[Federal Register Volume 85, Number 105 (Monday, June 1, 2020)]
[Notices]
[Pages 33212-33221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11650]
[[Page 33212]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88945; File No. SR-FINRA-2020-005]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Amend the
FINRA Code of Arbitration Procedure for Customer Disputes and the FINRA
Code of Arbitration Procedure for Industry Disputes To Apply Minimum
Fees To Requests for Expungement of Customer Dispute Information
May 26, 2020.
I. Introduction
On February 7, 2020, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend FINRA's Code of
Arbitration Procedure for Customer Disputes and Code of Arbitration
Procedure for Industry Disputes (collectively, the ``Codes'') to apply
minimum fees to requests for the expungement of customer dispute
information.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on February 26, 2020.\3\ The public comment period closed on
March 18, 2020. The Commission received seven comment letters in
response to the Notice.\4\ On April 2, 2020, FINRA extended the time
period in which the Commission must approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to approve or disapprove the proposed rule change to
May 26, 2020. On May 18, 2020, FINRA responded to the comment letters
received in response to the Notice.\5\ This order approves the proposed
rule change.
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\3\ See Exchange Act Release No. 88251 (Feb. 20, 2020), 85 FR
11165 (Feb 26, 2020) (File No. SR-FINRA-2020-005) (``Notice'').
\4\ See Letter from Steven B. Caruso, Maddox Hargett Caruso,
P.C., dated Feb. 21, 2020 (``Caruso Letter''); letter from Samuel
Edwards, President, Public Investors Arbitration Bar Association
(``PIABA''), dated Mar. 18, 2020 (``PIABA Letter''); letter from
Christopher Gerold, President & Chief, New Jersey Bureau of
Securities, North American Securities Administrators Association
(``NASAA''), dated Mar. 18, 2020 (``NASAA Letter''); letter from
Dochtor D. Kennedy, President & Founder, AdvisorLaw LLC, dated Mar.
18, 2020 (``AdvisorLaw Letter''); letter from Christine Lazaro,
Director of the Securities Arbitration Clinic and Professor of
Clinical Legal Education, Christina Buru, Legal Intern, Gia
Fernicola, Legal Intern, and Lauren K. Peterson, Legal Intern,
Securities Arbitration Clinic, St. John's University School of Law,
dated Mar. 18, 2020 (``SJU Letter''); letter from Robin M. Traxler,
Esq., Senior Vice President, Policy & Deputy General Counsel,
Financial Services Institute (``FSI''), dated Mar. 18, 2020 (``FSI
Letter''); and letter from Richard P. Ryder, Esq., President,
Securities Arbitration Commenter, Inc. (``SAC''), dated Mar. 26,
2020 (``SAC Letter''). Comment letters are available on the
Commission's website at https://www.sec.gov.
\5\ See Letter from Mignon McLemore, Assistant General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
U.S. Securities and Exchange Commission, dated May 18, 2020 (``FINRA
Letter''). The FINRA Letter is available on FINRA's website at
http://www.finra.org, at the principal office of FINRA, on the
Commission's website at https://www.sec.gov/comments/sr-finra-2020-005/srfinra2020005-7214393-216896.pdf, and at the Commission's
Public Reference Room.
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II. Description of the Proposed Rule Change \6\
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\6\ The subsequent description of the proposed rule change is
substantially excerpted from FINRA's description in the Notice. See
Notice, 85 FR at 11165-73.
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A. Background
1. Customer Dispute Information in the Central Registration Depository
Information regarding customer disputes involving associated
persons is contained in the Central Registration Depository (``CRD'')
system, the central licensing and registration system used by the U.S.
securities industry and its regulators. The concept for CRD, as well as
the policies pursuant to which FINRA operates CRD, were developed by
FINRA jointly with NASAA.\7\
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\7\ See Notice at 11165 and n. 4. NASAA and state regulators
remain involved with the ongoing development and implementation of
CRD. See Notice at n. 4.
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In general, the information in the CRD system is submitted by
broker-dealers, associated persons, and regulators in response to
questions on the uniform registration forms.\8\ Among other things,
these forms collect administrative, regulatory, criminal history, and
disciplinary information about associated persons, including customer
complaints, arbitration claims and court filings made by customers
(i.e., ``customer dispute information''). FINRA, state and other
regulators use this information in connection with their licensing and
regulatory activities, and broker-dealers use this information to help
them make employment decisions.
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\8\ The uniform registration forms are Form BD (Uniform
Application for Broker-Dealer Registration), Form BDW (Uniform
Request for Broker-Dealer Withdrawal), Form BR (Uniform Branch
Office Registration Form), Form U4 (Uniform Application for
Securities Industry Registration or Transfer), Form U5 (Uniform
Termination Notice for Securities Industry Registration), and Form
U6 (Uniform Disciplinary Action Reporting Form).
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Pursuant to rules approved by the SEC, FINRA makes specified
current CRD information publicly available through BrokerCheck.\9\
According to FINRA, BrokerCheck is part of its effort to help investors
make informed choices about the broker-dealers and associated persons
with which they may conduct business.\10\ BrokerCheck maintains
information on the approximately 3,600 registered broker-dealers and
628,000 associated persons. BrokerCheck also provides the public with
access to information about formerly registered broker-dealers and
associated persons.\11\
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\9\ There is a limited amount of information in the CRD system
that FINRA does not display in BrokerCheck, including personal or
confidential information. A detailed description of the information
made available through BrokerCheck is available at http://www.finra.org/investors/about-brokercheck.
\10\ See Notice at 11165.
\11\ Formerly registered associated persons, although no longer
in the securities industry in a registered capacity, may work in
other investment-related industries or may seek to attain other
positions of trust with potential investors. BrokerCheck provides
information on more than 16,800 formerly registered broker-dealers
and 567,000 formerly registered associated persons. An associated
person's records are available in BrokerCheck for 10 years after the
associated person leaves the industry, and associated persons who
are the subject of disciplinary actions and certain other events
remain on BrokerCheck permanently.
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According to FINRA, the regulatory framework governing the CRD
system and BrokerCheck has long contemplated the possibility of
expunging certain customer dispute information from these systems in
limited circumstances, such as where the allegations made about the
associated person are factually impossible or clearly erroneous.\12\
FINRA believes the expungement framework seeks to balance the important
benefits of disclosing information about customer disputes to
regulators and investors with the goal of protecting associated persons
from the publication of false allegations against them.\13\
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\12\ See Notice at 11166.
\13\ Id.
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A broker-dealer or associated person can seek expungement of
customer dispute information by going through the FINRA arbitration
process or directly to court (without first going through arbitration).
Regardless of whether expungement of customer dispute information is
sought directly through a court or through arbitration, FINRA Rule 2080
(Obtaining an Order of Expungement of Customer Dispute Information from
the Central Registration Depository (CRD) System), requires a member
firm or associated person seeking expungement to obtain an order of a
court of competent jurisdiction directing such expungement
[[Page 33213]]
or confirming an award containing expungement relief. FINRA will
expunge customer dispute information only after the court orders it to
execute the expungement.\14\
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\14\ FINRA Rule 2080 also requires that FINRA member firms or
associated persons seeking a court order or confirmation of the
arbitration award containing expungement relief name FINRA as a
party. FINRA may, however, waive the requirement to name it as a
party if it determines that the award containing expungement relief
is based on affirmative judicial or arbitral findings that: (1) The
claim, allegation or information is factually impossible or clearly
erroneous; (2) the associated person was not involved in the alleged
investment-related sales practice violation, forgery, theft,
misappropriation or conversion of funds; or (3) the claim,
allegation, or information is false. In addition, FINRA stated it
has sole discretion ``under extraordinary circumstances'' to waive
the requirement if the request for expungement relief and
accompanying award are meritorious and expungement would not have a
material adverse effect on investor protection, the integrity of the
CRD system, or regulatory requirements. See Notice at n. 2; see also
FINRA Rule 2080.
