 
commenter argued that nothing in FINRA's rules prohibits it from 
exercising power to limit the use of expungement findings; FINRA may 
promulgate rules regardless of whether a court will be ``bound'' by 
those rules; and because the expungement process is unique and has a 
public interest element with respect to regulatory record-keeping, 
FINRA would be justified in treating expungement findings in a 
different manner than other arbitral findings.
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    \20\ See Cornell II letter.
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    FINRA stated in its Second Response that modifying the proposal to 
prohibit collateral use of expungement findings could result in 
associated persons who are respondents asserting counterclaims against 
customers in arbitration to preserve their ability to have the claims 
resolved. In response to the argument that customers who settle and 
agree to expungement may subsequently be subject to a lawsuit alleging 
malicious prosecution based on the expungement findings, FINRA believes 
that the high evidentiary standard applied in such cases, and the fact 
that most customers are represented by counsel, provide sufficient 
safeguards for the customer.\21\
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    \21\ See Second Response.
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    Argument 2: If customer claimants do not participate in the 
expungement hearing, arbitrators will hear only the requesting party's 
position.\22\
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    \22\ See Cornell I, NASAA, and Estell letters.
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    Response: FINRA noted that under the proposal, customers will 
continue to have the opportunity to attend and participate in 
expungement hearings in person or via telephone, and the customer may 
submit a written statement if he chooses not to participate or attend 
in person.\23\ In addition, FINRA vowed to take measures to ensure that 
arbitrators are prepared to perform the critical fact-finding that is 
required by the rule proposal, whether or not a customer is present at 
the hearing.\24\
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    \23\ See First Response.
    \24\ FINRA will notify all arbitrators of the rule change. In 
addition, FINRA will (i) update its online training program to 
reflect the new expungement guidelines and encourage all of its 
arbitrators to take the training; (ii) send arbitrators written 
materials with questions and answers; (iii) publish an article in 
The Neutral Corner explaining the new rules; (iv) conduct a call-in 
workshop during which staff will discuss the rule change and answer 
questions previously submitted by arbitrators and mediators; and (v) 
have a broadcast e-mail which discusses the new rules. FINRA will 
require arbitrators to certify in writing that they have 
familiarized themselves with the new rule via at least one of the 
training methods. Telephone call among Jean I. Feeney, Vice 
President and Chief Counsel, FINRA Dispute Resolution, Katherine A. 
England, Assistant Director, Commission, and Kristie Diemer, Special 
Counsel, Commission on October 29, 2008.
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    Argument 3: The proposed rule inadequately attempts to fix the 
expungement process.\25\
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    \25\ See Cornell I, NASAA, and Estell letters.
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    Argument 4: Expungement affects the integrity of the CRD by 
permanently deleting information that is relevant to the regulatory 
function of the SEC, FINRA, and the states, making the CRD an 
unreliable and incomplete source of information.\26\ It may be possible 
for the public to obtain more complete records through independent 
investigation than regulators can obtain through the CRD.\27\
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    \26\ See Cornell I, Shewan, Estell, and Smiley letters.
    \27\ See Cornell I letter.
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    Response to Arguments 3 and 4: FINRA stated in its First Response 
that arguments which express opinions on the expungement process set 
forth in Rule 2130 are outside the scope of the present filing. 
Nevertheless, FINRA also stated that it believes the current proposal 
contains appropriate new procedures for arbitrators to follow when 
considering expungement requests under Rule 2130 that should help 
ensure that expungement is an extraordinary remedy and is granted only 
under appropriate circumstances. FINRA stated it believes the proposal 
would add transparency to the expungement process and would help 
enhance the integrity of information in the CRD.\28\
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    \28\ See First Response.
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    Argument 5: Arbitrators may not be the proper parties to make 
expungement decisions.\29\ Related comments (i) argue that expungement 
decisions should be made by regulators and/or by a regulatory tribunal, 
not by arbitrators,\30\ and (ii) question whether arbitrators may 
exceed their authority when considering requests for expungement.\31\
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    \29\ See Caruso and Cornell I letters.
    \30\ See Lipner, Black, Shewan, and PIABA letters.
    \31\ See NASAA letter.
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    Response: FINRA believes that this argument also goes to Rule 2130 
and is thus outside the scope of the proposal.\32\ FINRA noted, 
however, that Rule 2130 requires a firm or associated person 
petitioning a court for expungement relief or seeking judicial 
confirmation of an arbitration award containing expungement relief to 
name FINRA as a party in the court proceeding and serve FINRA with all 
appropriate documents, unless FINRA waives this requirement. Therefore, 
FINRA is able to conduct a regulatory review of all such waiver 
requests and/or participate in the judicial expungement proceeding. 
FINRA further noted it has a process whereby it notifies the states 
where the individual is registered or seeking registration of the 
expungement notice or waiver request,\33\ and if the state should wish 
to intervene, it may petition the court.\34\ Finally, as discussed 
above, FINRA would revise its arbitrator training to include guidance 
on the proposed rule change.
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    \32\ See Second Response.
    \33\ See NASD Notice to Members 04-16 (March 2004) (NASD Adopts 
Rule 2130 Regarding Expungement of Customer Dispute Information From 
The Central Registration Depository).
    \34\ See the Expungement Order, supra note 9, 68 FR at 74671.
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    Argument 6: The proposal should address the situation in which an 
arbitration brought against a firm that does not also name the 
individual broker as a party is not considered a complaint against the 
broker, even if the broker's name appears prominently in the text of 
the arbitration complaint.\35\
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    \35\ See Lipner, Shewan, and PIABA letters.
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    Response: FINRA stated in its Second Response that this issue is 
outside the scope of this proposal, but notes that in April 2008, it 
sought comment on a proposed change which would revise the customer 
complaint questions to elicit reporting of allegations of sales 
practice violations made in arbitrations or civil suits against 
registered persons not named as parties in those proceedings, and the 
proposed revisions would require firms to treat these matters as 
customer complaints.\36\
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    \36\ See FINRA Regulatory Notice 08-20 (April 2008) (Proposed 
Changes to Forms U4 and U5). The comment period ended on May 27, 
2008, and FINRA stated that it expects to file these changes with 
the Commission shortly.
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    Argument 7: The proposal should include a provision to deter 
overuse of expungement, particularly in settlements and/or as a 
condition of monetary payment to the customer.\37\
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    \37\ See Cornell I, NASAA, and PIABA letters.
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    Response: FINRA has expressly stated that expungement should be an 
extraordinary remedy \38\ and has

