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FINRA Seeks Tougher Rules on Brokers Switching Firms With Unpaid Arb Claims

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The Financial Industry Regulatory Authority is seeking comment on proposed amendments to its Membership Application Program (MAP) rules that would make it harder for brokers with unpaid arbitration claims to switch firms.

The amendments to the MAP rules, announced in Regulatory Notice 18-06, address situations in which:

  • a FINRA member firm hires individuals with pending arbitration claims, where there are concerns about the payment of those claims should they go to award or result in a settlement, and the supervision of those individuals; and
  • a member firm with substantial arbitration claims seeks to avoid payment of the claims should they go to award or result in a settlement by shifting its assets, which are typically customer accounts, or its managers and owners, to another firm and closing down.

FINRA states that the proposed changes to the MAP rules are designed to allow the broker-dealer self-regulator “to take a stronger approach to addressing the issue of pending arbitration claims, as well as arbitration awards and settlement agreements related to arbitrations that have not been paid in full in accordance with their terms, in connection with the new membership application (NMA) or continuing membership application (CMA) processes.”

The proposed amendments would give FINRA’s Department of Member Regulation the authority to “presumptively deny an NMA if the applicant or its associated persons are subject to pending arbitration claims.”

As it stands now, Member Regulation “considers if an applicant’s or its associated person’s record reflects a pending arbitration in determining if the applicant meets the standards for admission, but a record of a pending arbitration does not create a presumption of denial,” FINRA explains.

Under the proposal, “the applicant could overcome the presumption of denial if the applicant demonstrates its ability to satisfy the pending arbitration claims.”

Comments on the changes to MAP rules are due by April 9.

FINRA released a discussion paper on Feb.  9, which found that a quarter of all FINRA customer arbitration cases that awarded damages went unpaid in 2016.

Andrew Stoltmann, president of the Public Investors Arbitration Bar Association, called the percentage “massive,” but applauded FINRA for “attempting to get on top” of the issue by releasing the discussion paper.

The paper — “FINRA Perspectives on Customer Recovery” — details perspectives on customer recovery of judgments and awards in the financial services industry, with a particular focus on the arbitration forum operated by FINRA.

By releasing the paper, the broker-dealer self-regulator said it “hopes to encourage a continued dialogue about addressing the challenges of customer recovery across the industry.”


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