Finra Seeks Higher Expungement Fees by Closing $1-Claim Loophole
The Financial Industry Regulatory Authority wants to eliminate a loophole that slashes the fees firms and brokers pay when seeking to expunge customer complaints from brokers’ regulatory records.
Under current rules, brokers seeking to clean their records are assessed just $300 if they accompany their expungement request with a nominal monetary claim (as low as $1) against their firms, according to the filing. The $1 cases are reviewed by a single arbitrator, but under the revised rule all expungement hearings would require three arbitrators.
“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,” the self-regulator said in its rule modification filing.
The number of expungement requests has exploded as brokers move to clean their records ahead of changes Finra proposed two years ago. The broader changes, which have not yet been filed with the SEC for approval, would make it more difficult to remove customer complaints that show up on their publicly available BrokerCheck records.
More than three-quarters (76%) of 3,114 autonomous expungement requests made between January 2017 and June 2019 have included small monetary claims aimed at lowering costs, according to the amended rule filing. Finra gave up $7.3 million during the period because of the lower fees, it said.
But the minimum-fee proposal was criticized as weak tea by lawyers who represent customers and by those who argue on behalf of brokers.
The PIABA Foundation last year urged Finra to eliminate $1 expungement cases and use the incremental fees to subsidize an “investor advocate” who would represent customers at expungement hearings. Few customers present their opposition to such requests after their underlying cases are decided.
“What Finra chose to do instead is to stay with their fundamentally flawed process, and make more money on it,” said Lisa Bragança, a former SEC branch chief in Chicago who is active in the PIABA trade group for securities plaintiffs’ lawyers. “This merely fiddles around the edges.”
Dochtor Kennedy, the founder of AdvisorLaw, which represents brokers and firms in expungement proceedings, similarly criticized the Finra proposal as a largely meaningless attempt to prop up the regulator’s budget.
“I don’t think they have justified why they are ramping up their fees,” he said of the $9,100 minimum fee proposal. In its December 2017 expungement rule proposal, Finra had proposed a minimum fee of $1,425.
The change will do little to help Finra’s bottom line because $7 million is a tiny part of its budget and because it will have to pay three arbitrators rather than one to consider standalone expungement claims, he said. Some of Kennedy’s potential clients who are on the fence about making waves within their firms by bringing expungement claims (which are nominally filed against the firms) may be further riled by the increased charges, he added.
But he does not expect the fee hike itself, if approved, to deter many from seeking to clean their records.
Individual brokers under the proposal would be assessed a Finra filing fee of $1,575 and hearing session fees of about $2,250, according to Kennedy, up from a total of about $200 under the current $1 expungement regimen. The firms they worked for at the time of the relevant complaints would pay a surcharge of $1,900 per expungement filing and a $3,750 processing fee.