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Posts Tagged ‘FINRA’

FINRA Amends Rules to Incentivize Timely Payment of Arbitration Awards

Posted on: June 17th, 2020

By: Kathleen Cusack and Kirsten Patzer

On May 21, 2020, the Financial Industry Regulatory Authority (FINRA) announced that effective September 14, 2020, its Membership Application Program (MAP) rules will be amended to further incentivize the timely payment of arbitration awards. The amendment to MAP will seek to do so by preventing an individual from switching firms and prevent firms from transferring assets to avoid the payment of arbitration awards. Specifically, the amendments will: (1) require members to seek a materiality consultation for changes in ownership, control, or business operations; (2) create a rebuttable presumption to deny an application for membership if the applicant is the subject of an existing claim; (3) require that a member demonstrate the ability to satisfy unpaid or pending arbitration awards; and (4) require that an applicant notify FINRA of any arbitration claim involving the applicant. 

Unpaid arbitration awards have plagued FINRA’s dispute resolution division for years. In 2018 FINRA conducted a study showing that between 2012 and 2016 more than a quarter of all arbitration awards went unpaid.

FINRA’s new MAP rules will adversely impact any financial advisor with a pending arbitration matter seeking to change firms. The rules fail to address the idiosyncrasies of the FINRA arbitration process, which allows any investor to file an arbitration matter without the vetting of their claims. With limited ability to dismiss arbitrations without going to a full hearing, an advisor could be a part of a pending arbitration for years.

The Public Investors Advocate Bar Association (PIABA) has long advocated for an industry funded pool of money to remedy the unpaid award problem and now argue that the new MAP rules do not go far enough. Samuel Edwards, partner at Shepard Smith Edwards & Kantas and president of PIABA said in an interview said that the amended rules should instead “flat-out kick [members who attempt to skirt arbitration awards] out.”

FINRA rules already require that firms and brokers who do not pay their arbitration awards be barred from the industry.

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

Additional Information:

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.**

FINRA Issues Guidance on Remote Work Including Continued Warning for Cyber Threats

Posted on: June 15th, 2020

By: Kathleen Cusack and Kirsten Patzer

Although all 50 states have begun the process of reopening, business spaces have not yet returned to full capacity and many people continue to work remotely.  On May 28, 2020, the Financial Industry Regulatory Authority (FINRA) issued new guidance for working from home based on surveys of financial firms. 

One such piece of guidance is a continued reminder to be vigilant with confidentiality requirements and cybersecurity concerns.  FINRA suggests reminding associated persons of confidentiality requirements, including maintaining a private workspace while working from home and taking extra precautions when working near family or friends.  FINRA also recommends that financial businesses remind and train staff about cybersecurity vulnerabilities and potential fraud risks. 

Since 2015, FINRA has released multiple reports and notices aimed at informing financial professionals about cyber risks and best practices.  The mass shift to remote work has not only resulted in a dramatic increase in the use of personal devices for the completion of work, but has also prompted a sizable increase in cyber threats to individuals and businesses.  According to a study discussed in Forbes, cyber threats increased by about a third between January and March of this year. 

One of the most common types of cyber scams is phishing.  Phishing schemes attempt to entice users to provide sensitive information to people pretending to be a trustworthy person.  To protect against phishing scams, FINRA recommends that businesses employ a combination of technological tools and regular training for employees to identify scams. Financial advisors and other associated persons are reminded to not accept trade instructions, withdrawal requests, or third-party transfers via electronic mail. If such a request is received, the advisor should contact their client via telephone to verify and confirm the instruction.   

FINRA has also cautioned against increased cybersecurity risks with the use of mobile devices.  FINRA warns that compared to in-office devices, mobile devices face a higher risk of theft or exposure to the installation of malicious applications.  

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

Additional Information:

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.**

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]fmglaw.com.

**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].