[Federal Register Volume 79, Number 78 (Wednesday, April 23, 2014)]
[Notices]
[Pages 22734-22737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-09203]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71959; File No. SR-FINRA-2014-020]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt
FINRA Rule 2081 (Prohibited Conditions Relating to Expungement of
Customer Dispute Information)
April 17, 2014.
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 April 14, 2014, Financial Industry Regulatory Authority, Inc.
(``FINRA'') 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 to adopt FINRA Rule 2081 to prohibit member
firms and associated persons from conditioning or seeking to condition
settlement of a dispute with a customer on, or to otherwise compensate
the customer for, the customer's agreement to consent to, or not to
oppose, the firm's or associated person's request to expunge such
customer dispute information from the Central Registration Depository
(CRD[supreg]).
The text of the proposed rule change is available on FINRA's Web
site at http://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
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
Background
The CRD system is the central licensing and registration system for
the U.S. securities industry and its regulators. In general, the
information in the CRD system is submitted by registered securities
firms and regulatory authorities in response to questions on the
uniform registration forms. These forms collect administrative and
disciplinary information about registered personnel, including customer
complaints, arbitration claims, and court filings made by customers,
and the arbitration awards or court judgments that may result from
those claims or filings (i.e., ``customer dispute information'').\3\
FINRA, state and other regulators use this information in connection
with their licensing and regulatory activities. Firms also use the
information when making hiring decisions. In addition, the information
that FINRA releases to the public through BrokerCheck[supreg] is
derived from the CRD system.
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\3\ See Notice to Members (``NTM'') 04-16 (March 2004).
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Brokers who wish to have customer dispute information removed from
the CRD system (and thereby, from BrokerCheck) because, for example,
they believe that the allegations made against them are unfounded or
that they have been incorrectly identified, must seek expungement
pursuant to FINRA Rule 2080 (formerly NASD Rule 2130).\4\ FINRA Rule
2080 provides that firms and associated persons seeking expungement of
customer dispute information from the CRD system must
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obtain a court order that either directs expungement or confirms an
arbitration award containing expungement relief. The Rule requires that
firms and associated persons seeking such a court order or confirmation
name FINRA as a party. Upon request, FINRA may waive the obligation to
name it as a party if FINRA determines that the expungement relief is
based on an affirmative judicial or arbitral finding that: (1) The
claim, allegation or information is factually impossible or clearly
erroneous; (2) the registered person was not involved in the alleged
investment-related sales practice violation, forgery, theft,
misappropriation or conversion of funds; or (3) the claim, allegation
or information is false.\5\
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\4\ See Securities Exchange Act Release No. 48933 (December 16,
2003), 68 FR 74667 (December 24, 2003) (Order Approving File No. SR-
NASD-2002-168). See also Securities Exchange Act Release No. 59987
(May 27, 2009), 74 FR 26902 (June 4, 2009) (Order Approving File No.
SR-FINRA-2009-016).
\5\ See FINRA Rule 2080(b)(1). While expungement of customer
dispute information is an extraordinary measure, FINRA believes that
it is nevertheless appropriate where the information being expunged
meets one of the criteria specified in Rule 2080 and has no
meaningful investor protection or regulatory value.
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FINRA has long had concerns about the practice of firms and
associated persons conditioning settlement agreements for the purpose
of obtaining expungement relief and, thereby, potentially removing from
the CRD system information that helps protect investors. Over the
years, FINRA has taken numerous steps towards addressing these
concerns. For example, in proposing NASD Rule 2130, FINRA (then NASD)
stated that the Rule's affirmative determination requirement imposed on
arbitrators would reduce, if not eliminate, the risk of expunging
information that is critical to investor protection and regulatory
interests based on an agreement between the parties.\6\ In NTM 04-43,
FINRA cautioned firms and associated persons that negotiating
settlements with customers in return for exculpatory affidavits that
the firm or associated person knows or should know are false or
misleading is a violation of FINRA Rules.\7\
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\6\ See Letter from Shirley H. Weiss, Associate General Counsel,
NASD, to Jonathan G. Katz, Secretary, SEC, dated September 11, 2003.
See also Securities Exchange Act Release No. 48933 (December 16,
2003), 68 FR 74667 (December 24, 2003) (Order Approving File No. SR-
NASD-2002-168).
\7\ In addition, FINRA noted that ``[a]s a general matter, in
connection with settling arbitration claims and/or other complaints,
members may not engage in any conduct that impedes the ability of
[FINRA] or any other securities industry regulator to investigate
potential violations of [FINRA] rules or the securities laws. Such
conditions would include . . . procuring, as a condition to
settlement, affidavits or other statements from customers that
falsely or misleadingly repudiate or otherwise contradict prior
claims or complaints made by customers.'' See NTM 04-43 (June 2004).
