Document ID: SEC-2020-0852-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2020-06-01T04:00Z

[Federal Register Volume 85, Number 105 (Monday, June 1, 2020)]
[Notices]
[Pages 33212-33221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11650]

[[Page 33212]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88945; File No. SR-FINRA-2020-005]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving 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

May 26, 2020.

I. Introduction

    On February 7, 2020, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA's Code of 
Arbitration Procedure for Customer Disputes and Code of Arbitration 
Procedure for Industry Disputes (collectively, the ``Codes'') to apply 
minimum fees to requests for the expungement of customer dispute 
information.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on February 26, 2020.\3\ The public comment period closed on 
March 18, 2020. The Commission received seven comment letters in 
response to the Notice.\4\ On April 2, 2020, FINRA extended the time 
period in which the Commission must approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change to 
May 26, 2020. On May 18, 2020, FINRA responded to the comment letters 
received in response to the Notice.\5\ This order approves the proposed 
rule change.
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    \3\ See Exchange Act Release No. 88251 (Feb. 20, 2020), 85 FR 
11165 (Feb 26, 2020) (File No. SR-FINRA-2020-005) (``Notice'').
    \4\ See Letter from Steven B. Caruso, Maddox Hargett Caruso, 
P.C., dated Feb. 21, 2020 (``Caruso Letter''); letter from Samuel 
Edwards, President, Public Investors Arbitration Bar Association 
(``PIABA''), dated Mar. 18, 2020 (``PIABA Letter''); letter from 
Christopher Gerold, President & Chief, New Jersey Bureau of 
Securities, North American Securities Administrators Association 
(``NASAA''), dated Mar. 18, 2020 (``NASAA Letter''); letter from 
Dochtor D. Kennedy, President & Founder, AdvisorLaw LLC, dated Mar. 
18, 2020 (``AdvisorLaw Letter''); letter from Christine Lazaro, 
Director of the Securities Arbitration Clinic and Professor of 
Clinical Legal Education, Christina Buru, Legal Intern, Gia 
Fernicola, Legal Intern, and Lauren K. Peterson, Legal Intern, 
Securities Arbitration Clinic, St. John's University School of Law, 
dated Mar. 18, 2020 (``SJU Letter''); letter from Robin M. Traxler, 
Esq., Senior Vice President, Policy & Deputy General Counsel, 
Financial Services Institute (``FSI''), dated Mar. 18, 2020 (``FSI 
Letter''); and letter from Richard P. Ryder, Esq., President, 
Securities Arbitration Commenter, Inc. (``SAC''), dated Mar. 26, 
2020 (``SAC Letter''). Comment letters are available on the 
Commission's website at https://www.sec.gov.
    \5\ See Letter from Mignon McLemore, Assistant General Counsel, 
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary, 
U.S. Securities and Exchange Commission, dated May 18, 2020 (``FINRA 
Letter''). The FINRA Letter is available on FINRA's website at 
http://www.finra.org, at the principal office of FINRA, on the 
Commission's website at https://www.sec.gov/comments/sr-finra-2020-005/srfinra2020005-7214393-216896.pdf, and at the Commission's 
Public Reference Room.
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II. Description of the Proposed Rule Change \6\
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    \6\ The subsequent description of the proposed rule change is 
substantially excerpted from FINRA's description in the Notice. See 
Notice, 85 FR at 11165-73.
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A. Background

1. Customer Dispute Information in the Central Registration Depository
    Information regarding customer disputes involving associated 
persons is contained in the Central Registration Depository (``CRD'') 
system, the central licensing and registration system used by the U.S. 
securities industry and its regulators. The concept for CRD, as well as 
the policies pursuant to which FINRA operates CRD, were developed by 
FINRA jointly with NASAA.\7\
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    \7\ See Notice at 11165 and n. 4. NASAA and state regulators 
remain involved with the ongoing development and implementation of 
CRD. See Notice at n. 4.
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    In general, the information in the CRD system is submitted by 
broker-dealers, associated persons, and regulators in response to 
questions on the uniform registration forms.\8\ Among other things, 
these forms collect administrative, regulatory, criminal history, and 
disciplinary information about associated persons, 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 broker-dealers use this information to help 
them make employment decisions.
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    \8\ 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).
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    Pursuant to rules approved by the SEC, FINRA makes specified 
current CRD information publicly available through BrokerCheck.\9\ 
According to FINRA, BrokerCheck is part of its effort to help investors 
make informed choices about the broker-dealers and associated persons 
with which they may conduct business.\10\ BrokerCheck maintains 
information on the approximately 3,600 registered broker-dealers and 
628,000 associated persons. BrokerCheck also provides the public with 
access to information about formerly registered broker-dealers and 
associated persons.\11\
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    \9\ 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.
    \10\ See Notice at 11165.
    \11\ Formerly registered associated persons, 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-dealers 
and 567,000 formerly registered associated persons. An associated 
person's records are available in BrokerCheck for 10 years after the 
associated person leaves the industry, and associated persons who 
are the subject of disciplinary actions and certain other events 
remain on BrokerCheck permanently.
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    According to FINRA, the regulatory framework governing the CRD 
system and BrokerCheck has long contemplated the possibility of 
expunging certain customer dispute information from these systems in 
limited circumstances, such as where the allegations made about the 
associated person are factually impossible or clearly erroneous.\12\ 
FINRA believes the expungement framework seeks to balance the important 
benefits of disclosing information about customer disputes to 
regulators and investors with the goal of protecting associated persons 
from the publication of false allegations against them.\13\
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    \12\ See Notice at 11166.
    \13\ Id.
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    A broker-dealer or associated person 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), requires a member 
firm or associated person seeking expungement to obtain an order of a 
court of competent jurisdiction directing such expungement

