On July 27, 2022, FINRA filed a proposed rule change with the SEC that would “modernize” its supervision rule to make permanent pandemic-related temporary exemptions that allowed limited-scope work-from-home (“WFH”) for brokers.
The filing proposes “to adopt new Supplementary Material .19 (Residential Supervisory Location) under FINRA Rule 3110 (Supervision) that would align FINRA’s definition of an office of supervisory jurisdiction (“OSJ”) and the classification of a location that supervises activities at non-branch locations with the existing ...
In its April 27 Weekly Update, the Financial Industry Regulatory Authority’s (“FINRA”) National Cause and Financial Crimes Detection program urged FINRA member firms to review a cyber-threat alert arising from Russia’s invasion of Ukraine.
The Cybersecurity and Infrastructure Security Administration (“CISA”) issued an April 20, 2022, Advisory warning of increased Russian state-sponsored and criminal cyber threats in retaliation for Western support for resistance to Russia’s invasion of Ukraine. The cybersecurity authorities of Australia, Canada, New ...
In the securities industry, regulators like to say that the compliance professionals are their “partners.” But every so often, those regulators charge one of their compliance partners with rule violations. The compliance community understandably gets unsettled, expresses concern, and regulators respond with a “don’t worry” clarification explaining those charges were driven by unusual “facts and circumstances.” That cycle just completed again.
On March 17, the Financial Institution Regulatory Authority (“FINRA”) issued Regulatory Notice 22-10 to ...
The regular “Weekly Update” email from the Financial Industry Regulatory Authority (“FINRA”) had an eye-catching warning February 16, urging broker-dealer member firms to heed the “Shields Up” cyber threat warning from the Cybersecurity and Infrastructure Security Agency (“CISA”) and the FBI.
That warning urged heightened cybersecurity vigilance “related to Russia’s potential destabilizing activities against Ukraine.” The CISA alert said, “While there are not currently any specific credible threats to the U.S. homeland, we are mindful of the ...
Over the last couple of decades, the securities self-regulatory organization FINRA (f/k/a NASD) informs its membership each year of what compliance risks are noted by its examination program. Those are risks firms should address and also might be harbingers of enforcement focus for the coming year. Years ago, it was the “Errico Letter” - a friendly reminder from NASD’s Head of Member Regulation. Then it became the Examination Priorities Letter. Now it’s a Report, but with a more useful assemblage of the Rules and Resources applicable to each risk called out.
Some risks have ...
The Financial Industry Regulatory Authority (“FINRA”) recently kicked off a “sweep” examination with its August 2021 Targeted Exam Letter on “practices and controls related to the opening of options accounts and related areas, including account supervision, communications and diligence.” The exam covers both self-directed and rep-recommended retail accounts (not institutional or managed accounts) during January 1, 2020 through the present.
The sweep seeks:
- “Written Supervisory Procedures (WSP), compliance manuals and any other written guidance ...
On August 13, 2021, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 21-29, collecting guidance on outsourcing and vendor management. The Notice was prompted by increased reliance on outsourcing (especially during COVID), some enforcement actions involving vendor-management issues, and similar proposed inter-agency guidance by banking regulators.
The Notice reminds firms that while they can outsource task or functions, they cannot outsource-away their regulatory compliance obligations. In turn, that means the outsourcing process ...
Since the appointment of Allison Heron Lee as interim SEC chair, the SEC has pushed an ESG agenda in all things from corporate disclosures, to investment companies, international standards and even enforcement. See this blog post here. Those moves have sparked discussion, and sometimes, skepticism. Read more about that in this blog post here.
As April ended, the Street’s other main regulator, FINRA, joined the ESG discussion - but in a different way. Instead of contemplating new prescriptive rules or disclosure taxonomies, FINRA seeks constructive criticism. FINRA asked for ...
Last week, FINRA issued Regulatory Notice 21-16 cautioning member firms against attempting to limit customer claims through language in mandatory pre-dispute arbitration agreements. Rule 2628 prescribes disclosure requirements for arbitration clauses and generally prohibits provisions that contradict other FINRA Rules.
