The Expert's Examiner

The comment period closed March 18 on the FINRA Office of Dispute Resolution’s (“ODR”) proposed new fee regime specifically for expungement requests. The seven letters were mostly supportive, with some suggesting other improvements. 

We reported in SAA 2020-06 (Feb. 12) that, after years of accommodating brokers' expungement requests and fitting that subsidiary, quasi-regulatory relief into its existing filing fee structure, ODR had proposed a new fee regime specifically for expungement requests. The Authority filed with the SEC on February 7 SR-FINRA-2020-005, the purpose of which is to establish minimum fees for requesting expungements. It would 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. 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).

Only A Few Comments, Generally Supportive

The comment period closed on March 18. We present below all seven comments, grouped by views. Footnotes have been omitted.

Generally Supportive

St. John’s University School of Law Clinic: “Generally, the Clinic is supportive of the proposed rule changes. The proposed rule changes will provide uniformity amongst brokers attempting to expunge their records, ensure these requests are being properly decided, and protect customer interests.... It is wholly unfair to allow some brokers to evade the expungement fees imposed by the Codes by claiming fictitious nominal damages, whereas brokers that abide by the Code are required to pay thousands of dollars more.... Having three arbitrators look at the evidence and come to a resolution is far more effective than having a single arbitrator. Additionally, a three-person panel legitimizes the decision reached, and it follows that the risk of an erroneous decision is reduced.”

Steven B. Caruso, Esq., Maddox Hargett Caruso, P.C.: “It is my opinion that the proposed rule amendments would help to 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…. It is my further opinion that the proposed rule amendments represent an equitable allocation of reasonable dues and fees against those who would either file or be a party to an expungement request, as is currently intended under the Codes, and that they would close gaps in the fee structure that have emerged in the existing expungement process that have been abused and exploited by parties seeking expungement….”

Supportive, But More Should Be Done

For the most part, the other commenting investor advocacy groups and regulators support the proposal, but urge that more be done to protect investors from unwarranted expungements.

NASAA: President Christopher Gerold, who is also Chief of the New Jersey Bureau of Securities, writes: “The benefits of the Proposal aside, NASAA remains deeply concerned with how far the current expungement process has strayed from the original intent of FINRA Rule 2080 and related arbitration rules. Unfortunately, the current expungement process is compromising the integrity of the data, and will continue to do so without significant changes. NASAA’s position on expungement is clear: expungement is an extraordinary remedy to be granted solely in limited circumstances. The frequency of arbitrator-awarded expungement demonstrates that this is not in fact the case…. In order to try to restore the expungement process at least in part to what it was intended to be – an extraordinary remedy – NASAA strongly urges the Commission to require FINRA to enhance the proposal by requiring unanimous decisions by three-person arbitration panels…. While NASAA supports the Proposal, it maintains that further expungement reform is required to improve a failed system. NASAA encourages FINRA to continue to close gaps in the existing process and to initiate steps towards more meaningful expungement reform.”

PIABA: “While PIABA supports FINRA’s current proposal to apply minimum fees to requests for the expungement of customer dispute information, it is disappointed that FINRA has chosen to only focus on fees for expungement requests, rather than on the host of other proposed rules that were part of FINRA’s request for comments on expungement filed over two years ago…. [W]hile PIABA supports FINRA’s request to amend its rules to apply minimum fees to requests for the expungement of customer dispute information, it believes that FINRA’s proposal should be revised to require that all requests for the expungement of customer dispute information be heard before a three-person arbitration panel.”

Financial Services Institute: “FSI recommends amending the Proposal to provide that the Director of the Office of Dispute Resolution will refund the member firm surcharge and process fees when a member firm is required to participate in an associated person’s Straight-in Request for expungement, so long as the arbitration panel denies the associated person’s expungement request or, more importantly, on the member firm’s showing of financial hardship. We would also urge FINRA to address an underlying concern related to this Proposal, which stems from FINRA’s requirement (as stated in FINRA Regulatory Notice 08-20) that member firms disclose customer complaints on its representatives CRD even if the representative is not named as a party. As a practical matter, under the Proposal, the firm and its representatives will be responsible for significant amounts in arbitration fees for expunging a complaint where the representative is not named as a party. We urge FINRA to reconsider this issue.”

Securities Arbitration Commentator: SAC’s Founder and President Richard Ryder expresses his concerns “about an aspect of the proposed rulemaking that I did not see addressed in the submitted filing. When FINRA began requiring judicial confirmation of expungement ‘recommendations’ by its arbitrators, carved out from that requirement were pleas for CRD corrections from brokers whose Form U5s contained allegations by their former employers that had no relation to conduct involving customers, but were alleged to be ‘defamatory in nature.’ In other words, the U5 disclosures pertained to regulatory, policy or behavioral matters that didn't directly impact customers. The challenged disclosures, for the most part, do not even appear on the public CRD.” What to do about these “U5 Reformation” matters? Says Mr. Ryder: “Does the Rule change proposal see these reformation matters as different from expungement Awards or are they intended to be treated the same as expungement cases under the new expungement regime that FINRA is erecting? I believe FINRA should focus on this particular detail and supply clarification…. In our estimation, these cases do not involve the same investor protection considerations as does expunging customer-related information, and FINRA in the past has excepted these matters from the stringent requirements it has imposed on customer-oriented expungement requests.”

Opposed

AdvisorLaw: The firm, which states that it “is unique in that it exclusively advocates for, and actively represents, the interests of individual brokers, Investment Advisor Representatives (‘IAR’s’), and other associated persons” (emphasis in original), in an 11-page letter offers “an objective summary of the Notice’s importance, analytical shortcomings, unfounded rationale, and misplaced blame, as well as the significant deviation of the Regulator from its purpose.”