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 According to the paper, of the total of 2,457 arbitration cases in 2016, 1,747 were settled, 212 were withdrawn, 389 were closed by award, and 109 were closed “by other means.”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