By George H. Friedman, SAA Editor-in-Chief
Back in mid-2017, FINRA’s Board authorized staff to publish a Regulatory Notice seeking comments on a proposal to amend the Authority’s Membership Application Program (“MAP”) rules to create further incentives for the timely payment of arbitration awards. More than a year-and-a-half after the close of the comment period, the proposed rule has been: 1) filed with the SEC; 2) published in the Federal Register; 3) commented on; and 4) had a response to comments from FINRA.
We wondered why we had not seen any action on this anticipated Regulatory Notice, one that the FINRA Board approved at its July 2017 meeting. Specifically, the Board had authorized staff to file a Regulatory Notice seeking comments on possible changes to FINRA’s Membership Application Program rules to encourage award payment (see SAAs 2017-39, -37, -27, -26, -19 & -18). After a period of repose, things are really moving.
February 2018: Reg Notice 18-06 Published
FINRA in February 2018 issued a Press Release announcing publication of Regulatory Notice 18-06, FINRA Requests Comment on Proposed Amendments to Its Membership Application Program to Incentivize Payment of Arbitration Awards (see SAA 2018-06 (Feb. 7)). FINRA proposed amendments to its Membership Application and Associated Person Registration Rules, Series 1000, “to create further incentives for the timely payment of arbitration awards by preventing an individual from switching firms, or a firm from using asset transfers or similar transactions, to avoid payment of arbitration awards while staying in business.”
April 2018: Comment Period Closed
We analyzed in SAA 2018-16 (Apr. 25) the nine comments posted on FINRA’s Website when the comment period closed on April 9. Although the Regulatory Notice commenters – split evenly between investor and industry reps – generally supported the thrust of the proposed changes, some concerns were expressed. We anticipated that staff would analyze the comments and return to the Board to obtain authorization to do a 19b filing with the SEC. That presumption was correct; it just took a lot longer than we expected.
December 2019 - Present: Full Steam Ahead
The Authority on December 13, 2019 filed Rule SR-FINRA-2019-030, which was published in the Federal Register ten days later (Vol. 84, No. 249, P. 72088). The proposal would: “(1) amend Rule 1014 (Department Decision) to: (a) create a rebuttable presumption that an application for new membership should be denied if the applicant or its associated persons are subject to a pending arbitration claim, and (b) permit an applicant to overcome a presumption of denial by demonstrating its ability to satisfy an unpaid arbitration award, other adjudicated customer award, unpaid arbitration settlement or pending arbitration claim; (2) adopt a new requirement for a member, that is not otherwise required to submit an application for continuing membership for a specified change in ownership, control or business operations, including business expansion, to seek a materiality consultation if the member or its associated persons have a defined ‘covered pending arbitration claim,’ unpaid arbitration award, or an unpaid arbitration settlement; (3) amend Rule 1017 (Application for Approval of Change in Ownership, Control, or Business Operations) to require a member to demonstrate its ability to satisfy an unpaid arbitration award or unpaid settlement related to an arbitration before effecting the proposed change thereunder; (4) amend Rule 1013 (New Member Application and Interview) and Rule 1017 to require an applicant to provide prompt written notification of any pending arbitration claim that is filed, awarded, settled or becomes unpaid before a decision on an application constituting final action on FINRA is served on the applicant; and (5) make other non-substantive and technical changes in the specified MAP rules due to the proposed amendments.”
Just two comments were received by the January 21 deadline, from Steven B. Caruso, of Maddox Hargett & Caruso, P.C., and Christine Lazaro, Director of the Securities Arbitration Clinic and Professor Clinical Legal Education, St. John’s University School of Law ("SJU"). FINRA responded days later with a two-page January 31 letter from VP & Associate GC, Victoria Crane: “The commenters expressed their general support for the proposed rule change. SJU, however, suggested that either in this rulemaking or a subsequent rulemaking, FINRA consider a more expansive approach to address the issue of unpaid settlements by including those related to investor complaints regardless of whether the settlements were entered into during arbitration.” Would FINRA amend the proposed Rule? After recounting the many steps it has taken over the years to address the unpaid awards problem, the Authority says: “FINRA has determined not to amend the proposed rule change as suggested by SJU. However, FINRA welcomes continued engagement to discuss further ways to enhance customer recovery.”
(ed: *Judging by the pace of recent activity, we expect an SEC approval order very soon. **We figure FINRA rejected the proposed SJU amendment so as not to further delay the approval process. ***The Authority filed a technical amendment on February 6th clearing up some cross-references. ****Sorry we missed the late-December rule filing, but it was not listed as a dispute resolution rule filing or noted on the dispute resolution part of the Website.) (SAC Ref. No. 2020-06-01)
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