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FINRA Dispute Resolution Issues Status Report on Arbitration Task Force Recommendations

Action Taken on 35 of 51 Recommendations to Date

The Financial Industry Regulatory Authority (FINRA) today released a status report on the recommendations made in the FINRA Dispute Resolution Task Force’s Final Report issued in December 2015. In July 2014, FINRA had formed a 13-member task force composed of individuals representing a broad range of interests in securities dispute resolution to consider possible enhancements to its arbitration and mediation forum. FINRA released an interim status report in October 2016 and today’s report sets forth further progress made to date. FINRA has discussed all of the task force recommendations with the National Arbitration and Mediation Committee (NAMC). FINRA has taken action on 35 of the 51 recommendations; 16 are pending.

Robert Cook, FINRA’s President and CEO, said, “We are very pleased to report that we have already implemented many of the task force’s recommendations, and we are diligently responding to the remaining recommendations. Many of the recommendations we are putting in place are meaningful changes that will position the forum to better serve all parties involved. The NAMC and FINRA staff are doing an effective job of comprehensively reviewing and promptly taking action on the recommendations.”

Many of the recommendations, particularly those involving forum transparency, arbitrator recruitment and training, and case administration processes did not require rulemaking and were implemented in 2016. Among those, the report notes that FINRA received 945 arbitrator applications in 2016, far exceeding its goal to recruit 750 new arbitrators. FINRA’s latest arbitrator demographic survey, which was conducted by an external consulting firm, showed particular progress in adding women and African-Americans to the roster. In 2016, 33 percent of the arbitrators added were women (compared to 26 percent in 2015) and 14 percent were African-American (compared to 4 percent in 2015).

FINRA commenced the rulemaking process on six of the recommendations. Of those, the SEC has already approved two proposals related to the number of public arbitrators on lists and motions to dismiss; there are four proposals in various stages in the rulemaking process, including a proposal addressing the task force recommendation to develop an intermediate form of adjudication for small claims.

The task force’s recommendations were reviewed by the NAMC, FINRA’s standing Board advisory committee, which recommended items to implement immediately, items that would require further discussion and items that may not be feasible.

FINRA, the Financial Industry Regulatory Authority, regulates securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.

SEC Approves Amendments to the Customer Code of Arbitration Procedure Regarding Panel Selection in Cases with Three Arbitrators

The Securities and Exchange Commission (SEC) approved amendments to FINRA Rule 12403 (Cases with Three Arbitrators) of the Code of Arbitration Procedure for Customer Disputes (Customer Code) to increase the number of arbitrators on the public arbitrator list that FINRA sends to parties during the arbitration panel selection process from 10 to 15. The amendments also increase the number of strikes to the public arbitrator list from four to six, so that the proportion of strikes is the same under the amended rule as it is under the current rule.

The amendments will become effective for all arbitrator lists FINRA sends to parties on or after January 3, 2017, for panel selection in customer cases with three arbitrators.

Full version of the notice:

http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-16-44.pdf

 

Updates to the FINRA Arbitration Process

The FINRA Board of Governors met this week to discuss a number of issues, including several rulemaking items. A summary of the rule proposals that relate to FINRA arbitration, as approved by the FINRA Board, are below.

Broadening Chairperson Eligibility in Arbitration

The Board authorized filing with the SEC proposed amendments to Rules 12400 and 13400 (Neutral List Selection System and Arbitrator Rosters) to revise the arbitration forum chairperson eligibility requirements. Specifically, an attorney arbitrator would be eligible for the chairperson roster if he or she completes chairperson training and serves as an arbitrator through award on at least one arbitration, instead of two arbitrations, administered by a self-regulatory organization in which hearings were held.

Motions to Dismiss in Arbitration

The Board authorized filing with the SEC proposed amendments to Rules 12504 and 13504 (Motions to Dismiss) to provide that arbitrators in its forum may act upon a motion to dismiss prior to the conclusion of a party’s case in chief if the arbitrators determine that the non-moving party previously brought the same dispute against the same party, and the dispute was fully and finally adjudicated on the merits.

