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Posts Tagged ‘FINRA’

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].

FINRA Seeks To Simplify Non-Party Discovery

Posted on: April 9th, 2019

By: Greg Fayard

In January 2019, the Financial Industry Regulatory Authority (FINRA) proposed changes to its rules to give non-parties more time to respond to discovery requests and witness orders from arbitration panels. Currently, non-parties only have 10 calendar days from service by U.S. mail to respond or object to document subpoenas or witness/document production orders. Often times, the person responsible for responding to the non-party subpoena or arbitration order receives the subpoena or order after the 10 days have elapsed. When that happens, the non-party has waived its opportunity to object to the subpoena or order, subjecting it to potential sanctions or disciplinary action. To avoid such prejudice to non-parties, FINRA is recommending changes to its rules to give non-parties 15 calendar days (instead of 10) upon receipt (not service) of the order or subpoena. Receipt will include overnight mail, overnight delivery service like FedEx, hand delivery, e-mail or facsimiled documents. Importantly, under the proposed rule changes, service of discovery requests on non-parties by U.S. mail would be excluded. Lastly, FINRA seeks to codify rule changes to reflect how it currently processes and informs arbitration panels regarding non-party objections to subpoenas and orders.

The purpose of FINRA’s proposed rule changes is to provide better due process to non-parties, eliminate the problem of delays with U.S. mail, and to codify FINRA’s current protocols for non-party discovery.

The FINRA rules impacted by the proposed changes are 12512, 12513, 13512 and 13513. The new rules have to be approved by the Securities and Exchange Commission. If approved, FINRA will announce an effective date of the rule changes in a future regulatory notice.

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

Latest FINRA Rules to Regulate Expungement Actions

Posted on: February 19th, 2019

By: Margot Parker

FINRA recently announced its approval of enhanced training and guidance for arbitrators hearing expungement requests, an issue under increasing scrutiny as over 90% of such actions are currently granted. The proposal is now under review by the SEC and represents a step toward making it more difficult for brokers to have customer complaints expunged from their public records. The proposed rules also include a ban on compensated non-attorney representatives (NARs) from representing clients in FINRA arbitrations, as part of another step to strengthen the arbitration process.

While a ban on NARs has been widely supported, critics of the expungement process believe more should be done to take the burden away from customers to fight expungement actions. FINRA states that it shares these concerns. To reduce the high volume of expungements in the past, it codified a rule stating: “expungement is an extraordinary remedy that should be recommended only under appropriate circumstances.” With these recent steps, we may continue to see changes in the regulation of FINRA expungement actions in the near future.

If you have any questions or would like more information, please contact Margot Parker at (310) 937-2066 or [email protected].

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].