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Regulation and Compliance > Federal Regulation > FINRA

FINRA Seeks to Close ‘$1 Expungement Case’ Loophole

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The Financial Industry Regulatory Authority is proposing to apply minimum filing fees for all broker expungement requests in order to close a loophole allowing the onslaught of “$1 expungement cases.”

Industry attorneys, however, say FINRA’s plan is a revenue grab.

The fees would apply “irrespective” of whether the request is made as part of customer arbitration or the associated person files a straight-in request, or the requesting party adds a small damages claim.

The proposed rule change, filed on Feb. 7 with the Securities and Exchange Commission for approval, would also apply a minimum process fee and member surcharge to straight-in requests, as well as a minimum hearing session.

“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 proposal states.

Brokers use the “$1 trick,” explained Lisa Bragança of Bragança Law LLC in Chicago, “where they request $1 in damages from the respondent brokerage firms, to file their expungement requests as “simplified” cases to be heard by one arbitrator, rather than the usual three-arbitrator panel that would hear a request for unspecified (i.e. zero) damages.”

At hearing, however, “the brokers then drop their requests for the $1 in damages.”

Larry Polk, a partner with Eversheds Sutherland, added in a separate comment to ThinkAdvisor on Wednesday that “an increasing percentage of FINRA’s arbitration case load relates to requests for expungement by associated persons. FINRA is revising its fee structure for new filings to ensure that it collects additional revenue.”

“Some reps were including $1 as the amount in controversy in order to get a lower filing fee,” Polk said. “FINRA’s proposed rule will impose a new fee structure for all expungement filings.”

Bragança, an author of the PIABA Foundation study of expungements released in October 2019, said that “while FINRA says that the rule proposal to eliminate the $1 trick is just its first step in reforming the expungement process, it is a disappointing start.”

(The Public Investors Arbitration Bar Association is a group for lawyers who represent investors in disputes with the securities industry.)

The plan “merely increases the fees that FINRA will earn from this fundamentally broken process,” Bragança said. “Using FINRA’s dispute resolution process to resolve expungements — which are regulatory determinations rather than disputes — is improper yet FINRA refuses to impose a moratorium on expungements until it fixes this sham process.”

The PIABA Foundation report found that “the fundamental problem is the lack of opposition to expungement requests, not the number of arbitrators hearing the request,” Bragança said. “FINRA expects customers and their attorneys to do its job as a regulator by opposing expungements many years after disputes were settled for hundreds of thousands, even millions, of dollars. It is ridiculous to believe that brokerage firms pay those kinds of sums to settle false customer claims, yet arbitrators continue to grant these expungement requests.”

A FINRA spokesperson said that the fee proposal “is just one of several initiatives that FINRA’s board has approved for filing with the SEC,” including FINRA’s board approving changes to its expungement process by creating a roster of arbitrators with enhanced training and experience to decide whether to expunge customer complaints.

The fee changes, according to FINRA’s proposal, are as follows:

If an associated person files a straight-in request against a member firm, 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.

— Check out FINRA’s BrokerCheck Is Being ‘Gamed’: Lawyers on ThinkAdvisor.


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