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In 2008, FINRA adopted FINRA Rule 12805 to require arbitrators to
perform additional fact finding before recommending expungement of
customer dispute information from the CRD system.\8\ FINRA Rule 12805
requires arbitrators, among other things, to review settlement
documents, the amount of payments made to any party, and any other
terms and conditions of the settlement. In addition, FINRA Rule 12805
requires arbitrators to indicate in the award which of the grounds in
FINRA Rule 2080 serves as the basis for their expungement
recommendation and to provide a brief written explanation of the
reasons for recommending expungement. FINRA believed that these
requirements would address concerns about arbitrators recommending
expungement under what might appear to be questionable facts and
circumstances (e.g., cases that include payment of significant monetary
compensation to the customer).\9\
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\8\ See Securities Exchange Act Release No. 58886 (October 30,
2008), 73 FR 66086 (November 6, 2008) (Order Approving File No. SR-
FINRA-2008-010). In addition, FINRA adopted FINRA Rule 13805 to
establish procedures that arbitrators must follow when considering
requests for expungement relief in connection with intra-industry
disputes. See id.
\9\ See Securities Exchange Act Release No. 57572 (March 27,
2008), 73 FR 18308 (April 3, 2008) (Notice of Filing File No. SR-
FINRA-2008-010).
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In 2013, because of FINRA's concerns about the high percentage of
expungement recommendations made in connection with settled arbitration
claims, FINRA sent to arbitrators and published on FINRA's Web site
guidance (the ``Guidance'') stating that, in determining whether to
recommend expungement relief in settled arbitration claims, arbitrators
should inquire whether a party conditioned settlement on an agreement
not to oppose a request for expungement relief.\10\
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\10\ See Notice to Arbitrators and Parties on Expanded
Expungement Guidance, available at http://www.finra.org/arbitrationandmediation/arbitration/specialprocedures/expungement/.
Specifically, the Guidance states: ``Arbitrators should inquire and
fully consider whether a party conditioned a settlement of the
arbitration upon agreement not to oppose the request for expungement
in cases in which the investor does not participate in the
expungement hearing or the requesting party states that an investor
has indicated that he or she will not oppose the expungement
request.''
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Proposal
Despite previous steps to discourage the practice of firms and
associated persons conditioning settlement agreements for the purpose
of obtaining expungement relief, FINRA continues to have concerns
regarding such conduct. These concerns extend to any settlements
involving customer disputes, not only to those related to arbitration
claims. FINRA believes such agreements should be prohibited even if the
customer offers not to oppose expungement as part of negotiating a
settlement agreement. Further, FINRA believes that firms and associated
persons should be prohibited from otherwise compensating customers in
return for the customer's agreement not to oppose expungement of
customer dispute information from the CRD system.
Accordingly, FINRA is proposing to adopt FINRA Rule 2081 to
prohibit expressly such conduct. Specifically, FINRA Rule 2081 would
provide that no member or associated person shall condition or seek to
condition settlement of a dispute with a customer on, or to otherwise
compensate the customer for, the customer's agreement to consent to, or
not to oppose, the member's or associated person's request to expunge
such customer dispute information from the CRD system.\11\
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\11\ The proposed rule change would not affect the processes
relating to requests for expungement relief set forth in FINRA Rules
2080, 12805 and 13805. Thus, if an arbitration panel is considering
the appropriateness of expungement in accordance with FINRA Rule
12805, a customer could express support for, or opposition to, the
firm's or associated person's request for expungement as part of the
recorded hearing session required by that Rule.
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The proposal's prohibition would apply to both written and oral
agreements. In addition, as indicated above, the proposal would apply
to agreements entered into during the course of settlement
negotiations, as well as to any agreements entered into separate from
such negotiations. For example, the proposed rule change would preclude
a firm or associated person from conditioning the settlement of a
customer's claim on the customer's agreement to consent to, or not to
oppose, the firm's or associated person's request for expungement. In
addition, the proposed rule change would preclude a firm or associated
person, following settlement of the underlying customer dispute, from
compensating the customer in return for the customer not opposing the
firm's or associated person's expungement request.
As an alternative to proposed FINRA Rule 2081, some industry
representatives suggested that FINRA consider enhanced arbitrator
training as a means of addressing concerns regarding the conditioning
of settlement agreements for the purpose of obtaining expungement
relief. Since adopting NASD Rule 2130 in 2004, FINRA has required all
arbitrators to take a training course on expungement. Recently, FINRA
significantly revised its arbitrator expungement training. The
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revised training became available on FINRA's Web site on February 28,
2014.\12\ The revised training increases the emphasis on the importance
of the information in the CRD system and BrokerCheck, and the
arbitrator's critical role in maintaining the integrity of disclosure
information contained in the system.\13\ While FINRA recognizes the
importance of arbitrator training in the expungement process, and
anticipates that the revised training will further focus arbitrators'
attention on the appropriate analysis associated with determining
whether to recommend expungement, FINRA remains concerned about parties
to a settlement agreement ``bargaining for'' expungement relief as a
condition to settlement. The proposed rule change would directly
address this concern by expressly prohibiting firms and associated
persons from conditioning settlement agreements, or otherwise
compensating customers, for the purpose of obtaining expungement
relief.