The Notice specifically cautions against several provisions that improperly limit customer claims:
First, firms cannot specify hearing locations, because FINRA Rule 12213 provides the Arbitration Director will. FINRA usually schedules hearings ...
On March 4, FINRA issued a Regulatory Notice warning member firms not to fall for phishing scam preying on compliance fears. The scam uses a phony email address, firstname.lastname@example.org, demanding an immediate response to an “attached report” of “regulatory non-compliance.” FINRA doesn’t have a “finra-online” domain and its gTLD is “.org” not “.com”.
Regulatory Notice 21-08 (Mar. 4, 2021) is here.
Thomas K. Potter, III (email@example.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee ...
In an SEC filing, Friday, February 26, Robinhood Financial and Robinhood Securities disclosed they are negotiating with FINRA, the SEC, and state regulators, attempting to settle investigations into options-trading and outages from March 2020.
The investigations focus on Robinhood’s options-trading approval processes and how the app displays cash and buying power to customers. Similar issues were involved in the GameStop (“GME”) imbroglio earlier this year. Congress and various regulators continue to examine the GME situation.
The Companies disclosed they have ...
The Securities Industry and Financial Markets Association (“SIFMA”) recently proposed sweeping modernization of industry self-regulatory rules to reflect firms’ successful pivot to remote operations over the past year. SIFMA suggests significant remote work likely will continue, even after the COVID-19 “pilot program.”
SIFMA proposed a “location agnostic” overhaul of the Rules in its February 16 comment letter in response to FINRA’s call for “lessons learned” during the COVID-19 pandemic. See FINRA Reg. Notice 20-42 (Dec. 16, 2020).
The Wall Street Journal reports traders on Reddit’s WallStreetBets forum – the same social medium that helped fuel the GameStop short squeeze – have started bidding up cannabis stocks. Mentions on the forum jumping from near zero to over 8,000 in just a few days. WallStreetBets Traders Set Cannabis Stocks Alight (Wall St. J., Feb. 11, 2021), is here.
Perhaps not coincidentally, the day before, FINRA issued a Special Alert reminding firms of their regulatory obligations regarding low-priced, often volatile, stocks. The Alert is to
“help FINRA member firms that engage in ...
During the height of the GameStop (NYSE: GME) mania, Slate author Jordan Weissman explained that
“[A]t a moment that the markets are being overrun, for better or worse, by posters who’ve basically dedicated themselves to shredding the idea that markets are efficient, rational mechanisms for allocating capital and discovering value, tweeting about stonks seems far more appropriate than discussing something as reasonable and comprehensible as stocks. It’s an emotional onomatopoeia for talking about people throwing their money at the market when, lol, nothing ...
On Thursday, January 28, trading-app broker-dealer Robinhood – a self-styled disrupter democratizing trading – suspended its users’ ability to buy Gamestop stock or options (along with other stocks). After playing a prominent role in the crowd-sourced short-squeeze on the meme stock, abruptly shutting the “buy” door prompted swift and fierce reactions. NY Rep. Alexandria Ocasio Cortez tweeted that Robinhood’s freeze on Gamestop buys was “unacceptable” and called for Congressional hearings. Texas Sen. Ted Cruz quickly agreed (eliciting a snarky ...
On February 1, 2021, the Financial Industry Regulatory Authority (“FINRA”) released its “Report on FINRA’s Risk Monitoring and Examination Activities.” The Report combines two of FINRA’s long-standing reports: (a) the retrospective Report of Examination Findings from the prior year; with (b) its forward-looking Examination Priorities Letter.
The new format is more user-friendly for supervision and compliance professionals than the prior reports, setting out for each topic:
- Regulatory Obligation with citation to relevant rules;
- Related Considerations
October is cyber-security awareness month, so it’s only appropriate that FINRA started it with another Regulatory Notice warning member firms to beware of a false-survey phishing scheme. The Notice warns of “a widespread, ongoing phishing campaign” soliciting survey responses in an email using the fake domain “@regulation-finra.org.” See Reg. Notice 20-35 (Oct. 6, 2020), here.