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2. Current Fee Structure in FINRA Arbitration
Under the Codes, if a customer files a claim in arbitration against
an associated person and a member firm, the customer is assessed a
filing fee based on the claim amount.\15\ The member firm is assessed a
member surcharge and a process fee based on the claim amount.\16\ The
member firm is assessed only one surcharge and one process fee per
arbitration.\17\ When the associated person answers the claim,\18\ the
associated person is not assessed a fee if he or she does not add a
claim to the answer.\19\
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\15\ Customers, associated persons, and other non-members who
file a claim, counterclaim, cross claim or third party claim must
pay a filing fee. See FINRA Rule 12900(a)(1); see also FINRA Rule
13900(a)(1).
\16\ A member surcharge is assessed against a member firm if,
for example, the member firm files an arbitration claim, is named as
a respondent in a claim, or employed, at the time the dispute arose,
an associated person who is named as a respondent; the amount of the
surcharge is based on the amount of the claim. See FINRA Rules
12901(a)(1)(B) and 12901(a)(1)(C) and FINRA Rules 13901(a)(2) and
13901(a)(3).
Further, each member firm that is a party to an arbitration
claim in which more than $25,000 is in dispute, or that is non-
monetary or not specified, is required to pay a process fee based on
the amount or nature of the claim. If an associated person of a
member firm is a party, the member firm that employed the associated
person at the time the dispute arose is charged the process fee. See
FINRA Rules 12903(a) and (b) and FINRA Rules 13903(a) and (b).
\17\ Under the Codes, no member firm is assessed more than a
single surcharge or process fee in any arbitration. See FINRA Rules
12901(a)(4) and 12903(b) and FINRA Rules 13901(d) and 13903(b).
\18\ The respondent must answer the statement of claim within 45
days and may include other claims and remedies requested. See FINRA
Rules 12303(a) and (b) and FINRA Rules 13303(a) and (b).
\19\ For example, an associated person is permitted to file a
claim against the claimant requesting relief. Such counterclaim
would require the associated person to pay a filing fee. See FINRA
Rule 12303(d); see also FINRA Rule 13303(d).
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If the parties do not settle the arbitration, the panel will hold
at least one hearing to decide the customer arbitration and, at the
conclusion of the hearing(s), issue an award. In the award, the panel
will allocate the fees incurred by the parties during the arbitration,
including each party's portion of the hearing session fees,\20\ which
are also based on the amount of the customer's claim.\21\ If the
parties settle, the panel will not issue an award.
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\20\ Parties are charged hearing session fees for each hearing
session, based on the customer's
claim amount. In the award, the panel determines the amount of
each hearing session fee that each party is required to pay. See
FINRA Rules 12902 and 13902.
\21\ FINRA makes all arbitration awards publicly available. See
https://www.finra.org/arbitration-mediation/arbitration-awards.
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a. Current Fee Structure for Expungement Requests Made During a
Customer Arbitration
Currently, even if the associated person's answer to a customer's
claim includes a request for expungement, the associated person is not
assessed a filing fee. The member firm, having been assessed the
surcharge and process fee for the customer arbitration, will not incur
additional charges because of the expungement request. If the
customer's claim closes by award after a hearing,\22\ the panel will
decide the customer's claim and the expungement request (assuming the
associated person pursues the request during the arbitration), and
allocate the hearing session fees among the parties.
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\22\ The term ``hearing'' means the hearing on the merits of an
arbitration under Rule 12600.
See FINRA Rule 12100(o).
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If the customer arbitration does not close by award after a hearing
(e.g., settles) and the associated person or requesting party, if it is
an on-behalf-of request,\23\ continues to pursue the expungement
request, the panel from the customer arbitration will hold a separate
expungement-only hearing to decide the expungement request. The hearing
session fee for the expungement-only hearing will be based on the
amount of the customer's claim. Under the Codes, fees for hearing
sessions held solely to decide an expungement request must be charged
to the party or parties requesting expungement.\24\
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\23\ In 2009, the Commission approved amendments to Forms U4 and
U5 to require, among other things, the reporting of allegations of
sales practice violations made against unnamed persons. See Exchange
Act Release No. 59916 (May 13, 2009), 74 FR 23750 (May 20, 2009)
(Order Approving SR-FINRA-2009-008). Specifically, Forms U4 and U5
were amended to add questions to elicit whether the applicant or
registered person, though not named as a respondent or defendant in
a customer-initiated arbitration, was either mentioned in or could
be reasonably identified from the body of the arbitration claim as a
registered person who was involved in one or more of the alleged
sales practice violations. A party (typically, the firm) named in a
customer arbitration may request expungement on-behalf-of an
associated person who is a subject of, but not named in, the
arbitration. Such on-behalf-of requests occur in customer-initiated
arbitrations only.
\24\ See FINRA Rules 12805(d) and 13805(d).
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b. Current Fee Structure for an Expungement Requests Made in a Separate
Arbitration (``Straight-In Request'')
An associated person may request expungement by filing a straight-
in request rather than requesting expungement during a customer
arbitration. The straight-in request may be filed against a former or
current firm or the customer.\25\ Any claim that does not request a
dollar amount is considered a non-monetary or not specified claim
(``nonmonetary claim'') under the Codes. An expungement request is a
non-monetary claim; thus, under the Codes, the associated person must
pay a $1,575 filing fee, and the member firm named as a respondent or
that employed the associated person at the time the dispute arose must
pay a $3,750 process fee.\26\ A member firm named as a respondent or
that employed the associated person at the time the dispute arose is
also assessed a surcharge of $1,900.\27\ These claims are decided by a
three-person panel, unless the parties agree in writing to one
arbitrator.\28\ Further, the per-hearing session fee for a nonmonetary
claim is $1,125, and is assessed against the party requesting
expungement.
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\25\ FINRA notes, however, that straight-in requests filed
against the customer are rare.
See Notice at n. 19.
\26\ See supra note 16. Some associated persons have independent
contractor, rather than employment, relationships with their firms.
In these circumstances, FINRA assesses applicable member surcharge
or process fees against the firm at which the associated person was
associated at the time the dispute arose.
\27\ See supra note 16; see also supra note 17.
\28\ See FINRA Rules 12401(c) and 13401(c).
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c. FINRA's Concerns With Fees for Certain Expungement Requests
As discussed above, an expungement request is a non-monetary claim,
and FINRA believes that the parties requesting expungement should pay
the fees associated with such requests under the Codes.\29\ FINRA is
concerned, however, that member firms and associated persons are
engaging in
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practices to avoid fees applicable to expungement requests,
particularly expungement requests made as straight-in requests.\30\
FINRA cited as an example associated persons who file a straight-in
request adding a small monetary claim (typically, one dollar) to the
expungement request with the intent of reducing the fees assessed
against the associated person and qualify for an arbitration heard by a
single arbitrator.\31\ Further, FINRA stated that claims for small
damages also reduce the member fees that the forum assesses against
member firms when an arbitration claim is filed. Thus, adding a claim
for one dollar in a straight-in request against a member firm reduces
the fees that normally would be assessed to the associated person
requesting expungement and member firm from $9,475 to $300.\32\ FINRA
noted that, often, the associated person will subsequently drop the
claim for one dollar.\33\ Adding a small damages claim also changes the
default panel composition to a single arbitrator rather than a three-
person panel.\34\
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\29\ See Notice at 11167.
