[Federal Register Volume 85, Number 38 (Wednesday, February 26, 2020)]
[Notices]
[Pages 11165-11174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03772]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88251; File No. SR-FINRA-2020-005]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
the FINRA Code of Arbitration Procedure for Customer Disputes and the 
FINRA Code of Arbitration Procedure for Industry Disputes To Apply 
Minimum Fees to Requests for Expungement of Customer Dispute 
Information

February 20, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 7, 2020, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the Code of Arbitration Procedure for 
Customer Disputes (``Customer Code'') and the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code'') (together, 
``Codes'') to apply minimum fees to requests for expungement of 
customer dispute information. The proposed rule change would amend Part 
IX (Fees and Awards) of the Codes to apply minimum filing fees to 
requests for expungement of customer dispute information, whether the 
request is made as part of the customer arbitration or the associated 
person files an expungement request in a separate arbitration 
(``straight-in request'').\3\ The proposed rule change would also apply 
a minimum process fee and member surcharge to straight-in requests, as 
well as a minimum hearing session fee to expungement-only hearings.
---------------------------------------------------------------------------

    \3\ FINRA is separately developing other changes to the current 
expungement framework, including codifying as rules the Notice to 
Arbitrators and Parties on Expanded Expungement Guidance 
(``Guidance''), see https://www.finra.org/arbitration-mediation/notice-arbitrators-and-parties-expanded-expungement-guidance, and 
establishing a roster of arbitrators with additional training and 
experience from which a panel would be selected to decide straight-
in requests and expungement requests in settled customer 
arbitrations. See Regulatory Notice 17-42 (December 2017).
---------------------------------------------------------------------------

    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
(a) Background and Discussion
I. Customer Dispute Information in the Central Registration Depository
    Information regarding customer disputes involving associated 
persons is contained in the Central Registration Depository 
(``CRD[supreg]'') system, the central licensing and registration system 
used by the U.S. securities industry and its regulators.\4\ FINRA 
operates the CRD system pursuant to policies developed jointly with 
NASAA. FINRA works with the SEC, NASAA, and other members of the 
regulatory community to ensure that information submitted and 
maintained in the CRD system is accurate and complete.
---------------------------------------------------------------------------

    \4\ The concept for CRD was developed by FINRA jointly with the 
North American Securities Administrators Association (``NASAA''), 
and NASAA and state regulators play a critical role in its ongoing 
development and implementation.
---------------------------------------------------------------------------

    In general, the information in the CRD system is submitted by 
registered securities firms, brokers and regulatory authorities in 
response to questions on the uniform registration forms.\5\ Among other 
things, these forms collect administrative, regulatory, criminal 
history, and disciplinary information about brokers, including customer 
complaints, arbitration claims and court filings made by customers 
(i.e., ``customer dispute information''). FINRA, state and other 
regulators use this information in connection with their licensing and 
regulatory activities, and member firms use this information to help 
them make informed employment decisions.
---------------------------------------------------------------------------

    \5\ The uniform registration forms are Form BD (Uniform 
Application for Broker-Dealer Registration), Form BDW (Uniform 
Request for Broker-Dealer Withdrawal), Form BR (Uniform Branch 
Office Registration Form), Form U4 (Uniform Application for 
Securities Industry Registration or Transfer), Form U5 (Uniform 
Termination Notice for Securities Industry Registration), and Form 
U6 (Uniform Disciplinary Action Reporting Form).
---------------------------------------------------------------------------

    Pursuant to rules approved by the SEC, FINRA makes specified 
current CRD information publicly available through 
BrokerCheck[supreg].\6\ BrokerCheck is part of FINRA's ongoing effort 
to help investors make informed choices about the brokers and broker-
dealer firms with which they may conduct business. BrokerCheck 
maintains information on the approximately 3,600 registered broker-
dealer firms and 628,000 registered brokers. BrokerCheck also provides 
the public with access to information about formerly registered broker-
dealer firms and brokers.\7\ In 2019 alone, BrokerCheck helped users 
conduct more than 40 million searches of firms and brokers.
---------------------------------------------------------------------------

    \6\ There is a limited amount of information in the CRD system 
that FINRA does not display in BrokerCheck, including personal or 
confidential information. A detailed description of the information 
made available through BrokerCheck is available at http://www.finra.org/investors/about-brokercheck.
    \7\ Formerly registered brokers, although no longer in the 
securities industry in a registered capacity, may work in other 
investment-related industries or may seek to attain other positions 
of trust with potential investors. BrokerCheck provides information 
on more than 16,800 formerly registered broker-dealer firms and 
567,000 formerly registered brokers. Broker records are available in 
BrokerCheck for 10 years after a broker leaves the industry, and 
brokers who are the subject of disciplinary actions and certain 
other events remain on BrokerCheck permanently.
---------------------------------------------------------------------------

    The regulatory framework governing the CRD system and BrokerCheck 
has long contemplated the possibility of expunging certain customer 
dispute

[[Page 11166]]

information from these systems in limited circumstances, such as where 
the allegations made about the broker are factually impossible or 
clearly erroneous. The expungement framework seeks to balance the 
important benefits of disclosing information about customer disputes to 
regulators and investors with the goal of protecting brokers from the 
publication of false allegations against them.
    A broker can seek expungement of customer dispute information by 
going through the FINRA arbitration process or directly to court 
(without first going through arbitration). Regardless of whether 
expungement of customer dispute information is sought directly through 
a court or through arbitration, FINRA Rule 2080 (Obtaining an Order of 
Expungement of Customer Dispute Information from the Central 
Registration Depository (CRD) System), which was developed in close 
consultation with representatives of NASAA and state regulators, 
requires a broker-dealer firm or broker seeking expungement to obtain 
an order of a court of competent jurisdiction directing such 
expungement or confirming an award containing expungement relief. FINRA 
will expunge customer dispute information only after the court orders 
it to execute the expungement.\8\
---------------------------------------------------------------------------

    \8\ FINRA Rule 2080 also requires that firms and brokers seeking 
a court order or confirmation of the arbitration award containing 
expungement relief name FINRA as a party, and FINRA will challenge 
the request in court in appropriate circumstances. FINRA may, 
however, waive the requirement to name it as a party if it 
determines that the award containing expungement relief is based on 
affirmative judicial or arbitral findings that: (1) The claim, 
allegation or information is factually impossible or clearly 
erroneous; (2) the associated person was not involved in the alleged 
investment-related sales practice violation, forgery, theft, 
misappropriation or conversion of funds; or (3) the claim, 
allegation, or information is false. In addition, FINRA has sole 
discretion ``under extraordinary circumstances'' to waive the 
requirement if the request for expungement relief and accompanying 
award are meritorious and expungement would not have a material 
adverse effect on investor protection, the integrity of the CRD 
system, or regulatory requirements. See FINRA Rule 2080.
---------------------------------------------------------------------------

II. Current Fee Structure in FINRA Arbitration
    Under the Codes, if a customer files a claim in arbitration against 
an associated person and a firm, the customer is assessed a filing fee 
based on the claim amount.\9\ The firm is assessed a member surcharge 
and a process fee based on the claim amount.\10\ The member is assessed 
only one surcharge and one process fee per arbitration.\11\ When the 
associated person answers the claim,\12\ the associated person is not 
assessed a fee if he or she does not add a claim to the answer.\13\
---------------------------------------------------------------------------

