NASD Expungement Rule Comment Period

Controversial NASD Expungement Rule Is Out for Public Comment. Expires 3/31/03


ASD filed a rule proposal in November, designed to establish permanent procedures for brokers to obtain expungement of certain CRD information; an amended proposal has now been published for comment. The proposal, announced in a March 4 Release (#24-47435) by the Commission, has been in the works for some time.

A subject of considerable controversy, the rule proposal has now been released for formal comment before the Commission acts under its statutory approval procedures (68 Fed. Reg. 46, p. 11435, dated 3/10/03). The deadline for comments is March 31, 2003. NASD has solicited and received numerous comments on earlier versions of the proposal and this Arb Alert has tracked the progress of the proposal to this stage (See, e.g., SAA 02-03 (SIA comment); SAA 02-03 (NASAA comment); SAA 02-40 (NASD Rel.); SAA 02-48 (rule filing); SAA 02-49 (errata note)).

NASD has reacted to the comments, which include some 40 letters and more than 500 online survey responses, with some modifications.

New Rule 2130 would provide that members or associated persons seeking to expunge CRD information stemming from disputes with customers must obtain a court order directing such relief and, in that connection, must name NASD as an additional party in the court filing. Before filing, NASD may, if requested, waive being named, but only under two scenarios: (1) NASD determines that the findings are adequate to justify a waiver; or (2) where the findings are not adequate, NASD nevertheless, “in its sole discretion and under extraordinary circumstances,” grants a waiver. In the first instance, judicial and arbitral findings in support of expungement will be adequate, if they declare the “information or allegations [to be] without factual basis” or “defamatory in nature,” or rule that “the complaint fails to state a claim upon which relief can be granted or is frivolous.” Absent those findings, NASD will not grant a waiver from being named unless it determines that: “the expungement relief and accompanying findings on which it is based are meritorious; and … expungement would have no material adverse effect on investor protection, the integrity of the CRD system, or regulatory requirements.”

Stipulated Awards are eligible for consideration, but arbitrators will need to make findings in the Award that support a waiver. That means that mini-hearings where settlements or stipulations seek an expungement order will become standard fare. In that connection, NASD undertakes to “explore the use of telephonic versus in-person hearings, as well as the option of making a decision based on briefs and affidavits from the parties and relevant third parties.”

NASD’s filing explains that it has dropped an early proposal to amend its Conduct Rules to curb abusive practices that could arise. (SAC Ed: If it has not become so already, this new and arcane area promises to spawn a new, post-arbitration specialty business! Was there no other solution, NASAA and NASD?)

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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.