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Posts Tagged ‘FINRA’

FINRA Increases Penalties For Brokers’ Bad Behavior

Posted on: May 8th, 2018

By:  Ted Peters

In further response to mounting pressure for securities regulators to exert greater control over problem brokers, the Financial Industry Regulatory Authority (“FINRA”) released Regulatory Notice 18-17 on May 2, 2018.  FINRA has long maintained a “rulebook” of sorts to guide adjudicators in disciplinary proceedings when addressing the propriety and scope of sanctions that might issue.  Akin to sentencing guidelines, the Sanction Guidelines “provide both general principles that apply to the overall process of determining sanctions for every case and specific recommendations of a range of sanctions for particular rule violations.”

The stated goal of the guidelines  is “to assist FINRA’s adjudicators in determining the appropriate sanctions in disciplinary proceedings and to provide consistency in the imposition of sanctions.”  Such sanctions can include fines, suspensions or industry bars.

This most recent Notice trumpets FINRA’s revisions to the guidelines to instruct adjudicators “to consider customer-initiated arbitrations that result in adverse arbitration awards or settlements when assessing sanctions.”  More specifically, FINRA adjudicators are now expressly instructed to consider imposing more serious sanctions when there is a discernible “pattern” considering a respondent’s disciplinary history, and history or arbitration awards.

“By enabling adjudicators to consider arbitration settlements and adverse arbitration awards, in addition to the traditionally considered final disciplinary actions, the Sanction Guidelines will allow adjudicators to take such settlements and awards into account in appropriate cases when determining whether a pattern of harm to investors or market integrity, or disregard of regulatory requirements exists.”

The Sanction Guidelines apply only to enforcement actions, not FINRA arbitrations.  The revisions go into effect on June 1, 2018.

If you have questions or would like more information, please contact Ted Peters at [email protected].

New FINRA Proposals for High Risk Brokers

Posted on: May 4th, 2018

By: Theodore C. Peters

On April 30, 2018, FINRA published Regulatory Notice 18-16, captioned “High-Risk Brokers,” which seeks comment on proposed rule amendments that would place further restrictions on not only high-risk brokers, but also the member firms that employ them.  FINRA warns that such brokers “may present heightened risk of harm to investors, and any misconduct by them also may undermine confidence in the securities markets as a whole.”

This Notice, among others, stems from the increasing pressure upon FINRA to deal with problem brokers.  According to the Notice, the amendments would serve to “strengthen existing controls.”  More specifically, the amendment would affect the Rule 9200 Series (Disciplinary Proceedings) and the Rule 9300 Series (Review of Disciplinary Proceedings by National Adjudicatory Council and FINRA Board; Application for SEC Review), and would allow a hearing panel “to impose conditions or restrictions on the activities of member firms and brokers while a disciplinary matter is on appeal to the National Adjudicatory Council (“NAC”), and to require member firms to adopt heightened supervision procedures for brokers during the period the appeal is pending.”

The proposal would also impact the Rule 9520 Series (Eligibility Proceedings) to mandate that member firms adopt heightened supervision procedures for brokers during the period a statutory disqualification (“SD”) eligibility request is under review. Further, Rule 8312 (FINRA BrokerCheck Disclosures) would require disclosure of the status of a member firm as a “taping firm” under Rule 3170 (Tape Recording of Registered Persons by Certain Firms).

Lastly, the NASD Rule 1010 Series (Membership Proceeding)(MAP Rules) would be amended to place additional limits on member firms by requiring firms to first submit a written letter to FINRA’s Department of Member Regulation through the MAP Group (the Membership Application Program Group), requesting a “materiality consultation” when a natural person who has been the subject of, within the prior five years, one or more final criminal actions or two or more specific risk events, seeks to become an owner, control person, principal or registered person of an existing member firm.  “Specific risk events” generally mean “final, adjudicated disclosure events disclosed on a person’s or firm’s Uniform Registration Forms.”

Separately, FINRA also published Regulatory Notice 18-15, which reiterates the existing obligation of member firms to adopt and implement heightened supervisory procedures under Rule 3110 (Supervision) that are specifically tailored for high-risk brokers.  Unlike Notice 18-16 which seeks comment on proposed rule amendments, Notice 18-15 intends to “reiterate the supervisory obligations of member firms regarding associated persons with a history of past misconduct that may pose a risk to investors,” and to provide guidance for member firms in implementing effective heightened supervisory procedures for such persons.

If you have questions or would like more information, please contact Ted Peters at [email protected].

FINRA to Pick Up the Check on Unpaid Arbitration Awards?

Posted on: March 8th, 2018

By: Theodore C. Peters

As recently reported, unpaid FINRA arbitration awards is a growing problem.  As FINRA has acknowledged, roughly one quarter of FINRA arbitration awards issued in 2016 went unpaid.  If lawmakers have their way, FINRA itself may ultimately be stuck with the check, and be required to pay such awards.

On March 6, Sen. Elizabeth Warren, D-Mass, introduced legislation that would require FINRA to compensate investors for unpaid arbitration awards.  The Compensation for Cheated Investors Act would direct FINRA to establish a “relief fund” pool that could be used to provide investors with the full value of unpaid arbitration awards against brokerage firms or brokers regulated by FINRA.  The fund would derive “first from penalties paid by brokers and then from sources determined by FINRA.”  In the event FINRA fails to take steps to establish such a fund, the bill proposed by Sen. Warren would nevertheless require FINRA to compensate investors from its general budget.  The bill also provides that FINRA may require investors to subrogate their claims against brokers, and that FINRA may pursue additional remedies against the brokers.