That’s more of the same for FINRA. It warned in August that fraudsters were using a fake FINRA domain (www.finnra.org – with an extra “n”) in Regulatory Notice 20-27 ...
On August 20, FINRA warned member firms about a rash of imposter websites, using registered representative’s names, pictures, CRD numbers and other information to gull investors into providing personally-identifying information to fraudsters.
FINRA suggests member firms should contact the FBI and financial regulators, and posting a notification to investors on their legitimate websites. Other response measures include conducting a who-is search, complaining to host ISP or domain-name registrar, among others.
Websites maintained by FINRA member firms and their ...
The Financial Industry Regulatory Authority (“FINRA”) has issued a special alert to its member firms, alerting them to an imposter website: www.finnra.org (containing an extra “n”).
The fake site contains a purported “registration” form and firm gateway page, apparently phishing for credentials. FINRA also warns members that the fake domain may be the source of phishing emails.
Both FINRA and the SEC have amped up their cybersecurity warnings during the pandemic.
Regulatory Notice 20-27 is here.
Thomas K. Potter, III (firstname.lastname@example.org) is a partner in the ...
Effective June 30, SEC Reg. BI requires broker-dealers to make recommendations only in the “best interests” of retail customers, imposing additional disclosure, care, conflicts-of-interest and compliance obligations. The disclosure obligations include dissemination of Form CRS educating customers on the nature of their relationship with the firm.
FINRA Regulatory Notice 20-18, issued June 19, makes corresponding changes to its Rules stressing the primacy of Reg. BI with respect to retail customers:
Capital Acquisition Brokers’ suitability (Rule 211).
On May 28, 2020, FINRA issued its Regulatory Notice 20-16 sharing firms’ WFH practices observed to date. They include common practices adopted across most industries, as one would expect.
During the TRANSITION TO WFH, firm practices included:
- Increased Customer Assistance through outreach and web-based communications, to ensure customers knew how to access representatives and other resources;
- Location Monitoring & Contact Lists to know where staff were and ensure they knew how to stay in touch;
- Increased Support for staff, including more frequent training and ...
On May 8, FINRA filed an expedited request for an immediate rule change that would allow service by email, extensions of time, and video-conference hearings in member-application, disciplinary proceedings and appeals. FINRA notes that the COVID-19 work-from-home (“WFH”) environment makes it “exceedingly difficult to send and receive hard copy mail and conduct in-person meetings and hearings.” The rule change is expected to be temporary through June 15, subject to another later filing extending the provisions if and as necessary.
FINRA previously made similar ...
On April 9, FINRA amended its customer arbitration rules to give customers more options when a Respondent firm or associated person becomes “inactive” during an arbitration.
The largest percentage of unpaid customer awards in FINRA arbitrations are those against Respondent firms or associated persons who are “inactive” – that is, whose FINRA membership has been terminated, suspended, canceled, or revoked. Those “inactive” Respondents are out of the business – and often just out of business, period.
FINRA Rule 12202 requires a customer Claimant to ratify, by ...
On March 27, securities regulator FINRA extended its previous postponement of in-person hearings from May 1 through May 31. FINRA also will offer virtual hearing options (including Zoom) by agreement or panel order. Finally, postponement fees are waived through September with at least 20-days' notice. All other case deadlines remain unaffected.
Thomas K. Potter, III (email@example.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas, and Louisiana. He has over 34 years of experience representing financial ...
The SEC has gathered its guidance in a single location. Topics covered include:
(a) The SEC’s own Business Continuity Plan (“BCP”) and its implementation;
(b) Increased market monitoring and surveillance;
(c) Issuer guidance regarding COVID-related disclosures;
(d) Conditional exemptive orders for registrants, including investment companies and investment advisers, easing meeting and certain reporting requirements;
(e) Delaying certain open rulemaking proposals until April 24.
The Enforcement Division remains active, having implemented temporary trading ...
