FINRA 2018 Regulatory and Exam Priorities Released

Thursday, February 1, 2018

The Financial Industry Regulatory Authority (FINRA) recently released its 2018 Regulatory and Examination Priorities Letter (the “Priorities Letter”), highlighting topics FINRA will focus on in 2018.

FINRA regulates brokerage firms doing business with the public in the United States. FINRA writes rules; examines for and enforces compliance with FINRA rules and federal securities laws; registers broker-dealer personnel and offers them education and training; and informs the investing public. FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. 

Some of the key topics identified in the Priorities Letter as areas of focus in 2018 are fraud, high-risk firms and brokers, operational and financial risks—including technology governance and cybersecurity—and market regulation. Other areas of priority in 2018 include: 
  • Sales practice risks, including recommendations of complex products to unsophisticated, vulnerable investors 
  • Protection of customer assets and the accuracy of firms’ financial data 
  • Market integrity, including best execution, manipulation across markets and products, and fixed income data integrity 

In the Priorities Letter, FINRA CEO Robert Cook wrote, “The coming year will bring both continuity and change in FINRA’s programs. . . . The continuity comes, first and foremost, in our unwavering commitment to our mission: protecting investors and promoting market integrity in a manner that facilitates vibrant capital markets. Change will come in how we accomplish that mission.” 

FINRA flags the following significant new rules that are currently scheduled to become applicable in 2018. 

  • Financial Exploitation of Specified Adults – FINRA Rule 2165 will become effective February 5, 2018. The rule permits members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers. 
  • Amendments to FINRA Rule 4512 (Customer Account Information) – An amendment to FINRA Rule 4512 requires members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a non-institutional customer’s account. The amendment will become effective February 5, 2018. 
  • Amendments to FINRA Rule 2232 (Customer Confirmations) – The amended FINRA Rule 2232 requires a member to disclose the amount of mark-up or mark-down it applies to trades with retail customers in corporate or agency debt securities if the member also executes offsetting principal trades in the same security on the same trading day. The amended rule also requires members to disclose two additional items on all retail customer confirmations for corporate and agency debt security trades: (1) a reference, and a hyperlink if the confirmation is electronic, to a web page hosted by FINRA that contains publicly available trading data for the specific security that was traded, and (2) the execution time of the transaction, expressed to the second. These amendments are scheduled to become effective on May 14, 2018. 
  • Margin Requirements for Covered Agency Transactions (Amendments to FINRA Rule 4210) – FINRA’s new margin requirements for Covered Agency Transactions are slated to become effective June 25, 2018. Covered Agency Transactions include (1) To Be Announced (TBA) transactions, inclusive of adjustable rate mortgage (ARM) transactions; (2) Specified Pool Transactions; and (3) transactions in Collateralized Mortgage Obligations (CMOs), issued in conformity with a program of an agency or Government-Sponsored Enterprise (GSE), with forward settlement dates. Members are reminded that the risk limit determination requirements under the amendments to Rule 4210 became effective on December 15, 2016.

FINRA Proposes Amendments to the Codes of Arbitration Procedure Regarding Requests to Expunge Customer Dispute Information

Wednesday, December 27, 2017

Through Financial Industry Regulatory Authority (FINRA) Regulatory Notice 17-42, FINRA proposes establishing a roster of arbitrators with certain training, backgrounds, or experience to handle requests to expunge customer dispute information. These arbitrators would decide expungement requests where the underlying customer-initiated arbitration is not resolved on the merits (e.g., settled) or the associated person files a separate claim requesting expungement of customer dispute information.

FINRA also proposes additional changes to the expungement process, such as changes to the timeframe in which an associated person can seek expungement of the customer dispute information, as well as unanimous consent of a three-person panel of arbitrators to grant expungement.

This is one piece of a larger series of initiatives FINRA is considering related to the expungement process. Comments are requested. The comment period expires February 5, 2018.

FINRA Board Accused of Conflicts of Interest

Tuesday, December 5, 2017

As reported in InvestmentNews, the Public Investors Arbitration Bar Association (PIABA) issued a report asserting that certain “public governors” on the Financial Industry Regulatory Authority’s (FINRA) 24-person board serve on too many corporate boards and/or have connections to Wall Street such that they cannot represent the publicly effectively and face conflicts of interest.

FINRA is a self-regulatory organization which oversees thousands of broker-dealers on behalf of the Securities and Exchange Commission (SEC). It has 13 public governors, 10 industry governors and one seat for its CEO. The PIABA report notes that, under FINRA’s by-laws, its public governors shall not have any material business relationship with a broker or dealer or other self-regulatory organization.

