SEC approves Finra rule setting minimum fee for expungement requests


The Securities and Exchange Commission has signed off on a Finra rule that would establish a minimum fee of several thousand dollars for broker requests to clear their records of customer disputes.

The new Financial Industry Regulatory Authority Inc. rule will establish a fee of about $8,300 per expungement request. The fee schedule won’t change but how it is applied will be adjusted.

A registered representative requesting expungement would have to pay $1,575. The firm would be charged a $3,750 process fee and a $1,900  surcharge. A $1,125 prehearing fee would be split between the parties.

The new floor is designed to prevent brokers from filing an expungement request for a small claim amount – usually $1 in damages — which allows them to dodge much higher costs and qualify for a hearing by one arbitrator as opposed to the usual panel of three arbitrators.

The so-called $1 trick has been cited by the Public Investors Arbitration Bar Association as one of the abuses of the expungement system.

In the proposal, Finra said all parties requesting expungement should pay the same minimum filing fee and shouldn’t be able to dodge a three-person panel by citing a small claim amount. The minimum charge applies to expungement requests in customer arbitrations as well as straight-in requests.

In a June 1 approval order published in the Federal Register, the SEC supported Finra’s reasoning.

“The Commission agrees that the proposed minimum filing fee will help eliminate the inconsistent allocation of fees that results when parties add small dollar claims to their expungement requests to avoid the fees otherwise applicable to expungement requests,” the order states.

Finra has not yet released a regulatory notice about the rule approval. It’s likely to go into effect later this summer.

Eliminating the $1 trick is only one of several PIABA recommendations for overhauling the expungement system, which it says enables the scrubbing of broker records to the point that it poses a threat to investor protection.

Lisa Braganca, an Illinois securities attorney and co-author of the recent PIABA Foundation expungement study, was lukewarm about the minimum-fee rule.

“It is a tiny, tiny step in the right direction,” Braganca said. “On the margin, some firms will be irritated that their costs are going up.”

But she said Finra is focusing more on its revenue than expungement reform.

“All it is is a money grab,” Braganca said.

A lawyer who represents brokers seeking expungement criticized the rule for making the process too expensive.

“This is all about money for Finra,” said Dochtor Kennedy, founder of AdvisorLaw. “This change will eliminate the cost savings of using FINRA’s forum, as opposed to civil court or other forums. I expect to see a drastic increase in the use of the alternative forums as a result of the imminent change.” 

Finra denied that it was seeking to raise revenue through the rule.

The rule “is not raising fees,” Finra spokesperson Michelle Ong wrote in an email. “The purpose of this rule is to close an existing loophole which allows individuals seeking expungement to avoid the current fee structure for expungement requests.”

She added that more expungement reform is on the way.

“This is just one step to help address the issue of expungement, including the special roster [of expungement arbitrators] proposal and codifying existing guidance,” Ong said.

Finra said the final rule concentrates only on setting a minimum expungement fee. For instance, it doesn’t require a three-person arbitration panel to decide expungement cases nor does it require a unanimous vote by the panel. Those issues and others were brought up in comment letters on the proposal.

“Finra welcomes a continued dialogue with the commenters on these and other proposed changes to the expungement framework,” Mignon McLemore, Finra assistant general counsel, wrote in a May 18 letter to the SEC.

Written by Investors Wallets

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