    \9\ Customers, associated persons, and other non-members who 
file a claim, counterclaim, cross claim or third party claim must 
pay a filing fee. See FINRA Rule 12900(a)(1); see also FINRA Rule 
13900(a)(1).
    \10\ A member surcharge is assessed against a member if, for 
example, the member files an arbitration claim, is named as a 
respondent in a claim, or employed, at the time the dispute arose, 
an associated person who is named as a respondent; the amount of the 
surcharge is based on the amount of the claim. See FINRA Rules 
12901(a)(1)(B) and 12901(a)(1)(C) and FINRA Rules 13901(a)(2) and 
13901(a)(3).
     Further, each member that is a party to an arbitration claim in 
which more than $25,000 is in dispute, or that is non-monetary or 
not specified, is required to pay a process fee based on the amount 
or nature of the claim. If an associated person of a member is a 
party, the member that employed the associated person at the time 
the dispute arose is charged the process fee. See FINRA Rules 
12903(a) and (b) and FINRA Rules 13903(a) and (b).
    \11\ Under the Codes, no member is assessed more than a single 
surcharge or process fee in any arbitration. See FINRA Rules 
12901(a)(4) and 12903(b) and FINRA Rules 13901(d) and 13903(b).
    \12\ The respondent must answer the statement of claim within 45 
days and may include other claims and remedies requested. See FINRA 
Rules 12303(a) and (b) and FINRA Rules 13303(a) and (b).
    \13\ For example, an associated person is permitted to file a 
claim against the claimant requesting relief. Such counterclaim 
would require the associated person to pay a filing fee. See FINRA 
Rule 12303(d); see also FINRA Rule 13303(d).
---------------------------------------------------------------------------

    If the parties do not settle the arbitration, the panel will hold 
at least one hearing to decide the customer arbitration and, at the 
conclusion of the hearing(s), issue an award. In the award, the panel 
will allocate the fees incurred by the parties during the arbitration, 
including each party's portion of the hearing session fees,\14\ which 
are also based on the amount of the customer's claim.\15\ If the 
parties settle, the panel will not issue an award.
---------------------------------------------------------------------------

    \14\ Parties are charged hearing session fees for each hearing 
session, based on the customer's claim amount. In the award, the 
panel determines the amount of each hearing session fee that each 
party is required to pay. See FINRA Rules 12902 and 13902.
    \15\ FINRA makes all arbitration awards publicly available. See 
https://www.finra.org/arbitration-mediation/arbitration-awards.
---------------------------------------------------------------------------

(i) Current Fee Structure for Expungement Requests Made During a 
Customer Arbitration
    Currently, even if the associated person's answer to a customer's 
claim includes a request for expungement, the associated person is not 
assessed a filing fee. The member, having been assessed the surcharge 
and process fee for the customer arbitration, will not incur additional 
charges because of the expungement request. If the customer's claim 
closes by award after a hearing,\16\ the panel will decide the 
customer's claim and the expungement request (assuming the associated 
person pursues the request during the arbitration), and allocate the 
hearing session fees among the parties.
---------------------------------------------------------------------------

    \16\ The term ``hearing'' means the hearing on the merits of an 
arbitration under Rule 12600. See FINRA Rule 12100(o).
---------------------------------------------------------------------------

    If the customer arbitration does not close by award after a hearing 
(e.g., settles) and the associated person or requesting party, if it is 
an on-behalf-of request, continues to pursue the expungement request, 
the panel from the customer arbitration will hold a separate 
expungement-only hearing to decide the expungement request.\17\ The 
hearing session fee for the expungement-only hearing will be based on 
the amount of the customer's claim. Under the Codes, fees for hearing 
sessions held solely to decide an expungement request must be charged 
to the party or parties requesting expungement.\18\
---------------------------------------------------------------------------

    \17\ In 2009, the SEC approved amendments to Forms U4 and U5 to 
require, among other things, the reporting of allegations of sales 
practice violations made against unnamed persons. See Securities 
Exchange Act Release No. 59916 (May 13, 2009), 74 FR 23750 (May 20, 
2009) (Order Approving SR-FINRA-2009-008). Specifically, Forms U4 
and U5 were amended to add questions to elicit whether the applicant 
or registered person, though not named as a respondent or defendant 
in a customer-initiated arbitration, was either mentioned in or 
could be reasonably identified from the body of the arbitration 
claim as a registered person who was involved in one or more of the 
alleged sales practice violations. A party (typically, the firm) 
named in a customer arbitration may request expungement on-behalf-of 
an associated person who is a subject of, but not named in, the 
arbitration. Such on-behalf-of requests occur in customer-initiated 
arbitrations only.
    \18\ See FINRA Rules 12805(d) and 13805(d).
---------------------------------------------------------------------------

(ii) Current Fee Structure for a Straight-In Request
    An associated person may request expungement by filing a straight-
in request rather than requesting expungement during a customer 
arbitration. The straight-in request may be filed against a former or 
current firm or the customer.\19\ A claim that does not request a 
dollar amount is considered a non-monetary or not specified claim 
(``non-monetary claim'') under the Codes. An expungement request is a 
non-monetary claim; thus, under the Codes, the associated person must 
pay a $1,575 filing fee, and the member named as a respondent or that 
employed the associated person at the time the dispute arose must pay a 
$3,750 process fee.\20\ A member named as a respondent

[[Page 11167]]

or that employed the associated person at the time the dispute arose 
would also be assessed a surcharge of $1,900.\21\ These claims are 
decided by a three-person panel, unless the parties agree in writing to 
one arbitrator.\22\ Further, the per-hearing session fee for a non-
monetary claim is $1,125.
---------------------------------------------------------------------------

    \19\ FINRA notes, however, that straight-in requests filed 
against the customer are rare.
    \20\ See supra note 10. Some associated persons have independent 
contractor, rather than employment, relationships with their firms. 
In these circumstances, FINRA assesses applicable member surcharge 
or process fees against the firm at which the associated person was 
associated at the time the dispute arose.
    \21\ See supra note 10; see also supra note 11.
    \22\ See FINRA Rules 12401(c) and 13401(c).
---------------------------------------------------------------------------

(iii) Concerns With Avoidance of the Current Fee Structure for 
Expungement Requests
    As discussed above, an expungement request is a non-monetary claim 
and parties requesting expungement should pay the fees associated with 
such requests under the Codes. FINRA is concerned about practices to 
avoid fees applicable to expungement requests, particularly straight-in 
requests. For example, FINRA is aware that associated persons who file 
a straight-in request often add a small monetary claim (typically, one 
dollar) to the expungement request to reduce the fees assessed against 
the associated person and qualify for an arbitration heard by a single 
arbitrator.\23\ Further, the small damages claim reduces the member 
fees that the forum assesses firms when an arbitration claim is filed. 
Thus, adding a claim for one dollar in a straight-in request against a 
member firm reduces the fees assessed to the associated person 
requesting expungement and member firm from $9,475 to $300.\24\ Often, 
the associated person will subsequently drop the claim for one dollar.
---------------------------------------------------------------------------

    \23\ Whether the claimant specifies damages, and the amount 
specified, determines the fees assessed in arbitration cases and 
whether a single arbitrator or a three-person panel will decide the 
case. See FINRA Rules 12401 and 13401. If the amount of the claim is 
$50,000 or less, exclusive of interest and expenses, the panel will 
consist of one arbitrator and the claim is subject to the simplified 
arbitration procedures under Rule 12800. If the amount of the claim 
is more than $50,000, but less than $100,000, exclusive of interest 
and expenses, the panel will consist of one arbitrator unless the 
parties agree in writing to three arbitrators. If the amount of a 
claim is more than $100,000, exclusive of interest and expenses, or 
is non-monetary, or if the claim does not request money damages, the 
panel will consist of three arbitrators, unless the parties agree in 
writing to one arbitrator.
    \24\ 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. See also infra Item II.B. (discussing the 
economic impacts of the proposed rule change).
---------------------------------------------------------------------------