\30\ Id.
\31\ Whether the claimant specifies damages, and the amount
specified, determines the fees assessed in arbitration cases and
whether a single arbitrator or a three-person panel will decide the
case. See FINRA Rules 12401 and 13401. If the amount of the claim is
$50,000 or less, exclusive of interest and expenses, the panel will
consist of one arbitrator and the claim is subject to the simplified
arbitration procedures under Rule 12800. If the amount of the claim
is more than $50,000, but less than $100,000, exclusive of interest
and expenses, the panel will consist of one arbitrator unless the
parties agree in writing to three arbitrators. If the amount of a
claim is more than $100,000, exclusive of interest and expenses, or
is non-monetary, or if the claim does not request money damages, the
panel will consist of three arbitrators, unless the parties agree in
writing to one arbitrator.
\32\ FINRA cited another example of an associated person filing
a straight-in request against a member firm. If the associated
person does not add a monetary claim, and assuming one prehearing
conference and one hearing session on the merits, the associated
person is assessed a filing fee of $1,575 and a hearing session fee
of $2,250 ($1,125 for the prehearing conference and $1,125 for the
hearing session on the merits). In addition, the respondent member
firm is assessed a member surcharge of $1,900 and a process fee of
$3,750. If the associated person adds a one dollar claim to the
request, assuming one prehearing conference and one hearing session
on the merits, the associated person is assessed a filing fee of $50
and a hearing session fee of $100 ($50 for the prehearing conference
and $50 for the hearing session on the merits). The member firm is
also assessed a member surcharge of $150 but no process fee. See
Notice at n. 24.
\33\ See Notice at 11167.
\34\ See supra note 31.
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B. Proposed Amendments
As stated in the Notice, FINRA is proposing to amend the Codes to
apply a minimum filing fee for all expungement requests to help ensure
that parties requesting expungement pay the fees intended for such
requests under the Codes, that the fees charged when expungement is
requested are more consistent, and that more expungement requests are
heard by a three-person panel.\35\ Specifically, the same fees would
apply to an expungement request irrespective of whether the request is
made as part of the customer arbitration or the associated person files
a straight-in request, or the requesting party adds a small damages
claim.\36\ The proposed rule change would also apply a minimum process
fee and member surcharge to straight-in requests, as well as a minimum
hearing session fee to expungement-only hearings held after a customer
arbitration \37\ or in connection with a straight-in request.\38\
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\35\ See Notice at 11167.
\36\ Id.
\37\ As an example, FINRA provided that under the current
expungement process, if the customer arbitration settles, but an
associated person seeks to pursue a request for expungement made
during the customer arbitration, the panel from the customer
arbitration will hold a separate expungement-only hearing to decide
the expungement request and issue an award setting forth its
decision on the expungement request. Under the proposed rule change,
the associated person requesting expungement would be required to
pay the minimum hearing session fee for this separate expungement-
only hearing. See Notice at n. 26.
\38\ The proposed rule change would apply to all members,
including members that are funding portals or have elected to be
treated as capital acquisition brokers (``CABs''), given that the
funding portal and CAB rule sets incorporate the impacted FINRA
rules by reference.
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1. Proposed Filing Fee
Under the proposed rule change, an associated person, or requesting
party if it is an on-behalf-of request,\39\ would be required to pay
the filing fee for a non-monetary claim for an expungement request made
during a customer arbitration \40\ or filed as a straight-in
request.\41\ If the associated person or requesting party adds a
monetary claim to the expungement request, the filing fee would be the
fee for a non-monetary claim or the applicable filing fee based on the
claim amount, whichever is greater.\42\
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\39\ See supra note 23.
\40\ Under the proposed rule change, an associated person who
requests expungement of customer dispute information during an
industry arbitration would also be required to pay the filing fee
for a non-monetary claim. FINRA notes, however, that these requests
are rare. See Notice at n. 29.
\41\ If the requesting party chooses to seek expungement in the
customer arbitration, but later determines not to pursue the request
and then files a straight-in request for expungement of the same
customer dispute information, the requesting party would be required
to pay the filing fee applicable to the straight-in request,
notwithstanding the previous payment of the filing fee applicable to
the expungement request during the customer arbitration.
\42\ See Proposed Rules 12900(a)(3) and 13900(a)(3). An
associated person could add a monetary or non-monetary claim to the
expungement request. FINRA notes, however, that it is rare that
significant dollar claims accompany expungement requests.
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As discussed above, under the Codes, an expungement request that
does not include a claim for damages is a non-monetary claim that is
currently assessed a $1,575 filing fee and triggers review by a three-
person panel. FINRA believes that all parties requesting expungement
should pay the same minimum filing fee, and that parties should not be
able to avoid the fee (or a three-person panel) simply by adding a
small claim amount.
Accordingly, FINRA is proposing to impose the filing fee for all
non-monetary claims as the minimum filing fee for expungement requests.
Furthermore, FINRA is proposing to impose this minimum filing fee to
expungement requests in customer arbitrations as well as to straight-in
requests.\43\
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\43\ Under the Codes, the Director of Dispute Resolution
Services (``Director'') may defer payment of all or part of an
associated person's filing fee on a showing of financial hardship.
See FINRA Rules 12900(a)(1) and 13900(a)(1). The proposed rule
change would make clear that this provision applies to expungement
requests. Information on how to request an arbitration fee waiver is
available at https://www.finra.org/arbitrationmediation/arbitration-fee-waivers. In addition, in the award, the panel may order a party
to reimburse another party for all or part of any filing fee paid.
See FINRA Rules 12900(d) and 13900(d).
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FINRA also believes that the proposed minimum filing fee is
commensurate with the additional steps that arbitrators should take
when deciding an expungement request during a customer arbitration or
in connection with a straight-in request.\44\ Regardless of whether
expungement is decided during a customer arbitration or separately,
FINRA Rules 12805 and 13805 require the panel to hold one or more
recorded hearing sessions regarding the appropriateness of expungement,
to review settlement documents in cases involving settlements and
consider the amount of payments made to any party and any other terms
and conditions of the settlement, and to make a determination as to
whether any of the Rule 2080 grounds for expungement have been
established.
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\44\ See Notice at 11167-68.
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2. Proposed Member Surcharge for Straight-in Requests
The proposed rule change would apply a minimum member surcharge
when an associated person files a
[[Page 33215]]
straight-in request against either a customer or a member firm.\45\
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\45\ See proposed Rule 13901(c). If the associated person files
the straight-in request against another associated person, each
member firm that employed the respondent associated person at the
time the dispute arose would be assessed the member surcharge for a
non-monetary claim under the Codes. See FINRA Rule 13901(a)(3) and
proposed Rule 13901(c).
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Under the proposed rule change, if an associated person files a
straight-in request against a member firm, that firm would be assessed
the member surcharge for a non-monetary claim under the Codes
(currently $1,900). The proposed member surcharge is consistent with
what a member firm should pay today for a straight-in request without
an additional small monetary claim filed against a member firm.\46\
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\46\ Consistent with how the member surcharge is assessed today,
under the proposal, FINRA would not assess a member firm more than a
single surcharge in any arbitration. See also supra note 17.
