FINRA Issues Regulatory Notice Seeking Comments on Rule Changes To Protect Against At-Risk Firms. Unpaid Arbitration Awards Definitely a Focus!
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FINRA has issued a Regulatory Notice seeking comments on Rule changes aimed at better protecting investors from firms with significant regulatory histories. Arbitration is prominently mentioned throughout.

We reported in SAA 2019-12 (Mar. 20) that FINRA’s Board of Governors met February 28 – March 1 and that according to a post-meeting March 13 Press Release: “The Board approved moving forward with proposing new rules related to firms that have a disproportionately high number of regulatory disclosure events by the firm and/or its registered representatives.” At that time we queried, “Would this encompass a high number of arbitration Awards – paid or unpaid? We will have to await publication of a Regulatory Notice seeking constituent input (the next step in the rulemaking process), which FINRA says will happen ‘soon.’” We can now report the answer to our question was “yes” and that “soon” has arrived.

New Reg Notice

FINRA on May 2 announced release of Regulatory Notice 19-17, FINRA Requests Comment on Proposed New Rule 4111 (Restricted Firm Obligations) Imposing Additional Obligations on Firms with a Significant History of Misconduct. Says the announcement: “As part of FINRA’s ongoing initiatives to protect investors from misconduct, FINRA is requesting comment on proposed new Rule 4111 (Restricted Firm Obligations) that would impose tailored obligations, including possible financial requirements, on designated member firms that cross specified numeric disclosure-event thresholds.” What is driving the proposed changes? “The member firms that could be subject to these obligations, while small in number, present heightened risk of harm to investors and their activities may undermine confidence in the securities markets as a whole.” 

Two Major Rule Change Proposals

The Notice seeks comments on two core changes: The first is proposed new Rule 4111 (Restricted Firm Obligations), “which would authorize FINRA to require ‘Restricted Firms,’ identified by a multi-step process involving threshold calculations, to make deposits of cash or qualified securities that could not be withdrawn without FINRA’s prior written consent, adhere to other conditions or restrictions on the member’s operations that are necessary or appropriate for the protection of investors and in the public interest, or be subject to some combination of those obligations.” The second is proposed new Rule 9559 (Procedures for Regulating Activities Under Rule 4111) and amendments to existing Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series) that would “create an expedited proceeding that allows a prompt review of the determinations under the Restricted Firm Obligations Rule and grants a member a right to challenge any obligations imposed.”

Arbitration is a Key Driver

The 43-page Reg Notice, complete with 54 footnotes, contains the word “arbitration” or its derivative a staggering 46 times. The introductory paragraph concludes that the proposal “would further promote investor protection and market integrity and give FINRA another tool to incentivize member firms to comply with regulatory requirements and to pay arbitration awards.” How so? We present below just a few select portions (ed: repeated verbatim; footnotes omitted; bold added):

  • In addition, by the time intervention is practical, as noted above, the firm may have exited the industry, thereby limiting FINRA’s jurisdiction over the misconduct. In such circumstance, the firm may also fail to pay arbitration awards in favor of harmed investors, preventing their recovery and potentially diminishing confidence in the arbitration process.
  • This proposal also aims to preserve firm funds for payment of arbitration awards against them. The proposal would achieve this both through how a member’s “covered pending arbitration claims” and unpaid arbitration awards could impact the size of its restricted deposit requirement, and a presumption that a member would continue to maintain a restricted deposit if it has “covered pending arbitration claims” or unpaid arbitration awards.
  • The proposal also may help address unpaid arbitration awards associated with firms identified as Restricted Firms under the proposal. Under the proposed rule, the Department may require a Restricted Firm to maintain a restricted deposit at a bank or a clearing firm that agrees not to permit withdrawals absent FINRA’s approval. Moreover, the proposed rule would have a presumption that the Restricted Firm maintain the deposit if it has any covered pending arbitration claims or unpaid arbitration awards. Accordingly, the proposed rule could potentially create incentives for firms to pay unpaid arbitration awards, thereby alleviating, to some extent, harm to successful claimants and enhancing investor confidence in the arbitration process.”


(ed: *FINRA is evidently quite serious about tackling unpaid awards. **Comments must be filed by July 1 and can be submitted by email to or by surface mail to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, 1735 K Street, NW, Washington, DC 20006-1506.) (SAC Ref. No. 2019-18-01)

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