Panel Selection in Customer Cases with Three Arbitrators

The Board authorized filing with the SEC proposed amendments to Rule 12403 (Cases with Three Arbitrators) to increase the number of public arbitrators on the list that FINRA sends parties during the panel selection process in customer cases. Specifically, FINRA would increase the number of public arbitrators on the list from 10 to 15. FINRA would also increase the number of strikes to the public list from four to six, to keep the proportion of strikes the same under the amended rule as it is under the current rule.

– See more at: http://www.finra.org/industry/update-finra-board-governors-meeting-17#sthash.0jLFQXOe.dpuf

FINRA Launches National Ad Campaign Promoting BrokerCheck

Spots Underscore the Ease and Importance of Checking Before You Invest

The Financial Industry Regulatory Authority (FINRA) today launched a national ad campaign promoting BrokerCheck (brokercheck.finra.org), FINRA’s free online tool that allows investors to access information about every broker’s employment history, certifications and licenses, as well as regulatory actions, violations or complaints made against them.

The ads, created by Ogilvy & Mather, feature humorous examples of people taking action without conducting any background research, including:

  • a bride surprised by her organist’s song choice;
  • a man too late in reading the listed side effects of the medication he has taken; and
  • a truck driver blissfully ignorant of a road’s clearance restrictions.

Viewers are urged not to make the same type of leap-before-you-look mistakes when choosing a broker—they should use BrokerCheck.

The 15-second spots will run for five weeks on cable channels, including CNBC, Bloomberg, CNN, MSNBC, Fox Business, Fox News, ESPN, Discovery, The History Channel and HGTV. A print ad will run in The Wall Street Journal tomorrow. The campaign will run digitally on relevant sites that includeBloomberg, CNBC, Fortune, Reuters, TubeMogul, the Undertone Network and Wall Street Journal, and search engines Google, Bing/Yahoo andYouTube.

Chairman and Chief Executive Officer of FINRA, Richard G. Ketchum, said, “BrokerCheck is a key component to FINRA’s ongoing efforts to help investors make informed choices about brokers and brokerage firms. People immediately go online to check out a new restaurant where they might spend $25 for a meal, but don’t think to use BrokerCheck when they’re handing over $2,500—or $25,000 of their life’s savings or even more—to an investment professional to invest. That has to change, and we hope this campaign will help.”

FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.

FINRA Sanctions LPL Financial LLC $11.7 Million for Widespread Supervisory Failures

LPL Ordered to Pay Approximately $1.7 Million in Restitution to Customers

The Financial Industry Regulatory Authority (FINRA) announced today that it has censured LPL Financial LLC and fined it $10 million for broad supervisory failures in a number of key areas, including the sales of non-traditional exchange-traded funds (ETFs), certain variable annuity contracts, non-traded real estate investment trusts (REITs) and other complex products, as well as its failure to monitor and report trades and deliver to customers more than 14 million trade confirmations. In addition to the fine, FINRA ordered LPL to pay approximately $1.7 million in restitution to certain customers who purchased non-traditional ETFs. The firm may pay additional compensation to ETF purchasers pending a review of its ETF systems and procedures.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “LPL’s supervisory breakdowns resulted from a sustained failure to devote sufficient resources to compliance programs integral to numerous aspects of its business. With today’s action, FINRA reaffirms that there is little room in the industry for lax supervision and that it will not hesitate to order firms to review and correct substandard supervisory systems and controls, and pay restitution to affected customers.”

FINRA found that, at various times spanning multiple years, LPL failed to supervise sales of certain complex structured products, including ETFs, variable annuities and non-traded REITs. With regard to non-traditional ETFs, the firm did not have a system to monitor the length of time that customers held these securities in their accounts, did not enforce its limits on the concentration of those products in customer accounts, and failed to ensure that all of its registered representatives were adequately trained on the risks of the products. Also, LPL failed to supervise its sales of variable annuities, in some instances permitting sales without disclosing surrender fees, and in connection with certain mutual fund “switch” transactions, it used an automated surveillance system that excluded these trades from supervisory review. Additionally, LPL failed to supervise non-traded REITs by, among other things, failing to identify accounts eligible for volume sales charge discounts.

