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Bates Research  |  04-30-20

FINRA Carries On: Focuses on High-Risk Brokers, Broker Beneficiaries, Arb Postponement & Reg BI

Image © [Andriy Blokhin] /Adobe Stock

While the COVID-19 pandemic continues to create unusual and difficult challenges for the financial service industry, FINRA continues to move forward with regulatory matters that warrant attention. In this article, Bates reviews recent FINRA developments on high-risk brokers, proposed limitations on brokers acting as beneficiaries, executors or trustees for senior investors, additional COVID-19-related hearing postponements, a recent arbitration proposal related to claims against inactive members and further remarks on Regulation Best Interest (Reg BI).

FINRA Proposes to Hold Firms More Accountable for Bad Actors

On April 14, 2020, FINRA proposed a host of new rules that would strengthen oversight over member firms’ supervision of high-risk brokers. The proposed rules include (i) disciplinary changes that would allow a hearing officer to impose “conditions or restrictions” on firms and require heightened supervisory procedures during an appeal to the National Adjudicatory Council, (ii) changes that would require firms to adopt heightened supervisory procedures for statutorily disqualified brokers during an eligibility review; (iii) changes that would allow disclosure that a firm is subject to the "Taping Rule" through FINRA’s BrokerCheck system; and (iv) changes under membership application and registration rules that would require firms to engage in additional obligations before hiring any person who has final criminal matters or specified risk events during the previous five years to become an owner, control person, principal or registered person of the firm. 

FINRA Highlights Senior Investor Protection Proposal on Brokers Acting as Beneficiaries, Executors and Trustees

In one of her first statements since formally becoming Executive Vice President and Head of FINRA Enforcement on January 17, 2020, Jessica Hopper highlighted an increasingly frequent pattern of brokers who are appointed beneficiaries, executors or trustees on behalf of vulnerable senior clients. She pointed out the risks and potential conflicts of interest associated with these arrangements and noted that investigations into the details often present challenges, particularly in cases where the client has a mental impairment or has died.

Ms. Hopper’s statement is significant, in large measure because she calls attention to a recent FINRA rule proposal that would create a national standard to protect seniors by requiring member firms to review and approve—in writing—an associated registered person being named a beneficiary, executor, or trustee or to hold a power of attorney on behalf of a customer. As part of a firm’s review under the proposed rule, the member firm would be expected to reasonably assess the risks of the arrangement and would have to supervise compliance with any conditions placed upon the approval. (Note: the proposed rule would not apply where the customer is a member of the registered person’s “immediate family,”  which is defined to include “parents, grandparents, mother-in-law or father-in-law, spouse or domestic partner, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person financially supports, directly or indirectly, to a material extent. The term includes step and adoptive relationships.”)  

Not all respondents agree with FINRA’s proposed approach. The North American Securities Administrators Association (NASAA) commented with a recommendation for a stricter standard that would (i) prohibit outright any registered persons from “being named as a beneficiary or appointed to a position of trust by a customer, unless the customer is an immediate family member” (and even then, only under certain conditions), and (ii) implement heightened supervision of all such accounts.

Ms. Hopper emphasized that FINRA will act aggressively to sanction brokers that procure such an appointment through unethical means. While the comment period ended on January 10, 2020, the rule has yet to be adopted, and there is no indication when this will occur. However, a few days after her statement appeared on the agency blog, a FINRA podcast celebrating the five-year anniversary of its Securities Helpline for Seniors covered notable “trends and themes,” including the proposed new rule. It is clearly top of mind.

FINRA Extends Postponement of Arbitration and Mediation Proceedings

On March 17, 2020, Bates reported that FINRA administratively postponed all in-person arbitration and mediation proceedings scheduled through May 1, 2020. On April 20, 2020, FINRA extended that postponement through July 3, 2020. FINRA reminded all parties that “case deadlines will continue to apply and must be timely met unless the parties jointly agree otherwise.” In addition, FINRA announced that it is waiving postponement fees if the parties stipulate to “adjourn in-person hearing dates” between July 6 and September 4, 2020. Written notices are required. Those interested in virtual hearing services were encouraged to contact FINRA case administrators.

FINRA Expands Procedural Options for Claims against Inactive Members

On April 9, 2020, FINRA amended its arbitration rules to “expand the options available to customers” when a firm or associated person becomes inactive during a pending arbitration, or before a claim is filed. Under the new procedures, which go into effect on June 29, 2020, if a member firm or an associated person becomes inactive during a pending arbitration, FINRA will notify the customer claimant of the status change. Within 60 days of receiving notice that a member firm’s or an associated person’s status has been changed to inactive, a customer may withdraw the claim, add a claim or new party or postpone a scheduled hearing. The customer still retains the option to request a default proceeding against an inactive member or associated person.

FINRA Endorses OCIE’s Reg BI and Form CRS Approach

On April 8, 2020, FINRA issued a statement backing up the approach the SEC Office of Compliance Inspections and Examinations (OCIE) will take following the compliance date of June 30, 2020. (See Bates coverage on the OCIE alert here.) FINRA said that, like the SEC, it too will focus on whether firms have made a good-faith and reasonable effort at compliance with Reg BI and Form CRS. As a reminder, FINRA is also seeking to modify its suitability rule to better conform to the new Reg. BI standards. The proposed amendments clarify that pre-existing FINRA rules would not apply to broker-dealer recommendations for retail customers under Reg BI. (See additional Bates coverage.)

Like the assurances given by the OCIE, FINRA emphasized that it would work “with firms and the SEC on issues that may arise in the course of examinations for compliance.”


During this transition period between what was and what will be the “new normal,” FINRA continues on course. The proposal to protect senior investors in cases involving appointed beneficiaries, executors and trustees should be carefully watched, as it is unlikely that so much concentrated attention is coincidental. Similarly, the proposal to impose and strengthen accountability for firm supervision of bad actors communicates that this subject remains a top compliance priority. FINRA’s messaging on Reg BI is part of a continuing effort to harmonize its position with the SEC. FINRA’s long-anticipated amendments to the arbitration rules are necessary to shut down loopholes in this increasingly important aspect of the FINRA agenda. Bates will continue to monitor further developments.

For FINRA arbitration and litigation matters, please note the following services:

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If you are a Bates client and your case is postponed, please be in touch to discuss interim case support needs. Contact Julie Johnstone, Managing Director, Retail Litigation at


For Reg BI and Form CRS support, please visit our Reg BI service page or contact Robert Lavigne, Managing Director, Bates Compliance, at or Rory O’Connor, Director at to discuss your current needs one-on-one. (Note: Bates has developed a Training and CLE page for on-demand Reg BI webinars and Reg BI training for your company. Join our Form CRS Countdown Webinar today, 4/30 at 12 pm ET/9 am PT.)


Finally, please visit our Bates COVID-19 Practice News & Information page for recent news and regulatory announcements.

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.