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 www.nasaa.org.

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 A total of 2,843 securities licenses were withdrawn in 2016 as a result of state action, and an additional 657 licenses were either denied, revoked, suspended or conditioned.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. 

Department of Labor Fiduciary Rule in Effect as of June 9, 2017; More Conditions Scheduled to Become Effective January 1, 2018

Wednesday, June 14, 2017

Effective June 9, 2017 the U.S. Department of Labor’s “fiduciary rule” took effect. Anyone who handles retirement assets and gives advice (including financial professionals of all types, whether they call themselves brokers, financial advisors, financial planners, or wealth managers) must adhere to new “impartial conduct standards.”

The final rule was released nearly six years after it was first proposed by the Obama administration. The rule is set up to roll out in phases. Other provisions within the rule are scheduled to become effective January 1, 2018.

During the transition period, financial institutions and advisors must adhere to the “impartial conduct standards” which ensure adherence to fiduciary norms and standards of fair dealing. Advisors and financial institutions must give advice that is in the “best interest” of the retirement investor, which has two chief components: prudence and loyalty. Under the prudence standard, the advice must meet a professional standard of care. Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interests of the advisor or firm. Advisers must also charge no more than reasonable compensation and make no misleading statements about investment transactions, compensation and conflicts of interest.

If you thought the above was already required, you are not alone. Under many circumstances, including with respect to most “wrap” accounts, discretionary accounts, and where the broker has exercised de facto control over an account, a broker already owed a fiduciary duty.  In addition, this change better aligns public expectations with legal realities.   According to TIME.COM, nearly half (46%) of Americans believe that all financial advisors were already required to always act in their clients’ best interest.

Per Supreme Court, Anti-Discrimination Principles Apply to Arbitration Agreements

Thursday, May 25, 2017

In a decision that seems to draw inspiration from equal protection jurisprudence, the Supreme Court has reiterated that federal law bars discrimination against arbitration agreements.  State law rules that "single out" arbitration agreements for "disfavored treatment" violate federal law.  The opinion, Kindred Nursing Centers, L.P. v. Clark, 581 U.S. __ (2017), reinforces and strengthens a line of Supreme Court precedent making clear that arbitration agreements receive special protection by virtue of the Federal Arbitration Act and that state attempts to nibble away at such agreements will not stand.

The underlying case involved a family's attempt to have a jury decide whether a nursing home provided bad care to their relatives, causing their deaths.  The Kentucky Supreme Court declined to apply an arbitration clause contained in nursing home paperwork, under a state law rule that effectively singled out arbitration agreements for special (disfavored) treatment.

On appeal, the Supreme Court said that any state law rule that "on its face" or "covertly" disfavors arbitration agreements violates the Federal Arbitration Act.  The Court also made clear that the same anti-discrimination-in-arbitration principle applies to contract formation and contract enforcement.

The bottom line is that any state court interpreting the scope, application, or enforcement of an arbitration agreement -- or pretty much anything about arbitration agreements -- had better rely on case law having nothing to do with arbitration agreements and show that it treats other garden variety types of contracts the same way that it treats contracts to arbitrate.


FINRA Receives SEC Approval on Rule Proposal Addressing Financial Exploitation of Seniors

Monday, April 3, 2017

What Can FINRA do to curb financial exploitation by seniors?  The U.S. Securities and Exchange Commission recently (March 30, 2017) approved two steps to protect senior investors to be included in new FINRA Rule 2165 (Financial Exploitation of Specified Adults).

First, firms will be required to make reasonable efforts to obtain the name and contact information for a trusted contact person for a customer’s account. Second, firms will be permitted to place a temporary hold on a disbursement of funds or securities when there is reasonable belief of financial exploitation.
According to FINRA's announcement, here, "These rules will provide firms with tools to respond more quickly and effectively to protect seniors from financial exploitation. This project included input and support from both investor groups and industry representatives and it demonstrates a shared commitment to an important, common goal – protecting senior investors," said Robert W. Cook, FINRA President and CEO.
According to FINRA, The trusted contact person is intended to be a resource for firms in handling customer accounts, protecting assets and responding to possible financial exploitation of any vulnerable investors. The new rule allowing firms to place a temporary hold provides them and their associated persons with a safe harbor from certain FINRA rules. This provision will allow firms to investigate the matter and reach out to the customer, the trusted contact and, when appropriate, law enforcement or adult protective services, before disbursing funds when there is a reasonable belief of financial exploitation. It is a critical measure because of the difficulty investors face in trying to recover funds that they have inadvertently sent to fraudsters and scam artists.
FINRA will also amend its New Account Application Template, a voluntary model brokerage account form that is provided as a resource to firms when they design or update their new account forms, to capture trusted contact person information.
The Rule change is effective February 5, 2018.