[[Page 33213]]

or confirming an award containing expungement relief. FINRA will 
expunge customer dispute information only after the court orders it to 
execute the expungement.\14\
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    \14\ FINRA Rule 2080 also requires that FINRA member firms or 
associated persons seeking a court order or confirmation of the 
arbitration award containing expungement relief name FINRA as a 
party. 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 stated it 
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 Notice at n. 2; see also 
FINRA Rule 2080.
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2. Current Fee Structure in FINRA Arbitration
    Under the Codes, if a customer files a claim in arbitration against 
an associated person and a member firm, the customer is assessed a 
filing fee based on the claim amount.\15\ The member firm is assessed a 
member surcharge and a process fee based on the claim amount.\16\ The 
member firm is assessed only one surcharge and one process fee per 
arbitration.\17\ When the associated person answers the claim,\18\ the 
associated person is not assessed a fee if he or she does not add a 
claim to the answer.\19\
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    \15\ 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).
    \16\ A member surcharge is assessed against a member firm if, 
for example, the member firm 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 firm 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 firm is a party, the member firm 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).
    \17\ Under the Codes, no member firm 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).
    \18\ 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).
    \19\ 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).
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    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,\20\ which 
are also based on the amount of the customer's claim.\21\ If the 
parties settle, the panel will not issue an award.
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    \20\ 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.
    \21\ FINRA makes all arbitration awards publicly available. See
    https://www.finra.org/arbitration-mediation/arbitration-awards.
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a. 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 firm, 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,\22\ 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.
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    \22\ The term ``hearing'' means the hearing on the merits of an 
arbitration under Rule 12600.
    See FINRA Rule 12100(o).
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    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,\23\ continues to pursue the expungement 
request, the panel from the customer arbitration will hold a separate 
expungement-only hearing to decide the expungement request. 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.\24\
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    \23\ In 2009, the Commission 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 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.
    \24\ See FINRA Rules 12805(d) and 13805(d).
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b. Current Fee Structure for an Expungement Requests Made in a Separate 
Arbitration (``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.\25\ Any claim that does not request a 
dollar amount is considered a non-monetary or not specified claim 
(``nonmonetary 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 firm named as a respondent or 
that employed the associated person at the time the dispute arose must 
pay a $3,750 process fee.\26\ A member firm named as a respondent or 
that employed the associated person at the time the dispute arose is 
also assessed a surcharge of $1,900.\27\ These claims are decided by a 
three-person panel, unless the parties agree in writing to one 
arbitrator.\28\ Further, the per-hearing session fee for a nonmonetary 
claim is $1,125, and is assessed against the party requesting 
expungement.
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    \25\ FINRA notes, however, that straight-in requests filed 
against the customer are rare.
    See Notice at n. 19.
    \26\ See supra note 16. 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.
    \27\ See supra note 16; see also supra note 17.
    \28\ See FINRA Rules 12401(c) and 13401(c).
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c. FINRA's Concerns With Fees for Certain Expungement Requests
    As discussed above, an expungement request is a non-monetary claim, 
and FINRA believes that the parties requesting expungement should pay 
the fees associated with such requests under the Codes.\29\ FINRA is 
concerned, however, that member firms and associated persons are 
engaging in

[[Page 33214]]

practices to avoid fees applicable to expungement requests, 
particularly expungement requests made as straight-in requests.\30\ 
FINRA cited as an example associated persons who file a straight-in 
request adding a small monetary claim (typically, one dollar) to the 
expungement request with the intent of reducing the fees assessed 
against the associated person and qualify for an arbitration heard by a 
single arbitrator.\31\ Further, FINRA stated that claims for small 
damages also reduce the member fees that the forum assesses against 
member 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 that normally would be assessed to the associated person 
requesting expungement and member firm from $9,475 to $300.\32\ FINRA 
noted that, often, the associated person will subsequently drop the 
claim for one dollar.\33\ Adding a small damages claim also changes the 
default panel composition to a single arbitrator rather than a three-
person panel.\34\
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    \29\ See Notice at 11167.
    \30\ Id.
    \31\ 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.
    \32\ FINRA cited another example of an associated person filing 
a straight-in request against a member firm. If the associated 
person 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 
Notice at n. 24.
    \33\ See Notice at 11167.
    \34\ See supra note 31.
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B. Proposed Amendments

    As stated in the Notice, FINRA is proposing to amend the Codes to 
apply a minimum filing fee for all expungement requests 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.\35\ Specifically, the same fees would 
apply to an expungement request 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.\36\ 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 \37\ or in connection with a straight-in request.\38\
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    \35\ See Notice at 11167.
    \36\ Id.
    \37\ As an example, FINRA provided that 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. See Notice at n. 26.
    \38\ 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.
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1. Proposed Filing Fee
    Under the proposed rule change, an associated person, or requesting 
party if it is an on-behalf-of request,\39\ would be required to pay 
the filing fee for a non-monetary claim for an expungement request made 
during a customer arbitration \40\ or filed as a straight-in 
request.\41\ 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.\42\
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    \39\ See supra note 23.
    \40\ 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. FINRA notes, however, that these requests 
are rare. See Notice at n. 29.
    \41\ 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 the previous payment of the filing fee applicable to 
the expungement request during the customer arbitration.
    \42\ 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.
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    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 review by 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 to impose the filing fee for all 
non-monetary claims as the minimum filing fee for expungement requests. 
Furthermore, FINRA is proposing to impose this minimum filing fee to 
expungement requests in customer arbitrations as well as to straight-in 
requests.\43\
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    \43\ Under the Codes, the Director of Dispute Resolution 
Services (``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 that this provision applies to expungement 
requests. Information on how to request an arbitration fee waiver is 
available at https://www.finra.org/arbitrationmediation/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).
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    FINRA also believes that the proposed minimum filing fee is 
commensurate with the additional steps that arbitrators should take 
when deciding an expungement request during a customer arbitration or 
in connection with a straight-in request.\44\ 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 in cases involving settlements 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.
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    \44\ See Notice at 11167-68.
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2. Proposed Member Surcharge for Straight-in Requests
    The proposed rule change would apply a minimum member surcharge 
when an associated person files a

