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Posts Tagged ‘FINRA’

FINRA In-Person Hearings Further Postponed Until July 31

Posted on: May 20th, 2020

By: Kathleen Cusack and Kirsten Patzer

On Friday, May 15, 2020, amidst continued concern over the potential spread of COVID-19, the Financial Industry Regulatory Authority (FINRA) postponed all in-person arbitration and mediation proceedings until July 31, 2020. FINRA initially postponed in-person meetings beginning in March and extended the suspension several times. 

In its most recent announcement, FINRA also offered to waive the postponement fee if parties agree to reschedule in-person hearings currently scheduled between July 31 and September 4, 2020. All other case deadlines continue to apply. 

As an alternative to in-person meetings, videoconferencing or telephonic meetings are permissible if requested by parties or if mandated by arbitrators. This option is reportedly unpopular and infrequently utilized. And when it has been utilized, the outcomes are subject to scrutiny and may lead to awards being overturned.

A recent FINRA award has resulted in Wunderlich Securities, Inc. filing an action in the U.S. District Court for the Southern District of New York asking that the $11.4 million award issued against them in March be vacated after the final hearing was held via Zoom. According to Wunderlich, the panel had been inattentive throughout the entire proceeding, held over the course of 9 sessions, with the final session being the only one not held in person. During the Zoom videoconference, one arbitrator would look at other screens, typing, and eating during testimony, another arbitrator completely blocked her screen, and during closing arguments, one of the panelists completely walked away from his screen. After the final hearing Wunderlich filed a motion requesting that the panel recuse itself. That motion was unanimously denied by the panel.

The original FINRA arbitration was Dominick & Dickerman LLC, Michael John Campbell v. Wunderlich Securities, Inc., available here. The Petition to Vacate for that case, available here.  

If you have questions or would like more information, please contact Kirsten Patzer at [email protected] or Kathleen Cusack at [email protected]

Additional Information:

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis.  Click here to view upcoming webinars.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients.  Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments.  For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER:  The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19.  The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement.  We can only give legal advice to clients.  Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG.  An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest.  As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you.  We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such.  We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.**

Business Continuity Plans in the Age of Coronavirus

Posted on: March 23rd, 2020

By: Jennifer Weatherup

As the Coronavirus, or COVID-19, has caused unprecedented disruptions, including a precipitous decline in the stock market, it is increasingly important for broker-dealers to prepare plans which will allow them to fulfill their responsibilities to customers and continue operations under difficult circumstances. More specifically, broker-dealers should ensure that their business continuity plans allow their businesses to persist in the event of a pandemic such as the Coronavirus. To this end, the Financial Industry Regulatory Authority requires its members to plan ahead in order to meet customer needs in the event of an emergency.  Specifically, FINRA mandates that all broker-dealers “ must create and maintain a written business continuity plan identifying procedures relating to an emergency or significant business disruption… reasonably designed to enable the member to meet its existing obligations to customers [and] address the member’s existing relationships with other broker-dealers and counter-parties.” (FINRA Rule 4370(a).) FINRA further requires that members update their continuity plans in the event of material changes to their operation, and conduct an annual review to identify whether the plan must be modified. (FINRA Rule 4370(b).)

In response to the Coronavirus crisis, FINRA released Regulatory Notice 20-08, “Pandemic-Related Business Continuity Planning, Guidance and Regulatory Relief” on March 9, 2020. This Notice reiterates broker-dealers’ responsibilities under Rule 4370, and recommends that members include pandemic preparedness in their business continuity plans, and evaluate whether their current plans “are sufficiently flexible to address a wide range of possible effects in the event of a pandemic in the United States [including] staff absenteeism, use of remote offices or telework arrangements, travel or transportation limitations and technology interruptions or slowdowns.”  Notably, FINRA recommends that member firms’ business continuity plans include plans to employ remote offices or telework arrangements during a pandemic. In order to ensure that the use of remote work arrangements does not undermine firms’ abilities to satisfy their other professional duties, FINRA also recommends that firms which permit remote work arrangements consider strategies for exercising sufficient supervision over employees who are working remotely, and test the extensive use of telework arrangements by employees before remote work arrangements are broadly implemented at a member firm. FINRA identified other potential issues which could arise in the event of a pandemic, and which should be addressed in a business continuity plan, including the following: increased risk of cybersecurity breaches, emergency office relocations, increased customer call volumes, and challenges in making timely regulatory filings.

