On Wednesday, the FINRA Board met and discussed two topics that I recently blogged about: recidivist brokers and unpaid arbitration awards.  In predictable fashion, FINRA withered in the face of criticism that its existing rules and policies are somehow not tough enough on its member firms, and embarked on a proposed series of steps that, if ultimately approved, will further establish FINRA’s continuing refusal to stand behind its member firms.

Recidivist Brokers

The Board authorized several steps to address what it called “high-risk” brokers. It is notable at the outset, however, that, in addition, the Board also seeks to address “the firms that employ them,” thereby making this a firm issue, not just an individual issue. The specific proposals include:

  1. amendments to the Sanction Guidelines. According to the separate press release that FINRA issued, these amendments will make sanctions harsher “when an individual’s disciplinary history includes additional types of past misconduct.” This is hardly newsworthy, as the existing Sanction Guidelines already expressly encourage harsher sanctions when a respondent has a disciplinary history, so it is unclear exactly how this proposal means anything (apart from FINRA’s continuing trend of ratcheting up the sanctions, something it routinely does anyway from time-to-time, and as recently as earlier this year);
  2. amendments to the Rules governing FINRA Enforcement cases, to permit the activities of recidivist brokers to be restricted while an appeal is pending in “appropriate” – but undefined – “circumstances”;
  3. amendments to the “summary revocation” Rules, although no details were provided here;
  4. publication of a Regulatory Notice “rearticulating heightened supervision obligations under FINRA Rule 3110.” This is a particularly interesting proposal, given that under Rule 3110, there presently exist no obligations, ever, under any circumstances, to impose heightened supervision on a broker. Accordingly, this proposal, which “would specifically require firms to adopt heightened supervisory procedures for brokers while a statutory disqualification request is under FINRA’s review, or the broker is appealing a hearing panel decision,” represents a significant departure from existing rules;
  5. amendments to Schedule A of the FINRA By-Laws that will jack up the already sizable fees FINRA imposes for statutory disqualification eligibility applications;
  6. amendments to FINRA Rule 8312 that would require it to be disclosed on BrokerCheck when a firm is a “taping firm” under FINRA Rule 3170. No big deal, as FINRA already publishes on its website the up-to-date list of such firms.
  7. clarifications to FINRA’s examination waiver guidelines. Specifically, “the proposals would revise the guidelines for reviewing requests for a waiver from FINRA exam requirements to more broadly consider the past misconduct of an individual, including arbitration awards and settlements.” Given that FINRA supposedly already takes these things into consideration when it receives exam waiver requests – see this Guidelines to Exam Waivers that exist on FINRA’s website – this proposal is also just noise.

As you can see, many of these proposals simply restate existing positions that FINRA already takes, and, moreover, none reflects any inclination by FINRA to align itself with its members, most of whom would argue that nothing in particular needs to be done about recidivist brokers beyond the current Enforcement program. Even more disturbing, and as I noted in my recent blog, whatever one thinks about recidivist brokers, the proposals continue to reflect FINRA’s odd slant on the facts that it was surprised and dismayed to learn of the existence of recidivists in the industry, as if FINRA – the owner and operator of CRD and BrokerCheck – was somehow unaware of RRs’ disciplinary histories.

Unpaid Arbitration Awards

The Board also addressed PIABA’s sad complaint that too many arbitration awards go unpaid. To address this supposed problem – a problem that exactly zero members are complaining about – the Board is going to consider several proposals:

  1. “expand a customer’s option to withdraw an arbitration claim and file in court, even if a mandatory arbitration agreement applies to the claim,” when a member firm or an RR “becomes inactive” during a pending arbitration, or where an RR becomes inactive before a claim is filed. This is a fascinating proposal, given FINRA’s acknowledgement that firms and RRs arbitrate customer complaints not only because FINRA rules require them to do so, but also as a matter of contract. If a customer signs an agreement compelling him to arbitrate his disputes with FINRA, I can only wonder how FINRA proposed to trump that binding contractual obligation;
  2. allow customers to amend pleadings, postpone hearings, request default proceedings and receive a refund of filing fees under such situations when a firm or an RR becomes inactive. Like most, if not all, respondents’ counsel, I already am firmly of the view that the Code of Arbitration Procedure exists to benefit customers, at the expense of my clients. This proposal would simply continue the trend of providing customers protections unavailable to firms and RRs; and
  3. amend Form U-4 to “elicit information from registered representatives that do not pay arbitration awards, settlements and judgments in full in accordance with their terms.” Look: failure to pay an arbitration award, or honor a settlement agreement, absent a recognized reason,[1] can already result in summary revocation under 9554. Failure to honor an arbitration award or a settlement agreement is already deemed in IM-12000 to be a violation of Rule 2010. I simply do not believe that adding the requirement to disclose on Form U-4 an unpaid arbitration award or settlement to the existing list of horrible consequences really provides any additional incentive for a respondent to pay an adverse arbitration award or a settlement. Thus, this is really just more smoke than fire.

These proposals, plus, likely, whatever new ones the Board conjures up (as FINRA expressly said that the Board discussed “additional steps” that it will consider at subsequent meetings), typify FINRA’s keen interest in taking prompt action to address any suggestion in the media that it is failing at its job. Ironically, it seems that groups like PIABA has a much more direct pipeline to the FINRA Board than its own member firms do, given the speed and public showiness with which FINRA responds to PIABA’s complaints.  I can attest firsthand that this is galling to most broker-dealers, who are still waiting, perhaps with less and less patience, for some sign that FINRA head guy Robert Cook harbors any real desire to mend the relationship with the firms he regulates.


[1] According to Reg Notice 10-31, there are only four recognized defenses.  (There used to be a fifth – the inability to pay – but FINRA eliminated it.)  They are (1) paying the award in full or fully complying with the settlement agreement; (2) the claimant agreed to accept installment or otherwise agrees to settle the matter; (3) the respondent filed a timely motion to modify or vacate the arbitration award, and the motion has not been denied; and (4) the respondent filed for bankruptcy, and the bankruptcy petition is still pending or the bankruptcy court has discharged the award or the settlement payment obligation.