The Financial Industry Regulatory Authority has filed to allow broker-dealers to seek a stay of a sanction or disciplinary action — such as being suspended or barred from the industry — to allow time for the action to be reconsidered.
The plan, which has to be approved by the Securities and Exchange Commission, is "a change from the typical practice of having disciplinary actions and sanctions take immediate effectiveness without the opportunity" for firms and their reps to take action, Ben Marzouk, partner at Eversheds Sutherland in Washington, told ThinkAdvisor on Wednesday in an email.
FINRA is proposing to amend its rules to provide "FINRA staff and adjudicators authority to grant respondents and applicants, where appropriate, the opportunity to seek a stay from the SEC or take other appropriate action before the sanction or other regulatory measure takes effect, and in certain instances, would expressly prescribe such amount of time by rule."
As it stands, certain sanctions take effect immediately after FINRA acts but before an SEC appeal. Under the proposed rule, respondents can seek a stay of certain sanctions before the SEC acts on the appeal.
FINRA has filed the proposed rule change to take effect immediately.
Alpine Ruling
"It is good to see FINRA revisiting the finality of certain of its sanctions in light of the Alpine decision to make that process more flexible and fair," Brian Rubin, partner at Eversheds Sutherland, told ThinkAdvisor on Wednesday in an email. "Under the current rules, certain sanctions take effect before a party has the opportunity to appeal."
The Supreme Court in early June let FINRA proceed with disciplinary proceedings against Alpine Securities Corp., which was accused of stealing from customers.
The justices without comment turned away an appeal from Alpine, which argued that a lower court didn’t go far enough when it blocked FINRA from expelling the brokerage until the SEC weighed in.
"Although FINRA notes that the Alpine litigation is currently ongoing and FINRA isn’t waiving any arguments, the proposed rule is consistent with the DC Circuit’s holding that immediate FINRA sanctions without SEC review are sometimes problematic," Rubin added. In addition, FINRA proposed to institute a mandatory delay for expedited proceedings to allow the SEC to review the actions.
The "success of FINRA’s proposed rule change may hinge on how it exercises discretion in time-sensitive cases," Tiffany Magri, senior regulatory advisor at Smarsh, said in an email. "The flexibility to delay enforcement actions — particularly expulsions or suspensions — is a benefit only if applied with consistency and sound judgment."
If used effectively, "this discretion allows FINRA to tailor enforcement to the specific risk profile of a case," Magri said. "That strengthens procedural fairness without weakening investor protection. It also reinforces the perception of a mature regulator that can distinguish between administrative violations and truly urgent threats."
A key question: "Will FINRA develop a clear framework or decision matrix to guide when immediate effectiveness is warranted?" Magri said. "Could factors like potential investor harm, market disruption, or repeated non-compliance be used to ensure discretion is applied consistently and with accountability?"
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