SEC Approves FINRA’s Minimum Expungement Fees Rule Filing

By George H. Friedman, SAA Editor-in-Chief

No sooner had we reported in SAA 2020-19 (May 20) that FINRA Dispute Resolution Services (“DRS”) had responded to comments on its proposed new fee regime specifically for expungement requests, than the SEC just days later approved the rule.

After years of accommodating brokers’ expungement requests and fitting that subsidiary, quasi-regulatory relief into its existing filing fee structure, DRS had proposed a new fee regime specifically for expungement requests. We offer a recap below.

Background and a Core Objective

The Authority filed with the SEC on February 7, SR-FINRA-2020-005, the purpose of which was to establish minimum fees for requesting expungements. It proposed to amend both Codes to require separate fees for expungement requests arising organically within customer arbitration proceedings and impose a new fee set applicable to “straight-in” expungement proceedings. One key objective was to eliminate the “$1 Trick”a loophole that developed with the surge in expungement requests over the past several years. Because expungement is a form of equitable relief, Statements of Claim in arbitration matters concerned wholly with the question of expungement — so-called “straight-in” proceedings — did not require an amount in controversy, but FINRA Rules charge relatively expensive fees when Claimants don’t “specify” any monetary damages. By seeking $1 in compensatory damages for a related defamation claim, the “straight-in” Claimant obtains a one-person Panel, qualifies for small claims treatment, and achieves much lower fees for herself and the sponsoring firms (ed: FINRA estimated that 76% of filers of straight-in requests utilized this device). Adoption of the new rules will put an end to that practice.

Quick SEC Turnaround

As reported in SAA 2020-08 (Feb. 26), the SEC on February 20 Noticed the proposal (Release No. 34-88251), and published it in the Federal Register on February 26 (Vol. 85, No. 38, Page 11165). As reported in SAA 2020-12 (Mar. 25), the comment period closed March 18, resulting in seven letters that were mostly supportive (with some suggesting other improvements). As reported in #19, FINRA on May 18 responded to comments in a 13-page letter. Just eight days later, the SEC on May 26 approved the rule change proposal (Release No. 34-88945). In rejecting “more should be done” suggestions for changes to the proposed rule: “the Commission acknowledges the concerns of commenters who argue that the proposal should do more to reform the expungement process, including by requiring expungement requests to be decided by a three-person panel. However, the Commission notes that FINRA has represented that it is separately developing other proposed changes to the current expungement framework, including codifying as rules the Guidance and establishing a roster of arbitrators with additional training and experience from which a three-person panel would be selected to decide straight-in requests and expungement requests in settled customer arbitrations. FINRA also states that it welcomes a continued dialogue with the commenters on these and other proposed changes to the expungement framework” (footnotes omitted).

 

(ed: *While the new rule may seem to have cropped up, without context or design, it is in fact emblematic of systemic rule changes, currently in various stages of development, that will ultimately overhaul the FINRA expungement process. We read the SEC’s comment directly above as: “Keep working on this; we’ll be watching.” **The next step – aside from Federal Register publication – is FINRA filing a Regulatory Notice establishing the effective date. Specifically: “FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 60 days following Commission approval. The effective date will be no later than 60 days following publication of the Regulatory Notice announcing Commission approval of the proposed rule change.” Our hunch is a “cases filed” effectiveness. ***In the meantime, we expect there will be a flurry of under-the-wire expungement requests ahead of the effective date.)




Massachusetts Adopts Fiduciary Regulation

By Christine Lazaro, Professor of Law & Clinic Director
St. Johns Law School

This analysis was prepared by SAA Advisory Board Member Prof. Christine Lazaro. The Alert thanks Prof. Lazaro for her thoughtful insights. The words that follow, aside from the italicized comments at the end, are hers.

The Massachusetts Securities Division issued a Statement on February 21 that it had adopted amendments to its standards of conduct for broker-dealers and agents, 950 CMR 12.200 (the “Regulations”). The amendments go into effect on March 6, 2020, but will not be enforced until September 1, 2020.