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The proposed rule change would also provide that, for straight-in
requests filed against a customer, each member firm that employed the
associated person at the time the customer dispute arose would be
assessed the member surcharge for a non-monetary claim under the Codes
(currently $1,900).\47\
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\47\ See proposed Rule 12901(a)(3).
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Under the Proposal, if the associated person adds a separate claim
for damages to the straight-in request against the customer or member
firm, the member surcharge would be the non-monetary member surcharge
or the applicable surcharge under the Codes, whichever is greater.
Under the Proposal, the surcharge would be due when the Director serves
the Claim Notification Letter or the initial statement of claim under
the Codes.\48\
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\48\ See proposed Rules 12901(a)(5) and 13901(e).
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3. Proposed Hearing Session Fees
The proposed rule change would apply the hearing session fee for a
non-monetary claim heard by three arbitrators to each hearing session
in which the sole topic is the determination of a request for
expungement relief.\49\ Thus, the proposed hearing session fee would
apply to straight-in requests, and when a customer arbitration does not
close by award after a hearing (e.g., settles) and there is a separate
hearing session held after the customer arbitration to decide an
expungement request that was made during the customer arbitration.\50\
If the requesting party adds a monetary claim to the expungement
request, the hearing session fee would be the greater of the fee for a
non-monetary claim with three arbitrators or the applicable hearing
session fee under the Codes based on the claim amount.\51\ In addition,
consistent with the Codes today, the hearing session fee would be
assessed against the party requesting expungement.\52\
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\49\ FINRA notes that the proposed $1,125 hearing session fee
for expungement hearings would apply if a party requests expungement
as part of a Simplified Arbitration and no hearings are held to
decide the underlying customer claim, regardless of whether a single
arbitrator or a panel hears the Simplified Arbitration.
\50\ See proposed Rules 12900(a)(3) and 13900(a)(3); see also
supra note 37. If an associated person requests expungement during a
customer arbitration, the customer arbitration closes by award after
a hearing, and the arbitrator or panel decides the expungement
request during the customer arbitration, the hearing session fee
would be based on the amount of the customer's claim.
\51\ See proposed Rules 12902(a)(5) and 13902(a)(4).
\52\ Id.
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4. Proposed Process Fees for Straight-In Requests
The proposed rule change would apply a minimum process fee when an
associated person files a straight-in request against either a customer
or member firm. Under the proposed rule change, if an associated person
files a straight-in request against a member firm, that firm would be
assessed the process fee for a non-monetary claim under the Codes
(currently $3,750).\53\
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\53\ See proposed Rule 13903(c). Under the Proposal, if the
associated person files the straight-in request against another
associated person, the firm that employed the respondent associated
person at the time the dispute arose would be assessed the process
fee for a non-monetary claim under the Codes. See proposed Rules
13903(b) and 13903(c).
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The proposed rule change would also clarify that, for straight-in
requests filed against a customer, the member firm that employed the
associated person at the time the customer dispute arose would be
assessed the process fee for a non-monetary claim under the Codes
(currently $3,750).\54\
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\54\ See proposed Rule 12903(c).
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If the associated person adds a separate claim for damages to the
straight-in request against the customer or member firm, the process
fee would be the non-monetary process fee or the applicable process fee
under the Codes, whichever is greater.\55\ The proposed process fee is
consistent with what member firms should pay today for straight-in
requests without an additional small monetary claim filed against a
customer or member firm.
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\55\ Consistent with how the process fee is assessed today,
under the proposal, FINRA would not assess a member more than one
process fee in any arbitration. See also supra note 17.
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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.
III. Comment Summary
As noted above, the Commission received seven comment letters on
the proposed rule change.\56\ One commenter fully supported the
Proposal; \57\ three commenters supported the Proposal but urged FINRA
to make further changes; \58\ two commenters were critical of the
Proposal; \59\ and one commenter supported the Proposal but sought
clarification of its scope.\60\
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\56\ See supra note 4.
\57\ See Caruso Letter.
\58\ See SJU Letter, PIABA Letter, NASAA Letter.
\59\ See FSI Letter, AdvisorLaw Letter.
\60\ See SAC Letter.
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Supportive of Proposal
In one commenter's view, the proposed rule changes ``would be a
fair, equitable and reasonable approach that would expedite and
facilitate the efficiency of the arbitration forum as well as the
investor protection attributes that are all too often compromised
through the improper application of the expungement process.'' \61\
This commenter believes that the changes ``should be approved by the
SEC on an expedited basis.'' \62\ A second commenter was ``[g]enerally
. . . supportive of the proposed rule changes,'' noting that ``[i]t is
wholly unfair to allow some brokers to evade the expungement fees
imposed by the Codes by claiming fictitious nominal damages.'' \63\
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\61\ Caruso Letter.
\62\ Id.
\63\ SJU Letter.
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Proposal Is Beneficial but Insufficient
One commenter was supportive of the Proposal but stated that
expungement requests should be decided by a three-person panel in all
instances.\64\ Another commenter also supported the proposal ``as a
general matter,'' but ``strongly urge[d] the Commission to require
FINRA to enhance the proposal by requiring unanimous decisions by
three-person arbitration panels,'' noting that ``[a] divided panel
indicates that there is doubt that the broker has met the higher burden
attendant to eligibility for extraordinary relief, and thus should not
merit an expungement recommendation.'' \65\ This commenter also argued
that ``further expungement reform is required to improve a failed
[[Page 33216]]
system,'' and urged FINRA to ``continue to close gaps in the existing
process and to initiate steps towards more meaningful expungement
reform.'' \66\ This commenter was concerned that, ``[i]n light of
expungement's evolution from an extraordinary remedy into routinely
granted relief, the integrity of the data on the CRD and IARD systems
is suffering.'' \67\
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\64\ See id.
\65\ NASAA Letter.
\66\ Id.
\67\ Id.
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A third commenter supported the proposed minimum fees, stating that
``the practice of adding a small monetary claim to a request for
expungement in a `straight in' expungement request'' is an ``egregious
abuse of the process'' that has ``become the norm.'' This commenter
also favored requiring three-person panels, stating that ``rather than
hoping that the new rules `should' result in more expungement requests
[being] heard before three-person arbitration panels, FINRA should
require this under the revised arbitration rules.'' \68\
---------------------------------------------------------------------------
\68\ PIABA Letter.
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In response, FINRA noted that while it believes that ``most
expungement requests, particularly straight-in requests, should be
decided by a three-person panel,'' it has determined not to revise this
Proposal to require a three-person panel to decide expungement
requests, or to require the unanimous consent of a three-person panel
to decide expungement requests.\69\ FINRA stated that it believes ``it
is appropriate that this Proposal focus only on applying minimum fees
to requests for expungement of customer dispute information, to help
ensure that parties requesting expungement pay the fees intended for
such requests under the Codes and that the fees charged when
expungement is requested are more consistent.'' \70\ At the same time,
however, FINRA recognized the concerns raised by the commenters
regarding the current expungement framework, and stated that it is
separately developing other proposed changes to the framework,
including codifying as rules the Notice to Arbitrators and Parties on
Expanded Expungement Guidance (``Guidance''),\71\ 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.\72\
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\69\ FINRA Letter.
\70\ Id.
\71\ See https://www.finra.org/arbitrationmediation/notice-arbitrators-and-parties-expandedexpungement-guidance.
