Finra has submitted proposed rule amendments to the SEC seeking to increase the minimum fees assessed in cases where registered representatives seek to have customer information expunged from their CRD records. The filing, SR-2020-005, which was submitted on February 7, 2020, proposes to increase the minimum total fees paid by both parties (the claimant registered representative and the respondent firm) from $300 to $9,475.

Presently, parties to a Finra arbitration claim—expungement or otherwise—are charged fees based upon the amount at issue. Where a registered representative seeks expungement and requests $1 in compensatory damages, as many do, the filing fee is $50. Any pre-hearing and hearing session fees before the arbitrator are also $50, resulting in a total amount of $150 in Finra fees for a typical expungement claim. Respondent firms are similarly assessed surcharge and process fees based on the amount at issue in any given arbitration. Where the amount claimed is less than $5,000, as is the case in most expungement claims, respondent firms are charged $150 in surcharge fees. Process fees are waived for the member firm if the claim is less than $25,000. Thus, in a typical expungement claim, the respondent firm is charged only $150 in Finra fees in connection with the proceeding.

The proposed amendments, however, seek to increase these fees dramatically by requiring parties to an expungement proceeding to pay, at a minimum, the fee structure currently in place for non-monetary claims. For registered representatives, this translates to a minimum filing fee of $1,575, and minimum pre-hearing and hearing sessions fees of $1,125, for total fees in a typical expungement case of $3,825. Member firms would similarly see a steep increase with a minimum $1,900 member surcharge and a minimum $3,750 process fee, totaling $5,650 in typical fees for respondent firms. In those cases where expungement is sought by a registered representative as part of an underlying proceeding, and not a stand-alone claim, the minimum $1,125 hearing session fee would similarly apply, but additional member surcharge or process fees to the firm would not.

While recognizing that the proposal may be burdensome and discourage cost-sensitive parties from pursuing otherwise meritorious claims, which could impact the overall value of CRD reported customer dispute information as a result, the filing states that the proposed amendments will ensure that parties uniformly pay the intended fees for non-monetary relief such as expungement. It will also eliminate what Finra considers an unintended benefit parties have received of being assessed lower fees by claiming nominal compensatory damages. The minimum fees, according to the proposal, will more adequately reflect the complexity of the requests and the time and effort to administer, consider and decide such matters. The filing also notes Finra’s estimate that, between January 2016 and June 2019, it has lost out on $9.7 million in fees it would have received had parties paid the minimum fees contained in the proposal.

The SEC must approve Finra’s proposed amendments in order to become effective. If it does, the effective date will be announced in a regulatory notice published within 60 days of SEC approval, and the effective date would be within 60 days following the publication.

Last week’s proposal is similar to the suggested fee increases outlined in Finra’s Regulatory Notice 17-42, which was issued in December 2017, and in which Finra sought comment on a wide variety of proposed overhauls to the existing customer expungement claim framework. Whether the remainder of the proposed changes and amendments set forth in Regulatory Notice 17-42 will be enacted, and in what final form, remains uncertain.

The recent submission to the SEC, along with the other amendments still under consideration, appear to have the effect of making the process more burdensome and costly for both registered representatives and the firms involved. While it is of course imperative that Finra ensure that appropriate standards exist to keep investors safe and informed about the registered persons they retain, it is also important that registered representatives be given a fair opportunity to pursue expungement in those cases where it is warranted. The heightened limitations on the expungement process, without any corresponding reform in the reporting structure for customer dispute information in the first instance, seems to create an imbalanced system susceptible to distortion. It is unclear whether the increased fee proposal and those amendments still under consideration will enhance the integrity and purpose of conveying accurate and meaningful disclosures to the public, or will instead frustrate that goal. It appears likely, however, that such efforts will limit the access and opportunity of many brokers to the process of requesting removal of customer complaints in the Finra forum. 

Joelle A. Simms is a principal at the law firm of Bressler, Amery & Ross P.C., where she focuses on the representation of broker-dealers and registered representatives in customer and employment disputes, including expungement proceedings, in state and federal court, and in arbitration proceedings throughout the United States before the Financial Industry Regulatory Authority (Finra). Joelle can be reached at 954-430-7813 or by email, [email protected].