[[Page 33215]]

straight-in request against either a customer or a member firm.\45\
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    \45\ See proposed Rule 13901(c). If the associated person files 
the straight-in request against another associated person, each 
member 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 Codes. See FINRA Rule 13901(a)(3) and 
proposed Rule 13901(c).
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    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 Codes 
(currently $1,900). 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.\46\
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    \46\ Consistent with how the member surcharge is assessed today, 
under the proposal, FINRA would not assess a member firm more than a 
single surcharge in any arbitration. See also supra note 17.
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    The proposed rule change would also provide that, for straight-in 
requests filed against a customer, each member firm 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 Codes 
(currently $1,900).\47\
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    \47\ See proposed Rule 12901(a)(3).
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    Under the Proposal, 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.\48\
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    \48\ See proposed Rules 12901(a)(5) and 13901(e).
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3. 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.\49\ Thus, the proposed hearing session fee would 
apply to straight-in requests, and 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.\50\ 
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.\51\ In addition, 
consistent with the Codes today, the hearing session fee would be 
assessed against the party requesting expungement.\52\
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    \49\ 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.
    \50\ See proposed Rules 12900(a)(3) and 13900(a)(3); see also 
supra note 37. 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.
    \51\ See proposed Rules 12902(a)(5) and 13902(a)(4).
    \52\ Id.
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4. 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 Codes 
(currently $3,750).\53\
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    \53\ See proposed Rule 13903(c). Under the Proposal, 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 Codes. See proposed Rules 
13903(b) and 13903(c).
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    The proposed rule change would also clarify that, for straight-in 
requests filed against a customer, the member firm 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 Codes 
(currently $3,750).\54\
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    \54\ See proposed Rule 12903(c).
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    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.\55\ 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.
---------------------------------------------------------------------------

    \55\ 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 17.
---------------------------------------------------------------------------

    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.

III. Comment Summary

    As noted above, the Commission received seven comment letters on 
the proposed rule change.\56\ One commenter fully supported the 
Proposal; \57\ three commenters supported the Proposal but urged FINRA 
to make further changes; \58\ two commenters were critical of the 
Proposal; \59\ and one commenter supported the Proposal but sought 
clarification of its scope.\60\
---------------------------------------------------------------------------

    \56\ See supra note 4.
    \57\ See Caruso Letter.
    \58\ See SJU Letter, PIABA Letter, NASAA Letter.
    \59\ See FSI Letter, AdvisorLaw Letter.
    \60\ See SAC Letter.
---------------------------------------------------------------------------

Supportive of Proposal

    In one commenter's view, the proposed rule changes ``would be a 
fair, equitable and reasonable approach that would expedite and 
facilitate the efficiency of the arbitration forum as well as the 
investor protection attributes that are all too often compromised 
through the improper application of the expungement process.'' \61\ 
This commenter believes that the changes ``should be approved by the 
SEC on an expedited basis.'' \62\ A second commenter was ``[g]enerally 
. . . supportive of the proposed rule changes,'' noting that ``[i]t is 
wholly unfair to allow some brokers to evade the expungement fees 
imposed by the Codes by claiming fictitious nominal damages.'' \63\
---------------------------------------------------------------------------

    \61\ Caruso Letter.
    \62\ Id.
    \63\ SJU Letter.
---------------------------------------------------------------------------

Proposal Is Beneficial but Insufficient

    One commenter was supportive of the Proposal but stated that 
expungement requests should be decided by a three-person panel in all 
instances.\64\ Another commenter also supported the proposal ``as a 
general matter,'' but ``strongly urge[d] the Commission to require 
FINRA to enhance the proposal by requiring unanimous decisions by 
three-person arbitration panels,'' noting that ``[a] divided panel 
indicates that there is doubt that the broker has met the higher burden 
attendant to eligibility for extraordinary relief, and thus should not 
merit an expungement recommendation.'' \65\ This commenter also argued 
that ``further expungement reform is required to improve a failed

[[Page 33216]]

system,'' and urged FINRA to ``continue to close gaps in the existing 
process and to initiate steps towards more meaningful expungement 
reform.'' \66\ This commenter was concerned that, ``[i]n light of 
expungement's evolution from an extraordinary remedy into routinely 
granted relief, the integrity of the data on the CRD and IARD systems 
is suffering.'' \67\
---------------------------------------------------------------------------

    \64\ See id.
    \65\ NASAA Letter.
    \66\ Id.
    \67\ Id.
---------------------------------------------------------------------------

    A third commenter supported the proposed minimum fees, stating that 
``the practice of adding a small monetary claim to a request for 
expungement in a `straight in' expungement request'' is an ``egregious 
abuse of the process'' that has ``become the norm.'' This commenter 
also favored requiring three-person panels, stating that ``rather than 
hoping that the new rules `should' result in more expungement requests 
[being] heard before three-person arbitration panels, FINRA should 
require this under the revised arbitration rules.'' \68\
---------------------------------------------------------------------------

    \68\ PIABA Letter.
---------------------------------------------------------------------------

    In response, FINRA noted that while it believes that ``most 
expungement requests, particularly straight-in requests, should be 
decided by a three-person panel,'' it has determined not to revise this 
Proposal to require a three-person panel to decide expungement 
requests, or to require the unanimous consent of a three-person panel 
to decide expungement requests.\69\ FINRA stated that it believes ``it 
is appropriate that this Proposal focus only on applying minimum fees 
to requests for expungement of customer dispute information, to 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.'' \70\ At the same time, 
however, FINRA recognized the concerns raised by the commenters 
regarding the current expungement framework, and stated that it is 
separately developing other proposed changes to the framework, 
including codifying as rules the Notice to Arbitrators and Parties on 
Expanded Expungement Guidance (``Guidance''),\71\ and establishing a 
roster of arbitrators with additional training and experience from 
which a three-person panel would be selected to decide straight-in 
requests and expungement requests in settled customer arbitrations.\72\
---------------------------------------------------------------------------