\72\ See FINRA Letter.
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Critical of Proposal
One commenter argued that the Proposal ``will result in member
firms bearing the increased costs associated with Straight-in Requests
for expungement even though member firms do not have control over
whether the associated person files a request for expungement,'' and
even though ``an associated person's interest, and not necessarily a
member firm's interest, is primarily served'' by a straight-in request
for expungement.\73\ This commenter recommended amending the Proposal
to provide for a refund of the member firm surcharge and process fees
where an associated person's straight-in request for expungement is
denied, or on the member firm's showing of financial hardship.\74\
---------------------------------------------------------------------------
\73\ FSI Letter.
\74\ See id.
---------------------------------------------------------------------------
FINRA responded that the member surcharge and process fee are
charged to member firms using the arbitration forum to help cover the
costs of administering the forum.\75\ FINRA noted further that the
proposed member surcharge and process fee are consistent with what a
member firm should pay today for a non-monetary claim, and what member
firms currently pay for a straight-in request without an additional
small monetary claim filed against a member firm.\76\ FINRA stated that
it has ``determined not to revise the Proposal to refund the member
surcharge or process fee if a panel denies an associated person's
straight-in request, or to waive these fees on a member firm's showing
of financial hardship.'' \77\ FINRA noted, however, that the Codes
permit the Director to refund or waive the member surcharge under
extraordinary circumstances, and to refund the member surcharge if the
panel denies all of a customer's claims against the member firm or
associated person, and allocates all hearing session fees assessed
against the customer.\78\ Thus, the Codes currently permit the Director
to refund or waive the member surcharge in certain circumstances,
although they do not currently permit the waiver or refund of the
process fee; this would not change under the Proposal.\79\
---------------------------------------------------------------------------
\75\ See FINRA Letter.
\76\ See id.
\77\ FINRA Letter.
\78\ See id.
\79\ See id.
---------------------------------------------------------------------------
FINRA also noted that, consistent with the current fee structure
under the Codes, it believes that ``member firms, rather than
associated persons or customers, should continue to bear the larger
share of the costs of expungement.'' \80\ However, FINRA states that it
``intends to monitor the impact of the fees on parties and consider if
additional changes are warranted.'' \81\
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\80\ FINRA Letter.
\81\ Id. The commenter also urged FINRA to consider eliminating
the requirement that member firms disclose on CRD customer
complaints against their associated persons, even when the
associated person is not named as a party. In response, FINRA noted
that, as these concerns relate to the requirements to report
information in the CRD system and its publication through
BrokerCheck, rather than the application of fees related to requests
to expunge customer dispute information already submitted in the CRD
system and publicly available through BrokerCheck, FINRA would not
address those concerns as part of this Proposal. See FINRA Letter.
---------------------------------------------------------------------------
Another commenter sought to explain the practice of claiming
nominal damages, stating that the purpose and intent ``was never to
`reduce fees,' '' but rather to ``ensure that the Director does not
impose egregious forum fees,'' as the Director is authorized to assess
hearing session fees for non-monetary claims that exceed those for
monetary claims.\82\ In response, FINRA underscored that the Proposal
is ``intended to help ensure that parties requesting expungement pay
the fees associated with expungement requests by amending the Codes to
apply minimum fees for all expungement requests, regardless of whether
the requesting party adds a small damages claim to the request,'' and
to ``add consistency to the fees charged across all expungement
requests.'' \83\ FINRA notes that the proposed minimum fees would
result in the same filing and hearing session fees being assessed for
an expungement claim in the absence of the addition of a small damages
claim.\84\ Moreover, FINRA noted that the proposed minimum fees for
expungement requests (a non-monetary claim) would be the same as those
fees applicable to any non-monetary claim under the Codes.\85\
---------------------------------------------------------------------------
\82\ See AdvisorLaw Letter.
\83\ FINRA Letter.
\84\ See id.
\85\ Id. The Commission also notes that the Director also has
authority to defer the payment of all or part of an associated
person's filing fee on a showing of financial hardship, and the
Codes currently permit the Director to refund or waive the member
surcharge in certain circumstances. See Notice at 11173
---------------------------------------------------------------------------
This commenter also believes that FINRA's economic impact analysis
is flawed in that it: Lacks a full accounting of FINRA's costs in
connection with expungement claims; incorrectly assumes that all
expungement claims are limited to two hearings (one pre-hearing
conference and one hearing on the merits); and fails to account for the
[[Page 33217]]
fact that a portion of filing fees are refundable.\86\
---------------------------------------------------------------------------
\86\ See AdvisorLaw Letter.
The commenter also criticized FINRA's economic impact analysis
by claiming that FINRA understated the level of BrokerCheck usage.
Id. In response, FINRA stated that in 2017, it began using a
different service provider to monitor BrokerCheck web traffic, and
that differences in the monitoring methodology explain why the usage
numbers from 2016 and earlier that are cited in the Notice are
higher than the numbers from 2017 to the present. See FINRA Letter.
The commenter also argued that FINRA's economic analysis relies on a
study that overstates the predictive value of information currently
in BrokerCheck. See AdvisorLaw Letter. In response, FINRA noted that
the Proposal cites a second study with a different empirical
methodology, and that this study also finds that past disciplinary
and other regulatory events associated with a member firm or
individual can be predictive of similar future events. FINRA
believes ``the inferences from the [challenged study] are,
therefore, consistent with other, similar studies using different
sets of assumptions.'' FINRA Letter. Moreover, the commenter also
suggested that the Proposal would discourage the removal of
``factually impossible or clearly erroneous'' allegations from the
CRD system, compromising the integrity of the information therein,
and raised concerns regarding the requirements to report information
in the CRD system, and the accuracy and completeness of that
information. See AdvisorLaw Letter. In response, FINRA noted that
these concerns relate to the requirements to report information in
the CRD system and its publication through BrokerCheck and not the
application of fees related to requests to expunge customer dispute
information already submitted in the CRD system and publicly
available through BrokerCheck. Accordingly, FINRA did not address
these concerns as part of this Proposal. See FINRA Letter.
---------------------------------------------------------------------------
In response, FINRA reiterated that the cost and revenue information
detailed in its original economic analysis accurately demonstrates
``the impact that the practice of adding a small damages claim to an
expungement request has had on the forum.'' \87\ FINRA explained that
the assumption of one prehearing conference and one hearing session on
the merits ``is based on the median number of prehearing conferences
(one) and hearing sessions on the merits (one) associated with
straight-in requests that were filed and closed during the sample
period.'' \88\ FINRA believes that this assumption is consistent with
evidence provided by the commenter, which noted in its letter that the
majority (78.8%) of claims in its sample were concluded with one
prehearing conference and one hearing on the merits.\89\ Finally, FINRA
responded that because the Proposal only addresses the assessment of
fees, the collection of fees (which includes crediting the refundable
portion of the filing fees) is outside the scope of the Proposal.\90\
---------------------------------------------------------------------------
\87\ FINRA Letter.
\88\ Id.
\89\ See FINRA Letter (acknowledging that ``additional fees
would have been assessed for cases with a greater number of pre-
hearing conferences or a greater number of hearing sessions on the
merits,'' but ``continues to believe that the use of the assumption
results in a reasonable estimate for the additional fees that would
have been assessed during the sample period.'' See also AdvisorLaw
Letter.