As the Coronavirus pandemic has already affected operations, member firms should make it a priority to carefully review their business continuity plans to ensure that they adequately address the potential effects of the Coronavirus; without adequate plans in place, member firms may not only find themselves unable to satisfy obligations to customers, but may face regulatory scrutiny once this crisis is behind us.

Additional information: 

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues every day for the next week. We will discuss the impact of Coronavirus for companies in general, but also for business in insurance, healthcare, California specific issues, cybersecurity, and tort. Click here to register.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients. Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the Coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments. For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER: The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19. The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement. We can only give legal advice to clients. Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG. An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest. As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you.  We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such. We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.** 

Beware of FINRA’s Increased Focus on Non-Registered, Associated Persons

Posted on: August 9th, 2019

By: Elizabeth Lowery

On July 29, 2019, FINRA announced that Citigroup Global Markets, Inc. was fined $1.25 million for failing to conduct timely or adequate background checks on approximately 10,400 non-registered associated persons spanning a seven-year period from 2010 to 2017.  This large fine issued even though  Citigroup had completed screening and fingerprinting which was fully compliant with federal banking law for some of those employees.  Citigroup’s failure to screen all such employees as required by the more stringent federal securities laws allowed three individuals to associate with, or remain associated with Citigroup, even though they were subject to statutory disqualification from associating with a brokerage firm because of previous criminal convictions.  FINRA found that Citigroup had failed to maintain a reasonable supervisory system which had procedures to identify and screen non-registered associated persons.  In settling this matter, Citigroup consented to the entry of FINRA’s findings and to the corresponding $1.25 million fine, without admitting or denying FINRA’s charges.  FINRA’s Executive Vice President of its Department of Enforcement, Susan Schroeder, explained “FINRA member firms must live up to their responsibility as a gatekeeper protecting investors from bad actions.  It is important that firms appropriately screen all employees for past criminal or regulatory events that can disqualify individuals from associating with member firms, even in a non-registered capacity.”

This is yet one of several recent examples of FINRA’s focus on non-registered, associated persons.  Pursuant to FINRA Rule 8310, FINRA may impose sanctions, such as a censure, fine, suspension or bar, upon a person associated with a brokerage firm for violations not only of FINRA rules, but also for violations of certain federal securities laws and MSRB rules.  Such sanctions typically stem from FINRA enforcement actions.  FINRA enforcement actions often begin with a request for documents, information and/or sworn testimony, commonly called an “8210 Requests” because they are made pursuant to FINRA Rule 8210.  While registered associated persons, such as those holding a stockbroker’s license, are generally aware that they are subject to FINRA’s jurisdiction, scrutiny and sanctions; non-registered associated persons often lack such awareness.  It is important for brokerage firms and their employees to be mindful that FINRA’s jurisdiction, and its rules and enforcement actions, are not limited to registered associated persons.  This is especially since FINRA’s trend of increased focus on non-registered associated persons is expected to continue.

If you have any questions or would like assistance with a FINRA or SEC enforcement action, or with FINRA 8210 Requests, please contact Elizabeth Lowery at [email protected].

The SEC Seeks to Enhance the Quality and Transparency of Investors’ Relationships; Approves the Regulation Best Interest Rule

Posted on: June 17th, 2019

By: Joseph Suarez

On June 5, 2019, the U.S. Securities and Exchange Commission (“SEC”) approved its Best Interest Rule (the “Rule”) package requiring broker-dealers, and investment advisors, to act in their retail clients’ “best interests.” The SEC states the Rule, “will impose a materially heightened standard of conduct for broker-dealers when serving retail clients.” Broker-dealers must begin complying with the new rule, and broker-dealers and investment advisers must prepare, deliver to retail investors, and file a “relationship summary” by June 30, 2020.