    \69\ FINRA Letter.
    \70\ Id.
    \71\ See https://www.finra.org/arbitrationmediation/notice-arbitrators-and-parties-expandedexpungement-guidance.
    \72\ See FINRA Letter.
---------------------------------------------------------------------------

Critical of Proposal

    One commenter argued that the Proposal ``will result in member 
firms bearing the increased costs associated with Straight-in Requests 
for expungement even though member firms do not have control over 
whether the associated person files a request for expungement,'' and 
even though ``an associated person's interest, and not necessarily a 
member firm's interest, is primarily served'' by a straight-in request 
for expungement.\73\ This commenter recommended amending the Proposal 
to provide for a refund of the member firm surcharge and process fees 
where an associated person's straight-in request for expungement is 
denied, or on the member firm's showing of financial hardship.\74\
---------------------------------------------------------------------------

    \73\ FSI Letter.
    \74\ See id.
---------------------------------------------------------------------------

    FINRA responded that the member surcharge and process fee are 
charged to member firms using the arbitration forum to help cover the 
costs of administering the forum.\75\ FINRA noted further that the 
proposed member surcharge and process fee are consistent with what a 
member firm should pay today for a non-monetary claim, and what member 
firms currently pay for a straight-in request without an additional 
small monetary claim filed against a member firm.\76\ FINRA stated that 
it has ``determined not to revise the Proposal to refund the member 
surcharge or process fee if a panel denies an associated person's 
straight-in request, or to waive these fees on a member firm's showing 
of financial hardship.'' \77\ FINRA noted, however, that the Codes 
permit the Director to refund or waive the member surcharge under 
extraordinary circumstances, and to refund the member surcharge if the 
panel denies all of a customer's claims against the member firm or 
associated person, and allocates all hearing session fees assessed 
against the customer.\78\ Thus, the Codes currently permit the Director 
to refund or waive the member surcharge in certain circumstances, 
although they do not currently permit the waiver or refund of the 
process fee; this would not change under the Proposal.\79\
---------------------------------------------------------------------------

    \75\ See FINRA Letter.
    \76\ See id.
    \77\ FINRA Letter.
    \78\ See id.
    \79\ See id.
---------------------------------------------------------------------------

    FINRA also noted that, consistent with the current fee structure 
under the Codes, it believes that ``member firms, rather than 
associated persons or customers, should continue to bear the larger 
share of the costs of expungement.'' \80\ However, FINRA states that it 
``intends to monitor the impact of the fees on parties and consider if 
additional changes are warranted.'' \81\
---------------------------------------------------------------------------

    \80\ FINRA Letter.
    \81\ Id. The commenter also urged FINRA to consider eliminating 
the requirement that member firms disclose on CRD customer 
complaints against their associated persons, even when the 
associated person is not named as a party. In response, FINRA noted 
that, as these concerns relate to the requirements to report 
information in the CRD system and its publication through 
BrokerCheck, rather than the application of fees related to requests 
to expunge customer dispute information already submitted in the CRD 
system and publicly available through BrokerCheck, FINRA would not 
address those concerns as part of this Proposal. See FINRA Letter.
---------------------------------------------------------------------------

    Another commenter sought to explain the practice of claiming 
nominal damages, stating that the purpose and intent ``was never to 
`reduce fees,' '' but rather to ``ensure that the Director does not 
impose egregious forum fees,'' as the Director is authorized to assess 
hearing session fees for non-monetary claims that exceed those for 
monetary claims.\82\ In response, FINRA underscored that the Proposal 
is ``intended to help ensure that parties requesting expungement pay 
the fees associated with expungement requests by amending the Codes to 
apply minimum fees for all expungement requests, regardless of whether 
the requesting party adds a small damages claim to the request,'' and 
to ``add consistency to the fees charged across all expungement 
requests.'' \83\ FINRA notes that the proposed minimum fees would 
result in the same filing and hearing session fees being assessed for 
an expungement claim in the absence of the addition of a small damages 
claim.\84\ Moreover, FINRA noted that the proposed minimum fees for 
expungement requests (a non-monetary claim) would be the same as those 
fees applicable to any non-monetary claim under the Codes.\85\
---------------------------------------------------------------------------

    \82\ See AdvisorLaw Letter.
    \83\ FINRA Letter.
    \84\ See id.
    \85\ Id. The Commission also notes that the Director also has 
authority to defer the payment of all or part of an associated 
person's filing fee on a showing of financial hardship, and the 
Codes currently permit the Director to refund or waive the member 
surcharge in certain circumstances. See Notice at 11173
---------------------------------------------------------------------------

    This commenter also believes that FINRA's economic impact analysis 
is flawed in that it: Lacks a full accounting of FINRA's costs in 
connection with expungement claims; incorrectly assumes that all 
expungement claims are limited to two hearings (one pre-hearing 
conference and one hearing on the merits); and fails to account for the

[[Page 33217]]

fact that a portion of filing fees are refundable.\86\
---------------------------------------------------------------------------

    \86\ See AdvisorLaw Letter.
    The commenter also criticized FINRA's economic impact analysis 
by claiming that FINRA understated the level of BrokerCheck usage. 
Id. In response, FINRA stated that in 2017, it began using a 
different service provider to monitor BrokerCheck web traffic, and 
that differences in the monitoring methodology explain why the usage 
numbers from 2016 and earlier that are cited in the Notice are 
higher than the numbers from 2017 to the present. See FINRA Letter. 
The commenter also argued that FINRA's economic analysis relies on a 
study that overstates the predictive value of information currently 
in BrokerCheck. See AdvisorLaw Letter. In response, FINRA noted that 
the Proposal cites a second study with a different empirical 
methodology, and that this study also finds that past disciplinary 
and other regulatory events associated with a member firm or 
individual can be predictive of similar future events. FINRA 
believes ``the inferences from the [challenged study] are, 
therefore, consistent with other, similar studies using different 
sets of assumptions.'' FINRA Letter. Moreover, the commenter also 
suggested that the Proposal would discourage the removal of 
``factually impossible or clearly erroneous'' allegations from the 
CRD system, compromising the integrity of the information therein, 
and raised concerns regarding the requirements to report information 
in the CRD system, and the accuracy and completeness of that 
information. See AdvisorLaw Letter. In response, FINRA noted that 
these concerns relate to the requirements to report information in 
the CRD system and its publication through BrokerCheck and not the 
application of fees related to requests to expunge customer dispute 
information already submitted in the CRD system and publicly 
available through BrokerCheck. Accordingly, FINRA did not address 
these concerns as part of this Proposal. See FINRA Letter.
---------------------------------------------------------------------------