\90\ See FINRA Letter. Notwithstanding its position that the
collection of fees is outside the scope of the proposal, FINRA
offered additional information regarding the portion of the fees
that is refundable. Specifically, FINRA stated that every filing fee
contains a refundable portion and non-refundable portion. FINRA
provided an illustration of how the proposal would impact the
allocation of these two portions of the filing fee. In addition,
FINRA clarified that the ``refundable'' portion is generally not
refunded but rather used to offset expenses for which the party
paying the hearing session fee would otherwise be responsible at the
end of a claim (e.g., to offset hearing session fees assessed
against the party who paid the filing fee in the award).
---------------------------------------------------------------------------
The commenter also argued that FINRA fails to fully support its
contention that straight-in expungement requests should be heard by a
three-person panel, and stated that it is unclear whether the parties
to a straight-in request would be allowed to continue to agree to
adjudication by a single arbitrator.\91\ In response, FINRA clarified
that the Proposal would not require a three-person panel to decide
expungement requests, and that it would not change the parties' ability
to request a single arbitrator.\92\
---------------------------------------------------------------------------
\91\ See AdvisorLaw Letter.
\92\ See FINRA Letter.
---------------------------------------------------------------------------
Finally, the commenter argues that the Proposal is inconsistent
with the Exchange Act, and more specifically that it is not consistent
with Sections 15(A)(b)(5) and 15(A)(b)(6) of the Exchange Act because
it does not purport to address actual fraud, and because it will lead
to false information in the CRD, which is not in the interests of
investors or the public.\93\
---------------------------------------------------------------------------
\93\ See Advisor Law Letter.
---------------------------------------------------------------------------
FINRA responded that it believes that the Proposal is consistent
with the provisions of Section 15A(b)(5) which requires, among other
things, that FINRA rules provide for the equitable allocation of
reasonable dues, fees and other charges among members and issuers and
other persons using any facility or system that FINRA operates or
controls, and Section 15A(b)(6), which requires, among other things,
that FINRA rules be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
and, in general, to protect investors and the public interest.\94\
---------------------------------------------------------------------------
\94\ See FINRA Letter.
---------------------------------------------------------------------------
Specifically, FINRA stated that ``[t]he Proposal is intended to
close gaps in the fee structure that have emerged in the existing
expungement process, such as where parties add small dollar claims to
their expungement requests to significantly lower the fees associated
with expungement requests.'' \95\ As a result, FINRA believes that the
Proposal will apply fees consistently to all parties requesting
expungement, consistent with what is intended under the existing fee
structure in the Codes.\96\ In addition, FINRA stated that ``as an
expungement request is a separate relief request that an arbitrator or
panel must consider and decide, the filing fees and related member and
forum fees should reflect the general complexity of these requests, as
well as the time and effort needed to administer, consider and decide
them.'' \97\ By consistently applying the fees to all parties
requesting expungement, FINRA believes the Proposal will help ensure
that the fees for expungement requests are assessed, and that the costs
borne by the forum to administer expungement requests are allocated, as
intended, to those requesting expungement under the Codes.\98\
---------------------------------------------------------------------------
\95\ FINRA Letter. In response to the comment that the Proposal
``singles out'' expungement fees, FINRA notes that the Proposal only
singles out those fees in order to help ensure that expungement
requests are subject to the same minimum filing fee as other non-
monetary claims. See FINRA Letter.
\96\ See FINRA Letter.
\97\ FINRA Letter.
\98\ See id.
---------------------------------------------------------------------------
FINRA also stated that, to the extent that the Proposal results in
more expungement requests being heard by a three-person panel,
particularly for straight-in requests that often do not include
customer participation and can be complex to resolve, the Proposal
would help ensure a complete factual record to support the arbitrators'
decision, regardless of whether the arbitrators grant or deny the
expungement request.\99\ FINRA believes that this, in turn, will help
protect investors and the public interest by helping to ensure the
accuracy and integrity of information in the CRD system.\100\
---------------------------------------------------------------------------
\99\ Id. FINRA also stated that it is separately developing
other proposed changes to the expungement framework, which would
include 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. See supra notes 74-75 and
accompanying text.
\100\ See FINRA Letter.
---------------------------------------------------------------------------
Finally, FINRA stated that it disagrees with the commenter's
suggestion that customers who choose to participate in expungement
hearings, even though they are not a party to the arbitration, should
be assessed fees under the Proposal.\101\ FINRA believes that ``such
fees could have a chilling effect on customer participation and would
be
[[Page 33218]]
inconsistent with FINRA's long-held position of encouraging customer
participation in expungement hearings.'' \102\ FINRA asserted that
``[c]ustomer participation during an expungement hearing provides the
panel with important information and perspective that it might not
otherwise receive.'' \103\ Therefore, FINRA ``seeks to encourage
customer participation in expungement hearings, even if the customer is
not a party.'' \104\
---------------------------------------------------------------------------
\101\ Id.
\102\ FINRA Letter.
\103\ Id.
\104\ Id.
---------------------------------------------------------------------------
Proposal Requires Clarification
As noted above, one commenter was concerned that the Proposal does
not distinguish between expungement requests relating to customer
disputes, and requests from associated persons to expunge allegations
that relate to regulatory, policy, or behavioral matters that did not
directly impact customers, and which are alleged to be ``defamatory in
nature.'' \105\ This commenter noted that the expungement of these
``defamatory'' claims has historically been treated differently than
the expungement of customer dispute information, and suggested that
FINRA clarify whether or not they are included in the Proposal.\106\ In
response, FINRA clarified that the Proposal applies only to requests to
expunge customer dispute information, and not to other types of
expungement claims.\107\
---------------------------------------------------------------------------
\105\ SAC Letter.
\106\ Id.
\107\ FINRA Letter.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
After careful review of the Proposal, the comment letters, and
FINRA's response, the Commission finds that the Proposal is consistent
with the requirements of the Exchange Act and the rules and regulations
thereunder that are applicable to a national securities
association.\108\ Specifically, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Exchange
Act,\109\ which requires, among other things, that FINRA rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest, and Section 15A(b)(5) of the
Exchange Act, which requires, among other things, that FINRA rules
provide for the equitable allocation of reasonable dues, fees and other
charges among members and issuers and other persons using any facility
or system that FINRA operates or controls.
---------------------------------------------------------------------------
\108\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\109\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
Proposed Minimum Filing Fee
The Proposal would require an associated person, or requesting
party if it is an on-behalf-of request, to pay the current filing fee
for a non-monetary claim for an expungement request made during a
customer arbitration or filed as a straight-in request. If the
associated person or requesting party adds a monetary claim, the filing
fee would be the fee for a non-monetary claim or the applicable filing
fee based on the claim amount, whichever is greater.\110\
---------------------------------------------------------------------------
\110\ See Notice at 11167.
---------------------------------------------------------------------------
The Commission believes that applying a minimum filing fee to all
requests for expungement of customer dispute information will help
ensure that the fees are equitably allocated because the parties
requesting expungement will pay the fees intended for such requests
under FINRA's Codes. Specifically, 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 Commission also believes that the Proposal
will help ensure that the fees charged when expungement is requested
are consistent, irrespective of whether the request is made as a
straight-in request or during a customer arbitration, or whether
damages are included in the request; and that it will help ensure that
parties requesting expungement pay the fees intended for such requests.
For these reasons, the Commission believes the Proposal will help
provide for the equitable allocation of reasonable dues and fees
against those who would either file or be a party to an expungement
request.
