SEC Approves FINRA’s Minimum Expungement Fees Rule Filing
Posted on Categories Broker-Dealer, Expungement, FINRA Code of Arbitration, RulemakingTags , , ,

By George H. Friedman, SAA Editor-in-Chief

No sooner had we reported in SAA 2020-19 (May 20) that FINRA Dispute Resolution Services (“DRS”) had responded to comments on its proposed new fee regime specifically for expungement requests, than the SEC just days later approved the rule.

After years of accommodating brokers' expungement requests and fitting that subsidiary, quasi-regulatory relief into its existing filing fee structure, DRS had proposed a new fee regime specifically for expungement requests. We offer a recap below.

Background and a Core Objective

The Authority filed with the SEC on February 7, SR-FINRA-2020-005, the purpose of which was to establish minimum fees for requesting expungements. It proposed to amend both Codes to require separate fees for expungement requests arising organically within customer arbitration proceedings and impose a new fee set applicable to “straight-in” expungement proceedings. One key objective was to eliminate the “$1 Trick”a loophole that developed with the surge in expungement requests over the past several years. Because expungement is a form of equitable relief, Statements of Claim in arbitration matters concerned wholly with the question of expungement -- so-called "straight-in" proceedings -- did not require an amount in controversy, but FINRA Rules charge relatively expensive fees when Claimants don't "specify" any monetary damages. By seeking $1 in compensatory damages for a related defamation claim, the "straight-in" Claimant obtains a one-person Panel, qualifies for small claims treatment, and achieves much lower fees for herself and the sponsoring firms (ed: FINRA estimated that 76% of filers of straight-in requests utilized this device). Adoption of the new rules will put an end to that practice.

Quick SEC Turnaround

As reported in SAA 2020-08 (Feb. 26), the SEC on February 20 Noticed the proposal (Release No. 34-88251), and published it in the Federal Register on February 26 (Vol. 85, No. 38, Page 11165). As reported in SAA 2020-12 (Mar. 25), the comment period closed March 18, resulting in seven letters that were mostly supportive (with some suggesting other improvements). As reported in #19, FINRA on May 18 responded to comments in a 13-page letter. Just eight days later, the SEC on May 26 approved the rule change proposal (Release No. 34-88945). In rejecting “more should be done” suggestions for changes to the proposed rule: “the Commission acknowledges the concerns of commenters who argue that the proposal should do more to reform the expungement process, including by requiring expungement requests to be decided by a three-person panel. However, the Commission notes that FINRA has represented that it is separately developing other proposed changes to the current expungement framework, including codifying as rules the Guidance and establishing a roster of arbitrators with additional training and experience from which a three-person panel would be selected to decide straight-in requests and expungement requests in settled customer arbitrations. FINRA also states that it welcomes a continued dialogue with the commenters on these and other proposed changes to the expungement framework” (footnotes omitted).


(ed: *While the new rule may seem to have cropped up, without context or design, it is in fact emblematic of systemic rule changes, currently in various stages of development, that will ultimately overhaul the FINRA expungement process. We read the SEC’s comment directly above as: “Keep working on this; we’ll be watching.” **The next step – aside from Federal Register publication – is FINRA filing a Regulatory Notice establishing the effective date. Specifically: “FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 60 days following Commission approval. The effective date will be no later than 60 days following publication of the Regulatory Notice announcing Commission approval of the proposed rule change.” Our hunch is a “cases filed” effectiveness. ***In the meantime, we expect there will be a flurry of under-the-wire expungement requests ahead of the effective date.)