    In response, FINRA reiterated that the cost and revenue information 
detailed in its original economic analysis accurately demonstrates 
``the impact that the practice of adding a small damages claim to an 
expungement request has had on the forum.'' \87\ FINRA explained that 
the assumption of one prehearing conference and one hearing session on 
the merits ``is based on 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.'' \88\ FINRA believes that this assumption is consistent with 
evidence provided by the commenter, which noted in its letter that the 
majority (78.8%) of claims in its sample were concluded with one 
prehearing conference and one hearing on the merits.\89\ Finally, FINRA 
responded that because the Proposal only addresses the assessment of 
fees, the collection of fees (which includes crediting the refundable 
portion of the filing fees) is outside the scope of the Proposal.\90\
---------------------------------------------------------------------------

    \87\ FINRA Letter.
    \88\ Id.
    \89\ See FINRA Letter (acknowledging that ``additional fees 
would have been assessed for cases with a greater number of pre-
hearing conferences or a greater number of hearing sessions on the 
merits,'' but ``continues to believe that the use of the assumption 
results in a reasonable estimate for the additional fees that would 
have been assessed during the sample period.'' See also AdvisorLaw 
Letter.
    \90\ See FINRA Letter. Notwithstanding its position that the 
collection of fees is outside the scope of the proposal, FINRA 
offered additional information regarding the portion of the fees 
that is refundable. Specifically, FINRA stated that every filing fee 
contains a refundable portion and non-refundable portion. FINRA 
provided an illustration of how the proposal would impact the 
allocation of these two portions of the filing fee. In addition, 
FINRA clarified that the ``refundable'' portion is generally not 
refunded but rather used to offset expenses for which the party 
paying the hearing session fee would otherwise be responsible at the 
end of a claim (e.g., to offset hearing session fees assessed 
against the party who paid the filing fee in the award).
---------------------------------------------------------------------------

    The commenter also argued that FINRA fails to fully support its 
contention that straight-in expungement requests should be heard by a 
three-person panel, and stated that it is unclear whether the parties 
to a straight-in request would be allowed to continue to agree to 
adjudication by a single arbitrator.\91\ In response, FINRA clarified 
that the Proposal would not require a three-person panel to decide 
expungement requests, and that it would not change the parties' ability 
to request a single arbitrator.\92\
---------------------------------------------------------------------------

    \91\ See AdvisorLaw Letter.
    \92\ See FINRA Letter.
---------------------------------------------------------------------------

    Finally, the commenter argues that the Proposal is inconsistent 
with the Exchange Act, and more specifically that it is not consistent 
with Sections 15(A)(b)(5) and 15(A)(b)(6) of the Exchange Act because 
it does not purport to address actual fraud, and because it will lead 
to false information in the CRD, which is not in the interests of 
investors or the public.\93\
---------------------------------------------------------------------------

    \93\ See Advisor Law Letter.
---------------------------------------------------------------------------

    FINRA responded that it believes that the Proposal is consistent 
with the provisions of Section 15A(b)(5) 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, and Section 15A(b)(6), which requires, among other things, 
that FINRA rules 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.\94\
---------------------------------------------------------------------------

    \94\ See FINRA Letter.
---------------------------------------------------------------------------

    Specifically, FINRA stated that ``[t]he Proposal is intended to 
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.'' \95\ As a result, FINRA believes that the 
Proposal will apply fees consistently to all parties requesting 
expungement, consistent with what is intended under the existing fee 
structure in the Codes.\96\ In addition, FINRA stated that ``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.'' \97\ By consistently applying the fees to all parties 
requesting expungement, FINRA believes the Proposal will 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.\98\
---------------------------------------------------------------------------

    \95\ FINRA Letter. In response to the comment that the Proposal 
``singles out'' expungement fees, FINRA notes that the Proposal only 
singles out those fees in order to help ensure that expungement 
requests are subject to the same minimum filing fee as other non-
monetary claims. See FINRA Letter.
    \96\ See FINRA Letter.
    \97\ FINRA Letter.
    \98\ See id.
---------------------------------------------------------------------------

    FINRA also stated that, to the extent that the Proposal results in 
more expungement requests being heard by a three-person panel, 
particularly for straight-in requests that often do not include 
customer participation and can be complex to resolve, the Proposal 
would help ensure a complete factual record to support the arbitrators' 
decision, regardless of whether the arbitrators grant or deny the 
expungement request.\99\ FINRA believes that this, in turn, will help 
protect investors and the public interest by helping to ensure the 
accuracy and integrity of information in the CRD system.\100\
---------------------------------------------------------------------------

    \99\ Id. FINRA also stated that it is separately developing 
other proposed changes to the expungement framework, which would 
include establishing a roster of arbitrators with additional 
training and experience from which a three-person panel would be 
selected to decide straight-in requests and expungement requests in 
settled customer arbitrations. See supra notes 74-75 and 
accompanying text.
    \100\ See FINRA Letter.
---------------------------------------------------------------------------

    Finally, FINRA stated that it disagrees with the commenter's 
suggestion that customers who choose to participate in expungement 
hearings, even though they are not a party to the arbitration, should 
be assessed fees under the Proposal.\101\ FINRA believes that ``such 
fees could have a chilling effect on customer participation and would 
be