[[Page 66089]]

addressed the use of customer affidavits in settlements leading to 
stipulated awards.\39\ The proposed rule would require arbitrators to 
review settlement documents and consider the amount of payments made to 
any party as well as any other terms and conditions of the settlement. 
Arbitrators would be required to provide a written explanation of the 
reasons for finding that one or more of the grounds for expungement 
apply to the facts of the case. FINRA believes that the rule proposal 
will help ensure that arbitrators fully evaluate each request for 
expungement of information from the CRD.
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    \38\ See, e.g. , NASD Notice to Members 01-65 (October 2001) 
(NASD Seeks Comment On Proposed Rules And Policies Relating To 
Expungement Of Information From The Central Registration 
Depository); Securities Exchange Act Release No. 47435 (March 4, 
2003), 68 FR 11435 (March 10, 2003)(``Rule 2130 Notice''); Second 
Response.
    \39\ See NASD Notice to Members 04-43 (June 2004) (Members' Use 
of Affidavits in Connection with Stipulated Awards and Settlements 
to Obtain Expungement of Customer Dispute Information under Rule 
2130).
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    Argument 8: Payment for settlement in excess of the reporting 
threshold on Forms U4 and U5 should raise a presumption that 
expungement is not appropriate.\40\
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    \40\ See PIABA letter. The commenter states that this amount is 
currently $10,000, but FINRA recently sought comment on a proposal 
to increase this amount to $15,000. See FINRA Regulatory Notice 08-
20 (April 2008) (Proposed Changes to Forms U4 and U5). The comment 
period ended on May 27, 2008.
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    Argument 9: There should be an express presumption that claims 
should not be expunged from a representative's CRD record unless the 
person seeking expungement is able to overcome the presumption by a 
preponderance of the evidence.\41\
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    \41\ See NASAA and PIABA letters.
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    Response to Arguments 8 and 9: FINRA stated that because it is not 
proposing to amend the evidentiary standards in the Codes, these 
comments are outside the scope of the rule filing.\42\ Nonetheless, 
FINRA states that the proposal requires arbitrators to evaluate fully 
whether the party requesting expungement either in arbitration or in 
connection with a settlement agreement has met the criteria promulgated 
under Rule 2130(b)(1)(A)-(C), and FINRA notes that the proposal 
requires the arbitrators, if expungement is ordered, to set forth a 
written explanation regarding that decision.
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    \42\ See Second Response.
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    Argument 10: The effect of the proposal, combined with the current 
rule, is that there will be greater potential for broker-dealer misuse 
because (i) it will be more difficult to expunge defamatory information 
filed on CRD and will increase the power that FINRA member firms have 
over employees; and (ii) allegations by a whistleblower-employee of a 
FINRA member firm of criminal activities by the FINRA member firm or 
its senior executives can be expunged without judicial approval.\43\
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    \43\ See Sathianathan letter.
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    Response: FINRA stated in its First Response that Argument 10 is 
outside the scope of the filing.

