By Erwin J. Shustak, Esq. and Holly Nicoll, Law Clerk of Shustak Reynolds & Partners, P.C. posted on Thursday, May 14, 2020.

Erwin J. Shustak

Managing Partner

Location: San Diego, California
New York, New York
Phone: (619) 696-9500 (Ext. 109)
(800) 496-5900 (Ext. 109)
Email: [email protected]

Expensive changes are coming to FINRA’s expungement request.  Under revised, proposed rules submitted by FINRA, expungements requests soon will be more limited, and will be more expensive in light of a revised fee schedule FINRA recently submitted for approval by the SEC.  Changes to FINRA expungement rules have been expected for more than two years since FINRA first proposed them.

In December 2017, FINRA notified all members and registered persons that it proposed a complete overhaul of  the expungement rules for registered person who want to expunge - or, in lay language, erase from public disclosure - certain disclosure items that appear on their CRD records and FINRA’s BrokerCheck available to the public.  The 2017 proposal required requests for expungement be brought within one-year of the customer complaint being reported on the CRD or settlement of the underlying customer arbitration.  Moreover, the associated person seeking expungement of his or her CRD record  would be required to bring their expungement actions during the underlying customer arbitration; would be required to personally appear at the expungement hearing;  a request for expungement would require a unanimous decision from a three-person panel of arbitrators; and there would be increased filing fees for expungement requests.  These proposals were met with significant backlash from those in the industry because they would make it significantly more difficult and expensive for an adviser to be granted expungement and have a negative disclosure item removed from their public FINRA records.

Before those changes to the FINRA rules can take effect, however, FINRA must follow a series of steps to obtain the SEC’s approval of the proposed rule changes.  This includes formally submitting the proposed changes to the SEC, which then publishes the proposed amendments in the Federal Register, solicits and obtains  comments on the proposed changes from the public and industry, provides proposed amendments, and ultimately approves or rejects FINRA’s proposal.

Since the revised expungement rules were announced in late 2017, FINRA has only submitted one of these proposals to the SEC for approval and,  if the SEC signs off on the proposed change, the cost of expungement will increase significantly.  In February of this year, FINRA submitted SR-FINRA-2020-005 to the SEC for approval.  This proposal seeks to increase the minimum fees for filing expungement requests and eliminates one-arbitrator panels for expungement requests that only include a nominal monetary claim. Upon SEC approval of the proposal, FINRA will provide a 60-day notice to members before the change is implemented.  The pending proposal will increase the minimum fee for expungement requests from $300 to a whopping $9,475.  That is a very substantial and serious increase in the filing fee alone of more than three thousand percent!

In the fee increase proposal, FINRA stated the reason for this increase is to ensure all parties pay the same minimum fee for expungement requests.  Previously FINRA charged different rates depending on the type of expungement requested.   An expungement request that claims $1 in compensatory damages lowers the total fees paid to $300 compared to the $9,475 paid by non-monetary claims.  The minimum fee proposed to the SEC aligns with the current fee structure of non-monetary claims.  If a party adds a monetary claim for compensatory damages to the request, the filing fee will be the greater of the applicable filing fee based on the claim or the fee for a non-monetary claim.

            A breakdown of the fee changes will be as follows:

            Filing Fee: Prior Rule ($50) / New Rule ($1,575)

            Pre-hearing Session Fee: Prior Rule ($50) / New Rule ($1,125)

            Hearing Session Fee: Prior Rule ($50) / New Rule ($1,125)

            Member Surcharge: Prior Rule ($150) / New Rule ($1,900)

            Processing Fee: Prior Rule (Waived on claims under $25,000) / New Rule ($3,750)

All the additional items from the 2017 proposal have not yet been be submitted to the SEC for final approval: only the fee changes.  In March 2019, Senator Elizabeth Warren wrote to FINRA asking them when they planned to submit the expanded rules on expungement to the SEC.  In her letter Senator Warren pushed for stronger regulations around the expungement process to protect investors.

Recently Richard Berry, the head of FINRA’s Office of Dispute Resolution, announced FINRA would instead proceed with modified versions of the 2017 proposals.  He announced FINRA is no longer proposing expungement requests require a unanimous decision, instead moving to a majority decision for expungement claims heard by a panel of three FINRA approved arbitrators. FINRA proposes a two-year period to file expungement requests rather then the original proposal of a one-year.  FINRA, however, is sticking with the proposed change that if an associated person is named in a customer’s complaint they must file for expungement during the underlying arbitration and no longer will be able to wait until the outcome of the underlying case and bringing an expungement proceeding later on before a different panel.  These adjustments are somewhat more lenient than the original 2017 proposal but still provide significantly more restrictions than the current rules.  Forcing an associated person to seek expungement from the same panel hearing the customer’s complaint against that broker, ultimately will make it more difficult to convince a panel that expungement is warranted.

This amended proposal has not yet been sent to the SEC for approval and FINRA has not yet provided any timeline for going forward with the proposed changes.

We greatly appreciate Holly Nicoll's contribution to our firm!  Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.  We routinely represent broker-dealers and financial advisors in arbitrations, financial advisor transitions, broker protocol disputes and related matters.  Please direct any questions to our managing partner, Erwin J. Shustak, Esq. and contact us today for a confidential, complimentary consultation.

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