[[Page 33218]]

inconsistent with FINRA's long-held position of encouraging customer 
participation in expungement hearings.'' \102\ FINRA asserted that 
``[c]ustomer participation during an expungement hearing provides the 
panel with important information and perspective that it might not 
otherwise receive.'' \103\ Therefore, FINRA ``seeks to encourage 
customer participation in expungement hearings, even if the customer is 
not a party.'' \104\
---------------------------------------------------------------------------

    \101\ Id.
    \102\ FINRA Letter.
    \103\ Id.
    \104\ Id.
---------------------------------------------------------------------------

Proposal Requires Clarification

    As noted above, one commenter was concerned that the Proposal does 
not distinguish between expungement requests relating to customer 
disputes, and requests from associated persons to expunge allegations 
that relate to regulatory, policy, or behavioral matters that did not 
directly impact customers, and which are alleged to be ``defamatory in 
nature.'' \105\ This commenter noted that the expungement of these 
``defamatory'' claims has historically been treated differently than 
the expungement of customer dispute information, and suggested that 
FINRA clarify whether or not they are included in the Proposal.\106\ In 
response, FINRA clarified that the Proposal applies only to requests to 
expunge customer dispute information, and not to other types of 
expungement claims.\107\
---------------------------------------------------------------------------

    \105\ SAC Letter.
    \106\ Id.
    \107\ FINRA Letter.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review of the Proposal, the comment letters, and 
FINRA's response, the Commission finds that the Proposal is consistent 
with the requirements of the Exchange Act and the rules and regulations 
thereunder that are applicable to a national securities 
association.\108\ Specifically, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Exchange 
Act,\109\ which requires, among other things, that FINRA rules 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 
Exchange Act, 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.
---------------------------------------------------------------------------

    \108\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \109\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

Proposed Minimum Filing Fee

    The Proposal would require an associated person, or requesting 
party if it is an on-behalf-of request, to pay the current filing fee 
for a non-monetary claim for an expungement request made during a 
customer arbitration or filed as a straight-in request. If the 
associated person or requesting party adds a monetary claim, 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.\110\
---------------------------------------------------------------------------

    \110\ See Notice at 11167.
---------------------------------------------------------------------------

    The Commission believes that applying a minimum filing fee to all 
requests for expungement of customer dispute information will help 
ensure that the fees are equitably allocated because the parties 
requesting expungement will pay the fees intended for such requests 
under FINRA's Codes. Specifically, the Commission agrees that the 
proposed minimum filing fee will help eliminate the inconsistent 
allocation of fees that results when parties add small dollar claims to 
their expungement requests to avoid the fees otherwise applicable to 
expungement requests. The Commission also believes that the Proposal 
will help ensure that the fees charged when expungement is requested 
are consistent, irrespective of whether the request is made as a 
straight-in request or during a customer arbitration, or whether 
damages are included in the request; and that it will help ensure that 
parties requesting expungement pay the fees intended for such requests. 
For these reasons, the Commission believes the Proposal will help 
provide for the equitable allocation of reasonable dues and fees 
against those who would either file or be a party to an expungement 
request.
    With respect to associated persons who would otherwise make a small 
damages claim in order to avoid the applicable fees, while the 
Commission acknowledges that the proposed rule changes will result in 
costs that are currently being avoided, the effect of the proposal is 
simply to apply the applicable fees that were intended for such 
requests under FINRA's Codes. This will help provide for the equitable 
allocation of reasonable dues and fees against those who would file or 
be a party to an expungement request.
    The Commission acknowledges that Proposal would increase costs for 
member firms and associated persons who include a request for 
expungement in the answer to a customer's claim. However, the 
Commission also believes that these increased costs are consistent with 
the Exchange Act, because they will help ensure that the fees charged 
when expungement is requested are consistent across associated persons 
and member firms, regardless of whether the request for expungement is 
made during a customer arbitration or as a straight-in request, and 
that requests for expungement made during a customer arbitration are 
treated consistently with other types of claims. The Commission 
believes that this will provide for the equitable allocation of 
reasonable dues and fees against those who would file an expungement 
request.
    The Commission notes also that the amount of the filing fees 
applicable to these requests is not the subject of the Proposal, which 
is instead addressing the equitable application of the existing filing 
fees applicable to non-monetary claims. Further, as FINRA notes, the 
Director may defer payment of all or part of an associated person's 
filing fee on a showing of financial hardship.\111\
---------------------------------------------------------------------------

    \111\ See Notice at 11173.
---------------------------------------------------------------------------

Proposed Minimum Member Surcharge and Process Fee for Straight-In 
Requests

    The Proposal would apply a minimum member surcharge and process fee 
when an associated person files a straight-in request against either a 
customer or a member firm. 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 Codes (currently $1,900) 
and the process fee for a non-monetary claim under the Codes (currently 
$3,750). These fees are consistent with what a member firm would pay 
today for a straight-in request without an additional small monetary 
claim filed against a member firm. For straight-in requests filed 
against a customer, the member firm that employed the associated person 
at the time the customer dispute arose would be assessed the member 
surcharge and process fee.\112\ 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 and process fee or the applicable surcharge and 
process fee under the Codes, whichever is greater.\113\
---------------------------------------------------------------------------

    \112\ FINRA notes, however, that straight-in requests filed 
against the customer are rare. See Notice at n. 19.
    \113\ See Notice at 11168.

