FINRA makes it easier for state regulators to oppose the offering

Out of concerns that it was too easy for mediators to strike consumer disputes off its records, FINRA is adjusting its procedures.

Client disputes and complaints are recorded from the broker’s disciplinary record in a central registry repository (all accessible through FINRA’s BrokerCheck database). FINRA has established a process through which brokers can delist those records, but the intent has always been to limit it to exceptional circumstances, according to Michael Edmiston, an attorney with Jonathan W. Evans & Associates and former president of the Public Investor’s Lawyers Association.

“What happened is that it was obviously anything but,” he said. “It was very normal.”

Edmiston hopes for the new measures set by FINRA last week It is due to go into effect on October 16th and will prevent what it sees as violations in the delisting process.

One of the changes to the new FINRA rules includes the requirement that a broker’s “live” request (which is when a broker files a claim against their company just to have a dispute removed from their record) is decided by a three-person randomly selected panel of arbitrators with “enhanced eliminator training”. Other mandates include time limits on when mediators can file such requests and prevent parties from agreeing to a smaller panel or striking arbitrators.

Exclusions are granted frequently, according to PIABA. In a 2021 report, PIABA analysts found that FINRA arbitrators granted strike requests 90% of the time, with “direct” cases rising from 59 in 2018 to 545 in 2018 (in these cases, the client who filed the original complaint is not one of the parties). .

PIABA found that clients appeared to oppose a delisting request in only about 15% of cases, but that opposition could influence the ruling. Arbitrators were more than five times more likely to deny the delisting when a mediator opposed it, and more than four times more likely if a client opposed the delisting during the proceedings, according to PIABA.

Edmiston focused specifically on changes requiring notification of state securities regulators of “all requests to delist customer dispute information,” and asking FINRA to help facilitate regulators’ attendance and participation in hearings.

In the current delisting process, the broker would appear before the arbitration panel for an evidence hearing, which would result in a judgment based on the evidence of whether or not the delisting was justified. Brokers will need a court order to confirm the delisting, but Edmiston said this step is often a “rubber stamp,” as judges rarely challenge an arbitrator’s decision.

Previously, state securities regulators were told to request a delisting only at this last step, but Edmiston stressed that it is very difficult to overturn an arbitrator’s decision by the time it reaches the court level. The new rules mean that state regulators will be notified about deletion requests earlier in the process, which means they have a greater chance of opposing a delisting attempt.

“We hope (state regulators) will use these new measures to engage and protect state records,” Edmiston said.

According to the changes, FINRA will have to notify the relevant government securities regulators within 15 days of the agency’s receipt of the delisting request, and must provide all documents relevant to the request, as well as documents of previous client arbitrations related to the claim.

“Including government securities regulators in direct applications provides states with an opportunity to meet their regulatory obligations, while at the same time increasing the likelihood that in a direct application the committee will hear evidence from multiple viewpoints, allowing the committee to inform decisions,” read FINRA’s summary of the amendments.

The North American Association of Securities Officers declined a request to comment on the change, but the organization last September I sent a message To the Securities and Exchange Commission regarding FINRA’s proposed rule changes for erasure.

While NASA said it “highly appreciated” the opportunity to participate in direct deletion procedures, its role would be constrained by “country-specific resources and procedural hurdles.”

“The degree to which these records are kept for all stakeholders should not lead to disparate capabilities for any party – the state regulator, authorized representative or client – to appear to be making an argument,” the letter said. “Doing so will continue to cause inconsistent results unrelated to the importance of this information.”

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