New FINRA Aribrator Selection Process Improves Arbitrator Selection

Thursday, March 2, 2017

Effective January 3, 2017, the arbitrator selection process administered by FINRA changed to give parties greater choice in arbitrator selection and, by extension, a better likelihood of selecting higher ranked arbitrators.   The number of candidate arbitrators on the "public list" is increased from ten to fifteen and the number of strikes rises to six from four.   FINRA explains more about this update in Regulatory Notice 16-44, available here

Trends in FINRA Arbitration in Massachusetts, Maine, & New Hampshire

Tuesday, January 24, 2017

According to FINRA, arbitration case filings in 2016 (3,681) were about 7 percent ahead of the number of total case filings in 2015 (3,435).  The number of customer disputes, which account for 70% of the total number of disputes filed, is up about 8%.  The number of intra-industry disputes is up about 6%.  FINRA nearly kept pace with this modest bump in filings by closing 4% more cases in 2016 than it had in 2015.  The turnaround time from filing to a standard decision in 2016 was 16.7 months. The turnaround time from filing to simplified decision was less than half that time period, 7 months.  

How many cases were filed in New England states?  According to FINRA:

Augusta, Maine -- 5
Boston, Massachusetts -- 59 
Hartford, Connecticut -- 37
Manchester, New Hampshire -- 7
Montpelier, Vermont -- 3
Providence, Rhode Island -- 8

How many FINRA arbitration decisions were issued in 2016?

Augusta, Maine -- 2
Boston, Massachusetts -- 24
Hartford, Connecticut -- 9
Manchester, New Hampshire -- 5
Montpelier, Vermont -- 1
Providence, Rhode Island -- 7

This compares with hotbeds of FINRA arbitration in San Jan, Puerto Rico (890 case filings), New York City (536 case filings), and Boca Raton, FL (287 case filings).

Statute of Limitations in Maine Arbitration

Wednesday, January 4, 2017

How long is too long to wait before a securities arbitration claim can be asserted?  There's no simple answer.  Many factors go into the mix in fixing deadlines, including (of critical importance) the nature of the claim.  Another factor is whether the claim is subject to arbitration. 

In Maine -- as in many other states -- the generally applicable deadline for filing legal claims (the statute of limitations) does not apply in arbitration.  The default statute of limitations applicable to most Maine civil actions is six years after a cause of action accrues.  14 M.R.S. §752 (“All civil actions shall be commenced within 6 years after the cause of action accrues and not afterwards … except as otherwise specifically provided.”).  Under Maine law, however, the statute of limitations does not apply to arbitration because arbitration is not an action an action at law.  Lewiston Firefighters Assoc. v. Lewiston, 354 A.2d 154, 167 (Me. 1976) (“Arbitration is not an action at law and the statute is not, therefore, an automatic bar to . . . recovery.”).  

But under Maine law a claimant cannot wait forever to assert a claim.  Arbitrators may consider the equitable affirmative defense of laches, whether a claimant has waited “an unreasonable length of time” and thereby induced the other party to rely “in good faith on the other party’s non-action” and “change his position” accordingly.  Id. at 168.  A laches defense is equitable in nature and “addressed to the [arbitration panel’s] conscience.”  Id.  Its touchstone is “fairness” under the “particular factual circumstances” of a claim.  Id.  Because laches is an affirmative defense, the defendant bears the burden of proof to show that it applies.    In customer disputes it is almost always necessary for a panel to allow a claimant to present his or her proof at a final hearing before determining whether a claim is timely (in whole or part) or whether an award should be reduced for some reason due to the passage of time.