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February 12, 2020 at 02:31 PM
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.”
