The Financial Institutions Regulatory Authority proposed rule amendments to the Securities and Exchange Commission seeking to increase the minimum fees assessed by FINRA in arbitration cases where registered/licensed representatives, such as brokers and other securities industry professionals, aim to have customer complaints and other information expunged from their Central Registration Depository (“CRD”) records.
The CRD, which is administered by FINRA, is the central licensing and registration system used by the United States securities industry and its regulators. The CRD contains the registration records of broker-dealer firms as well as of their associated individuals, including their qualifications, employment, and disclosure histories, such as customer complaints.
In the securities industry, it is common for a broker, financial advisor, or other FINRA-registered person to commence arbitration against their employers (or former employers), who are FINRA members, seeking an award that would provide expungement relief in order to amend and/or delete negative information from CRD records that could impact that individual’s reputation and potential for career advancement.
FINRA’s filing, SR-2020-005, as submitted on February 7, proposes to increase the minimum total fees to be paid by both the claimant-registered representative and the respondent-registered firm from $300 to $9,475. At present, parties to an arbitration seeking expungement are charged fees based upon the amount at issue; thus, when a registered representative seeks expungement and requests $1 in compensatory damages in the arbitration, the filing fee is only $50. Any pre-hearing and hearing session fees before an arbitrator also are $50, resulting in a likely total out-of-pocket charge of $150 to the claimant.
SR-2020-005, however, seeks to substantially increase these fees by requiring parties to an expungement arbitration to pay, at a minimum, using the fee structure currently in place for non-monetary claims. For registered representatives, this includes a minimum filing fee of $1,575, and minimum pre-hearing and hearing session fees of $1,125 each, for total fees of $3,825 assessed to the individual claimant. As to the respondent FINRA-member firms, they would be required to pay $1,900 as a member surcharge, plus a minimum $3,750 process fee, for a total of $5,650.
It is unclear how the foregoing jump in fees will impact the ability of parties to FINRA arbitrations to settle cases. Clearly, the new fees proposal will make it far more costly for both the claimant-registered representatives and the respondent firms involved.
FINRA’s reasoning for the amendment appears to be twofold. First, FINRA estimates that between January 2016 and June 2019, it lost $9.7 million in fees that it would have received had arbitration litigants paid the minimum fees contained in SR-2020-005. Second, FINRA wants to ensure that the litigants to an expungement arbitration uniformly pay the intended fees for the non-monetary relief sought.
The SEC must approve SR-2020-005 in order for it to become effective. If it does, the effective date will be announced in a regulatory notice published within 60 days of the SEC’s approval, and the effective date would be within 60 days following the publication. Troutman Sanders will continue to monitor developments on this issue.
Troutman Sanders regularly represents financial services institutions and their associated persons, including brokers, financial advisors, and other registered representatives in FINRA arbitrations, securities industry disputes, and regulatory matters involving customer, employment, and intra-industry claims.