Final Regulations

In its Adopting Release, the Securities Division sets forth the changes made following the publication of a proposed regulation, a public hearing, and review of the comments received. The Final Regulations make a number of changes to the Proposed Regulations (see our analysis in SAA 2020-04 (Jan. 29)). First, they remove any reference to investment advisers and investment adviser representatives from the title of 950 CMR 12.207, which is now titled, “Fiduciary Duty of Broker-Dealers and Agents.” Next, they limit application of the standard to recommendations concerning securities, removing references to commodity and insurance products. 950 CMR 12.207(1)(a). The Final Regs also limit the application of the fiduciary duty, narrowing the scope of the duty. In the Proposed Regulations, the duty would have applied during the time period the firm or broker received any on-going compensation, as well as when the firm or broker did anything that would result in the reasonable expectation that the firm or broker would monitor the customer’s account. Based on concerns raised in the comments that this created on-going duties to monitor a customer’s account, the Final Regulations limit the duty to monitor to brokers who exercise discretion, have a contractual fiduciary duty, or have agreed to monitor on a periodic basis. 950 CMR 12.207(1)(b). The Final Regulations further clarify that an agreement to monitor only creates a duty to review the account at the agreed upon interval (e.g. monthly or quarterly). 950 CMR 12.207(1)(b)(3). Under the Proposed Regulations, there was also a presumption that brokers who used certain titles would be deemed to have created the expectation that they would monitor a customer’s account. The Final Regulations eliminate this presumption.

Duty of Care

The Final Regulations establish a Duty of Care and a Duty of Loyalty on the part of brokers. 950 CMR 12.207(2). The Duty of Care remains unchanged from the Proposed Regulations, requiring that a broker “use the care, skill, prudence, and diligence that a person acting in a like capacity and familiar with such matters would use, taking into consideration all of the relevant facts and circumstances.” 950 CMR 12.207(2)(a). A broker is required to inquire as to the customer’s investment objectives, risk tolerance, financial situation, and needs; and must consider the risks, costs, and conflicts of interest related to recommendations. 950 CMR 12.207(2)(a)(1) and (2). The Duty of Loyalty in the Final Regulations is similar to the duty set out in the Proposed Regulations. It requires a broker to: “(1) Disclose all material conflicts of interest; (2) Make all reasonably practicable efforts to avoid conflicts of interest, eliminate conflicts that cannot reasonably be avoided, and mitigate conflicts that cannot reasonably be avoided or eliminated; and (3) Make recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer.” 950 CMR 12.207(2)(b). The Final Regulations presume it will be a violation of the Duty of Loyalty if the broker makes any recommendation in connection with a sales contest. 950 CMR 12.207(2)(d). This is narrower than the Proposed Regulations that presumed a violation for recommendations in connection with an implied or express quota requirement, or other special incentive program, in addition to sales contests. The Final Regulations retain the language that “disclosing conflicts alone does not meet or demonstrate the duty of loyalty.” 950 CMR 12.207(c).

Implementation and Enforcement

Although there were requests that Massachusetts hold off on adoption and implementation of any changes to its standards of conduct until compliance with the SEC’s Reg BI is implemented on June 30, the Final Regulations make the regulation effective on March 6, 2020. However, the Securities Division will not enforce the Final Regulations until September 1, 2020.

(ed: *We analyzed the Proposed Regulations in SAA 2019-47 (Dec. 11) and the comments in SAA 2020-04 (Jan. 29). **Readers may recall that Massachusetts also published a preliminary request for comments earlier in 2019, and those comments were analyzed in SAA 2019-30 (Aug. 7). ***Every time we’ve reported on State efforts to move ahead with their own fiduciary rules or laws, we’ve queried the potential preemptive effect of the SEC’s rule. Reg BI addresses this issue directly: “We note that the preemptive effect of Regulation Best Interest on any state law governing the relationship between regulated entities and their customers would be determined in future judicial proceedings based on the specific language and effect of that state law.” A footnote observes that “the preemptive effect on any state law would be determined in future judicial proceedings, and would depend on the language and operation of the particular state law at issue.” We expect to see litigation challenging the adoption of the Final Regulations on preemption grounds.) (SAC Ref. No. 2020-08-02)

Like what you see here?

Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.




After Moving at a Snail’s Pace, FINRA’s Proposed Changes to the Membership Program To Encourage Arbitration Award Payment Switch to the Express Lane

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)

Like what you see here?

Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.




Very Few Comments on FINRA’s Proposed Inactive Industry Party Arbitration Rule

By George H. Friedman, SAA Editor-in-Chief

The comment period closed December 13 on FINRA’s proposed rule to expand a customer’s arbitration options when firms or APs become inactive, with just a few comments, all supportive but with most urging further steps be taken.