    Adding a small damages claim also changes the panel composition 
such that the straight-in request is heard by a single arbitrator 
rather than a three-person panel.\25\ FINRA believes that most 
expungement requests should be decided by a three-person panel. 
Expungement requests may be complex to resolve, particularly straight-
in requests where customers typically do not participate in the 
expungement hearing. Thus, having three arbitrators available to ask 
questions and request evidence would help ensure that a complete 
factual record is developed to support the arbitrators' decision at 
such expungement hearings.
---------------------------------------------------------------------------

    \25\ See supra note 23.
---------------------------------------------------------------------------

    To help 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, FINRA is proposing to amend 
the Codes to apply a minimum filing fee for all expungement requests, 
irrespective of whether the request is made as part of the customer 
arbitration or the associated person files a straight-in request, or 
the requesting party adds a small damages claim. The proposed rule 
change would also apply a minimum process fee and member surcharge to 
straight-in requests, as well as a minimum hearing session fee to 
expungement-only hearings held after a customer arbitration \26\ or in 
connection with a straight-in request.\27\
---------------------------------------------------------------------------

    \26\ For example, under the current expungement process, if the 
customer arbitration settles, but an associated person seeks to 
pursue a request for expungement made during the customer 
arbitration, the panel from the customer arbitration will hold a 
separate expungement-only hearing to decide the expungement request 
and issue an award setting forth its decision on the expungement 
request. Under the proposed rule change, the associated person 
requesting expungement would be required to pay the minimum hearing 
session fee for this separate expungement-only hearing.
    \27\ The proposed rule change would apply to all members, 
including members that are funding portals or have elected to be 
treated as capital acquisition brokers (``CABs''), given that the 
funding portal and CAB rule sets incorporate the impacted FINRA 
rules by reference.
---------------------------------------------------------------------------

(b) Proposed Amendments
I. Proposed Filing Fee
    Under the proposed rule change, an associated person, or requesting 
party if it is an on-behalf-of request,\28\ would be required to pay 
the filing fee for a non-monetary claim for an expungement request made 
during a customer arbitration \29\ or filed as a straight-in 
request.\30\ If the associated person or requesting party adds a 
monetary claim to the expungement request, the filing fee would be the 
fee for a non-monetary claim or the applicable filing fee based on the 
claim amount, whichever is greater.\31\
---------------------------------------------------------------------------

    \28\ See supra note 17.
    \29\ Under the proposed rule change, an associated person who 
requests expungement of customer dispute information during an 
industry arbitration would also be required to pay the filing fee 
for a non-monetary claim. However, these requests are rare.
    \30\ If the requesting party chooses to seek expungement in the 
customer arbitration, but later determines not to pursue the request 
and then files a straight-in request for expungement of the same 
customer dispute information, the requesting party would be required 
to pay the filing fee applicable to the straight-in request, 
notwithstanding previous payment of the filing fee applicable to the 
expungement request during the customer arbitration.
    \31\ See proposed Rules 12900(a)(3) and 13900(a)(3). An 
associated person could add a monetary or non-monetary claim to the 
expungement request. FINRA notes, however, that it is rare that 
significant dollar claims accompany expungement requests.
---------------------------------------------------------------------------

    As discussed above, under the Codes, an expungement request that 
does not include a claim for damages is a non-monetary claim that is 
currently assessed a $1,575 filing fee and triggers a three-person 
panel. 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.
    Accordingly, FINRA is proposing that the filing fee for non-
monetary claims would be the minimum filing fee for all expungement 
requests, and that the minimum filing fee would apply to expungement 
requests in customer arbitrations as well as to straight-in 
requests.\32\ A request for expungement is a claim that a party is 
requesting the arbitrators to decide. Under the Codes, if a party files 
a claim or adds a claim in an answer to a statement of claim, the 
respondent must pay all required filing fees. \33\ As an expungement 
request is also a claim, the party requesting this relief should also 
pay a filing fee.
---------------------------------------------------------------------------

    \32\ Under the Codes, the Director may defer payment of all or 
part of an associated person's filing fee on a showing of financial 
hardship. See FINRA Rules 12900(a)(1) and 13900(a)(1). The proposed 
rule change would make clear this provision applies to expungement 
requests. Information on how to request an arbitration fee waiver is 
available at https://www.finra.org/arbitration-mediation/arbitration-fee-waivers. In addition, in the award, the panel may 
order a party to reimburse another party for all or part of any 
filing fee paid. See FINRA Rules 12900(d) and 13900(d).
    \33\ See FINRA Rules 12303(d) and 13303(d).
---------------------------------------------------------------------------

    The proposed minimum filing fee is also commensurate with the 
additional

[[Page 11168]]

steps that arbitrators should take when deciding an expungement request 
during a customer arbitration or in connection with a straight-in 
request. Regardless of whether expungement is decided during a customer 
arbitration or separately, FINRA Rules 12805 and 13805 require the 
panel to hold one or more recorded hearing sessions regarding the 
appropriateness of expungement, to review settlement documents and 
consider the amount of payments made to any party and any other terms 
and conditions of the settlement, and to make a determination as to 
whether any of the Rule 2080 grounds for expungement have been 
established. In addition, as described in the Guidance, arbitrators 
have a unique, distinct role when deciding whether to recommend a 
request to expunge customer dispute information from CRD. Accordingly, 
the Guidance directs arbitrators to ensure that they have all of the 
information necessary to make an informed and appropriate 
recommendation on expungement. The Guidance also directs arbitrators to 
request any documentary or other evidence they believe is relevant to 
the expungement request.
II. Proposed Member Surcharge for Straight-In Requests
    The proposed rule change would apply a minimum member surcharge 
when an associated person files a straight-in request against either a 
customer or a member firm.\34\ Under the proposed rule change, if an 
associated person files a straight-in request against a member firm, 
that firm would be assessed the member surcharge for a non-monetary 
claim under the Industry Code (currently $1,900).\35\ The proposed 
member surcharge is consistent with what a member firm should pay today 
for a straight-in request without an additional small monetary claim 
filed against a member firm.\36\
---------------------------------------------------------------------------

    \34\ See supra note 10 (discussing the member surcharge under 
the Codes today).
    \35\ See proposed Rule 13901(c). If the associated person files 
the straight-in request against another associated person, each firm 
that employed the respondent associated person at the time the 
dispute arose would be assessed the member surcharge for a non-
monetary claim under the Industry Code. See FINRA Rule 13901(a)(3) 
and proposed Rule 13901(c).
    \36\ Consistent with how the member surcharge is assessed today, 
under the proposal, FINRA would not assess a member more than a 
single surcharge in any arbitration. See also supra note 11.
---------------------------------------------------------------------------

    The proposed rule change would also provide that, for straight-in 
requests filed against a customer, each member that employed the 
associated person at the time the customer dispute arose would be 
assessed the member surcharge for a non-monetary claim under the 
Customer Code (currently $1,900).\37\
---------------------------------------------------------------------------

    \37\ See proposed Rule 12901(a)(3).
---------------------------------------------------------------------------