Also of note, FINRA would not be permitted to limit the amount that an investor may receive from the relief fund, nor would FINRA be allowed to prohibit any investor from submitting a claim to the fund.  FINRA would also be required to annually disclose, among other things, the total number of arbitration awards issued in favor of investors against brokerage firms or brokers under its watch, the number and amount of unpaid awards, and the names of the brokerage firms/brokers at issue.

If you have questions or would like more information, please contact Ted Peters at [email protected].

Unpaid FINRA Awards May Result in Tighter Membership Rules Governing Brokers and Member Firms

Posted on: February 16th, 2018

By: Theodore C. Peters

On February 8, the Financial Industry Regulatory Authority (“FINRA”) released a discussion paper: FINRA Perspectives on Customer Recovery, which openly addressed the reality that roughly one quarter of FINRA arbitration awards issued in 2016 were unpaid.  According to the paper, of the total of 2,457 arbitration cases in 2016, 1,747 were settled, 212 were withdrawn, 389 were closed by award, and 109 were closed “by other means.”  In releasing the paper, FINRA stated that it “hopes to encourage a continued dialogue about addressing the challenges of customer recovery across the industry.”  FINRA also indicated in the paper that it plans to organize discussions with other regulators and policy makers, “to further address the issue of customer recovery, identify additional data or analysis that may help inform effective decision-making in this area, and consider potential courses of action.”

On the same day, FINRA published Regulatory Notice 18-06, addressing its Membership Application Program (“MAP”).  The Notice does not alter FINRA’s current MAP protocols, but it clearly indicates FINRA’s intent to tighten rules governing membership including, among other things, the transfer of a registered persons from one broker-dealer to another when they have unpaid arbitration claims.  “FINRA is proposing to amend the MAP rules to allow FINRA to take a stronger approach to addressing the issue of pending arbitration claims, as well as arbitration awards and settlement agreements related to arbitration that have not been paid in full in accordance with their terms.”

In their current form, MAP rules permit consideration of a pending arbitration against an associated person as a factor in assessing whether the applicant meets the standards for admission.  However, “a pending arbitration does not create a presumption of denial.”  The amendments proposed by FINRA would give its Department of Member Regulation “rule-based authority to preemptively deny an NMA [new member application] if the applicant or its associated persons are subject to pending arbitration claims.”  This presumption would not apply to continuing membership applications. Further, the proposed amendments would allow the applicant to overcome this presumption if he demonstrated his “ability to satisfy the pending arbitration claims.”

In addition, the proposal would disallow certain business expansions where one or more of the associated persons involved have a “covered pending arbitration claim.”  Such claims are defined as “those whose amount (either individually or in the aggregate) exceed the member’s excess net capital.”

Finally, the amendments proposed by FINRA would disallow “any direct or indirect acquisitions or transfers of a member’s assets or any asset, business or line of operation where the transferring member or one or more of its associated persons has a covered pending arbitration claim, unpaid arbitration award or unpaid settlement related to an arbitration” under certain conditions.

The Notice seeks comment on the proposed amendments.  Comments are due by April 9, 2018.

If you have any questions or would like more information, please contact Ted Peters at [email protected].

FINRA’s Senior Protection Rules Now Effective

Posted on: February 7th, 2018

By: Theodore C. Peters

In 2007, FINRA issued Regulatory Notice 07-43, which served as a “reminder” that member firms and registered persons had a heightened obligation to senior investors.  At that time, NASD Rule 2310 required that in recommending “the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable” for that customer, based on “the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.”  The rule also required that before executing a recommended transaction, the member firm was required to make reasonable efforts to obtain information concerning the customer’s financial status, tax status, investment objectives and “such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.”  While Rule 2310 did not explicitly refer to a customer’s age or life stage, Reg. Notice 07-43 notified members that “both are important factors to consider in performing a suitability analysis.”  FINRA Rule 2111, adopted in 2014, replaced NASD Rule 2310, and now clearly references the need for consideration of a customer’s age.

In October 2015, FINRA issued Reg. Notice 15-37, which requested comment on proposed rules relating to the financial exploitation of seniors and other vulnerable adults. The proposed rule amendments added a new rule (FINRA Rule 2165 – Financial Exploitation of Specified Adults) and proposed an amendment to an existing rule (FINRA Rule 4512 – Customer Account Information).  Rule 2165 would permit “qualified persons” who reasonably believe that financial exploitation is occurring to place temporary holds on disbursements of funds or securities from the accounts of “specified adults.”  The amendment to Rule 4512 would require firms to make reasonable efforts to obtain the name of and contact information for a trusted contact person upon the opening of a non-institutional customer’s account.  By definition, a “specified adult” is a natural person age 65 or older, or age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.

In March 2017, FINRA issued Reg. Notice 17-11, confirming that the SEC had approved (1) the adoption of new FINRA Rule 2165 to permit members to place temporary holds on disbursement of funds or securities under certain circumstances; and (2) amendments to FINRA Rule 4512 to require members to make reasonable efforts to obtain the name and contact information for a trusted contact person for a customer’s account.  While the provisions of Rule 2165 are permissive (a member firm has the ability, but no obligation, to place a temporary hold), the requirements of Rule 4512 are mandatory (thus requiring member firms to make reasonable efforts to gather trusted contact information).

The new rules became effective on February 5, 2018.

If you have any questions or would like more information, please contact Ted Peters at [email protected].