We reported in SAA 2019-42 (Nov. 6) that FINRA had filed proposed rule, SR-FINRA-2019-027, on November 5, and in SAA 2019-44 (Nov. 20) that the SEC on November 13th had released that proposal for public comment in SEC Rel. No. 34-87557. This proposal, which would amend the FINRA Code of Arbitration Procedure for Customer Disputes, in order to “…Expand the Options Available to Customers if a Firm or Associated Person is or Becomes Inactive,” was first floated in an October 2017 Reg Notice, Regulatory Notice 17-33, after FINRA Board approval in May 2017. As the name implies, the proposal is aimed at expanding the customer’s options when an industry party becomes inactive before or during a case. It is an added measure for reducing the incidence of unpaid Awards. As reported in SAA 2019-45 (Nov. 27), the proposal was published November 22 in the Federal Register (Vol. 84, No. 226, Page 64581), making comments due December 13. 

The Basics

Under the new proposed rule, customers with claims against inactive parties would be provided additional options in an expanded set of situations “where a firm becomes inactive during a pending arbitration, or where an associated person becomes inactive either before a claim is filed or during a pending arbitration.” In those situations, the customer would have the option to amend the pleadings, as under the current rule, and also to postpone the proceedings, request default proceedings, or to withdraw the claims and receive a refund of the filing fees. Under the new provisions, the customer would also have the option to proceed in court, rather than filing a FINRA claim. FINRA would now advise the customer of the inactive party’s “status change” and the customer would have 60 days to withdraw the claim “with or without prejudice.” (ed: why would one withdraw the complaint “with prejudice”? Doesn’t this option just create confusion?) 

More Specifics on Customer Options

If the customer does not withdraw, FINRA believes that s/he should be able to adjust strategy based on the status change news. Although Rule 12309 will not permit the adding of parties between ranking and appointment stages, customers in this situation will have that privilege. Similarly, the customer may amend a pleading during a 60-day window from notification. Rule 12601 does not permit postponements without arbitrator approval, absent mutual agreement; here, customers will have the right to postpone, if the notification of the status change comes within 60 days prior to hearing. Finally, the right to default proceedings under Rule 12801 will be broadened under a technical change, so that any terminated associated person who fails to file an answer will trigger the request privilege.

Comments: Few, Supportive, But Most Say More Can be Done

Just five comments were posted on the Commission’s Website as of the comment period’s close on December 13. All were supportive, and four recommended additional investor protections. We commented in #44 that “it will be interesting to see if NASAA comments in its usual ‘this is a good step, but more can be done’ fashion.” No NASAA comment has appeared, but the three institutional commenters – PIABA, SIFMA, and the Financial Services Institute – generally support the proposed rule but urge that more be done. Footnotes have been omitted.

PIABA: “PIABA supports the amendments contemplated in SR-FINRA-2019-027 (hereinafter ‘the Notice’) that expand options for customers in pursuing and attempting to collect money awarded to them against industry respondents in arbitration proceedings. However, as set forth below, PIABA believes that the proposed rule changes set forth in the Notice are insufficient to remedy the longstanding problem of unpaid arbitration awards, which disproportionately involve customer claims against inactive FINRA members and associated persons.” The suggested changes (presented essentially verbatim)? Expand Customers’ Ability to Withdraw Claims Without Prejudice and Amend Claims; Expand Customers’ Ability to Adjourn Hearings and Obtain Refunds of Filing Fees; Streamline Default Proceedings; Do More to Solve the Problem of Unpaid Arbitration Awards (The letter concludes: “PIABA urges FINRA to establish a national investor recovery pool. While PIABA supports every measure taken to address the serious unpaid award problem, we reiterate our concern that FINRA’s current proposal will not address in a meaningful way the millions of dollars in unpaid awards that make a mockery of FINRA arbitration as a means of recovering investor losses”).

SIFMA: “SIFMA’s support is predicated on FINRA’s stated purpose of the Proposal – namely, to facilitate ‘dealing with those member firms or associated persons who are responsible for most unpaid awards – firms and associated persons who are no longer in business either at the time the claim is filed or at the time of the award.’ We agree that the Proposal would probably help address the issue of unpaid arbitration awards. To that end, to better achieve the purpose of the Proposal (i.e., help address unpaid arbitration awards), we recommended that the Proposal be expanded to apply not only to customer cases but also to intra-industry Cases.” 

Financial Services Institute: “FSI largely supports the Proposed Amendments as set forth in the Notice and the corresponding rule text…. However, as discussed more fully below, FSI is concerned that certain aspects of the Proposed Amendments have the unintended consequence of creating an unbalanced arbitration process and we make suggestions to address that concern.” The letter raises the following concerns (ed: presented essentially verbatim): 1) The Proposed Amendments Are Not Likely to Address the Issue of Unpaid Arbitration Awards, But Instead Create an Imbalance in the Arbitration Process. 2) Amending Pleadings to Add Parties Should Be Subject to the Arbitration Panel’s Approval.