PIABA states that, instead of bringing a customer-oriented view to the table, FINRA’s public governors “often provide additional representation for security industry constituencies.” PIABA also critiques the selection of public governors with ties to the security industry. It states, “In many instances FINRA’s public governors join the board after long careers in the securities industry. . . . Although some academics and former regulators do serve on FINRA’s board as public governors, the board only infrequently includes persons primarily identified as investor protection advocates. This absence is troubling for an organization that publicly characterizes itself as dedicated to investor protection.”

InvestmentNews also reports that a FINRA spokesperson defended the FINRA board and its public governors, noting that “Each governor, regardless of his or her affiliation or classification, is responsible for serving in an unbiased and objective manner, and voting on matters for the good of the investors, industry and marketplace.”

NASAA Releases Annual Enforcement Report

Friday, November 3, 2017

On September 26, 2017, the North American Securities Administrators Association (NASAA) released its annual Enforcement Report. The report is available on the NASAA website at

In its Enforcement Report, NASAA reported that state securities regulators conducted 4,341 investigations in 2016, and took 2,017 enforcement actions overall. These actions led to more than $231 million in restitution returned to investors, fines of $682 million and criminal relief of 1,346 years (incarceration and probation).

For the second consecutive year, NASAA reported that its U.S. members brought more enforcement actions against registered firms and individuals (620), compared to unregistered individuals and firms (604).

State securities regulators reported a significant increase in investigations of investment adviser firms and representatives, with 700 investigations (a 31 % increase year-over-year).

State securities regulators also continue to serve a vital gatekeeper function to screen bad actors before they have an opportunity to conduct business with investors. A total of 2,843 securities licenses were withdrawn in 2016 as a result of state action, and an additional 657 licenses were either denied, revoked, suspended or conditioned.

As the report makes clear, NASAA members:
  1. Routinely share information with other state and federal regulators and coordinate enforcement efforts to increase efficiency and eliminate duplication of efforts;
  2. Are committed to protecting vulnerable senior investors through enforcement actions and legislative improvements; and
  3. Are working to counter the threat posed by emerging financial technologies, such as binary options and speculative cryptocurrency trading, through both enforcement and education efforts

Maine Superior Court Grants Expungement of Customer Complaint Against Broker

Thursday, October 26, 2017

A previous post discusses the high standard necessary to expunge a customer complaint from a broker's record, here.  

A recent Maine case demonstrates how that standard can be met.  In an unfortunate family dispute, Ferland v. Ferland, Docket No. CV-15-292 (Aug. 2, 2017), the claimant alleged that she had loaned about $721,408 to her son (a stockbroker a/k/a registered representative), which remained unpaid, and that the broker sold her an unsuitable annuity.  The broker denied all of the allegations.  The parties ultimately settled for $749,803, according to a record still available on Broker Check.  The Court's order describes the settlement as a "resolution" that involved "payment and/or restructuring of certain loans" made by the claimant to the broker.

The Court's order says that FINRA had been notified of the motion for expungement, but whether FINRA actually participated is unclear.

The order states that the broker's conduct "did not constitute investment-related sales practice violations, forgery, theft, misappropriation or conversion of funds."  More specifically, the claimant "freely loaned [the broker] and one of his business partners approximately [$721,408] as part of a commercial real estate transaction that was evidenced by a promissory note; secured by a life insurance policy on [the broker's] life; and resulted in scheduled payments to [the claimant]."  The loan was unrelated to the broker's role as financial advisor, as were most of the other allegations that formed the basis of the complaint.  As for the annuity, the claimant had purchased it from Allianz, not Ameriprise as she had alleged in her sworn complaint.  The court found that her allegations related to the annuity were baseless.

Although expungement is the rare exception, the outcome in this instance demonstrates that it is appropriate where allegations are "clearly erroneous" or "false."  

Proposed FINRA Rule Change Revises to the Definition of Non-Public Arbitrator to Expand Arbitrator Pool

Monday, August 28, 2017

FINRA arbitrators—neutral, qualified individuals—serve as decision makers, weigh the facts of each case presented and render a final and binding decision. Arbitrators have long been classified as “public” or “non-public.” Public arbitrators are individuals who are not required to have knowledge of the securities industry, but often do. Non-public arbitrators are individuals who have worked in the financial industry or regularly provide services to brokers, broker-dealers, their customers, and others in the financial industry. 

