Advisors pursuing customer dispute expungements before July 31st will pay a fraction of the new cost.
In short, the following provisions of the recently-approved Rule apply to all matters in which expungement of a customer dispute disclosure is requested as a claim or counterclaim:
Here’s a comparison of existing fees with the new, increased fees:
The fee increases ultimately raise the average cost of expungement by approximately $9,200 in total, all of which goes straight into FINRA’s pockets. In matters where both expungement and monetary relief are requested, the new Rule requires that parties are assessed “the greater of” either the fee associated with the monetary claim, or the new minimum fees outlined above.
FINRA’s fees saddle claimants with costs above and beyond that of hiring representation for the expungement process, which currently runs anywhere from $10,000 to $20,000 per customer dispute.
The new Rule also speaks to a deviation away from evenly splitting hearing session fees among the parties and a shift toward assessing hearing session fees against the party requesting expungement.
When will those requesting expungement become subject to the 3,690% increase in forum costs?
Pursuant to Section 19 of the Exchange Act, the SEC has 60 days to consider whether to suspend the rule change or allow it to remain in effect—though, the SEC has never suspended a FINRA rule change. Therefore, AdvisorLaw expects the change to take effect by July 31st.
Allowing a mere 3-4 weeks for due diligence, drafting, and filing the claim requesting expungement relief, those interested in avoiding the higher fees are encouraged to engage before July 4th.
Being that member firms will likely pass along any increased costs to the claimant advisors, the new Rule is anticipated to have a detrimental effect on the viability of expungement claims pursued after the new Rule becomes effective.
A full summary of the proposal can be found here.
If you want to avoid these new fees, you should have your case for expungement filed immediately.
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The soon-to-be-implemented general instructions for Form ADV Part 3 dictate that it must include “disclosures for any of your financial professionals in Items 14 A–M on Form U4.” So, while these investor disputes are no longer reportable on an advisor’s ADV Part 1A and Part 2A, because advisors must still report the events on their Form U4, these items will have to be reported to ADV Part 3.
Form U4, specifically in question 14I(1)(b), requires disclosure when an advisor was named as a respondent in the customer dispute with allegations of sales-practice violations in cases where a FINRA arbitration panel awarded a judgment against the financial advisor.
Question 14I(2)(a) of Form U4 requires disclosure for advisors who have ever been the subject of an investment-related, consumer-initiated complaint, which alleged that they were involved in one or more sales-practice violations and was settled for $10,000 or more prior to May 18, 2009 or $15,000 or more after May 18, 2009.
For the purposes of illustration, let’s consider an advisor whose BrokerCheck and IAPD profile includes two separate customer dispute disclosures: one from 1991 and one from 1997.
Settled Customer Dispute from 1991
The customer complaint disclosure from 1991 is an investor dispute claiming damages of $140,000 that went to arbitration. The advisor’s client alleged several sales-practice violations, and it ultimately concluded in a full award judgment of $33,000 against our financial advisor and two others. Our advisor was liable for $3,000 of that amount, and the other two respondents were liable for the remaining $30,000. No findings were entered regarding any causes of action on our advisor’s part.
Settled Customer Dispute from 1997
This same advisor’s 1997 initial complaint alleged damages over $250,000 with investor allegations of excessive margin trading and breach of fiduciary duty. The broker-dealer settled on behalf of the financial advisor in the amount of $200,000, with our advisor contributing $10,000.
Form U4 vs. ADV
The 1991 customer dispute that went through FINRA arbitration is not reportable on the advisor’s ADV Parts 1 or 2, because it’s over ten years old, and there were no findings of conduct violations on the part of the financial advisor. However, the FINRA arbitration case must be reported to Form U4, as Form U4 14I(1)(b) only requires an advisor to be named as a respondent with allegations of sales-practice violations in which a FINRA arbitration panel awarded a judgment against the advisor. Thus, because our financial advisor was named as a respondent, because the underlying arbitration alleged multiple sales-practice violations, and because the arbitration panel awarded a judgement against the advisor, the customer dispute disclosure must be reported on Form U4.
The 1997 customer dispute is not reportable on Form ADV Parts 1 or 2 for multiple reasons, primarily, because it was merely an investor complaint and did not involve a judgment, as well as the fact that ten years have passed. However, Form U4 still requires disclosure, because the complaint alleged a sales-practice violation and was settled for an amount in excess of the $10,000 threshold for reporting client disputes from that time.
Despite the fact that neither investor complaint is reportable to existing ADV Parts 1 and 2, both customer disputes in our hypothetical example will now be reportable to the new ADV Part 3, due to its requirement to report such events from financial advisors’ Forms U4.
If the application of these new rules in determining what should and should not be disclosed seems tricky to navigate—don’t worry—relief is available. AdvisorLaw can do all of the compliance heavy lifting for you and make sure that your ADV Part 3 or Form CRS will stand up to an audit.
Give us a call at (303) 952-4025 for a free consultation
Be sure you’re following the written policy and any written guidance provided by your supervisor or home office compliance.
Ensure your communications are properly monitored.
Once you’re sure that you’re in line with the written BCP, consider whether or not your firm has an internet phone service, and, if so, use it to its fullest potential.
Can you call out on a work line through your mobile phone? If so, use that feature when working from home. If you have an app that allows your firm to capture your texts, use that.
If you are not set up for text surveillance, don’t text or respond to texts from your personal phone. Clients may know you are working remotely and may reach out through methods, such as personal email or texts to your personal mobile phone. Always be sure to respond from the appropriate account and device.
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This blog is our ongoing effort to inform and educate FINRA licensed professionals about the evolving regulatory ecosystem in which we operate.
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