RSS Feed LinkedIn Instagram Twitter Facebook
FMG Law Blog Line

Posts Tagged ‘FINRA’

FINRA to Pick Up the Check on Unpaid Arbitration Awards?

Posted on: March 8th, 2018

By: Theodore C. Peters

Image result for giving moneyAs 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  According to the paper, of the total of 2,457 arbitration cases in 2016, 1,747 were settled, 212 were withdrawn, 389 were closed by award, and 109 were closed “by other means.”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].

FINRA Seeks to Tighten Rules for Expungement of Customer Dispute Information

Posted on: January 5th, 2018

By: Theodore C. Peters

What once was a relatively simple process of removing outdated or false information on a registered person’s CRD (Central Registration Depository) record has become increasingly complicated (and expensive) over the years.  Bit by bit, securities regulators have tightened the rules and requirements pertaining to expungement of information relating to customer disputes and claims asserted against registered individuals.  If the Financial Industry Regulatory Authority (FINRA) has its way, the road to expungement may become even steeper, resulting in fewer successful challenges.  With investors wanting full disclosure by their brokers on the one hand, and securities professionals understandably seeking to keep their CRDs clear from extraneous and even incorrect information on the other, FINRA finds itself trying to find a happy medium that allows for both transparency and a fair procedure for securities professionals.  Striking an equitable balance is a laudable goal, but can it be done?

The CRD is a database used by FINRA to store and maintain information on securities registered persons and member broker-dealer firms.  Currently, the system contains the registration records of more than 3,700 registered broker-dealers, and the qualification, employment and disclosure histories of more than 634,000 active registered individuals.  When a broker gets sued, he must disclose the claim to his broker-dealer, and he must also update his Form U4, the formal registration information provided to FINRA.  Regardless of the truth of the claims asserted against the broker, and irrespective of whether the broker was errantly named in the action, the claim must nevertheless be disclosed to FINRA, and this disclosure becomes a part of the broker’s permanent CRD record.

Years ago, getting false or inaccurate information removed from a CRD was relatively simple; the broker only needed to obtain an order of expungement from the arbitrator (or panel of arbitrators as the case may be) and present that order to CRD, whereupon the subject information would be removed from the broker’s record.   In 2004, FINRA’s predecessor, the National Association of Securities Dealers (NASD) adopted Rule 2080, which governs the means by which a broker can obtain expungement.  Under Rule 2080, an arbitration order granting an expungement request is not effective unless and until the broker also obtains an order from a court of competent jurisdiction directing the expungement or confirming an arbitration award containing expungement relief.  Further, Rule 2080 requires that FINRA be named in any such court action unless FINRA agrees to waive this requirement (available under limited circumstances).

In 2009, FINRA adopted Rules 12805 and 13805, requiring that there be a recorded hearing (by telephone or in person) regarding the appropriateness of expungement.  Further, in cases involving settlements, the arbitrator(s) are required to review the settlement documents and consider the amount of payment made and any terms and conditions of the settlement.  The arbitrator(s) are also required to indicate in the order the reason(s) supporting a finding that expungement is appropriate.  Most importantly, under an amendment to Rule 2080 and pursuant to Rules 12805 and 13805, expungement became limited to one of three narrow circumstances:

  • The claim, allegation or information is factually impossible or clearly erroneous;
  • The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
  • The claim, allegation or information is false.

In 2014, FINRA further refined expungement proceedings in adopting Rule 2081, which prohibits making settlement contingent upon the aggrieved party’s consent to or agreement not to oppose the broker’s request to expunge that party’s customer dispute information from the CRD system.

Most recently, on December 6, 2017, FINRA published Regulatory Notice 17-42, which requests comment on a proposed amendment to the Codes of Arbitration Procedure governing requests for expungement of customer dispute information.  FINRA notes that “[c]ritics of expungement have raised specific concerns about expungement hearings held after a settlement in the customer’s arbitration case that gave rise to the customer dispute information… critics argue that the panel from the [underlying case] has not heard the full merits of that case… [and that] claimants and their counsel have little incentive to participate in an expungement hearing after the [underlying case] settles and typically do not participate in such hearings.”