But the line-drawing exercise delineating who qualifies as “public” or “non-public” is fairly arbitrary, and often excludes qualified neutrals who fall through the cracks in that they are not primarily financial industry professionals, but also for one reason or another do not meet the “public” definition. The proposed rule change aims to cure this problem.

Some history on arbitrator classifications sets the stage for the recent change.  In 2015 the SEC approved amendments to the definition of non-public arbitrators and public arbitrators. Among other things, the amendments provided that persons who worked in the financial industry at any point in their careers would always be classified as non-public arbitrators.  The amendments also added new disqualifications to the public arbitrator definition relating to an arbitrator’s provision of services to parties in securities arbitration and litigation and to revenues earned from the financial industry by an arbitrator’s co-workers. The amendments also broadened disqualifications based on the activities or affiliations of an arbitrator’s family members. The proposed rule change was intended to address concerns about arbitrator neutrality.

A key focus of the 2015 amendments was the elimination of certain individuals from the public arbitrator roster. However, FINRA’s intent was not to prevent these individuals from serving in any capacity. Many arbitrators or arbitrator applicants who formerly qualified to serve as public arbitrators are now unable to serve even as non-public arbitrators. As a result, the pool of eligible arbitrators has decreased.  FINRA has turned away many candidates who would have been eligible to service but for the 2015 amendments.

On July 10, 2017, FINRA filed a proposed rule change with the SEC, (SR-FINRA-2017-025),to revise the non-public arbitrator definition. Specifically, the proposal would define a non-public arbitrator to mean a person who is otherwise qualified to serve as an arbitrator, and is disqualified from service as a public arbitrator under the Codes. The proposed rule change would expand the pool of candidates eligible to serve as non-public arbitrators. The change would permit these previously eligible persons to serve as non-public arbitrators.

A practical result of the rule change will be that parties skeptical of “non-public” arbitrators should take a closer look.  The roster of non-public arbitrators is likely to include an increasing number of neutrals with limited “industry” background, but who for one reason or another do not qualify as “public.”  For example, a well-qualified former judge affiliated with a larger law firm may not qualify as “public” if the law firm has any significant financial industry clients, as is likely, but may be impeccably qualified and neutral to a fault.  

Expungement: an "Extraordinary Remedy"

Monday, July 17, 2017

What are the rules of the road with regard to broker requests to expunge customer claims from their records?  This post surveys the current standards for applicable to broker requests to remove customer complaints from their records (i.e., the Central Registration Depository or "CRD").  According to FINRA, the CRD system is "the central licensing and registration system for the U.S. securities industry and its regulators. The system contains the registration records of more than 3,790 registered broker-dealers, and the qualification, employment and disclosure histories of more than 632,735 active registered individuals."
FINRA describes expungement is an “extraordinary remedy.”  FINRA cautions, “Customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.”  This is because the availability of customer dispute resolution services important institutional interests. FINRA explains, “Ensuring that CRD information is accurate and meaningful is essential to investors, who may rely on the information when making decisions about brokers with whom they may conduct business; to regulators, who rely on the information to fulfill their regulatory responsibilities; and to prospective broker-dealer employers, who rely on the information when making hiring decisions.”

FINRA Rules 12805 and 13805 establish procedures – recently tightened up considerably – that arbitrators must follow before recommending expungement of customer dispute information related to arbitration cases from a broker’s CRD record.  The expungement procedures ensure that it occurs only when the arbitrators find and document one of the “narrow grounds” specified in Rule 2080:

(A)        the claim, allegation or information is factually impossible or clearly erroneous;
(B)        the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
(C)        the claim, allegation or information is false.

The burden of proof falls on the party seeking expungement to show that these high standards are met.

To reject expungement on the first prong of the expungement standard an arbitration panel need only find that the claims mare factually “possible” and not “clearly erroneous.”  The second prong of the expungement standard applies to situations of mistaken identity, where the wrong person is named in a claim.  According to FINRA this “standard would require an affirmative arbitral finding that the registered person was not involved . . . .”  The final prong of the expungement standard requires that the panel assess whether the claims or allegations are “false.”  If expungement is sought for this reason, the panel must “assess the evidence in the case, make an affirmative finding that the claim, allegation, or information is false.”

The net result is a strong default rule against expungement.  The fact of a customer complaint, whether or not validated by favorable arbitration award or a settlement, does (and should) typically remain on record.  By the same token, all complaints are not created equal.  Just as a broker without any record of complaints still may be a compliance nightmare, a broker with one or few complaints may not turn out to be a compliance problem.