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

[[Page 33219]]

    The Commission agrees with FINRA that applying a minimum member 
surcharge and process fee to requests for expungement of customer 
dispute information will help ensure that member firms pay the fees 
intended for such requests under FINRA's Codes, and will help ensure 
that the fees charged when expungement is requested are consistent 
across member firms. As is the case with filing fees, the practice of 
adding small dollar claims to an expungement request significantly 
lowers the applicable member surcharge and process fee in a way not 
intended when those provisions of the FINRA Codes were adopted. The 
Commission acknowledges that, for member firms who are parties to 
requests that would otherwise include small dollar claims, the Proposal 
will increase costs. However, the Commission agrees with FINRA that 
eliminating this practice by applying the member surcharge and process 
fee consistently will help provide for the equitable allocation of 
reasonable dues and fees against those members who would be parties to 
an expungement request.
    The Commission also acknowledges the concern expressed by a 
commenter that the Proposal ``will result in member firms bearing the 
increased costs associated with Straight-in Requests for expungement 
even though member firms do not have control over whether the 
associated person files a request for expungement,'' and that ``an 
associated person's interest, and not necessarily a member firm's 
interest, is primarily served'' by a straight-in request for 
expungement.\114\ However, the Commission observes that the requirement 
that member firms bear some of the costs associated with straight-in 
requests for expungement, even where member firms do not have control 
over whether the associated person files a request for expungement, is 
not part of the Proposal, but instead is an existing requirement under 
FINRA's Codes. The Proposal would not change FINRA's rules with respect 
to member firms bearing some of the costs associated with straight-in 
requests for expungement, but rather, would eliminate the ability of 
associated persons and member firms to avoid paying the full amount 
intended for such requests under FINRA's Codes.\115\
---------------------------------------------------------------------------

    \114\ FSI Letter.
    \115\ Similarly, the Commission acknowledges that one commenter 
suggested that customers who choose to participate in expungement 
hearings, even though they are not a party to the arbitration, be 
assessed fees under the Proposal. See AdvisorLaw Letter. The 
Commission observes that this is outside the scope of the Proposal. 
Additionally, the Commission agrees with FINRA that customer 
participation during an expungement hearing provides the panel with 
important information and perspective that it might not otherwise 
receive, and that such fees could have a chilling effect on customer 
participation.
---------------------------------------------------------------------------

    Additionally, the Commission notes that, under FINRA's Codes, the 
Director can waive or refund the member surcharge under extraordinary 
circumstances.\116\ In addition, under the Codes, the Director can 
refund the member surcharge if the panel denies all of a customer's 
claims against the member firm or associated person and allocates all 
fees assessed pursuant to Rule 12902(a) against the customer.\117\ 
FINRA notes also in its response that these waivers and refunds would 
continue to be available under the Proposal, and that it intends to 
monitor the impact of the fees on parties and consider if additional 
changes are warranted.\118\
---------------------------------------------------------------------------

    \116\ See FINRA Letter.
    \117\ Id.
    \118\ Id.
---------------------------------------------------------------------------

Proposed Minimum Hearing Session Fee

    The Proposal 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. 
This fee would apply to straight-in requests, and 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. 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.\119\
---------------------------------------------------------------------------

    \119\ See Notice at 11168. This is consistent with the current 
fee structure, which provides that 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.
---------------------------------------------------------------------------

    The Commission agrees with FINRA that applying a hearing session 
fee to requests for expungement of customer dispute information will 
help ensure that parties requesting expungement pay the fees intended 
for such requests under FINRA's Codes, and will help ensure that the 
fees charged when expungement is requested are consistent. As with the 
filing fees, member surcharge, and process fee, the practice of adding 
small dollar claims to an expungement request significantly lowers the 
applicable hearing session fee.

Other Issues Related to Minimum Fees for the Expungement of Customer 
Dispute Information

    The Commission notes the concern, expressed by one commenter, that 
the proposed minimum fees may deter some member firms and associated 
persons from making meritorious expungement requests that they would 
have otherwise made.\120\ As a result, the Commission agrees that the 
minimum fees may impact certain associated persons and member firms 
more than others.\121\ However, the Commission agrees with FINRA that 
the proposed rule change will not result in any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Exchange Act. As discussed above, some associated persons and 
member firms avoid paying the intended fees under the Codes by adding a 
small damages claim to their expungement requests, thus receiving a 
benefit not intended under the Codes. The Commission notes that these 
small damages claims do not necessarily reflect an actual claim against 
the member firm; \122\ and, in fact, associated persons who file such 
monetary claims often drop them during the proceedings.\123\ Therefore, 
the Commission agrees with another commenter who noted that it is 
``unfair to allow some brokers to evade the expungement fees imposed by 
the Codes by claiming . . . nominal damages.'' \124\
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    \120\ See AdvisorLaw Letter.
    \121\ See Notice at 11173.
    \122\ See AdvisorLaw Letter.
    \123\ See Notice at 11167.
    \124\ SJU Letter.
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    The Commission acknowledges the concerns of commenters who argue 
that the proposal should do more to reform the expungement process, 
including by requiring expungement requests to be decided by a three-
person panel.\125\ However, the Commission notes that FINRA has 
represented that it is separately developing other proposed changes to 
the current expungement framework, including codifying as rules the 
Guidance \126\ and establishing a roster of arbitrators with additional 
training and experience from which a three-person panel would be 
selected to decide straight-in requests and expungement requests in 
settled customer arbitrations.\127\ FINRA also states that it welcomes 
a continued dialogue with the commenters on these

[[Page 33220]]

and other proposed changes to the expungement framework.\128\
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    \125\ See PIABA Letter, NASAA Letter, SJU Letter.
    \126\ See supra note 74.
    \127\ See FINRA Letter.
    \128\ Id.
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Reliability of FINRA's Analysis