    If the associated person adds a separate claim for damages to the 
straight-in request against the customer or member firm, the member 
surcharge would be the non-monetary member surcharge or the applicable 
surcharge under the Codes, whichever is greater. Under the proposal, 
the surcharge would be due when the Director serves the Claim 
Notification Letter or the initial statement of claim under the 
Codes.\38\
---------------------------------------------------------------------------

    \38\ See proposed Rules 12901(a)(5) and 13901(e).
---------------------------------------------------------------------------

III. Proposed Hearing Session Fees
    The proposed rule change would apply the hearing session fee for a 
non-monetary claim heard by three arbitrators to each hearing session 
in which the sole topic is the determination of a request for 
expungement relief.\39\ Thus, the proposed hearing session fee would 
apply when a customer arbitration does not close by award after a 
hearing (e.g., settles) and there is a separate hearing session held 
after the customer arbitration to decide an expungement request that 
was made during the customer arbitration, and to straight-in 
requests.\40\ If the requesting party adds a monetary claim to the 
expungement request, the hearing session fee would be the greater of 
the fee for a non-monetary claim with three arbitrators or the 
applicable hearing session fee under the Codes based on the claim 
amount.\41\ In addition, consistent with the Codes today, the hearing 
session fee would be assessed against the party requesting 
expungement.\42\
---------------------------------------------------------------------------

    \39\ FINRA notes that the proposed $1,125 hearing session fee 
for expungement hearings would apply if a party requests expungement 
as part of a Simplified Arbitration and no hearings are held to 
decide the underlying customer claim, regardless of whether a single 
arbitrator or a panel hears the Simplified Arbitration.
    \40\ See proposed Rules 12900(a)(3) and 13900(a)(3); see also 
supra note 26. If an associated person requests expungement during a 
customer arbitration, the customer arbitration closes by award after 
a hearing, and the arbitrator or panel decides the expungement 
request during the customer arbitration, the hearing session fee 
would be based on the amount of the customer's claim.
    \41\ See proposed Rules 12902(a)(5) and 13902(a)(4).
    \42\ See proposed Rules 12902(a)(5) and 13902(a)(4).
---------------------------------------------------------------------------

IV. Proposed Process Fees for Straight-In Requests
    The proposed rule change would apply a minimum process fee when an 
associated person files a straight-in request against either a customer 
or member firm. Under the proposed rule change, if an associated person 
files a straight-in request against a member firm, that firm would be 
assessed the process fee for a non-monetary claim under the Industry 
Code (currently $3,750).\43\
---------------------------------------------------------------------------

    \43\ See proposed Rule 13903(c). If the associated person files 
the straight-in request against another associated person, the firm 
that employed the respondent associated person at the time the 
dispute arose would be assessed the process fee for a non-monetary 
claim under the Industry Code. See proposed Rules 13903(b) and 
13903(c).
---------------------------------------------------------------------------

    The proposed rule change would also clarify that, for straight-in 
requests filed against a customer, the member that employed the 
associated person at the time the customer dispute arose would be 
assessed the process fee for a non-monetary claim under the Customer 
Code (currently $3,750).\44\
---------------------------------------------------------------------------

    \44\ See proposed Rule 12903(c).
---------------------------------------------------------------------------

    If the associated person adds a separate claim for damages to the 
straight-in request against the customer or member firm, the process 
fee would be the non-monetary process fee or the applicable process fee 
under the Codes, whichever is greater.\45\ The proposed process fee is 
consistent with what member firms should pay today for straight-in 
requests without an additional small monetary claim filed against a 
customer or member firm.
---------------------------------------------------------------------------

    \45\ Consistent with how the process fee is assessed today, 
under the proposal, FINRA would not assess a member more than one 
process fee in any arbitration. See also supra note 11.
---------------------------------------------------------------------------

    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no later than 60 days 
following publication of the Regulatory Notice announcing Commission 
approval of the proposed rule change.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\46\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest, and Section 15A(b)(5) of the Act,\47\ which requires, 
among other things, that FINRA rules provide for the equitable 
allocation of reasonable dues, fees and other charges among members and 
issuers and other persons using any facility or system that FINRA 
operates or controls.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78o-3(b)(6).
    \47\ 15 U.S.C. 78o-3(b)(5).

---------------------------------------------------------------------------

[[Page 11169]]

    The proposed rule change represents 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. As an 
expungement request is a separate relief request that an arbitrator or 
panel must consider and decide, the filing fees and related member and 
forum fees should reflect the general complexity of these requests, as 
well as the time and effort needed to administer, consider and decide 
them. In addition, the fees should apply consistently to all parties 
requesting expungement.
    The proposed rule change will close gaps in the fee structure that 
have emerged in the existing expungement process, such as where parties 
add small dollar claims to their expungement requests to significantly 
lower the fees associated with expungement requests and to have 
expungement requests considered and decided by a single arbitrator 
rather than a three-person panel. The proposed rule change will help 
ensure that parties requesting expungement pay the fees intended for 
such requests under the Codes and that the fees charged when 
expungement is requested are more consistent, irrespective of whether 
the request is made as a straight-in request or during an arbitration, 
or whether damages are included in the request. The proposed rule 
change should also result in more expungement requests being heard by a 
three-person panel. A three-person panel will help ensure a complete 
factual record to support the arbitrators' decision, particularly in 
straight-in requests that often do not include customer participation 
and can be complex to resolve.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to analyze the regulatory need for the proposed rule change, its 
potential economic impacts, including anticipated costs, benefits, and 
distributional and competitive effects, relative to the current 
baseline, and the alternatives FINRA considered in assessing how best 
to meet FINRA's regulatory objectives.
(a) Regulatory Need
    FINRA is aware that parties requesting expungement are not always 
paying the fees intended for such requests under the Codes, 
particularly for straight-in requests. In addition, the current fee 
schedules under the Codes do not ensure that costs to the forum for 
administering expungement requests are being allocated to the party or 
parties requesting expungement and, as applicable, the member firms 
that employ them. The proposed rule change would help ensure that the 
fees for expungement requests are assessed, and that the costs borne by 
the forum to administer expungement requests are allocated, as 
intended, to those requesting expungement under the Codes.
(b) Economic Baseline
    The economic baseline for the proposed rule change includes the 
provisions under the Codes that address the fees associated with 
expungement requests in FINRA arbitration. In general, the proposed 
rule change is expected to affect parties to an expungement request 
including associated persons and member firms. The proposed rule change 
may also affect other stakeholders of the forum, and users of customer 
dispute information contained in the CRD system and displayed through 
BrokerCheck.\48\
---------------------------------------------------------------------------

    \48\ Other stakeholders of the forum include FINRA, others 
member firms, and other forum participants. Users of customer 
dispute information include investors; member firms and other 
companies in the financial services industry; individuals registered 
as brokers or seeking employment in the brokerage industry; and 
FINRA, states, and other regulators.
---------------------------------------------------------------------------

    The customer dispute information contained in the CRD system is 
submitted by registered securities firms and regulatory authorities in 
response to questions on the uniform registration forms.\49\ The 
information can be valuable to current and prospective customers to 
learn about the conduct of associated persons.\50\ Current and 
prospective customers may not select or remain with an associated 
person or a member firm that employs an associated person with a record 
of customer disputes. Similarly, member firms and other companies in 
the financial services industry may use the information when making 
employment decisions.\51\ In this manner, the customer dispute 
information contained in the CRD system (and displayed through 
BrokerCheck) may negatively affect the business and professional 
opportunities of associated persons but also provide for customer 
protections.
---------------------------------------------------------------------------