FINRA held its bi-annual Cybersecurity Conference in January and recently published five take-away real-world experiences from the conference:
- A firm’s social media posts about a charity golf tournament, tipped the scammers when to send an urgent email changing wire instructions, while most of the firm’s management was out on the course;
- A thumb-drive planted in a parking lot labeled “bonuses,” “payroll,” or “commissions” proved bait too tasty for a firm’s personnel to resist;
- Even the best vendor-based data systems have hidden vulnerabilities lurking ...
FINRA issued a targeted-exam letter on February 20, 2020 seeking information on the effect of zero-commission trading upon compliance with related obligations of Best Execution, payment for order flow, and non-commission account fees. The Exam Letter is here.
The zero-commission tide rose quickly throughout 2019, together with some industry consolidation as well. Among those announcing no commissions:
- Ally Invest, the investment affiliate of online Ally Bank;
- E-Trade, to be acquired by Morgan Stanley, announced February 20, here.
- Interactive Brokers
Firms permitting the creation and operation of custodial accounts related to Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) transactions must take special notice of Financial Industry Regulatory Authority's (FINRA) recent Regulatory Notice 11-02. This notice requires firms to take steps to establish the identity and age of the custodians and beneficiaries of custodial accounts. Such custodial accounts are tied to UTMA and UGMA transactions allowing individuals to transfer property to a minor without the need for a formal trust.
While some ...
On September 11, FINRA announced its filing of an enforcement action accusing a Massachusetts broker of fraud and registration violations arising from his sale of an unregistered cryptocurrency, "HempCoin." It is FINRA's first cryptocurrency enforcement action.
FINRA alleges Timothy Ayre of fraudulently attempting to bolster his worthless public shell company, Rocky Mountain Ayre, Inc. (RMTN in the OTC pink sheets). Ayre alleged repackaged HempCoin as a security backed by RMTN common stock, marketing it as "the world's first currency to represent equity ownership" in a ...
FINRA recently proposed to remove the broker's "control" of a securities account as a required element of a "quantitative suitability" violation under Rule 2111.
For many decades, case law on broker-dealer fraudulent practices under Rule 10b-5 and others recognized a cause of action for "churning:" Knowingly recommending an unsuitable volume or frequency of trading in an account, by a broker exercising actual or constructive control over that account, as a form of self-dealing to generate commission revenue at the customer's expense.
When FINRA revised its "suitability" rule ...
FINRA has proposed a new $100 per-arbitrator fee and a $100 per-arbitrator honorarium for the late cancellation or continuation of prehearing conferences in FINRA arbitrations. The proposed rule change would affect both customer cases and industry cases, and FINRA is seeking to amend FINRA Rules 12214(a), 12500, 12501, 13214(a), 13500, and 13501. In essence, if one or more of the arbitrating parties cancels or obtains a continuance of a prehearing conference within three business days of the scheduled hearing (for example, an Initial Prehearing Conference or "IPHC"), the ...
Effective April 3, 2017, all FINRA arbitration participants (except pro se parties) must use FINRA's web-based DR-Portal to file and serve documents in both customer and industry arbitrations.
Pro se parties may elect to use the Portal or opt-out, using traditional filing and service methods instead.
Exceptions to Portal service include most items involving new or non-parties, documents produced and permanent injunction claims:
- pro se customers who do not elect to use the Party Portal;
- documents produced in response to discovery requests or pursuant to the Discovery Guide;
On January 4, new President and CEO Richard Cook issued FINRA's Annual Regulatory and Examination Priorities Letter. This year's list in summary is:
New for 2017:
Targeted electronic off-site reviews "on select firms not scheduled for cycle exams."
An annual summary report of key exam findings on selected issues
More resources for small firms, including:
- Compliance calendar;
- Compliance service provide directory.
High-Risk / Recidivist Brokers
Dedicated exam group
Supervisory procedures and due-diligence
Seniors: fraud and abuse; ...
In late October, FINRA issued a sweep exam, commanding firms to produce 15 categories of documents about firm's cross-selling programs over a 5-year span. The sweep seeks information on cross-selling, including incentives and compensation, tracking and performance metrics, complaints and discipline, compliance and supervision, among others. The letter also imposes a November 15 response deadline.
