Significant Changes Coming for Brokers Seeking an Expungement of Customer Dispute Information
Registered representatives seeking to expunge customer dispute information from the Central Registration Depository system (“CRD”) will likely be required to pay increased FINRA filing and hearing fees in the near future. With Proposed Rule Change 2020-005, FINRA seeks to amend Part IX of the FINRA Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes to institute new minimum fees to requests for expungement of customer dispute information from a registered representative’s Broker Check record. The change, which was originally released for public comment by FINRA in July 2018, was filed with the Securities and Exchange Commission on February 7, 2020. Following an extension, the Commission has until May 26, 2020 to act on the proposed changes to the Codes. If approved by the Commission, FINRA will announce the effective date in a Regulatory Notice published within 60-days of SEC approval.
When a claim is initiated in FINRA, the filing fee imposed is based on the total amount of damages asserted. These fees, found in Section 12900(a) for customer disputes, range from $50 for claims of $.01-$1,000 up to $4,000 for claims over $5,000,000. A similar fee schedule is found in 13900(a) for industry disputes including expungement actions filed against. Currently, even if the rep’s answer to a customer’s claim includes a request for expungement, the rep is not assessed a filing fee. If the customer’s claim closes by award after a hearing, the panel will decide the customer’s claim and the expungement request (assuming the rep pursues the request during the arbitration), and allocate the hearing session fees among the parties. If the claim is settled or dismissed prior to hearing, the panel will hold a separate expungement-only hearing and assess hearing fees based on the amount of the customer’s claim. In this case, no filing fee is ever assessed. FINRA asserts in its proposal that expungement requests are claims and, as such, a filing fee should be imposed at the time the request is made. Proposed Rule Change 2020-005 requires a rep, or a broker-dealer making the request on behalf of an unnamed rep, to pay the required filing fees upon request for an expungement in a customer dispute.
When a rep files a separate arbitration from the original customer dispute seeking an expungement (called a “straight-in request”) the required fees are based on the damages claim in the expungement. While expungement requests under the Industry Code are considered non-monetary claims that are subject to a $1,575 filing fee, FINRA notes in its Statement of Purpose for the Proposed Rule Change that reps have avoided this filing fee by including a nominal monetary damages claim. By claiming damages of $1 in the expungement request, the rep is able to avoid the non-monetary claim fee and, instead, pay the $50 fee set by the schedule. More importantly, because the size of the panel is determined by the size of the claim, the practice of adding a small damages claim changes the composition of the panel so that the expungement request is heard by a single arbitrator rather than a three person panel regardless of the size of the underlying customer claim. This also caps the hearing session fees at $450 versus up to $1,500 per session for a hearing with three arbitrators. Proposed Rule Change 2020-005 requires a broker pay the amount of the filing fee would be either the applicable fee based on the claim amount or the fee for a non-monetary claim, whichever is greater.
In addition, to an increase in fees for reps, the Proposed Rule Change includes increases to fees imposed on member firms. Currently, member firms pay a surcharge of $150 for straight-in expungements involving a nominal monetary damages claim. Under the new proposal, member firms would be required to pay a $3,750 process fee and a $1,900 member surcharge for a total cost of $5,650, consistent with the total cost of an action involving a claim for non-monetary relief.
While expungements will likely become more costly following the implementation of this Rule Change, they are an important legal mechanism for registered representatives to remove false, factually impossible, or even defamatory complaints included on their CRD. If you have questions about expungements or are looking for representation for an expungement action, contact our litigation team.
 Notably, FINRA removed several proposed changes to the Code contained in the original Regulatory Notice 17-42, including the imposition of a one-year statute of limitations for expungements, a requirement that expungement hearings proceed in-person rather than allowing telephonic hearings, and a change to the burden of proof to require a panel finding that an expungement is appropriate under both Rule 2080(b)(1)(A) and (B).
This update provides general information and does not provide tailored legal advice or establish an attorney-client relationship.