On May 2, 2018, The Financial Industry Regulatory Authority (FINRA) announced revisions to its Sanction Guidelines to reflect changes to General Principle No. 2. FINRA now advises that when the current violation and a respondent’s disciplinary history, including a history of arbitration awards and arbitration settlements, form a pattern, adjudicators should consider imposing more stringent sanctions.
According to FINRA, “These Sanction Guidelines revisions allow adjudicators to consider more completely a respondent’s interactions with customers and regulators. Adjudicators will no longer be limited from considering what, in some cases, could be an extensive series of arbitration awards and arbitration settlements that share similarities with the violations found in a disciplinary case.” The changes will impact disciplinary complaints filed on or after June 1, 2018. See FINRA Regulatory Notice 18-17 and FINRA FAQ.
Revisions to General Principle No. 2
The newly added section in General Principal No. 2 of the Sanction Guidelines directs adjudicators to specifically consider whether the misconduct in the current disciplinary case, together with regulatory actions and arbitration history, establishes that the respondent has a pattern of causing harm. The revisions replace the term “disciplinary history” with “Disciplinary and Arbitration History,” which is defined as:
[D]isciplinary history by regulators, and arbitration awards and arbitration settlements resulting from disputes between a customer and the respondent, including those when the respondent is the subject of an arbitration claim that only names a FINRA member firm.
The term “Disciplinary and Arbitration History” includes arbitrations that a customer filed involving investment-related disputes that have been resolved through an adverse award or settlement. The definition excludes customer-initiated arbitration claims that have been filed but not resolved. It also excludes customer complaints when no arbitration claim has been filed and settlements reached with a customer when no arbitration claim was filed. Dismissals and withdrawals of customers’ arbitration claims also will not be relevant to determinations of disciplinary sanctions.
When FINRA’s Department of Enforcement asserts that a respondent has arbitration awards or arbitration settlements that are relevant to determining sanctions, adjudicators will rely on the information about those awards or settlements that are included in the Central Registration Depository. The parties may not collaterally attack or seek to undermine the validity of an arbitration award or arbitration settlement.
When evaluating factors that establish or negate a pattern of causing harm, FINRA advises that adjudicators should draw on their experience and exercise their judgment. “Adjudicators should consider the nature, severity, and frequency of all disciplinary history, adverse arbitration awards and arbitration settlements, or a combination of these events, as well as the length of time between events, the isolated nature of an event, or other extenuating circumstances.” See FAQ Answers 19 through 22. When such a pattern is established, an adjudicator should consider imposing more severe sanctions than what would have been imposed if no pattern existed.
If you have any questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Paul Lieberman, at 201-806-3364.