    \49\ See supra note 4 and accompanying text (discussing the 
uniform registration forms and the information contained in the CRD 
system). The information includes matters, which may or may not have 
been previously adjudicated in FINRA arbitration or a court of 
competent jurisdiction.
    \50\ Recent academic studies provide evidence that the past 
disciplinary and other regulatory events associated with a firm or 
individual can be predictive of similar future events. See Hammad 
Qureshi and Jonathan Sokobin, Do Investors Have Valuable Information 
About Brokers? FINRA Office of the Chief Economist Working Paper, 
(August 2015); see also Mark Egan, Gregor Matvos, and Amit Seru, The 
Market for Financial Adviser Misconduct, Journal of Political 
Economy 127, no. 1 (February 2019): 233-295.
    \51\ Customer dispute information submitted to the CRD system 
may have other uses. For example, associated persons may use 
information from the CRD system when deciding with whom to do 
business. FINRA, states, and other regulators also use the 
information to regulate brokers.
---------------------------------------------------------------------------

    Any such negative impact on the business and professional 
opportunities of associated persons may be appropriate and consistent 
with investor protection, such as when the customer dispute information 
has merit. Any such negative impact may be inappropriate, however, such 
as when the customer dispute information is factually impossible, 
clearly erroneous, or false. Regardless of the merit, associated 
persons have incentive to remove customer dispute information from the 
CRD system and its public display through BrokerCheck.
    An associated person or party on behalf of an associated person 
typically begins the process to remove customer dispute information 
from the CRD system by filing an expungement request in FINRA 
arbitration. FINRA is able to identify 5,732 expungement requests of 
customer dispute information filed from January 2016 through June 2019. 
More than one expungement request can be filed in a single arbitration, 
and multiple expungement requests may relate to the same customer 
complaint if the complaint relates to more than one associated person.
    Under the Codes, a claim for expungement is considered a non-
monetary claim, generally requiring fees in the middle of the range of 
potential fees that are assessed based on claim amount, and triggering 
a three-person panel. As described in more detail above and depending 
on the method that a party uses to request expungement, however, 
associated persons and member firms can be assessed fees less than what 
is intended for non-monetary claims.
    Among the 5,732 expungement requests, 2,618 requests (46 percent) 
were filed during a customer or industry arbitration and 3,114 requests 
(54 percent) were filed as a straight-in

[[Page 11170]]

request. The 2,618 expungement requests during a customer or industry 
arbitration include 2,604 requests during a customer arbitration and 14 
requests during an industry arbitration; and the 3,114 straight-in 
requests include 3,048 requests filed solely against a member firm or 
against a member firm and a customer, and 66 requests filed solely 
against a customer. An associated person added a small monetary claim 
(of less than $1,000) in 2,356 of the 3,114 straight-in requests (76 
percent). In general, associated persons did not add a monetary claim 
for the remaining straight-in requests.
    In general, parties filed an increasing number of expungement 
requests over the sample period. For example, parties filed 1,400 
requests in 2016, 1,708 requests in 2017, 1,936 requests in 2018, and 
688 requests in the first half of 2019. Similarly, the proportion of 
straight-in requests also increased over the sample period. For 
example, associated persons filed 328 straight-in requests in 2016 (23 
percent of 1,400), 846 requests in 2017 (50 percent of 1,708), and 
1,371 requests in 2018 (71 percent of 1,936). In the first half of 
2019, associated persons filed 569 straight-in requests (83 percent of 
688).
    The proportion of the straight-in requests where the associated 
person added a small monetary claim (of less than $1,000) has also 
increased over the sample period. For example, associated persons added 
a small monetary claim to 179 straight-in requests in 2016 (55 percent 
of 328), 569 requests in 2017 (67 percent of 846), 1,143 requests in 
2018 (83 percent of 1,371), and 465 requests in the first half of 2019 
(82 percent of 569). FINRA expects that absent this proposed rule 
change, associated persons who file straight-in requests will continue 
to add a small monetary claim to avoid the fees typically assessed for 
non-monetary claims.
(c) Economic Impact
    The proposed rule change would apply the fees associated with non-
monetary claims as minimum fees to expungement requests in FINRA 
arbitration. The fees associated with non-monetary claims are not new 
and would not change under the proposal. The fees would apply when 
parties file an expungement request during a customer arbitration, when 
parties file a rare expungement request during an industry arbitration, 
and when associated persons file a straight-in request.
    Under the proposed rule change, a party that requests expungement 
during a customer or industry arbitration would be assessed a minimum 
filing fee of $1,575. Currently, parties requesting expungement during 
a customer or industry arbitration are not assessed a filing fee in 
connection with the expungement request.
    In addition, under the proposed rule change, if the arbitrator or 
panel holds a separate expungement-only hearing to decide the 
expungement request after the customer's arbitration, then the party 
that requested expungement would be assessed a minimum hearing session 
fee of $1,125.\52\ The proposed minimum hearing session fee may be less 
than, equal to, or greater than the fees currently assessed for 
expungement-only hearings held after an arbitration. These current fees 
depend on the claim amount in the customer arbitration.\53\
---------------------------------------------------------------------------

    \52\ See supra note 26.
    \53\ From January 2016 through June 2019, 314 expungement-only 
hearings were held after an arbitration. In these instances, the 
assessed hearing session fee under the proposed rule change for an 
expungement-only hearing would have been less than (86 cases or 28 
percent), equal to (155 cases or 49 percent), or greater than (73 
cases or 23 percent) the fee assessed currently for an expungement-
only hearing held after an arbitration, depending on the size of the 
initial claim. Assuming one expungement-only hearing session to 
consider and decide the expungement request, on average and under 
the proposed rule change, the party filing an expungement request 
would be assessed an additional hearing session fee of $54 per 
arbitration. One expungement-only hearing session is consistent with 
the median number of hearing sessions (one) associated with the 
straight-in requests that were filed and closed during the sample 
period.
---------------------------------------------------------------------------

    If an associated person files a straight-in request against a 
member firm, assuming one prehearing conference and one hearing session 
on the merits, then under the proposed rule change, the associated 
person and a member firm would be assessed minimum fees totaling 
$9,475. The associated person would be assessed a minimum filing fee of 
$1,575 and a minimum 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 member firm would be assessed a minimum 
surcharge of $1,900 and a minimum process fee of $3,750.\54\
---------------------------------------------------------------------------

    \54\ The assumption of one prehearing conference and one hearing 
session on the merits is consistent with the median number of 
prehearing conferences (one) and hearing sessions on the merits 
(one) associated with straight-in requests that were filed and 
closed during the sample period. Also, the assumption that one 
member firm would be assessed a minimum surcharge and process fee is 
consistent with the median number of member firms (one) that were 
assessed these fees in a straight-in request that was filed and 
closed during the sample period.
---------------------------------------------------------------------------

    In general, these fees are the same as those that are assessed 
today if the associated person does not add a small monetary claim to 
the straight-in request against a member firm. Associated persons and 
member firms, however, may incur significantly lower fees than what is 
intended for a straight-in request if the associated person adds a 
small monetary claim (of less than $1,000) to the request. Assuming one 
prehearing conference and one hearing session on the merits, an 
associated person and the member firm would currently be assessed fees 
totaling $300.\55\
---------------------------------------------------------------------------

