May 6, 2022

Via E-Mail to [email protected]

Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Attn: Vanessa A. Countryman, Secretary

Re: File No. SR-FINRA-2020-030
SIFMA Supplemental Comment on FINRA Expungement Rules and
Request for Immediate Remedial Relief

Dear Ms. Countryman:

The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to submit this supplemental comment on FINRA’s proposed rule change to amend the Code of Arbitration Procedure regarding requests for expungement (the “Proposal”)2 and current expungement rules, and to request immediate remedial relief, as follows:

On April 22, 2022, FINRA published a Discussion Paper entitled Expungement of Customer Dispute Information (the “Discussion Paper”)3 in which FINRA reiterated its intent to pursue the Proposal. In the Discussion Paper, FINRA repeated its erroneous assertion – also made in the Proposal – that the grounds on which FINRA arbitrators may grant expungement under Rules 12805(c) and
13805(c) are strictly limited to the three grounds listed in Rule 2080(b)(1) (i.e., error, mistake, or falsity).4 But that is not what the rules say.5

Rules 12805(c) and 13805(c) state that the arbitration panel must indicate “which of the Rule 2080 grounds for expungement serve(s) as the basis for [the] expungement order.” Rules 12805(c) and 13805(c) do not limit expungement to the Rule 2080(b)(1) grounds. Rather, the rules explicitly extend to the full “Rule 2080 grounds” which include both Rule 2080(b)(1) and (b)(2) grounds.

FINRA’s position is in direct conflict with the plain language of Rule 2080. Rule 2080(b)(2) states, “If the expungement relief is based on arbitral findings other than those described above [i.e., in Rule 2080(b)(1)], FINRA . . . also may waive the obligation to name FINRA as a party if it determines that: [the expungement relief and findings are meritorious and would have no material adverse effect on investor protection, CRD system integrity, or regulatory requirements].” (emphasis added). Thus, FINRA arbitrators (and courts) today remain free to grant expungement on equitable grounds,6 including without limitation the grounds listed in Rule 2080(b)(2).

In a May 2021 response to an SEC staff request to clarify the grounds on which FINRA arbitrators may grant expungement, FINRA offered two explanations, neither of which hold water.  First, FINRA stated that it was “FINRA’s longstanding view” that the grounds were limited to Rule 2080(b)(1). 7 Obviously, “longstanding views” do not rewrite existing rules.8

Second, FINRA argued that the grounds listed in Rule 2080(b)(2) are not “grounds” for granting expungement, but are simply factors for FINRA to consider whether to waive the obligation to name FINRA as a party in a court petition for expungement relief.9
This argument also makes no sense. Rules 2080(b)(1) and 2080(b)(2) operate in exactly the same manner. When Rule 2080 is applied
directly, both 2080(b)(1) and 2080(b)(2) serve as factors for FINRA to consider whether to waive being named as a party. When Rule 12805 is applied (noting that it can only be applied by reference to Rule 2080), both 2080(b)(1) and 2080(b)(2) serve as grounds for granting expungement.

 

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate on legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

2 Securities Exchange Act Release No. 90000 (Sep. 25, 2020), 85 FR 62142 (Oct. 1, 2020), https://www.govinfo.gov/content/pkg/FR-2020-12-28/pdf/2020-28509.pdf.

3 Discussion Paper – Expungement of Customer Dispute Information (April 2022), https://www.finra.org/sites/default/files/2022-04/Expungement_Discussion_Paper.pdf at p. 17.

4 Id. at p. 5.

5 This is the third time we have brought this issue to FINRA’s attention. See SIFMA comment letter to SEC, File No. SRFINRA-2020-030 (Oct. 22, 2020), https://www.sifma.org/wp-content/uploads/2020/10/sifma-comment-re-FINRAexpungement-10.22.2020.pdf, at pp. 2 – 5; and SIFMA comment letter to SEC, File No. SR-FINRA-2020-030 (Jan. 19, 2021), https://www.sifma.org/wp-content/uploads/2021/01/sifma-comment-re-SEC-review-of-expungement-proposal1.19.2020-FINAL.pdf, at pp. 2 – 4.

6 See, e.g., Lickiss v. FINRA, A134179 (Cal. App. 1st, 2012) (a court may exercise its equitable jurisprudence to decide
whether and under what circumstances expungement relief is appropriate), https://caselaw.findlaw.com/ca-court-ofappeal/1610198.html#.X34lDVBp9HI.mailto.

7 FINRA letter to SEC, File No. SR-FINRA-2020-030 (May 18, 2021) (“FINRA Letter”),
https://www.sec.gov/comments/sr-finra-2020-030/srfinra2020030-8811356-238001.pdf at pp. 5 – 6.

8 Regardless, FINRA’s view is not that longstanding. In 2003, when the SEC approved then new Rule 2130 (now known as Rule 2080), FINRA apparently held a different view, as evidenced by the following excerpt: Some commenters suggested that the burden of complying with the three proposed standards should be placed squarely upon [FINRA’s] members. Such a rule would require that NASD members only seek expungement of data from the CRD system if such data fits within one of the three standards. NASD noted
that it does not believe such an approach is necessary to achieve the objectives of the proposed rule. Federal and state courts, that are fully informed about the investor protection and regulatory implications of a proposed expungement order, [FINRA] argued, should be trusted to make the proper decision. Release No. 34-48933; File No. SR-NASD-2002-168 (Dec. 16, 2003), https://www.sec.gov/rules/sro/34-48933.htm. FINRA’s FAQs about Rule 2080 also explicitly recognize that “expungement relief [may be] based on judicial or arbitral findings other than those described [in Rule 2080(b)(1)].” See FAQ 5, https://www.finra.org/registration-exams-ce/classiccrd/faq/finra-rule-2080-frequently-asked-questions. See also FAQ 6 (acknowledging that courts are not obligated to follow the standards in Rule 2080, but FINRA recommends that they do so).

9 FINRA Letter at p. 5.