Individual Commenters

Comments were also received from two individuals, Steven B. Caruso, Esq., Maddox, Hargett & Caruso, PC, and Professor Benjamin P. Edwards of the University of Nevada, Las Vegas William S. Boyd School of Law (in his individual capacity). Mr. Caruso’s letter supports the proposed change without qualification. Professor Edwards supports the changes, but is also harshly critical of its shortcomings: “The proposal simply does not do enough to address the problem. It does not recognize that the industry bears collective responsibility for allowing the business practices that result in unpaid awards. With FINRA unwilling to meaningfully address the problem through its own initiative, the Commission should require FINRA to propose meaningful reforms. Ultimately, self-regulation will only succeed if the Commission requires the self-regulating brokerage industry to somehow internalize the cost of unpaid awards. If the industry were liable for the harms it generates, it would have a more meaningful incentive to police its own conduct.”

(ed: *Wonder if FINRA’s response to comments will commit to further changes? **As we’ve noted before, the rule filing presumes throughout that any PDAA exercised by an inactive party will be invalidated by virtue of the inactivity — so, for instance, the customer can now go to court. Actually, FINRA can’t invalidate a PDAA. FINRA is “jawboning” a bit here; it can only deny its forum. It’s perfectly feasible that a court might compel arbitration at an alternative forum under FAA section 5, for instance.) ***Professor Edwards attached to his letter his article, The Dark Side of Self-Regulation, 85 U. CIN. L. REV. 573 (2017). ****We are surprised that NASAA so far has not commented. As noted in SAA 2019-47 (Dec. 11) and elsewhere in this Alert, NASAA on December 11 released a Report, NASAA Broker-Dealer Section E&O Insurance Survey Report, recommends requiring brokers to carry Errors and Omissions insurance as a way to address the unpaid arbitration awards problem. *****What’s next? Staff will analyze the comments and then send to the SEC a formal “response to comments” letter.) (SAC Ref. No. 2019-48-01)

Like what you see here?

Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.




The Inactive Industry Party Arbitration Rule Has Been Released for Public Comment by the SEC

We reported in SAA 2019-42 (Nov. 6) that FINRA had filed proposed rule, SR-FINRA-2019-027, on November 5. The SEC has now released that proposal for public comment in SEC Rel. No. 34-87557, dated November 13, 2019.

This proposal, which would amend the FINRA Code of Arbitration Procedure for Customer Disputes, in order to “…Expand the Options Available to Customers if a Firm or Associated Person is or Becomes Inactive,” was first floated in an October 2017 Reg Notice, Regulatory Notice 17-33, after FINRA Board approval in May 2017. As the name implies, the proposal was aimed at expanding the customer’s options when an industry party becomes inactive before or during a case. Fewer than ten comments were received by the December 2017 due date. Since then, the exact language has presumably been under review by the FINRA and SEC staff as an added provision for reducing the incidence of arbitration Awards that go unpaid by defunct broker-dealers and brokers leaving the industry.

FINRA’s Statement of Purpose

The amendments, if adopted, will require revisions to FINRA Rules 12100, 12202, 12214, 12309, 12400, 12601, 12702, 12801, and 12900, so a relatively simple conceptual change requires a great deal of textual modification. FINRA’s Statement of Purpose in the SEC Release starts by mentioning unpaid Awards and asserting that most non-payments can be ascribed to “firms or individuals whose FINRA registration has been terminated, suspended, cancelled, or revoked, or who have been expelled from FINRA.” FINRA terms these individuals and firms “inactive,” for purposes of its arbitration rules, while making the oblique observation that, while no longer associated with a broker-dealer or a member firm, these parties “may continue to operate in another area of the financial services industry where FINRA registration is not required.” FINRA explains that, at times, firms or individuals become “inactive,” because of FINRA taking disciplinary action against them; other times, the action is voluntary. Its current approach under Rule 12202, where inactive parties are involved, is to alert the complaining customer when the claim is first filed, advise her of the inactive party and the chances of non-payment, and extend the option to amend “his or her claim to add other respondents from whom the customer may be able to collect should the claim go to award.” The customer must then agree in writing to proceed; in other words, FINRA will not go forward solely on the basis of a pre-dispute arbitration agreement.