    \55\ For these requests, 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 fee of 
$150 but no process fee. If instead the associated person files an 
expungement request solely against the customer, then the parties to 
the request are assessed fees totaling $150. The associated person 
is still assessed a filing fee of $50 and a hearing session fee of 
$100, but the member firm is not assessed a member surcharge or a 
process fee.
---------------------------------------------------------------------------

    The fees associated with a small claim procedure are intended to 
ensure that the forum is economically feasible for claimants with small 
claims,\56\ and, in general, do not cover the specific costs to 
administer an expungement request, which requires a hearing session and 
typically involves a prehearing conference. For example, the costs to 
administer a straight-in request can include chairperson honoraria, 
travel expenses, conference room rental, and other costs to administer 
the forum. For the typical straight-in request with one prehearing 
conference and one hearing session on the merits to consider and decide 
the request, the chairperson honoraria alone totals $725; \57\ yet as 
discussed above, if the associated person adds a small monetary claim 
(of less than $1,000) to a straight-in request filed against a member 
firm, then the parties to the request are assessed fees totaling $300.
---------------------------------------------------------------------------

    \56\ Under the Codes, arbitrations involving $50,000 or less, 
exclusive of interest and expenses, will consist of one arbitrator 
and the claim is subject to the simplified arbitration procedures. 
Under these procedures, no hearing is held unless the customer or 
claimant requests a hearing, and the arbitrator renders an award 
based on the pleadings and other materials submitted by the parties. 
See FINRA Rules 12800 and 13800.
    \57\ The chairperson honoraria includes $300 for the prehearing 
conference and $425 for the hearing session on the merits.
---------------------------------------------------------------------------

    The minimum fees that would be assessed under the proposed rule 
change reflect the application of the fee schedule as intended for a 
non-monetary claim. The proposed rule change would help ensure that 
costs to the forum for administering expungement requests are allocated 
as intended to the party or parties requesting expungement and, as 
applicable, the member firms that employ them. The costs to the forum

[[Page 11171]]

include the specific costs to administer the claim as well as the 
overall attendant costs to administer expungement requests in the 
forum. Associated persons and member firms that are not assessed the 
fees for a non-monetary claim experience a benefit in the form of an 
economic transfer; the costs that were intended to be allocated but not 
assessed to the party or parties requesting expungement are instead 
borne by FINRA, other member firms, and other forum participants 
including other member firms, associated persons, and customers.
    In the aggregate, if parties requesting expungement had been 
assessed the fees applicable to non-monetary claims during the sample 
period, then a reasonable estimate for the additional fees that would 
have been assessed is $9.7 million. The $9.7 million includes $2.4 
million for the expungement requests during a customer or industry 
arbitration,\58\ and $7.3 million for the straight-in requests where an 
associated person added a small monetary claim (of less than 
$1,000).\59\ This amount reflects the potential economic transfer over 
the sample period. The extent of the transfer increased over the sample 
period with the proportion of straight-in requests where the associated 
person added a small claim amount.
---------------------------------------------------------------------------

    \58\ From January 2016 through June 2019, there were 1,508 
arbitrations that closed during which an expungement request was 
filed (that was not a straight-in request). If the parties 
requesting expungement had been assessed the fees applicable to non-
monetary claims, the parties requesting expungement would have been 
assessed additional filing fees totaling $2.4 million (minimum 
filing fee of $1,575 for each of the 1,508 cases). Although the 
parties to these expungement requests may also be assessed 
additional hearing session fees, the additional fees associated with 
hearing sessions are estimated to be marginal (see supra note 53).
    \59\ From January 2016 through June 2019, there were 1,064 
arbitrations that closed in which a straight-in expungement request 
was filed. Associated persons added a small monetary claim (of less 
than $1,000) in 797 of the 1,064 cases. Among the 797 arbitrations, 
783 were filed against a member firm or a member firm and a 
customer, and 14 were filed solely against a customer. If parties 
requesting expungement had been assessed the fees applicable to non-
monetary claims, and assuming one prehearing conference and one 
hearing session on the merits, then the parties to the straight-in 
requests filed against a member firm (or filed against that member 
firm and a customer) would have been assessed additional fees 
totaling $7.2 million ($9,475 less $300 for each of the 783 cases), 
and the parties to the straight-in requests filed against a customer 
would have been assessed additional fees totaling $0.1 million 
($9,475 less $150 for each of the 14 cases). See supra notes 54 and 
55 and accompanying text (discussing the fees that would be assessed 
under the proposed rule change and that are currently assessed).
---------------------------------------------------------------------------

    The proposed rule change may affect some parties more so than 
others. Some parties, including associated persons and parties who 
request expungement relief on behalf of an unnamed person, may be more 
sensitive to the assessed fees under the proposed rule change or have 
monetary constraints that may inhibit them from filing an expungement 
request. They may determine that the cost of seeking expungement is 
higher than the anticipated benefit and, therefore, not seek 
expungement relief.\60\ Associated persons and parties who request 
expungement relief on behalf of an unnamed person may also be more 
sensitive to the fees assessed under the proposed rule change if, given 
the facts and circumstances of the customer dispute, an arbitrator or 
panel is less likely to recommend expungement.\61\
---------------------------------------------------------------------------

    \60\ Under the Codes, the Director may defer payment of all or 
part of an associated person's filing fee on a showing of financial 
hardship. See supra note 3232.
    \61\ A firm or associated person can also initiate an 
expungement proceeding directly in a court of competent jurisdiction 
without first going through any arbitration proceeding. FINRA will 
challenge these requests in court in appropriate circumstances. From 
January 2016 through June 2019, the expungement of 123 customer 
dispute disclosures were sought directly in court. The assessed fees 
may incent firms or associated persons to initiate an expungement 
proceeding directly in a court of competent jurisdiction without 
first going through any arbitration proceeding. The number of firms 
or associated persons who would instead initiate an expungement 
proceeding directly in a court of competent jurisdiction is 
dependent not only on the fees assessed under the proposed rule 
change, but also the legal fees and other costs a firm or associated 
person would expect to incur in the different forums to initiate an 
expungement proceeding. This information is generally not available, 
and accordingly the potential effect of the proposed rule change on 
direct-to-court expungement requests is uncertain.
---------------------------------------------------------------------------

    Associated persons who would have otherwise expunged customer 
dispute information that may have or not have merit may experience a 
loss of business and professional opportunities as a result of the 
information remaining on the CRD system and its display through 
BrokerCheck. The loss of business and professional opportunities by one 
associated person, however, may be the gain of another. Associated 
persons who may benefit in this regard include those who are less price 
sensitive and continue to seek expungement of customer dispute 
information, and associated persons who do not have similar 
disclosures.
    The proposed rule change may also affect some member firms more so 
than others. In particular, the fees assessed under the proposed rule 
change may be more material for small firms or firms with fewer 
financial resources than for large firms or firms with additional 
financial resources.\62\ Although the fees may be more material to some 
firms, the fees are the same as those required for a non-monetary claim 
and do not depend on the size or financial resources of the firm.
---------------------------------------------------------------------------

    \62\ The definition of firm size is based on Article 1 of the 
FINRA By-Laws. A firm is defined as ``small'' if it has at least one 
and no more than 150 registered persons, ``mid-size'' if it has at 
least 151 and no more than 499 registered persons, and ``large'' if 
it has 500 or more registered persons. In the cases associated with 
an expungement request filed and closed from January 2016 through 
June 2019, including expungement requests during a customer or 
industry arbitration and straight-in requests, 78 percent of the 
surcharge and process fees were incurred by large firms, 11 percent 
were incurred by mid-size firms, and 11 percent were incurred by 
small firms. The large firms incurring member surcharge or process 
fees had a median excess net capital of $21.7 million in the year 
prior to the filing of a straight-in request, the mid-size firms had 
a median excess net capital of $1.6 million, and the small firms had 
a median excess net capital of more than $334,000.
---------------------------------------------------------------------------