The Rule is designed to enhance investor protections while preserving retail investor access and choice in: (1) the type of professional with whom they work, (2) the services they receive, and (3) how they pay for these services. In order to satisfy the new best interest standard of care, a broker-dealer who makes recommendations to a retail customer must fulfill four obligations: 1) a “disclosure obligation”; 2) a “duty of care” obligation; 3) a “conflicts of interest” obligation; and, 4) a “compliance obligation.” The duty of care obligation requires a broker-dealer to exercise reasonable “diligence, care and skill” when making investment recommendations. This obligation is similar to FINRA’s suitability rules. In order to satisfy the best interest obligation, a broker-dealer must understand and communicate the “risk, rewards and costs of any recommendation;” have a reasonable basis to believe that the recommendation is in the best interest of the customer; and refrain from making “excessive” recommendations, given the customer’s investment profile.

Regardless of whether a retail investor chooses a broker-dealer or an investment adviser, the retail investor will be entitled to a recommendation (if (s)he chooses a broker-dealer) or advice (if (s)he uses an investment adviser) that is in the retail investor’s best interest and that does not place the interests of the firm or the financial professional ahead of the retail investor’s interests. Nonetheless, the Rule’s perceived uncertainty is cause for division. The SEC claims the Rule is designed to enhance the quality and transparency of retail investors’ relationships with broker-dealers and advisors. Proponents say the Rule will elevate the standard for what is considered an investor’s best interest, specifically, that broker-dealers will need to make substantial changes to enhance investor protection. Opponents argue the Rule is too vague and retains a muddled standard that will not change any practices in the brokerage industry.

Given the current uncertainty, the question becomes: will the Rule cause more litigation? Given the near immediate scrutiny, the answer may be in the affirmative. The Plaintiff’s Bar will likely argue that the Rule now provides customers with a higher standard of care than the suitability standard in furtherance of asserting claims against broker-dealers. In any event, the Rule’s lack of clarity will surely stir debate over the next year before its implementation.

For more information, please contact Joseph Suarez at [email protected].

Protecting Seniors From Investment Exploitation – One Year Later

Posted on: June 3rd, 2019

By: Ryan Baggs

One year after the passage of the Senior Safe Act (the “Act”) the SEC, FINRA, and NASAA continue to emphasize the importance of “covered financial institutions” (“CFIs” or “CFI”) providing adequate training to all relevant employees for the protection of investors over the age of 65. If an employee undergoes proper training and reports a violation of the act in “good faith” and “with reasonable care” she/he will be immune from suit or issues related to the reporting. What’s even more of an incentive to CFIs, such as a large broker-dealer, is that if the broker-dealer properly trains and educates all of its representatives and a representative later reports a violation of the Act, the broker-dealer itself, not just the representative, will be immune from that suit. Each organization involved, as can be seen by the numerous articles and reminders regarding the Act’s one year anniversary, is eagerly dedicated to encouraging training and education related to the immunity benefits behind the Act.  As noted by FINRA President and CEO Robert Cook: “The Senior Safe Act seeks to empower financial professionals to detect and report cases of suspected abuse of senior investors and we believe it is important to broaden awareness and understanding of the Act throughout the securities industry.” (finra.org May 23, 2019 news release).

The goals of the SEC, FINRA, and NASAA are extremely important and beneficial to the industry in general; however, with all well-meaning intentions, there always exists the possibility of abuse. What is uncertain because of the brief history of the Act is exactly what “good faith” and “with reasonable care” mean or will mean in the future. Are there ways a CFI or representative will be able to manipulate the Act to avoid liability or litigation? Almost undoubtedly, but how is remained to be seen. But overall, despite the possibility of some abuse at some point, the purpose of the Act and dedication to protecting seniors from investment and elder abuse is an admirable step in the industry.

For more information, please contact Ryan Baggs at [email protected].