    FINRA supports the Proposal with data regarding BrokerCheck usage 
and the predictive value of information therein, as well as an economic 
impact analysis that includes information on the costs of expungement 
hearings, the number of hearings in which a small claim for damages was 
made, and the shortfall between the total amount of fees assessed and 
the amount that would have been assessed if the fees for non-monetary 
claims were applied consistently. As set out in more detail above, one 
commenter criticized various aspects of FINRA's data and analysis.\129\
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    \129\ See AdvisorLaw Letter.
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    The Commission notes that the purpose of the Proposal is to help 
ensure that those who would either file or be a party to an expungement 
request pay the existing fees as required by the Codes. The fees 
established by the Proposal are not new; rather, they are the same fees 
currently applicable to non-monetary claims, applied on a more 
consistent basis to all, rather than some, expungement requests. 
Therefore, the question of whether the amount of the fees applicable to 
non-monetary claims is appropriate is beyond the scope of the Proposal. 
As noted above, the Commission believes that eliminating the practice 
of claiming nominal damages to avoid the existing fees, and applying 
the fees consistently to parties requesting expungement, is consistent 
with Section 15A(b)(5) of the Exchange Act, 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.
    FINRA provided cost and revenue information, which demonstrate the 
negative impact that the practice of adding a small damages claim to an 
expungement request has had on the forum.\130\ The Commission 
emphasizes that the fees established by the Proposal are not new,\131\ 
and that the question of whether the amount of the fees is appropriate 
is beyond the scope of the Proposal. However, the Commission also notes 
that FINRA provides evidence that there is a shortfall between the cost 
of a typical expungement request and the fees assessed where parties 
claim a small amount in damages to reduce the applicable fees, which 
supports a regulatory need for the Proposal.\132\ FINRA also provides 
sufficient evidence that the disparity in fees that would be assessed 
under the Proposal's more consistent approach and the fees currently 
assessed is significant.\133\ Commenters generally did not challenge 
this evidence.\134\
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    \130\ See FINRA Letter.
    \131\ While none of these fees is a new forum fee, some fees, 
such as the filing fee, will be assessed more uniformly regardless 
of when the expungement request is made. See sections II.A.2.a and 
II.B.1 above.
    \132\ Specifically, FINRA explains that the costs to administer 
a straight-in request can include chairperson honoraria, travel 
expenses, conference room rental, and other costs to administer the 
forum. FINRA states that the cost of chairperson honoraria alone for 
a typical straight-in request is $725--more than double the total 
amount of the fees typically assessed for a straight-in request 
where a small damages claim is added ($300). See Notice at 11170.
    \133\ For example, FINRA notes that, for a sample period of 
January 2016-June 2019, 76% of straight-in requests for expungement 
included a small damages claim. FINRA also provides an estimate of 
the total amount of fees not assessed during the sample period as a 
result of: (1) Filings made during the customer arbitration that 
were not subject to a filing fee ($2.4 million) and (2) straight-in 
expungement requests that included a small damages claim ($7.3 
million). See Notice at 11170.
    \134\ In calculating the overall shortfall in fees assessed, 
FINRA assumed that each straight-in expungement request would result 
in one prehearing conference and one hearing session on the merits. 
One commenter questioned this assumption. See AdvisorLaw Letter. 
FINRA responded that the assumption is based on 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. See FINRA Letter. FINRA also stated 
that this assumption is consistent with evidence provided by the 
commenter, which noted in its letter that the majority (78.8%) of 
claims in its sample were concluded with one prehearing conference 
and one hearing on the merits. Id. The Commission does not believe 
that the exact amount of the shortfall is necessary to determine 
whether the Proposal is consistent with the Exchange Act; rather, 
the relevant consideration is whether the fees are currently 
assessed inconsistently across members and associated persons.
    The commenter also asserted that the Proposal fails to account 
for the fact that a portion of filing fees are refundable. See 
AdvisorLaw Letter. FINRA responds that because the Proposal only 
addresses the assessment of fees, the collection of fees (which 
includes crediting the refundable portion of the filing fees) is 
outside the scope of the Proposal. See FINRA Letter. However, FINRA 
also offers additional information regarding the portion of the fees 
that is refundable. Id. As noted above, the Commission does not 
believe that the exact amount of the shortfall is necessary to 
determine whether the Proposal is consistent with the Exchange Act; 
rather, the relevant consideration is whether the fees are currently 
assessed inconsistently across member firms and associated persons.
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    One commenter also questioned the reliability of FINRA's data 
regarding BrokerCheck usage.\135\ As noted above, FINRA clarified in 
its response that in 2017, it began using a different service provider 
to monitor BrokerCheck web traffic, and that differences in the 
monitoring methodology explain why the numbers from 2016 and earlier 
seem to indicate higher usage than the numbers from 2017 to the 
present.\136\ The Commission believes that this explanation is 
reasonable, and that regardless, the specific number of unique users of 
BrokerCheck is not relevant to the application of the fees related to 
requests to expunge customer information already mentioned in the CRD 
system and publicly available through BrokerCheck, and is not necessary 
to the Commission's analysis of whether or not the Proposal is 
consistent with the Exchange Act.
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    \135\ See AdvisorLaw Letter.
    \136\ See FINRA Letter.
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    The commenter also argued that FINRA's 2015 study overstates the 
predictive value of information currently in BrokerCheck because it 
excludes certain types of claims from its analysis.\137\ In response, 
FINRA notes that the Proposal cites another study with a different 
empirical methodology that also finds past disciplinary and other 
regulatory events associated with a member firm or individual can be 
predictive of similar future events.\138\ The Commission notes that the 
two studies cited by FINRA provide support for the contention that past 
disciplinary and other regulatory events associated with a firm or 
individual can be predictive of similar future events; the Commission 
also notes that the commenter does not point to any studies reaching a 
different conclusion. Regardless, the Commission believes that the 
utility of BrokerCheck as a tool for predicting future misconduct is 
not relevant to the application of the fees related to requests to 
expunge customer information already mentioned in the CRD system and 
publicly available through BrokerCheck, and is not necessary to the 
Commission's analysis of whether or not the Proposal is consistent with 
the Exchange Act.
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    \137\ See AdvisorLaw Letter.
    \138\ See FINRA Letter.
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    Thus, for the reasons described above, the Commission believes that 
the Proposal, as filed with the Commission, is consistent with Sections 
15(A)(b)(5) and 15(A)(b)(6) of the Exchange Act.

V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \139\ that the proposal (SR-FINRA-2020-005) be, and hereby 
is, approved.
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    \139\ 15 U.S.C. 78s(b)(2).

[[Page 33221]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\140\
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    \140\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11650 Filed 5-29-20; 8:45 am]
 BILLING CODE 8011-01-P