FINRA also found that LPL’s systems to review trading activity in customer accounts were plagued by multiple deficiencies. For example, LPL used a surveillance system that failed to generate alerts for certain high-risk activity, including low-priced equity transactions, actively traded securities and potential employee front-running. The firm used a separate, but flawed, automated system to review its trade blotter that failed to provide trading activity past due for supervisory review. LPL failed to deliver over 14 million confirmations for trades in 67,000 customer accounts. In addition, due to coding defects that remained undetected for nearly six weeks, LPL’s anti-money laundering surveillance system failed to generate alerts for excessive ATM withdrawals and ATM withdrawals in foreign jurisdictions. FINRA also found that LPL failed to report certain trades to FINRA and the MSRB, and failed to ensure it provided complete and accurate information to FINRA and to federal and state regulators concerning certain variable annuity transactions.

FINRA further found that LPL failed to reasonably supervise its advertising and other communications, including its registered representatives’ use of consolidated reports. LPL did not monitor the creation or use of consolidated reports, and failed to ensure that these reports reflected complete and accurate information.

In settling this matter, LPL neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Aidikoff, Uhl & Bakhtiari files Securities and Exchange Commission comments on FINRA Rule 2081 regarding expungement

Aidikoff, Uhl & Bakhtiari partners, Philip M. Aidikoff and Ryan K. Bakhtiari, have filed comments with the Securities and Exchange Commission concerning proposed FINRA Rule 2081 (Prohibited Conditions Relating to Expungement of Customer Dispute Information).  Proposed Rule 2081 seeks to add additional safeguards to the expungement process by prohibiting the conditioning of the settlement of a dispute with a customer or compensating a public customer for the agreement to consent to, or not to oppose, a request to expunge information from the CRD system.

For information about the firm’s comments, visit http://www.securitiesarbitration.com/comments-filed.php

Aidikoff, Uhl & Bakhtiari is an “AV” rated law firm with a worldwide practice representing individuals and institutions in disputes with Wall Street and the financial services industry. Attorneys for the firm regularly appear before the Financial Industry Regulatory Authority (FINRA) as well as in numerous state and federal courts to resolve financial disputes between customers, employees, banks, brokerage firms, insurance companies and other members of the financial services industry.

Aidikoff, Uhl & Bakhtiari partner Ryan Bakhtiari to Speak at 2014 FINRA Annual Conference

Aidikoff, Uhl & Bakhtiari partner Ryan Bakhtiari has been invited to participate as a speaker at the 2014 FINRA Annual Conference program on Monday, May 19, 2014 titled “Arbitration, Expungement and Arbitrator Disclosure.” 

The FINRA Annual Conference is held between May 19, 2014 and May 21, 2014 at the Renaissance Washington, DC Hotel.  The conference brings together legal and compliance professionals, with securities industry regulators to discuss regulatory priorities and practical compliance solutions.
 
This year’s conference features more than 30 sessions, many of which are geared toward attorneys, including: 

  • Arbitration, Expungement and Arbitrator Disclosure
  • Enforcement Developments
  • Ethics and Professional Responsibility for Securities Attorneys

For more information and to register for the conference, visit www.finra.org/annualconference.

Aidikoff, Uhl & Bakhtiari is an “AV” rated law firm with a worldwide practice representing individuals and institutions in disputes with Wall Street and the financial services industry. Attorneys for the firm regularly appear before the Financial Industry Regulatory Authority (FINRA) as well as in numerous state and federal courts to resolve financial disputes between customers, employees, banks, brokerage firms, insurance companies and other members of the financial services industry.  More information is available at www.securitiesarbitration.com.

Finra board approves requirement of background checks for brokers

The Financial Industry Regulatory Authority (FINRA) announced today that its Board of Governors approved amendments to FINRA’s supervision rule that would expand the obligations of firms to check the background of applicants for registration, including first-time applications as well as transfers, to verify the accuracy and completeness of the information contained in an applicant’s Form U4. Firms would also be required to adopt written procedures in this area that include searching public records.