IV. Discussion and Commission Findings

    After careful review of the proposal and consideration of the 
comment letters and FINRA's response to the comment letters, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to FINRA.\44\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\45\ which requires, among other things, that FINRA's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
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    \44\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \45\ 15 U.S.C. 78o-3(b)(6).
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    The Commission finds that the proposed rule change is reasonably 
designed to accomplish these ends by establishing procedures that 
arbitrators must follow when considering whether to grant requests for 
expungement either in connection with arbitration or with a settlement 
agreement, thus making the expungement process more transparent. The 
additional procedures, such as the required review of settlement 
documents, and the written explanation of the regulatory basis and 
reason for granting expungement, in the proposed rule are designed to 
help assure that the expungement process is not abused. This, in turn, 
should help ensure that investors and regulators have access to all 
relevant data in the CRD.
    The Commission believes that FINRA has adequately addressed the 
issues raised by the commenters. The CRD is an important regulatory 
tool as well as an important tool for investors who seek information 
about associated persons and member firms.\46\ Once information is 
removed from CRD via expungement it is lost to both the regulators and 
the investing public. Therefore, the Commission takes seriously the 
concerns raised by the commenters. The commenters raised concerns both 
of a general nature and of a specific nature. The general concerns 
related to the integrity of the CRD, who should make the decision to 
grant expungement, and the frequency with which expungement is granted. 
The specific concerns related to whether the new rules will result in 
findings that can be used in a subsequent legal proceeding based on the 
doctrine of collateral estoppel and the meaning of the standards in the 
new rules and how the standards will be applied.
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    \46\ See, e.g., http://www.finra.org/Investors/ToolsCalculators/
BrokerCheck/index.htm.
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    The Commission agrees with FINRA that the comments about existing 
Rule 2130 and the expungement process itself, as well as comments with 
respect to whether arbitrators are the proper parties to decide if 
information should be expunged from CRD, are technically outside the 
scope of the proposed rule change.\47\ The Commission notes, however, 
that FINRA has stated repeatedly that expungement is meant to be an 
extraordinary remedy,\48\ and recognizes it ``should be used only when 
the expunged information has no meaningful regulatory or investor 
protection value.'' \49\ The Commission agrees with FINRA that 
expungement should be an extraordinary remedy. Information that is 
expunged from CRD is permanently deleted and thus no

[[Page 66090]]