    Although the proposed rule change may affect some associated 
persons and member firms more so than others, the proposed rule change 
will not result in any burden on competition that is not necessary or 
appropriate. As discussed above, associated persons and member firms 
that are assessed significantly lower fees for an expungement request 
than what is intended under the Codes by adding a small damages claim 
to the expungement request experience a benefit in the form of an 
economic transfer. Any burden on competition as a result of this 
proposed rule change, therefore, relates to the removal of this 
unintended benefit.
    Finally, the proposed rule change may have other, marginal, 
economic effects. For example, the proposed minimum filing fee would 
trigger a three-person panel for all straight-in requests. Associated 
persons would lose the ability to unilaterally decide the number of 
arbitrators who would consider and decide the request and, therefore, 
may increase the number of three-person panels. The impact of this 
change may be small because parties may still jointly agree to a single 
arbitrator.
    The proposed rule change may also affect the customer dispute 
disclosures on the CRD system and their public display through 
BrokerCheck. The disclosures that would have otherwise been expunged 
would remain, and, depending on the merit of these disclosures, may 
affect the value of the information describing the conduct of 
associated persons. The merit of these disclosures is dependent on many 
factors which are difficult to predict. These factors include the 
incentive of parties to file an expungement request under the proposed 
rule change and the merit of the customer disputes that would have 
otherwise been sought expunged. The effect on the value of the customer 
dispute information is therefore uncertain.

[[Page 11172]]

(d) Alternatives Considered
    An alternative to the proposed rule change includes the minimum 
filing fee of $1,425 for all expungement requests that was proposed in 
Regulatory Notice 17-42 (December 2017) (discussed in more detail 
below). Although parties filing an expungement request would pay an 
additional $100 to file an expungement request under the proposed rule 
change, the $1,575 filing fee is the filing fee applicable to non-
monetary claims. As discussed above, an expungement request is a non-
monetary claim under the Codes.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    FINRA published Regulatory Notice 17-42 (December 2017) 
(``Notice'') to seek comment on proposed rule changes related to 
expungement, including the minimum fees discussed in this filing.\63\ 
FINRA received 28 comment letters in response to the Notice that 
addressed the filing fee, member surcharge, or process fee. A copy of 
the Notice is attached as Exhibit 2a. A list of the comment letters 
received in response to the Notice that are applicable to this filing 
are attached as Exhibit 2b.\64\ Copies of the comment letters received 
in response to the Notice that are applicable to this filing are 
attached as Exhibit 2c.
---------------------------------------------------------------------------

    \63\ This filing addresses the comments to the Notice that: (i) 
Relate to the proposed fees and (ii) do not address the other 
proposed changes in the Notice to the expungement framework that are 
not part of this filing, but are being developed separately from 
this filing. See supra note 3.
    \64\ All references to commenters are to the comment letters as 
listed in Exhibit 2b.
---------------------------------------------------------------------------

    In the Notice, FINRA proposed a minimum filing fee of $1,425 for 
all expungement requests. In addition, FINRA proposed, consistent with 
the existing provisions under the Codes, to assess a member surcharge 
and process fee against each member that is named a party or 
respondent, or that employed the associated person at the time of the 
events giving rise to the dispute, as applicable. Some commenters 
supported the proposal and others raised concerns with the proposed 
fees or with the costs of expungement in general. A summary of the 
comments and FINRA's responses are discussed below.
Filing Fee
    NASAA and Public Citizen supported the $1,425 minimum filing fee 
proposed in the Notice. NASAA stated that ``the increased fees would at 
least in part'' offset the significant costs that FINRA and the states 
incur related to expungement requests, which include both the costs to 
review and to process expungement requests. Public Citizen stated that 
the minimum filing fee would be a ``limit[ ] to potential overuse of 
expungement proceedings.'' White expressed some support for the 
proposed minimum filing fee, stating that it may ``benefit staff and 
limit'' the ``occasional'' request for expungement ``made years after 
the underlying event.''
    Other commenters, including associated persons, member firms, and 
their industry and legal representatives, opposed the proposed minimum 
filing fee. Some commenters viewed the proposed minimum filing fee as 
an additional fee that would be burdensome and discourage associated 
persons from pursing meritorious expungement claims.\65\ For example, 
SIFMA stated that the filing fee would be an additional fee that the 
individual would have to pay in addition to the fees in the underlying 
arbitration. SIFMA also stated that the filing fee could (along with 
the other fees proposed in the Notice) \66\ ``have an unfortunate 
impact of creating a tiered system where only registered 
representatives and firms that can absorb these additional costs will 
be able to pursue expungement, regardless of merit.'' JonesBell and 
Behr contended that since ``presentation of an expungement request by a 
registered person who is a party to the underlying customer case does 
not require any additional administrative time or effort, either by 
FINRA, or by the arbitrators,'' a purpose of the fee was to 
``financially punish the associated person for making an expungement 
request, and to generate additional (but unwarranted) revenue for 
FINRA.'' Liebrader stated that the approximately $1,500 filing fee 
``just to file their claim'' was ``too high'' for both associated 
persons seeking expungement and claimants in general in comparison to 
court filing fees, which ``are in the $200-$300 range.'' Several other 
commenters objected to the proposed minimum filing fee as an increase 
in the amount of the filing fee \67\ or objected to the costs of 
requesting expungement in general.\68\ Some commenters objected to the 
current costs associated with requesting expungement, which they viewed 
as too high.\69\
---------------------------------------------------------------------------

    \65\ See Behr, JonesBell, and SIFMA; see also infra note 67.
    \66\ Some commenters misconstrued the proposed fees discussed in 
the Notice as allowing the same member firm to be charged two 
separate member surcharge and process fees in the same arbitration. 
See infra note 80 and accompanying text.
    \67\ See Baritz, Higgenbotham, James, Janney, Keesal, Saretsky, 
Speicher, Walter, and Weinerf. One commenter, SEC Investor Advocate, 
stated that potentially increasing the fees that brokers or firms 
must pay when requesting expungement, along with other enhancements 
to the expungement process proposed in the Notice but not addressed 
in this filing, may cause brokers to seek to avoid the Rule 2080 
process entirely, and instead request expungement of their records 
directly from a court. FINRA notes that a broker can seek 
expungement by going through the FINRA arbitration process or 
directly to court (without first going through arbitration). See 
FINRA Rule 2080; see also supra note 8 (describing the requirement 
to name FINRA as a party when brokers seek expungement in court).
    \68\ See Deal, Harris, Isola, Rieger, and Smart.
    \69\ See AdvisorLaw, Commonwealth, Di Silvio, Mahoney, and 
Scrydloff. AdvisorLaw also provided a hyperlink to an online 
petition that requested signatures to ``support a balanced, cost and 
time effective, expungement process'' and that collected associated 
comments.
---------------------------------------------------------------------------