The sweep letter does not expressly refer to the recent Wells Fargo cross-selling scandal or to Senator Warren's ensuing broad-side calling for SEC Chair White's resignation ...
The Public Investors Arbitration Bar Association (PIABA) renewed its criticism of FINRA's Broker-Check® system in a report issued in late October. PIABA was especially critical of the system's
- Lack of synchronization with state-regulator databases that often contain more fulsome information (including, e.g., CRD information such as reasons for broker termination, bankruptcy filings and tax liens);
- Lack of comparative, contextual data such as the total number of brokers and percentage of those with similar numbers of disciplinary results;
- Inaccessibility to the public ...
The SEC announced August 25 that it approved FINRA's pay-to-play rules governing placement-agent or solicitor broker-dealers and was "prepared" to approve the extension of MSRB Rule G-37 to municipal advisors as well.
The two rule proposals would complete the pay-to-play suite of rules across municipal securities dealers, investment advisors, broker-dealers, and municipal advisors. The bedrock Rule - MSRB's Rule G-37 governing municipal finance professionals and dealers - has been in place since 1994. After Dodd-Frank's expansion of municipal-advisory regulation, the ...
In a July 22 Notice, FINRA took umbrage at a growing line of Court decisions suggesting that a later or more-specific forum selection clause in an agreement between the parties may override a prior customer arbitration agreement. FINRA defended it arbitral forum, pointing out that members are subject to discipline for restricting a customer's right (or even request) to arbitrate.
An expanding line of precedent holds that a later forum-selection provision (limiting disputes to a particular court) may supersede a prior arbitration provision between the same two parties. See, e.g ...
For years, self-regulatory agencies (like FINRA or the Exchanges) have wielded the statutory authority granted them by Congress - and backed by the SEC - exercising governmental power to compel testimony, impose fines and punishments, and even bar a person or firm from an entire industry.
At the same time, they declaim that they're just membership organizations, so don't owe anyone Constitutional protections (like Fifth Amendment Due Process) and aren't subject to Equal Access to Justice Act claims for your litigation expenses when they lose.
So SROs essentially are the ...
In a recent new release, the Tennessee Securities Division urged investors to ask tough questions of their investment advisors, and about their compensation, account arrangements and educational / regulatory history.
The May 26 release is here.
SEC-registered investment advisors are required to provide the answers to those (and other) questions on their ADV Part 2, which is kept on file with the SEC and publicly-available through the Commission's IA Public Disclosure Portal, here. Information on registered broker-dealers and their associated persons is available through ...
Richard Ketchum, the retiring CEO of FINRA, said that the regulator intends to expand the reporting available through its BrokerCheck ® web tool to include relative concentrations of disciplined brokers in industry firms.
Some studies have found that brokers terminated for misconduct often are hired by firms having a higher incidence of their own misconduct. "There are firms that hire from the predatory firms that go out of business. That is your biggest risk," said Ketchum. Ketchum also said that FINRA is considering making its underlying BrokerCheck data available for bulk ...
The Municipal Securities Rulemaking Board ("MSRB") issued a concept release last month suggesting that market transparency trumps the direct Congressional prohibition against federal regulations requiring filing of information by (or by broker-dealers, from) municipal issuers (the "Tower Amendment").
Regulators are concerned that direct purchases of municipal debt (akin to private placements) and bank loans to municipal entities might avoid the municipal securities regulatory regime, yet affect the priority and integrity of municipal securities:
The MSRB has ...
An article in this weekend's Wall Street Journal called for FINRA to make the database underlying its BrokerCheck ® system (of reports on stockbroker registration and disciplinary history) more widely available for data mining and analysis by public-sector participants.
The article roundly criticized FINRA's interface that limits public access to peep-show, one-broker-at-a-time reports: "In the age of Big Data, it is time to liberate the BrokerCheck files. Only when information is set free can it turn into insight." J. Zweig, "Is Your Stockbroker Great or Mediocre?" Wall ...