With respect to associated persons who would otherwise make a small
damages claim in order to avoid the applicable fees, while the
Commission acknowledges that the proposed rule changes will result in
costs that are currently being avoided, the effect of the proposal is
simply to apply the applicable fees that were intended for such
requests under FINRA's Codes. This will help provide for the equitable
allocation of reasonable dues and fees against those who would file or
be a party to an expungement request.
The Commission acknowledges that Proposal would increase costs for
member firms and associated persons who include a request for
expungement in the answer to a customer's claim. However, the
Commission also believes that these increased costs are consistent with
the Exchange Act, because they will help ensure that the fees charged
when expungement is requested are consistent across associated persons
and member firms, regardless of whether the request for expungement is
made during a customer arbitration or as a straight-in request, and
that requests for expungement made during a customer arbitration are
treated consistently with other types of claims. The Commission
believes that this will provide for the equitable allocation of
reasonable dues and fees against those who would file an expungement
request.
The Commission notes also that the amount of the filing fees
applicable to these requests is not the subject of the Proposal, which
is instead addressing the equitable application of the existing filing
fees applicable to non-monetary claims. Further, as FINRA notes, the
Director may defer payment of all or part of an associated person's
filing fee on a showing of financial hardship.\111\
---------------------------------------------------------------------------
\111\ See Notice at 11173.
---------------------------------------------------------------------------
Proposed Minimum Member Surcharge and Process Fee for Straight-In
Requests
The Proposal would apply a minimum member surcharge and process fee
when an associated person files a straight-in request against either a
customer or a member firm. If an associated person files a straight-in
request against a member firm, that firm would be assessed the member
surcharge for a non-monetary claim under the Codes (currently $1,900)
and the process fee for a non-monetary claim under the Codes (currently
$3,750). These fees are consistent with what a member firm would pay
today for a straight-in request without an additional small monetary
claim filed against a member firm. For straight-in requests filed
against a customer, the member firm that employed the associated person
at the time the customer dispute arose would be assessed the member
surcharge and process fee.\112\ If the associated person adds a
separate claim for damages to the straight-in request against the
customer or member firm, the member surcharge would be the non-monetary
member surcharge and process fee or the applicable surcharge and
process fee under the Codes, whichever is greater.\113\
---------------------------------------------------------------------------
\112\ FINRA notes, however, that straight-in requests filed
against the customer are rare. See Notice at n. 19.
\113\ See Notice at 11168.
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[[Page 33219]]
The Commission agrees with FINRA that applying a minimum member
surcharge and process fee to requests for expungement of customer
dispute information will help ensure that member firms pay the fees
intended for such requests under FINRA's Codes, and will help ensure
that the fees charged when expungement is requested are consistent
across member firms. As is the case with filing fees, the practice of
adding small dollar claims to an expungement request significantly
lowers the applicable member surcharge and process fee in a way not
intended when those provisions of the FINRA Codes were adopted. The
Commission acknowledges that, for member firms who are parties to
requests that would otherwise include small dollar claims, the Proposal
will increase costs. However, the Commission agrees with FINRA that
eliminating this practice by applying the member surcharge and process
fee consistently will help provide for the equitable allocation of
reasonable dues and fees against those members who would be parties to
an expungement request.
The Commission also acknowledges the concern expressed by a
commenter that the Proposal ``will result in member firms bearing the
increased costs associated with Straight-in Requests for expungement
even though member firms do not have control over whether the
associated person files a request for expungement,'' and that ``an
associated person's interest, and not necessarily a member firm's
interest, is primarily served'' by a straight-in request for
expungement.\114\ However, the Commission observes that the requirement
that member firms bear some of the costs associated with straight-in
requests for expungement, even where member firms do not have control
over whether the associated person files a request for expungement, is
not part of the Proposal, but instead is an existing requirement under
FINRA's Codes. The Proposal would not change FINRA's rules with respect
to member firms bearing some of the costs associated with straight-in
requests for expungement, but rather, would eliminate the ability of
associated persons and member firms to avoid paying the full amount
intended for such requests under FINRA's Codes.\115\
---------------------------------------------------------------------------
\114\ FSI Letter.
\115\ Similarly, the Commission acknowledges that one commenter
suggested that customers who choose to participate in expungement
hearings, even though they are not a party to the arbitration, be
assessed fees under the Proposal. See AdvisorLaw Letter. The
Commission observes that this is outside the scope of the Proposal.
Additionally, the Commission agrees with FINRA that customer
participation during an expungement hearing provides the panel with
important information and perspective that it might not otherwise
receive, and that such fees could have a chilling effect on customer
participation.
---------------------------------------------------------------------------
Additionally, the Commission notes that, under FINRA's Codes, the
Director can waive or refund the member surcharge under extraordinary
circumstances.\116\ In addition, under the Codes, the Director can
refund the member surcharge if the panel denies all of a customer's
claims against the member firm or associated person and allocates all
fees assessed pursuant to Rule 12902(a) against the customer.\117\
FINRA notes also in its response that these waivers and refunds would
continue to be available under the Proposal, and that it intends to
monitor the impact of the fees on parties and consider if additional
changes are warranted.\118\
---------------------------------------------------------------------------
\116\ See FINRA Letter.
\117\ Id.
\118\ Id.
---------------------------------------------------------------------------
Proposed Minimum Hearing Session Fee
The Proposal would apply the hearing session fee for a non-monetary
claim heard by three arbitrators to each hearing session in which the
sole topic is the determination of a request for expungement relief.
This fee would apply to straight-in requests, and when a customer
arbitration does not close by award after a hearing (e.g., settles) and
there is a separate hearing session held after the customer arbitration
to decide an expungement request that was made during the customer
arbitration. If the requesting party adds a monetary claim to the
expungement request, the hearing session fee would be the greater of
the fee for a non-monetary claim with three arbitrators or the
applicable hearing session fee under the Codes based on the claim
amount.\119\
---------------------------------------------------------------------------
\119\ See Notice at 11168. This is consistent with the current
fee structure, which provides that whether the claimant specifies
damages, and the amount specified, determines the fees assessed in
arbitration cases and whether a single arbitrator or a three-person
panel will decide the case. See FINRA Rules 12401 and 13401.
---------------------------------------------------------------------------
The Commission agrees with FINRA that applying a hearing session
fee to requests for expungement of customer dispute information will
help ensure that parties requesting expungement pay the fees intended
for such requests under FINRA's Codes, and will help ensure that the
fees charged when expungement is requested are consistent. As with the
filing fees, member surcharge, and process fee, the practice of adding
small dollar claims to an expungement request significantly lowers the
applicable hearing session fee.
Other Issues Related to Minimum Fees for the Expungement of Customer
Dispute Information
The Commission notes the concern, expressed by one commenter, that
the proposed minimum fees may deter some member firms and associated
persons from making meritorious expungement requests that they would
have otherwise made.\120\ As a result, the Commission agrees that the
minimum fees may impact certain associated persons and member firms
more than others.\121\ However, the Commission agrees with FINRA that
the proposed rule change will not result in any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Exchange Act. As discussed above, some associated persons and
member firms avoid paying the intended fees under the Codes by adding a
small damages claim to their expungement requests, thus receiving a
benefit not intended under the Codes. The Commission notes that these
small damages claims do not necessarily reflect an actual claim against
the member firm; \122\ and, in fact, associated persons who file such
monetary claims often drop them during the proceedings.\123\ Therefore,
the Commission agrees with another commenter who noted that it is
``unfair to allow some brokers to evade the expungement fees imposed by
the Codes by claiming . . . nominal damages.'' \124\
---------------------------------------------------------------------------
\120\ See AdvisorLaw Letter.