    In response to these comments, FINRA declines to reduce or 
eliminate the proposed minimum filing fee. The $1,425 filing fee 
proposed in the Notice corresponds to the minimum claim amount tier for 
a three-person panel to decide an arbitration.\70\ As noted above, 
FINRA believes that most expungement requests should be decided by a 
three-person panel.\71\ In addition, an expungement request without a 
damages claim is a non-monetary claim under the Codes, which requires a 
three-person panel and currently requires a filing fee of $1,575. Thus, 
under the proposed rule change, an associated person, or a requesting 
party if it is an on-behalf-of request, would be required to pay a 
$1,575 filing fee for an expungement request made during a customer 
arbitration or straight-in request.
---------------------------------------------------------------------------

    \70\ The minimum claim amount tier for a three-person panel and 
a filing fee of $1,425 is $100,000.01 to $500,000.
    \71\ See supra Item II.A.1.(a)II.(iii), ``Concerns with 
Avoidance of the Current Fee Structure for Expungement Requests.''
---------------------------------------------------------------------------

    Associated persons should not be able to reduce the filing fee from 
the $1,575 owed for a non-monetary claim to $50--and reduce the hearing 
session fee to $50, the member surcharge to $150 and the process fee to 
$0--merely by adding a small monetary claim, that the associated person 
often subsequently drops. Today, persons who do not add a small 
monetary claim to a straight-in request pay the $1,575 filing fee 
associated with non-monetary claims. The proposal would ensure that all 
associated persons who request expungement are subject to the same 
minimum filing fee.
    In addition, as with other non-monetary claims, FINRA incurs costs 
to process expungement requests. Accordingly, expungement requests

[[Page 11173]]

should be subject to the same minimum filing fee as other non-monetary 
claims.
    FINRA also declines to revise its proposal to charge the minimum 
filing fee when expungement is requested, irrespective of whether the 
request is made in a straight-in request or in an underlying customer 
arbitration. FINRA notes that other claims for relief filed by 
associated persons during a customer arbitration (i.e., counterclaims, 
cross claims, and third party claims) all result in a separate filing 
fee, just as they would if the associated person filed the claim in a 
separate arbitration. FINRA acknowledges that the costs to process 
straight-in requests and requests made in an underlying customer 
arbitration may not be identical.\72\ However, FINRA believes that the 
proposed minimum filing fee is commensurate with the additional work 
that arbitrators should undertake when expungement is requested.\73\
---------------------------------------------------------------------------

    \72\ See supra note 11 (describing how a second member surcharge 
and process fee will not be assessed in an arbitration, even if 
expungement is requested).
    \73\ See supra Item II.A.1.(b)I.
---------------------------------------------------------------------------

    With respect to the concern that the minimum filing fee may prevent 
associated persons from making meritorious expungement requests, FINRA 
notes that the Director may defer payment of all or part of an 
associated person's filing fee on a showing of financial hardship.\74\
---------------------------------------------------------------------------

    \74\ See supra note 32.
---------------------------------------------------------------------------

A. Cost Shifting
    Some commenters proposed shifting the costs of requesting 
expungement away from associated persons. Braschi suggested that FINRA 
provide a mechanism to shift the cost of expungement to customers and 
their attorneys, and Wellington suggested that FINRA should impose 
little or no cost if the associated person receives an expungement 
recommendation. Liebrader stated that FINRA should have its members 
``shoulder more of the cost in this mandatory arbitration forum'' and 
should ``provide more relief for Claimants who for financial reasons 
have trouble coming up with the filing fees.''
    FINRA believes that the costs associated with expungement requests 
should generally be shared by the associated persons who are the 
subject of the customer complaints and arbitrations, and the firms that 
employ them.\75\ In addition, consistent with the current fee structure 
under the Codes, under the proposed rule change member firms will 
continue to bear the larger share of the costs of expungement. As with 
other types of arbitration claims, member firms that are respondents or 
employed the associated person seeking expungement, not the associated 
person or customer, pay the majority of the expense of the forum 
through the member surcharge and process fee. In addition, as noted 
above, the Director may defer payment of the filing fee for claimants 
that demonstrate financial hardship.\76\
---------------------------------------------------------------------------

    \75\ Under the Codes, a panel may order in the award that a 
party reimburse another party for all or part of any filing fee 
paid. See supra note 32. In addition, in a customer arbitration, the 
Director will refund the member surcharge if the panel denies all of 
the customer's claims against the member or associated person and 
allocates all hearing session fees against the customer. See FINRA 
Rule 12901(b)(1).
    \76\ See supra note 32.
---------------------------------------------------------------------------

Member Surcharge and Process Fee
    In the Notice, FINRA proposed that when expungement is requested, 
there would be an assessment of a member surcharge and process fee, 
consistent with the existing provisions of the Codes,\77\ against each 
member that is named as a party or respondent, or that employed the 
associated person named as a respondent or party at the time of the 
events giving rise to the dispute, as applicable. Several commenters 
expressed concerns with this proposal.
---------------------------------------------------------------------------

    \77\ See supra notes 10 and 11 and accompanying text.
---------------------------------------------------------------------------

A. Assessment Against Firm That Employed Associated Person ``At the 
Time of the Events Giving Rise to the Dispute''
    Keesal stated that the proposed assessment of a member surcharge 
and process fee against the member firm that employed the associated 
person at the time of the ``events giving rise to the dispute'' 
required ``further clarification.'' Keesal stated that parties may 
contend that multiple events gave rise to a customer claim, during 
which the associated person may have been employed with multiple member 
firms.
    After considering the comment, FINRA has modified the proposal to 
assess, consistent with the existing provisions of the Codes, member 
surcharge and process fees against the member firm that is a party or 
is named as a respondent, or ``that employed the associated person at 
the time the customer dispute arose.'' \78\ This is the standard that 
currently triggers an obligation to pay the process fee and member 
surcharge in FINRA arbitrations.\79\
---------------------------------------------------------------------------

    \78\ See supra notes 35 and 43 and accompanying text.
    \79\ See, e.g., FINRA Rules 12901(a)(1)(C) and 13903(b).
---------------------------------------------------------------------------

B. When Expungement Is Requested in a Customer Arbitration
    SIFMA expressed concern that, when expungement is requested in a 
customer arbitration, the proposal would result in the assessment of a 
second member surcharge and process fee against a member firm ``in 
addition to the fees charged in the underlying arbitration.'' Keesal 
similarly stated that imposing these fees during the customer 
arbitration was not justified because the expense of ``empaneling and 
compensating arbitrators and administering the case'' should be handled 
as part of the customer arbitration.
    FINRA notes that the proposal retains the existing requirement that 
firms may be assessed only one member surcharge and one process fee in 
a customer arbitration,\80\ and that the proposal does not impact how 
the member surcharge and process fee are assessed today in a customer 
arbitration.\81\ Accordingly, member firms will not be assessed these 
fees twice in the same customer arbitration, even if expungement is 
requested during the arbitration. In addition, in the proposal, FINRA 
has clarified that the minimum member surcharge and process fee apply 
only when the associated person files a straight-in request against a 
member firm or customer.\82\
---------------------------------------------------------------------------

    \80\ See supra notes 36 and 45; see also proposed Rules 
12901(a)(6), 12903(e), 13901(f), and 13903(e).
    \81\ See supra note 10.
    \82\ See proposed Rules 12901(a)(3), 12903(c), 13901(c), and 
13903(c).
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 11174]]

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2020-005 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2020-005. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of FINRA. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2020-005 and should be submitted on or before March 18, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\83\
---------------------------------------------------------------------------

    \83\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03772 Filed 2-25-20; 8:45 am]
BILLING CODE 8011-01-P


