Financial Institutions Law Alert

On July 20, 2020, FINRA issued Regulatory Notice 20-25 to Amend the Arbitration Codes to Apply Minimum Fees to Requests for Expungement of Customer Dispute Information. The amendments become effective for cases filed on or after September 14, 2020. The Regulatory Notice reflects FINRA’s swift action after its February 7, 2020 filing of SR-2020-005 with the U.S. Securities & Exchange Commission (the “SEC”) proposing amendments to apply minimum fees to expungement requests of customer dispute information, whether made as part of a customer arbitration or a separate arbitration claim filed by the associated person against a former or current member firm or the customer (“straight-in request”). The SEC published an Order on June 1, 2020 (SEC Release No. 34–88945) approving the proposed rule changes, giving FINRA 60-days to issue a Regulatory Notice. 

The amendments, which respond to FINRA’s concern about practices taken to avoid or reduce fees in expungement proceedings, mandate minimum FINRA fees that significantly increase the combined fees assessed to all parties in expungement proceedings. Notably, the amendments will increase total FINRA fees assessed to the parties in straight-in requests from approximately $300 to approximately $9,475, consistent with the current fee structure for non-monetary claims.

Under the current fee structure, FINRA assesses fees to parties based on the claim amount. For associated persons requesting expungement in straight-in requests that include a small monetary claim (less than $1,000), the filing fee is $50. Pre-hearing and hearing fees are each $50, for a total fee of $150. Accordingly, parties requesting expungement in straight-in requests often avail themselves of this favorable fee structure to reduce costs. For these cases, FINRA assesses a $150 member surcharge to member firms, but waives the process fee. Therefore, the total fees that FINRA assesses parties in straight-in proceedings under the current rules are $300. For expungement requested as part of a customer arbitration, FINRA does not impose an additional filing fee, member surcharge or process fee, but assesses a hearing fee based on the claim amount.

Filing Fees Under Amended Rules

Under the newly adopted rules, however, FINRA will assess a minimum filing fee of $1,575 against associated persons for straight-in requests and against associated persons or firms when requesting expungement as part of a customer arbitration, which could be greater depending upon the claimed monetary damages. If the requesting party requests expungement as part of a customer arbitration, but decides not to pursue the request and subsequently files a straight-in expungement request of the same customer dispute information, the requesting party will be required to pay the minimum filing fee applicable to the straight-in request, even though that party may have already paid the applicable filing fee for expungement during the customer arbitration. 

Hearing Fees Under Amended Rules

Minimum pre-hearing and hearing fees assessed against the party requesting expungement will be $1,125, respectively, for a hearing with three arbitrators for total hearing and pre-hearing fees of $3,825. For straight-in expungements, this minimum fee will be assessed against the associated person requesting expungement. For expungement requested as part of a customer arbitration, this minimum fee will be assessed against the party (firm or associated person) requesting expungement. However, depending upon the damages requested in the claim, these hearing fees can be higher, consistent with FINRA Rules 12902 and 13902. Non-monetary claims, such as expungement, will continue to be decided by a three-person panel, unless the parties agree in writing to one arbitrator. While the amendment is unclear, it appears that the hearing fee for an expungement decided by one arbitrator would be $450 pursuant to FINRA Rules 12902(a) and 13902(a). 

Member and Process Fees Under Amended Rules

For straight-in expungement proceedings, FINRA will assess member firms a minimum $3,750 process fee and $1,900 member surcharge, for total minimum fees of $5,650, consistent with the present fee structure for non-monetary claims. In the rare case where an associated person files a request for expungement of customer dispute information against the customer, FINRA will assess the non-monetary/not specified member surcharge and process fee against each member firm that employed the associated person at the time the customer dispute arose, even where the member firm is not a party to the expungement. While FINRA will not assess member firms an additional member surcharge or process fee in customer arbitrations in which expungement is requested, the proposed minimum expungement hearing fees assessed against the party requesting expungement will still apply.   

Given the increase in a variety of fees associated with expungement, it remains to be seen whether these amendments will have a chilling effect on the expungement process overall and adversely impact smaller firms and associated persons who are more fee sensitive. While FINRA has not implemented any substantive expungement rule changes proposed in Regulatory Notice 17-42 in late 2017, this rule change is a relatively quick fix to increase fees and close any loopholes that may have existed. Member firms and associated persons should be aware of these fee increases/changes, especially those filing fees that FINRA will assess at the time of the expungement request. Accordingly, member firms and associated persons should consider excluding expungement requests in the pleading stage of customer arbitrations and instead request expungement, where appropriate, during the latter stages of the proceeding.    



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