It is not uncommon for registered representatives to change broker-dealers over the course of their career.
In most cases, their customers will typically switch firms as well, as they follow their representative to wherever he or she may go. Seems like a non-issue, right? FINRA did not think so. FINRA became concerned that when the representatives contacted the customers to discuss the switch, the customers may not be provided all the information necessary to make an informed decision on whether to transfer their assets. Accordingly, FINRA proposed a rule that requires ...
FINRA reported that, for 2015, Claimants won about half of private securities arbitrations: 47% for all-public panel decisions; 45% for majority-public panels. A colleague and securities mediator, Dana Pescosolido, recently studied FINRA's 2015 private securities arbitrations to see just what the results are when Claimants "win." The study can illuminate mediation (and other risk-assessment) expectations. FINRA Securities Arbitrations Of the 3,435 securities arbitrations filed in 2015, 2,341 (68%) were customer cases and 1,094 (32%) were intra-industry disputes ...
FINRA released its annual Regulatory and Examination Priorities Letter (so-called "Errico Letter") on January 5. FINRA's top five priorities:
- Firm Culture. FINRA's been pushing "culture of compliance" for years, but in 2016 will take it to the next level: "FINRA will formalize our assessment of firm culture while continuing our focus on conflicts of interest and ethics." In looking at a firm's culture, FINRA will focus on "Five Factors" to assess whether:
- policy or control breaches are tolerated;
- control functions are valued within the organization;
- managers are ...
As 2015 ended, FINRA fined Barclays Capital $13.75 million for mutual-fund switching and breakpoint supervisory failures that might have been avoided if that part of Barclay's WSPs had been properly calibrated and/or part of their annual compliance testing. The lapses stemmed in part from an inaccurate definition of switching in Barclay's WSPs and those undetected problems mounted over the years. A five-year look back review uncovered over 6100 unsuitable switches with customer harm of about $8.63 million; a similar six-month look back revealed 1,723 unsuitable mutual-fund ...
FINRA's Dispute Resolution Task Force issued its Final Report in mid-December. The Report reflects the group's consideration of wide-ranging issues affecting the nation's principle dispute-resolution forum for broker-dealers, their associated persons and customers. The Task Force made 51 recommendations for changes to FINRA Arbitrations, including: Improve Arbitrator Quality by:
- Increasing compensation;
- Improving recruitment for depth and diversity;
- Improving selection to provide a pool of 30 in all-public arbitrator cases; achieve earlier and better conflict ...
Last week, VW blamed its "culture" for allowing "individual misconduct" that lead to the emissions-testing-evasion scandal engulfing the company. It reminded me of a couple of corporate-compliance mantras and of DOJ's recent Yates Memo: To deter individual misconduct, you need a "Culture of Compliance" set by "Tone from the Top." Volkswagen's mea culpa bears that out: VW admitted it had neither and blamed both. See "VW Says 'Culture' Flaw Led to Crisis," Wall St. J. at B1 (Dec. 11, 2015) For years - decades, in fact - the United States Department of Justice and securities ...
FINRA this week released its targeted exam letter requesting information on firms' conflict-of-interest policies surrounding broker compensation and retail accounts. The sweep follows up on FINRA's Conflicts Report from October 2013, which recommended changes to firm supervision and oversight of conflicts of interest. The letter requests extensive categories of information covering retail accounts during the period from August 2014 through July 2015. FINRA seeks information about firm policies and procedures to:
- Identify and manage conflicts;
- Surveillance of ...
The Financial Industry Regulatory Authority's disciplinary appellate body (the National Adjudicatory Council or NAC) has revised the Sanction Guidelines used to determine penalties in enforcement cases. The revisions increase the severity of some Guidelines and generally index monetary fines to the Consumer Price Index. Key among the changes, the NAC:
- Urges "strong consideration" of individual bars or firm expulsion for intentional fraud or cases in which aggravating circumstances predominate
- Emphasizes more severe sanctions for recidivists;
- Increases the upper ...
