I sometimes (well, perhaps frequently) use this blog as a vehicle to complain about certain things that FINRA does, or about certain of its rules, that I feel are just unfair, plain and simple. To show you that I am not simply making this up, I experienced two such events this past week, which I will share with you, and I dare you to reach a contrary conclusion.

The first arose in connection with a customer arbitration. As every reader here likely knows, broker-dealers are compelled to arbitrate customer disputes.  This is both a matter of rule, but, more importantly, a matter of contract, as an arbitration clause is baked into the customer agreement.  Because arbitration is a matter of the parties’ mutual agreement, for the most part, the Code of Arbitration Procedure provides that as long as the claimant and the respondent agree on something, even if it is contrary to the rules, the panel is compelled to follow suit.  For instance, if the parties both want to extend the cut-off date for serving discovery, or move the 20-day exchange deadline to ten days, then the hearing panel has no choice and must accept these modifications.

The selection of the arbitrators is also a matter of agreement between the parties. FINRA supplies a list of names of potential arbitrators, and the parties each strike those who they simply won’t accept, and rank the remaining names in order of preference.  FINRA then compares the two lists and creates the panel from the three remaining names with the highest rankings.  Thus, the parties dictate who hears their case.

Unless, as happened to me, one of the arbitrators decides to withdraw on the eve of the hearing. Then, FINRA can cram down on the parties anyone it wants to serve as replacement.

To be fair, that doesn’t always happen. Before FINRA picks the replacement, it gives the parties the ability to agree either to (1) proceed with only two arbitrators, or (2) delay the hearing, in which case FINRA will supply the parties a short list of names – three people – from which the parties will select the replacement through the strike-and-rank method.  But, if the parties cannot agree on either of these options, what happens is this: FINRA goes back to the original rankings that the parties submitted at the outset of the case, and starts calling those people, to see if anyone is willing, at the last minute, to jump on a plane.  In my case, the hearing was scheduled to start the Tuesday after Memorial Day, which would have required the substitute to fly out on Memorial Day, so, not surprisingly, FINRA struck out.  Most of the time, no one is available, or willing.

At that point, FINRA simply goes into its giant database of arbitrators, and starts calling anyone who might have nothing on their to-do list for the following week and is actually willing to go hear a case. When FINRA finds someone – and assuming there is no conflict – then, BOOM, that person is appointed to your case.  And the parties have nothing to say about it.  It doesn’t matter how horrible that person may be, you’re stuck with him, or her.

My case was a good one, and we felt we had a good chance of prevailing at the hearing, based on the facts, on the law, and, of course, on the three panelists sitting on the case. When we analyzed the case to calculate the likelihood of winning, and what that meant in terms of a reasonable settlement value, we carefully considered the quality of the arbitrators.  And they were good.  But, when one dropped out five days before the hearing, FINRA ended up appointing as substitute an attorney, who just happened to be a PIABA member, and who just happened to have an award history that was full of big awards for claimants, sometimes with punitive damages included.  He was the type of arbitrator that I would have stricken immediately…had I been given the chance.  But, FINRA gave me no such chance.  As a result, we ended up paying to settle, because we concluded that there was simply no way we could get a fair hearing from this substitute arbitrator that FINRA stuck me with.

It is not easy to explain to a client that this case we were all prepared to try – plane tickets purchased, hotel rooms rented, boxes of documents shipped – had changed dramatically for the worse, at the 11th hour, because of a FINRA procedure over which we had zero control.  THAT is not fair.

The second episode concerns statutory disqualification, one of my favorite subjects for this blog. When an individual becomes statutorily disqualified, the broker-dealer with which he is registered receives a letter from RAD, Registration and Disclosure, advising the firm of the fact that the person is SD’d.  Because associating with an SD’d individual would, in turn, also render the firm SD’d, the firm is given a couple of weeks to make one of three choices: it can terminate the SD’d person, it can file a Form BDW (and withdraw from membership), or, alternatively, it can file an MC-400.  An MC-400 is the application that the firm files seeking permission to remain a member of FINRA notwithstanding the fact that is associating with an SD’d person.  Importantly, while the MC-400 application process is pending, the SD’d person is free to continue to work at the BD.[1]  If the MC-400 is ultimately denied, then, at that point, the firm has to terminate the SD’d person or BDW.

Got it? So, I had a client that had one of its partial owners become SD’d as a result of the fact he got barred, through an AWC.  We knew when he signed the AWC he would become SD’d, but we also knew we could file an MC-400, which would allow him to remain associated with the firm, as a partial owner, while he worked to sell his ownership interest.

So we filed the MC-400. But then, things went weird.  Even though filing the MC-400 allows the SD’d person to remain associated with the broker-dealer, FINRA initiated an “Expedited Proceeding” under Rule 9555.  In short, what that rule says is that FINRA can summarily revoke a firm’s registration within 14 days if it does something which renders it unqualified to be a member.  Here, FINRA alleged that my client was unqualified because it was associating with an SD’d person.


The firm dutifully filed the MC-400, right? So, the SD’d person could continue to associate with the firm while the MC-400 application was pending, right?  Apparently, FINRA decided that is not the case.  Despite the fact that my client did exactly what RAD said it could do to remain a member when it was apprised that the partial owner was SD’d, another arm of FINRA, specifically, Member Reg at the District level, has apparently concluded that it was somehow not enough for my client to rely on that instruction it received from RAD.

Heads, FINRA wins; tails, my client loses. Even when you follow FINRA’s instructions, you can find yourself booted from the industry.  That seems fair…where?  Not in this country.

In politics now, we are at the point where it is impossible to shock people anymore. Insult women with a graphic reference on Entertainment Tonight?  No problem.  Mock a reporter with a disability.  No problem.  Body slam a reporter on the eve of the election?  No problem.  Sadly, I am at the same point with FINRA.  Its actions are past the point of being able to shock or surprise me anymore.  But, as I said at the outset, tell me if you think I am overreacting.

[1] How do we know, apart from experience?  FINRA tells us on its website: “If a person is currently associated with a FINRA member at the time the disqualifying event occurs, the person may be permitted to continue to work in certain circumstances, provided the employer member promptly files a written application with FINRA seeking permission to continue that person’s employment with the member firm.”