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\12\ See FINRA Arbitrator Training Online Learning Courses,
available at http://www.finra.org/ArbitrationAndMediation/Arbitrators/Training/AdvancedTraining/P124939. All arbitrator
applicants must complete this training to become eligible to serve
on arbitration cases.
\13\ In addition, FINRA monitors the effectiveness of its
training and guidance on an ongoing basis and makes additions or
changes as necessary.
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FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 60 days following
Commission approval. The effective date will be no later than 30 days
following publication of the Regulatory Notice announcing Commission
approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\14\ 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.
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\14\ 15 U.S.C. 78o-3(b)(6).
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As discussed above, the information in the CRD system is used by
FINRA, state and other regulators in connection with their licensing
and regulatory activities. Firms also use the information to help them
make informed hiring decisions. In addition, the information that is
provided to the public through FINRA BrokerCheck is derived from the
CRD system. BrokerCheck is part of FINRA's ongoing effort to help
investors make informed choices about member firms and associated
persons with which investors may conduct business. Thus, it is critical
to investor protection that the CRD system includes accurate and
complete customer dispute information.\15\
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\15\ FINRA routinely advises investors to check BrokerCheck
before deciding to do business with a firm or associated person.
See, e.g., Working With Your Investment Professional, available at
http://www.finra.org/Investors/ProtectYourself/BeforeYouInvest/WorkingWithYourInvestmentProfessional/; ``Phishing'' and Other
Online Identity Theft Scams: Don't Take the Bait, available at
http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/FraudsAndScams/P010734; and Avoiding Investment Scams, available at
http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/FraudsAndScams/P118010.
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In addition, FINRA has stated repeatedly that expungement is
extraordinary relief that should be granted only when the expunged
information is unfounded and has no meaningful regulatory or investor
protection value.\16\ Once information is expunged from the CRD system,
it is permanently deleted and, therefore, no longer available to the
investing public or regulators. By removing the ability of the parties
to a customer dispute to ``bargain-for'' expungement relief as part of
a settlement agreement, or otherwise, the proposed rule change would
help ensure that information is expunged from the CRD system only when
there is an independent judicial or arbitral decision that expungement
is appropriate. Accordingly, the proposed rule change would also help
maintain the integrity of the information in the CRD system.
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\16\ See, e.g., NTM 01-65 (October 2001); Securities Exchange
Act Release No. 47435 (March 4, 2003), 68 FR 11435 (March 10, 2003)
(Notice of Filing File No. SR-NASD-2002-168); letter from Margo A.
Hassan, FINRA, to Florence Harmon, Deputy Secretary, SEC, dated
September 3, 2008; and the Guidance, supra note 10.
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change would result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. FINRA understands that altering
the terms available as part of a settlement might impact the settlement
itself. For example, some industry representatives have questioned
whether the proposal would result in a reduction in the number of
customer disputes that will settle, thereby potentially increasing the
costs to all parties involved. Specifically, these representatives have
raised concerns that some firms may choose not to settle because a
customer claimant may subsequently oppose a request for expungement,
notwithstanding settlement of the underlying customer dispute. Industry
representatives also have questioned whether the proposal would result
in a reduction in the size of settlements offered by firms and
associated persons.
FINRA believes such impacts are likely to be small. Specifically,
FINRA understands that some firms already prohibit the use of such
conditions as part of their settlement agreements. These firms have
indicated that such a practice has not substantially impacted their
ability to reach settlement or affected the terms of their settlement
agreements in material ways. Further, those firms that have already
adopted this practice would bear no significant additional costs as a
result of the proposed rule change.
Notwithstanding the concerns noted above, FINRA believes that
parties to a settlement agreement should not be able to ``bargain for''
expungement relief as a condition to a settlement agreement, or
otherwise. By prohibiting such conduct, the proposed rule change would
help ensure that judicial and arbitral determinations regarding
requests for expungement relief are based solely on the facts of the
underlying customer dispute. In addition, the CRD system would more
accurately reflect customer dispute information, permitting customers,
potential customers, regulators, and firms to better assess an
associated person's record.
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 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate 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 or disapprove 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
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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 email to [email protected]. Please include
File Number SR-FINRA-2014-020 on the subject line.
Paper Comments
Send paper comments in triplicate to, Secretary,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-1090.
All submissions should refer to File Number SR-FINRA-2014-020. This
file number should be included on the subject line if email 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 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-2014-020 and should be
submitted on or before May 14, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09203 Filed 4-22-14; 8:45 am]
BILLING CODE 8011-01-P