The Financial Industry Regulatory Authority ("FINRA") recently issued an Investor Alert (the "Alert") to warn investors about the most prevalent types of investment fraud and provide guidance on how to avoid being defrauded. According to the Alert, the five (5) most common fraudulent investment schemes tend to fall into the following general categories:
Pyramid Scheme: A fraudulent ploy in which a small investment is promised to yield large profits within a short period in time, but, in reality, investors only make money if they successfully recruit new investors into the ...
The Wall Street Journal reported Thursday that the SEC is in the midst of a sweep to crack down on companies' use of NDAs or employment agreements that might impede whistleblower reporting in violation of Dodd-Frank amendments. Wall St. J. at C1 (Feb. 26, 2015). We reported last November on a letter from eight House Democrats asking the SEC to examine the issue, here. SEC Chair White's January 5 response is here. SEC Rules prohibit using agreements to restrict or prevent whistleblower reporting. 17 C.F.R. § 240.21F-17(a). And the SEC's broadened administrative jurisdiction now gives ...
FINRA Dispute Resolution filed with the SEC a proposed change to Code of Arbitration Rules 12214 and 12601 (and industry Rules 13214 and 13601) to increase late cancellation fees from $100 to $600 per arbitrator and expand the notice period for late hearing cancellations from 3 to 10 days. See SR-FINRA 2015-003 (filed SEC Feb. 5, 2015). Thomas K. Potter, III (firstname.lastname@example.org) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Managing Partner of the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience ...
The SEC and FINRA each issued February 3 cyber security "alerts" summarizing last year's sweep exams and pointing out the obvious. In two parts, the SEC's press-release covered the results of the Commission's 2013-2014 sweep exams and an investor bulletin. SEC Press Release 2015-20, here. The Commission's Office of Compliance Inspections and Examinations ("OCIE") conducted a "sweep exam" - or wide industry survey on the subject among broker-dealers and investment advisers- during 2013 and 2014. The good news is that a wide majority of them have have information security ...
The Financial Industry Regulatory Authority ("FINRA") released its 10th annual Exam Priority Letter earlier this week (Jan. 6, 2015). The so-called "Errico Letter" advises broker-dealer member firms of the operational risks the regulator expects to focus on in its examination (and enforcement) program. Moving a little closer to a principles-based regulatory approach than the usual "hot issue" laundry list from past years, this year's Letter first addresses five key areas of concern: 1. Alignment of Customer/Firm Interest 2. Standards of Ethical Behavior 3. Strong ...
Since 2004, FINRA has required its member firms to include in settlement-agreement confidentiality clauses an exception expressly allowing a customer to respond to regulatory inquiries. See Notice to Members 04-44. FINRA recently updated that requirement to include express permission to be a whistleblower. FINRA's suggested language provides: Any non-disclosure provision in this agreement does not prohibit or restrict you (or your attorney) from initiating communications directly with, or responding to any inquiry from, or providing testimony before, the SEC, FINRA, any ...
Carlo DiFlorio, FINRA's Chief Risk Officer and Head of Strategy, told the annual meeting of the National Society of Compliance Professionals Monday that FINRA is emphasizing efforts to mitigate market risks, even as it regards US capital-market integrity as at its strongest historically. HFT & Algorithmic Trading DiFlorio addressed thee initiatives. First, FINRA examiners are focusing on firms' supervision of HFT and algorithmic trading, including pre-implementation testing and firm-wide "kill switch" procedures when something goes awry. Second, FINRA's Board decided ...
The Second Circuit stayed its mandate last week to allow public-pension litigants to file cert petitions seeking review of its August holding that a subsequent account-agreement forum-selection clause requiring federal-court litigation trumps FINRA's rules requiring all member firms to arbitrate on a customer's request. Goldman, Sachs & Co., v. Golden Empire Schools Financing Auth., Nos. 13-797-cv, 13-2247-cv (2nd Cir. Aug. 21, 2014), here. We discussed the opinion here. The public-pension litigants argued three grounds for the stay. First, they wrote the Second Circuit's ...