The Form U4 is the Uniform Application for Securities Industry Registration or Transfer used by FINRA, other self-regulatory organizations (SROs) and states to elicit employment background, disciplinary and other information to register individuals with appropriate SRO(s) and/or jurisdiction(s).

Separately, FINRA also plans to perform an initial search of public financial records for all registered representatives. Additionally, FINRA will conduct a search of publicly available criminal records for all registered individuals who have not been fingerprinted within the last five years. Once these searches are completed, FINRA will conduct periodic reviews of public records to ascertain the accuracy and completeness of the information available to investors, regulators and firms. These efforts also better position FINRA to assess firm and registered individual compliance with reporting requirements.

FINRA is also considering whether additional data from the CRD system used by regulators should be included in BrokerCheck. FINRA’s Chief Economist has initiated a study to see if there is a meaningful relationship between that data – which includes failed examinations – and broker misconduct.

Richard Ketchum, FINRA Chairman and Chief Executive Officer, said, “These are important initiatives to improve the accuracy and totality of details reported on a registered individual’s Form U4. FINRA would require firms to use publicly available records to verify that information such as criminal and bankruptcy records, civil litigations, judgments and liens are properly reported upon a registered individual’s application. FINRA encourages every investor to use BrokerCheck to research the background of individuals they are trusting to invest their money.”

The amendments to the supervision rule will be submitted to the Securities and Exchange Commission for review and approval.

Finra abandons effort to become RIA regulator

Finra chairman and CEO Richard G. Ketchum said the regulator is no longer interested in expanding its oversight to financial advisers.  Mr. Ketchum told the Wall Street Journal on Thursday, “We are not pursuing it at the present time.”

“We don’t perceive any likelihood that it would be successful,” Mr. Ketchum told the WSJ, referring to the regulator’s efforts, which began in 2012 when it made a strong push for congressional approval of a bill that would shift financial adviser oversight.

Advisers resisted the legislation, fearing that Finra, an industry-funded regulator, would fill the role and the measure died. Finra backed down when the new Congress convened last year and the champion of the SRO bill, Rep. Spencer Bachus, R-Ala., relinquished his seat as chairman of the House Financial Services Committee.

Mr. Ketchum reiterated the regulator’s belief that adviser oversight should be increased, telling the newspaper that Congress should provide the SEC with the resources necessary to increase adviser examinations. The SEC examines about 8% of the nearly 11,000 registered investment advisers each year.

FINRA fines LPL Financial $950,000 for alternative investment supervisory failures

The Financial Industry Regulatory Authority (FINRA) announced that it has fined LPL Financial LLC $950,000 for supervisory deficiencies related to the sales of alternative investment products, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDCs), hedge funds, managed futures and other illiquid pass-through investments. As part of the sanction, LPL must also conduct a comprehensive review of its policies, systems, procedures and training, and remedy the failures.

Many alternative investments, such as REITs, set forth concentration limits for investors in their offering documents. In addition, certain states have imposed concentration limits for investors in alternative investments. LPL also established its own concentration guidelines for alternative investments. However, FINRA found that from January 1, 2008, to July 1, 2012, LPL failed to adequately supervise the sales of alternative investments that violated these concentration limits. At first, LPL used a manual process to review whether an investment complied with suitability requirements, relying on information that was at times outdated and inaccurate. The firm later implemented an automated system for review, but that database contained flawed programming and was not updated in a timely manner to accurately reflect suitability standards. LPL also did not adequately train its supervisory staff to analyze state suitability standards as part of their suitability reviews of alternative investments.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “In order to sell alternative investments, a broker-dealer must tailor its supervisory system to these products. LPL exposed customers to unacceptable risks by not having an adequate system in place that could accurately review whether a transaction complies with suitability requirements imposed by the states, the product issuers and the firm itself – and it failed to train its registered representatives to apply all the suitability guidelines appropriately.”

In settling this matter, LPL Financial LLC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

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