The proposed amendments do not directly alter current FINRA rules.  However, if adopted, the new rules will certainly increase the time and expense of meritorious expungement requests.  Among other things, the amendments proposed under Regulatory Notice 17-42 would:

  • Require all associated persons seeking expungement to appear in person (or via video teleconference) at the expungement hearing;
  • Require a three-person panel of arbitrators to unanimously agree that expungement is appropriate under Rule 2080(b)(1);
  • Require the unanimous three-person panel to find that the customer dispute information has no investor protection or regulatory value;
  • Limit an associated person to a single request for expungement, which must be exercised not more than a year after the underlying case has concluded;
  • Specify a minimum filing fee of $1,425 for expungement requests; and
  • Establish a roster of public chairpersons with additional qualifications to decide expungement requests.

Regulatory Notice 17-42 is simply a request for comment (comment period expires on February 5, 2018) at this time, and the proposal will still need approval by the Securities Exchange Commission before any new rules or requirements take effect.  The sweeping changes proposed by FINRA could substantial impair a registered person’s ability to remove incorrect information from his CRD.  On the other hand, the proposed conditions and requirements may benefit the investing public at large by requiring transparency. Regardless of the outcome, one thing is clear; FINRA is encouraging its arbitrators to grant expungement requests in only the rarest of circumstances.

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

New FINRA Rules to Bring Significant Changes to Qualification & Registration Process for Representatives and Principals

Posted on: November 10th, 2017

By: Patrick Y. Yoo

In October, 2017, the Securities and Exchange Commission approved a new set of Rules proposed by the Financial Industry Regulatory Authority (FINRA) that will go into effect October 1, 2018.  The changes enacted by these Rules may be reviewed in FINRA’s Regulatory Notice 17-30.

For the past several years, FINRA (formerly the National Association of Securities Dealers or “NASD”) has been in the process of consolidating the NASD and New York Stock Exchange (“NYSE”) Rules into a single, uniform set of FINRA rules. Pursuant to Section 15A(g)(3) of the Securities Exchange Act of 1934, FINRA is empowered to prescribe standards of training, experience, and competence for persons associated with FINRA members.  Accordingly, some of the central focuses of this consolidation effort concerned the issues of qualification, registration and testing of persons associated with FINRA members.  These newly approved Rules seek to revise and streamline the exam process and makes significant changes to the registration categories for registered persons and principals.  According to the Regulatory Notice, “FINRA’s registration rules ensure that associated persons attain and maintain specified levels of competence and knowledge pertinent to their function.”

These new rules, which add to and amend FINRA Rules 1200 et seq, will directly affect many newcomers’ admission into the securities industry, as well as continued registration in their respective functions for those already in the industry.  For broker-dealers and their personnel, the most salient components of these new changes will bear on the registration and proficiency testing requirements of representatives and principals of FINRA member broker-dealer firms.

1. The SIE

For new representative- and principal-level applicants on or after October 1, 2018, the most noticeable change will be the implementation of the all-new general knowledge exam, called the Securities Industry Essentials (“SIE”) exam.  This exam is aimed at eliminating duplicative testing of general securities knowledge each time an individual takes an additional representative-level exam, by moving that general content into the SIE. The SIE will consist of 75 questions testing basic securities industry knowledge, including products, the structure and function of the securities industry, the regulatory agencies and their functions, and regulated and prohibited practices.  The SIE is required of representative-level and principal-level applicants, but may also be taken by all associated persons whose functions are solely and exclusively clerical or ministerial, as well as by members of the general public who are not associated persons of a member firm (i.e., not sponsored).  However, FINRA specifically advises that passing the SIE alone will not qualify an individual for registration with FINRA, and in order to be eligible for registration, the individual must be associated with a firm and pass the appropriate qualification examinations.  The SIE will be subject to a four-year expiration period.