FINRA celebrated its 75th Anniversary this September 18. It is the "largest independent regulator for all securities firms doing business in the United States," with a notionally voluntary membership of over 4,100 securities firms. Its mission is protecting investors, and FINRA is the primary cop on the beat, policing over 634,000 registered securities representatives. FINRA employs 3,400 people in 20 offices. It monitors 6 billion share trades a day and fined Wall Street over $74 million last year. Read the release here. FINRA is a voluntary membership organization you have to ...
On July 22, the SEC approved amendments to FINRA Rule 2081 that prohibit member firms from conditioning arbitration settlements (or seeking to) upon a customer's assent to CRD expungement relief. The Rule amendments prohibit paying any consideration or compensation for expungement relief and apply even if a customer suggests such a bargain. SEC Rel. No. 34-72649 (July 22, 2014). In cases that may warrant expungement relief under the conditions specified in Rule 2081, SIFMA's comment letter suggested, and FINRA responded approvingly to, using settlement-agreement language ...
On June 30, 2014, the Financial Industry Regulatory Authority ("FINRA") sent its proposed rules to limit the definition of "public arbitrators" to those without any experience in the securities industry. Previously, an arbitrator who had in the past worked in the securities industry but did not currently work in the industry could qualify as a "public" rather than a "non-public" or "industry" arbitrator. See FINRA Rules 12100 and 13100. According to FINRA, people "who represent investors or the financial industry as a significant part of their business would also be classified as ...
It is obvious that broker-dealers and their registered representatives, as well as investment advisors, must be careful in making recommendations to their clients. But the rise of claims related to inaction in a client account should also give members of the securities industry cause for concern. In particular, the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and other critics have begun to focus their attention on "reverse churning," a claim arising from an allegation that a registered representative or investment ...
On June 23, 2014, BrokerCheck Information makes publicly available information regarding investment-related civil action(s) brought by a state or foreign financial regulatory authority dismissed pursuant to a settlement agreement about former associated persons of a FINRA member firm that were registered on or after August 16, 1999. Established in 1988, the public disclosure program known as BrokerCheck assists investors in making informed choices about the individuals and firms with which they conduct business. Past settlements will now be disclosed publicly for ...
I wrote earlier that the SEC was wrong to extend its "admission of wrongdoing" policy (once reserved for extreme cases) to negligent software-glitch misreporting of trade-data in the Scottrade case. Burr blog here, (April 17, 2014); Law360 Securities article here, (June 2, 2014). On June 4, FINRA announced that its response to similar blue-sheet violations by three firms was a standard AWC ("neither admit nor deny") with a fine of less than half the amount assessed Scottrade by the SEC. As in Scottrade, the firms' violations stemmed from software problems and FINRA also found ...
The Alabama Court of Civil Appeals released a slip opinion on May 16, 2014 addressing enforcement of a nonsolicitation agreement against a licensed securities broker. See G.L.S. & Associates, Inc., and G.L. Smith & Associates, Inc. v. Keith Rogers, No. 2130322 (Ala. Civ. App. May 16, 2014) (Slip Opinion). The defendant (Rogers) worked for a securities firm (GLSA) and had an employment agreement that contained a nonsolicitation provision which prohibited Rogers from soliciting GLSA's clients for a period of two years after termination of employment. Rogers resigned from his ...
- FINRA 2023 Exam Priorities
- FINRA Proposal Modernizes Supervision Rule to Recognize WFH
- FINRA Report Denies Arbitrator Selection Manipulation
- FINRA Warns Against Russian-Sponsored Cyber Attacks
- SIFMA’s After-Action Report on Quantum Dawn VI Cybersecurity Exercise
- FINRA Clarifies CCO Supervisory Liability
- SEC Proposes Cybersecurity Disclosure Rule For Public Companies
- FINRA Urges Firms to Heed CISA/FBI “Shields Up” Warning on Russia
- SEC Proposes Cybersecurity Rule for Advisers, Investment Companies
- FINRA’S 2022 Report on Examination & Risk Monitoring Program
- Supreme Court
- Cyber Security
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