The Compliance and Regulatory Consulting practice summarizes announcements and priorities relating to the Financial Industry Regulatory Authority (FINRA) from the second quarter of 2020.
FINRA Amends Arbitration Code to Expand Options Available to Customers if a Firm or Associated Person Is or Becomes Inactive
On April 9, 2020 FINRA amended its Code of Arbitration Procedure for Customer Disputes (Customer Code) to expand a customer’s options to withdraw an arbitration claim if a member firm or an associated person becomes inactive. These amendments also allow customers to amend pleadings, postpone hearings, request default proceedings and receive a refund of filing fees in these situations.
Thus, under the amendments, if a member firm or an associated person is inactive at the time a claim is filed, the claim is ineligible for arbitration unless the customer claimant agrees in writing to arbitrate after the claim arises. 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 of a member firm’s or an associated person’s status change to inactive, a customer claimant may withdraw the claim(s) or amend the pleading to add a claim or new party without prior approval by a panel, or postpone a scheduled hearing that is within 60 days of the date the customer claimant receives the notice from FINRA. The amendments retain the customer’s option to request a default proceeding against an inactive member or associated person.
Similar to the current rules and procedures relating to claims filed against inactive member firms, the amendments will allow the customer to evaluate the likelihood of collecting on an award, adjust their litigation strategy and make an informed decision whether to proceed in arbitration, to file the claim in court or to take no action, regardless of whether the customer signed a pre-dispute arbitration agreement.
The amendments are effective for cases filed on or after June 29, 2020.
Read more here.
FINRA Issues Guidance on Protecting Senior Investors
On April 30, 2020 FINRA published a report to provide an update on initiatives to help senior investors on the five-year anniversary of the FINRA Securities Helpline for Seniors (the Helpline). The report includes data regarding enforcement action as a result of the newly implemented Helpline. Protecting senior investors continues to be a top priority for FINRA and has been an examination priority in countless FINRA annual priority letters since 2014.
The report describes the impact of the Helpline and includes cases illustrating its broad effect. In addition, the report provides insight into FINRA’s ongoing work to protect senior investors beyond the Helpline, including targeted rulemaking in this area, and shares effective practices observed during firm examinations.
As of December 31, 2019, the Helpline has received over 18,000 calls and has made over 1,400 referrals to state Adult Protective Services (APS). As a result of these efforts, broker-dealers have returned more than $7 million to investors. Enforcement sanctions arising from Helpline matters include 44 suspensions, 31 monetary penalties and 35 registered representatives barred from the industry.
Read more here.
FINRA Regulatory Notice 20–13: FINRA Reminds Firms to Beware of Fraud During COVID-19
On May 5, 2020, FINRA issued a regulatory notice urging firms and associated persons to be cognizant of the heightened threats of frauds and scams which firms and their customers may be exposed to during COVID-19. The notice outlines four common scams: 1) fraudulent account openings and money transfers; (2) firm imposter scams; (3) IT help desk scams; and (4) business email compromise schemes. It also describes measures that firms and associated persons can take to mitigate related risks.
This information pre-dates COVID-19, but it may be especially useful to firms since FINRA has observed that these threats persist in the current environment.
Read more here.
FINRA Regulatory Notice 20–14: Sales Practice Obligations with Respect to Oil-Linked Exchange-Traded Products (ETPs)
FINRA released a regulatory notice on May 15, 2020, reminding firms of their obligations in connection with oil-linked exchange-traded products. The performance of such products may be linked to unfamiliar indices or reference benchmarks, making them difficult for the average investor to comprehend. As the crude oil market has recently endured extraordinary conditions, several oil-linked ETPs have experienced significant volatility and lost a substantial percentage of their value.
The notice reminds firms of their sales practice obligations in connection with oil-linked ETPs. These include: recommendations to customers must be based on a full understanding of the terms, features and risks of the product; communications with the public must be fair and accurate; firms must have reasonably designed supervisory procedures in place to ensure that these obligations are met; and firms that offer oil-linked ETPs must train registered representatives who sell these products about the terms, features and risks of these products.
Read more here.
Frequently Asked Questions About Advertising Regulation
On May 20, 2020, FINRA published new FAQs addressing whether firms are required to refile with FINRA retail communications that eliminate references to “adviser” or “advisor” in compliance with Reg BI.
The SEC presumes that the use of the terms “adviser” or “advisor” in the name or title by a broker-dealer not registered as an investment adviser, or an associated person not a supervised person of an investment adviser, to be violations of the capacity disclosure requirement under Reg BI. If a firm previously filed a retail communication with FINRA, but now needs to revise the communication to eliminate references to adviser or advisor in the firm’s name or an associated person’s title due to Reg BI’s presumption, the firm is not required to re-file the communication with FINRA. Under these facts, FINRA would not consider such revisions to be a material change.
Read FINRA’s FAQs here.
FINRA Regulatory Notice 20-18: FINRA Amends Its Suitability, Non-Cash Compensation and Capital Acquisition Broker (CAB) Rules in Response to Regulation Best Interest
On June 19, 2020, FINRA issued Regulatory Notice 20-18, which addresses changes to its rules emphasizing the importance of Reg BI in connection with retail customers.
FINRA rule 2111 (suitability) requires that a broker-dealer or associated person have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer. “FINRA has amended Rule 2111 to state that it will not apply to recommendations subject to Reg BI. FINRA has also removed the element of control from the quantitative suitability obligation, a change that is consistent with Reg BI. Finally, FINRA has confirmed the CAB suitability rule, CAB Rule 211, to the amendments to Rule 2111.” 1
Read more here.