2. Changes to the Qualification Exams

In addition to the implementation of the SIE, the new rules will also eliminate several representative-level registration categories and their associated exams. Specifically, the following registration categories will be eliminated: (1) Order Processing Assistant Representative; (2) United Kingdom Securities Representative; (3) Canada Securities Representative; (4) Options Representative; (5) Corporate Securities Representative; (6) Government Securities Representative; and (7) Foreign Associate.

Beginning October 1, 2018, FINRA will retain only the following registration categories, which will be tested by the revised versions of their relevant exams as indicated below:


FINRA Representative-Level Registration Categories and Qualification Exams


Registration Category Current Examination(s) (prior to October 1, 2018) Future Examination(s) (on or after October 1, 2018)
Investment Company and Variable Contracts Products Representative Series 6 (100 questions) SIE (75 questions) + Revised Series 6 (50 questions)
General Securities Representative Series 7 (250 questions) SIE (75 questions) + Revised Series 7 (75 questions)
Direct Participation Programs Representative Series 22 (100 questions) SIE (75 questions) + Revised Series 22 (50 questions)
Securities Trader Series 57 (125 questions) SIE (75 questions) + Revised Series 57 (50 questions)
Investment Banking Representative Series 79 (175 questions) SIE (75 questions) + Revised Series 79 (75 questions)
Private Securities Offerings Representative Series 82 (100 questions) SIE (75 questions) + Revised Series 82 (50 questions)
Research Analyst Series 7 (250 questions) + Series 86 (Part I: Analysis) (100 questions) + Series 87 (Part II: Regulatory Administration and Best Practices) (50 questions) SIE (75 questions) + Revised Series 86 (Part I: Analysis) (100 questions) + Revised Series 87 (Part II: Regulatory Administration and Best Practices) (50 questions)
Operations Professional Series 99 (100 questions) SIE (75 questions) + Revised Series 99 (50 questions)

(Posted Table from FINRA Reg. Notice 17-30)


However, individuals who apply for registration for any category being eliminated, or any individual maintaining the eliminated representative-level registrations prior to October 1, 2018, will be “grandfathered” in (i.e., they may continue to maintain their current registration on or after October 1, 2018, unless the registration lapses). As is the case currently, representative-level registrations will lapse after two years of non-registration.

3. New Principal Registration Categories

The newly approved rules affect not only representatives and representative-level applicants, but principals as well. Per these rules, effective October 1, 2018, firms will be required to designate a Principal Financial officer and a Principal Operations Officer, which designation replaces the current requirement of designating a CFO and COO for dual-FINRA and NYSE-registered members, or designating a CFO for FINRA members.  But the greatest change comes in the form of three new principal categories.

First, any individual designated Chief Compliance Officer (“CCO”) will be required to register as the new principal category, “Compliance Officer.”  Designated CCOs who are registered as a General Securities Representative (Series 7) and a General Securities Principal will automatically be registered as a Compliance Officer, while any individuals maintaining the General Securities Representative and General Securities Principal or Compliance Official registrations on October 1, 2018 are qualified to register as Compliance Officers without taking any further exams.  The second of these new categories applies to principals responsible for supervising specified investment banking activities, who will be expected to register as “Investment Banking Principals.”  This category is available to any individual maintaining an Investment Banking Representative (Series 79) registration and a General Securities Principal registration.  For those maintaining these registrations on October 1, 2018, the registration will be automatic.  The last of the new principal registration categories applies to principals solely responsible for supervising specified activities relating to private securities offerings.  These individuals may register as a Private Securities Offerings Principal if they maintain a Private Securities Offerings Representative registration and a General Securities Principal registration.  As with the other principal categories, if the individual maintains the requisite registrations on October 1, 2018, registration will be automatic.

In sum, Regulatory Notice 17-30 and the newly approved FINRA Rules continue FINRA’s practice of consolidating and streamlining registration and testing requirements in its pursuit of maintaining standards of competence and knowledge of those involved in the securities industry. With the elimination of a sponsorship requirement and the elimination of duplicative testing via implementation of the SIE, FINRA’s new rules appear poised to attract greater numbers of people to the securities industry.

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