\121\ See Notice at 11173.
\122\ See AdvisorLaw Letter.
\123\ See Notice at 11167.
\124\ SJU Letter.
---------------------------------------------------------------------------
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.\125\ 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 \126\ 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.\127\ FINRA also states that it welcomes
a continued dialogue with the commenters on these
[[Page 33220]]
and other proposed changes to the expungement framework.\128\
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\125\ See PIABA Letter, NASAA Letter, SJU Letter.
\126\ See supra note 74.
\127\ See FINRA Letter.
\128\ Id.
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Reliability of FINRA's Analysis
FINRA supports the Proposal with data regarding BrokerCheck usage
and the predictive value of information therein, as well as an economic
impact analysis that includes information on the costs of expungement
hearings, the number of hearings in which a small claim for damages was
made, and the shortfall between the total amount of fees assessed and
the amount that would have been assessed if the fees for non-monetary
claims were applied consistently. As set out in more detail above, one
commenter criticized various aspects of FINRA's data and analysis.\129\
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\129\ See AdvisorLaw Letter.
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The Commission notes that the purpose of the Proposal is to help
ensure that those who would either file or be a party to an expungement
request pay the existing fees as required by the Codes. The fees
established by the Proposal are not new; rather, they are the same fees
currently applicable to non-monetary claims, applied on a more
consistent basis to all, rather than some, expungement requests.
Therefore, the question of whether the amount of the fees applicable to
non-monetary claims is appropriate is beyond the scope of the Proposal.
As noted above, the Commission believes that eliminating the practice
of claiming nominal damages to avoid the existing fees, and applying
the fees consistently to parties requesting expungement, is consistent
with Section 15A(b)(5) of the Exchange Act, which requires, among other
things, that FINRA rules provide for the equitable allocation of
reasonable dues, fees and other charges among members and issuers and
other persons using any facility or system that FINRA operates or
controls.
FINRA provided cost and revenue information, which demonstrate the
negative impact that the practice of adding a small damages claim to an
expungement request has had on the forum.\130\ The Commission
emphasizes that the fees established by the Proposal are not new,\131\
and that the question of whether the amount of the fees is appropriate
is beyond the scope of the Proposal. However, the Commission also notes
that FINRA provides evidence that there is a shortfall between the cost
of a typical expungement request and the fees assessed where parties
claim a small amount in damages to reduce the applicable fees, which
supports a regulatory need for the Proposal.\132\ FINRA also provides
sufficient evidence that the disparity in fees that would be assessed
under the Proposal's more consistent approach and the fees currently
assessed is significant.\133\ Commenters generally did not challenge
this evidence.\134\
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\130\ See FINRA Letter.
\131\ While none of these fees is a new forum fee, some fees,
such as the filing fee, will be assessed more uniformly regardless
of when the expungement request is made. See sections II.A.2.a and
II.B.1 above.
\132\ Specifically, FINRA explains that the costs to administer
a straight-in request can include chairperson honoraria, travel
expenses, conference room rental, and other costs to administer the
forum. FINRA states that the cost of chairperson honoraria alone for
a typical straight-in request is $725--more than double the total
amount of the fees typically assessed for a straight-in request
where a small damages claim is added ($300). See Notice at 11170.
\133\ For example, FINRA notes that, for a sample period of
January 2016-June 2019, 76% of straight-in requests for expungement
included a small damages claim. FINRA also provides an estimate of
the total amount of fees not assessed during the sample period as a
result of: (1) Filings made during the customer arbitration that
were not subject to a filing fee ($2.4 million) and (2) straight-in
expungement requests that included a small damages claim ($7.3
million). See Notice at 11170.
\134\ In calculating the overall shortfall in fees assessed,
FINRA assumed that each straight-in expungement request would result
in one prehearing conference and one hearing session on the merits.
One commenter questioned this assumption. See AdvisorLaw Letter.
FINRA responded that the assumption is based on the median number of
prehearing conferences (one) and hearing sessions on the merits
(one) associated with straight-in requests that were filed and
closed during the sample period. See FINRA Letter. FINRA also stated
that this assumption is consistent with evidence provided by the
commenter, which noted in its letter that the majority (78.8%) of
claims in its sample were concluded with one prehearing conference
and one hearing on the merits. Id. The Commission does not believe
that the exact amount of the shortfall is necessary to determine
whether the Proposal is consistent with the Exchange Act; rather,
the relevant consideration is whether the fees are currently
assessed inconsistently across members and associated persons.
The commenter also asserted that the Proposal fails to account
for the fact that a portion of filing fees are refundable. See
AdvisorLaw Letter. FINRA responds that because the Proposal only
addresses the assessment of fees, the collection of fees (which
includes crediting the refundable portion of the filing fees) is
outside the scope of the Proposal. See FINRA Letter. However, FINRA
also offers additional information regarding the portion of the fees
that is refundable. Id. As noted above, the Commission does not
believe that the exact amount of the shortfall is necessary to
determine whether the Proposal is consistent with the Exchange Act;
rather, the relevant consideration is whether the fees are currently
assessed inconsistently across member firms and associated persons.
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One commenter also questioned the reliability of FINRA's data
regarding BrokerCheck usage.\135\ As noted above, FINRA clarified in
its response that in 2017, it began using a different service provider
to monitor BrokerCheck web traffic, and that differences in the
monitoring methodology explain why the numbers from 2016 and earlier
seem to indicate higher usage than the numbers from 2017 to the
present.\136\ The Commission believes that this explanation is
reasonable, and that regardless, the specific number of unique users of
BrokerCheck is not relevant to the application of the fees related to
requests to expunge customer information already mentioned in the CRD
system and publicly available through BrokerCheck, and is not necessary
to the Commission's analysis of whether or not the Proposal is
consistent with the Exchange Act.
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\135\ See AdvisorLaw Letter.
\136\ See FINRA Letter.
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The commenter also argued that FINRA's 2015 study overstates the
predictive value of information currently in BrokerCheck because it
excludes certain types of claims from its analysis.\137\ In response,
FINRA notes that the Proposal cites another study with a different
empirical methodology that also finds past disciplinary and other
regulatory events associated with a member firm or individual can be
predictive of similar future events.\138\ The Commission notes that the
two studies cited by FINRA provide support for the contention that past
disciplinary and other regulatory events associated with a firm or
individual can be predictive of similar future events; the Commission
also notes that the commenter does not point to any studies reaching a
different conclusion. Regardless, the Commission believes that the
utility of BrokerCheck as a tool for predicting future misconduct is
not relevant to the application of the fees related to requests to
expunge customer information already mentioned in the CRD system and
publicly available through BrokerCheck, and is not necessary to the
Commission's analysis of whether or not the Proposal is consistent with
the Exchange Act.
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\137\ See AdvisorLaw Letter.
\138\ See FINRA Letter.
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Thus, for the reasons described above, the Commission believes that
the Proposal, as filed with the Commission, is consistent with Sections
15(A)(b)(5) and 15(A)(b)(6) of the Exchange Act.
V. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \139\ that the proposal (SR-FINRA-2020-005) be, and hereby
is, approved.
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\139\ 15 U.S.C. 78s(b)(2).
[[Page 33221]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\140\
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\140\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11650 Filed 5-29-20; 8:45 am]
BILLING CODE 8011-01-P