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Compliance and Regulatory Alerts, Bates Research  |  10-25-17

FINRA Update: New Arbitration Proposals, Identifying High Risk Brokers

In two notices issued last week, the Financial Industry Regulatory Authority addressed a few longstanding issues. First, FINRA proposed expanding the legal options available to investors when filing a claim against an inactive firm or associated person. Second, FINRA requested comments on allowing compensated non-attorney representatives to continue to represent customers in disputes between investors and broker-dealers. Comments on both are due December 18, 2017. In addition, FINRA Executive Vice President of Regulatory Operations Susan Axelrod offers insight on how FINRA is identifying high risk brokers.

FINRA Proposes New Arbitration Options for Investors

FINRA is proposing amendments to the Code of Arbitration Procedure for Customer Disputes to address the issue of unpaid customer arbitration awards in specific circumstances. Regulatory Notice 17-33 describes such circumstances as “situations where a firm or associated person is no longer in business either at the time the claim is filed or during a pending arbitration.”

The notice provides the rationale behind allowing investors in those circumstances to “evaluate the likelihood of collecting on an award” and to “make an informed decision about whether to proceed in arbitration, to file the claim in court or to amend [a] claim to add other respondents from whom the customer may be able to collect.” FINRA staff identified 278 out of 1,328 customer cases closed “by hearing or by papers” from 2014 to 2016 where a firm or an associated person would have been identified as inactive under the proposed amendments.

Generally, the amendments are intended to allow customers to reconsider their litigation strategy once notified of the change in status of the respondent. The amendments would provide customers more latitude to withdraw an arbitration claim, amend pleadings, postpone hearings, and receive a refund of filing fees.

FINRA is requesting comments and submissions on all aspects of the proposed amendments including economic impacts, data and other quantitative measures.

FINRA Wants Feedback on Non-Attorney Representation in Arbitration Cases

FINRA moved on a longstanding proposal to examine the “efficacy” of allowing compensated non-attorney representatives (“NARs”) to represent customers. Regulatory Notice 17-34 requests feedback on questions related to forum users’ experiences with NAR firms.

FINRA reports receiving numerous complaints about NARs, which typically represent investors with claims of $100,000 or less. Some of the complaints include: (i) employing "inappropriate business practices,” (ii) requiring non-refundable fees in retainer agreements, (iii) representing parties in contravention of state law, and (iv) pursuing frivolous claims to elicit settlements, among others.

The FINRA Code of Arbitration and Mediation Procedure allows NARs to represent clients in arbitrations subject to certain exceptions. However, according to the notice, there are no rules of professional conduct applicable to NAR firms, and NARs are not subject to licensing or supervision regarding their practices. In addition, NARs are not subject to malpractice insurance requirements. As a result, investors have little recourse if a NAR firm negligently represents or defrauds them.

Bates retail litigation expert Ralph Cursio was recently interviewed on the subject of NARs by Investment News, which you can read about here.

FINRA is considering whether it should restrict representation of parties by NAR firms. To determine whether restrictions should be put in place – and the extent of those restrictions – FINRA is looking for answers to a broad set of questions seeking information on forum user experiences, barriers to attorney representation, economic impacts and costs and benefits. FINRA Director of Dispute Resolution Richard Berry stated that dealing with the concerns around NARs are “among FINRA’s arbitration-related priorities” for 2018.

Addendum: FINRA Keeps a Ranking List of “Bad Apples”

According to a recent report, FINRA Executive Vice President for Regulatory Operations Susan Axelrod revealed that FINRA has been keeping a list and ranking the 634,403 brokers that it oversees. Bates Group has been following developments on FINRA’s response to recidivist actors.

The report states that “the list is compiled based on a broker's prior regulatory disclosures, disciplinary actions and employment history.” Though Ms. Axelrod stated that the ranking would be used for “internal guidance,” the possible disclosure of the list, inadvertently or through some cyber breach, gives some cause for concern. The article notes that as far back as the 2015 Annual Report, FINRA has been “using real-time data to help us identify individual brokers who pose a significant risk to investors or the industry,” and that the “potential rogue brokers could become the subject of examinations conducted by a special FINRA exam unit established earlier this year.”

Bates will keep you informed as these and other FINRA developments unfold.


Continue the conversation with Bates at the SIFMA C&L Society New York Regional Conference on November 1st. Stop by our booth for a demo of Arbitrator Evalutor, Bates' powerful new arbitrator selection tool.

Contact Bates Group

Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.