longer available to regulators or the investing public.
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    \47\ Another commenter's concern which FINRA stated was outside 
the scope of the proposal was the belief that under the proposal, 
allegations by a whistleblower-employee of a member firm of criminal 
activities by either the FINRA member firm or senior executives of a 
FINRA member firm could be expunged without judicial approval. The 
Commission urges all persons to report allegations of criminal 
activity to the relevant authority, regardless of the rules 
governing expungement. Furthermore, the Commission notes that 
criminal activity does not qualify for expungement under the current 
rule, and thus would not be more easily expunged under FINRA's 
proposed rules. As noted above, the arbitrator could not make an 
affirmative finding that one of the conditions for waiver was met, 
and FINRA would have to oppose the expungement. The Commission 
expects FINRA to review any allegations of misuse of the CRD by 
member firms. This is particularly important in light of the ruling 
in New York that broker-dealer firms have absolute immunity for 
statements made on U4 and U5. See Rosenberg v. MetLife, Inc., 493 
F.3d 290 (2d Cir. N.Y., June 14, 2007). CRD should not be used by 
broker-dealers against registered representatives. Such actions 
would violate FINRA rules.
    \48\ See, e.g., NASD Notice to Members 01-65 (October 2001) 
(NASD Seeks Comment On Proposed Rules And Policies Relating To 
Expungement Of Information From The Central Registration 
Depository); Securities Exchange Act Release No. 47435 (March 4, 
2003), 68 FR 11435 (March 10, 2003); Second Response.
    \49\ See Rule 2130 Frequently Asked Questions, http://
www.finra.org/Industry/Compliance/Registration/CRD/FilingGuidance/
P005224.
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    Under Rule 2130, FINRA must be named as a party when a respondent 
is seeking confirmation from a court of an expungement award. FINRA can 
waive its right to be named as a party in the court confirmation 
process, if it makes an affirmative determination consistent with Rule 
2130.\50\ The Commission believes that FINRA should use its authority 
to review expungement requests to ensure that expungement is an 
extraordinary remedy.\51\
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    \50\ Rule 2130(b)(2), however, does allow for exceptions under 
extraordinary circumstances.
    \51\ FINRA also provides the states with all requests for 
expungement and petitions so that the states have an opportunity to 
review them and/or participate in the hearing. The ability for FINRA 
and the states to participate in the expungement process is critical 
so that information that should remain in CRD is not expunged. The 
Commission expects that all regulators will take these 
responsibilities seriously and work cooperatively as the new rule is 
implemented, and thereafter. See, e.g., UBS Financial Services, Inc. 
v. Gibson, 851 N.Y.S.2d 75 (N.Y. Sup. Ct.)(consolidated with Johnson 
v. Summit Equities, Inc., 238 N.Y.L.J. 109 (Nov. 15, 2007)); 
Zaferiou v. Holgado, Index No. 102996/07 (N.Y. Sup. Ct. April 14, 
2008); Matter of Kay v. Abrams, 853 N.Y.S.2d 862 (N.Y. Sup. Ct. Feb. 
21, 2008); and Karsner v. Lothian, 532 F.3d 876 (D.C. Cir. July 15, 
2008).
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    With respect to the issue of whether an associated person or member 
will be able to use the arbitrators' written findings on expungement as 
collateral estoppel in a subsequent legal proceeding against the 
customer, FINRA believes that the high evidentiary standard that 
applies in such cases, and the fact that most customers are represented 
by legal counsel, should address this issue. The Commission believes 
that this is a reasonable assessment and conclusion regarding this 
potential situation.
    As discussed, the Commission believes that having accurate and 
complete information in the CRD is vital; information that has 
regulatory value or that could assist investors in protecting 
themselves should not be removed from CRD.\52\ Because of the central 
role that arbitrators have in the expungement process, the Commission 
believes that it is critical for arbitrators to be well-informed 
regarding FINRA's rules governing expungement. FINRA stated that this 
proposal is part of its ``continuing effort to ensure that arbitrators 
evaluate fully each request for expungement.'' \53\ The Commission 
believes that the training and education FINRA provides in conjunction 
with the proposed rule change will be critical to the implementation 
and proper application of the rules. Proper training of arbitrators 
should help make expungement the extraordinary remedy that it was meant 
to be and should convey to the arbitrators the importance of their role 
in maintaining the integrity of the CRD.
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    \52\ FINRA routinely advises investors to check CRD before they 
decide to do business with a firm or a broker. See e.g., http://
www.finra.org/Investors/SmartInvesting/GettingStarted/
SelectingInvestmentProfessional/index.htm; http://www.finra.org/
Investors/ProtectYourself/InvestorAlerts/FraudsAndScams/P01492; and 
http://www.finra.org/Investors/ProtectYourself/BeforeYouInvest/
AvoidProblemswithYourBroker/index.htm.
    \53\ See Second Response.
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    FINRA noted that it has requested comment on amendments to address 
the issue of complaints that do not name a registered representative as 
a party. FINRA stated that it expects to file these changes with the 
Commission shortly.\54\ The Commission does not believe that it would 
be in the interest of investors to delay approval of the instant 
proposal while that rule change is being considered by FINRA; however 
given the interrelationship of the issues, the Commission urges FINRA 
to submit this filing as soon as possible so that this information will 
be recorded in CRD.
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    \54\ Id.
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    In conclusion, the Commission believes that the proposed rule is 
consistent with the Act and will help assure that accurate information 
will remain in CRD and inaccurate information will be expunged. Given 
the importance of CRD for regulators and to customers who want to get 
information about registered persons or member firms before they do 
business with them, the Commission urges FINRA in its regulatory role 
to monitor how this rule is applied by arbitrators to assure that it is 
achieving its goals, and to propose additional changes, if needed.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to FINRA, and, in 
particular, with Section 15A(b)(6) of the Act.\55\
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    \55\ Id.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\56\ that the proposed rule change (SR-FINRA-2008-010) is approved.
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    \56\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
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    \57\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-26442 Filed 11-5-08; 8:45 am]

BILLING CODE 8011-01-P