Expanding the Customer’s Options

Under the new proposed rule, customers with claims against inactive parties would be provided additional options in an expanded set of situations “where a firm becomes inactive during a pending arbitration, or where an associated person becomes inactive either before a claim is filed or during a pending arbitration.” In those situations, the customer would have the option to amend the pleadings, as under the current rule, and also to postpone the proceedings, request default proceedings, or to withdraw the claims and receive a refund of the filing fees. Under the new provisions, the customer would also have the option to proceed in court, rather than filing a FINRA claim. FINRA would now advise the customer of the inactive party’s “status change” and the customer would have 60 days to withdraw the claim “with or without prejudice.” (ed: why would one withdraw the complaint “with prejudice”? Doesn’t this option just create confusion?) 

More Specifics on Customer Options

If the customer does not withdraw, FINRA believes that s/he should be able to adjust strategy based on the status change news. Although Rule 12309 will not permit the adding of parties between ranking and appointment stages, customers in this situation will have that privilege. Similarly, the customer may amend a pleading during a 60-day window from notification. Rule 12601 does not permit postponements without arbitrator approval, absent mutual agreement; here, customers will have the right to postpone, if the notification of the status change comes within 60 days prior to hearing. Finally, the right to default proceedings under Rule 12801 will be broadened under a technical change, so that any terminated associated person who fails to file an answer will trigger the request privilege.

(ed: *Several other small changes regarding arbitrator honoraria and filing fees are included in the proposal. It runs 34 pages and will soon be published in the Federal Register, at which time the period for comment will be set for 21 days thereafter. We will be sure to advise readers in the next Alert, which is scheduled for November 22. **The rule filing presumes throughout that any PDAA exercised by an inactive party will be invalidated by virtue of the inactivity — so, for instance, the customer can now go to court. Actually, FINRA can’t invalidate a PDAA. FINRA is “jawboning” a bit here; it can only deny its forum. It’s perfectly feasible that a court might compel arbitration at an alternative forum under FAA section 5, for instance. ***FINRA has taken a lot of flak on the subject of unpaid Awards from Congress and consumer advocates, so we wonder about the remark regarding these delinquents still operating in the financial industry. They may be operating in the construction industry, too! So, what’s the point? Is FINRA suggesting that state regulators (or even the SEC), who regulate registered investment advisors — or the bank authorities — should be adjusting their policies to get these Awards paid? It will be interesting to see if NASAA comments in its usual “this is a good step, but more can be done” fashion (see, e.g., our coverage in SAA 2017-27 (Jul. 19) of NASAA’s comments during the FINRA 360 Review: “NASAA would also like to work with FINRA on the issue of unpaid arbitration awards, describing the efforts of FINRA’s Board to date as having the ‘best intentions,’ but offering no solution to the core problem.”).) (SAC Ref. No. 2019-44-01)

Like what you see here?

Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.




It Took a While, but the Inactive Industry Party Arbitration Rule has Been Filed with the SEC

By George H. Friedman, SAA Editor-in-Chief

FINRA on November 5 filed with the SEC a long-awaited rule amendment that would give investors greater rights when arbitrating with inactive industry parties. Next up is publication in the Federal Register, and the opening of a public comments period.

FINRA in October 2017 issued Regulatory Notice 17-33, Amendments to the Code of Arbitration Procedure for Customer Disputes to Expand the Options Available to Customers if a Firm or Associated Person is or Becomes Inactive. The Reg Notice followed action by FINRA’s Board in May 2017 and, as the name implies, was aimed at expanding the customer’s options when an industry party becomes inactive before or during a case. Less than ten comments were received by the December 2017 due date.

Rule Change Proposal Filed with SEC

Just as we went to press, we learned that the proposed rule, SR-FINRA-2019-027, was filed with the SEC on November 5. The thrust? Says the rule filing: “FINRA is proposing to amend the Code of Arbitration Procedure for Customer Disputes (Code) to expand a customer’s options to withdraw an arbitration claim if a firm or an associated person becomes inactive before a claim is filed or during a pending arbitration. In addition, the proposed amendments would allow customers to amend pleadings, postpone hearings and receive a refund of filing fees under these situations.” We will do a more thorough review of the text in a future Alert after the rule is published in the Federal Register and the due date for comments is set, but we thought we would share this news with our readers now.

(ed: *Wonder what took so long? It’s taken nearly two years from the close of the comment period. **In keeping with the “new normal,” FINRA solicited public comments via a Regulatory Notice. The rule filing addresses the comments. ***This is the latest of several steps FINRA has taken to address unpaid awards. For example, the Authority now publishes detailed statistics on the subject. ****The filing had not yet been posted on the SEC Website as we went to publication.)

Like what you see here?

Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.