Signs of increased volatility, like changes to service of process on the part of the SEC and arbitration process on the part of FINRA, may be a harbinger of increased enforcement action on consumer issues.
As the folks over at Financial Planning have been noting, FINRA’s new regulations seem to be growing increasingly public. They called the move towards making the “restricted” label on FINRA’s broker check site public (it had been hidden from public view in the past) part of it’s scarlet letter system. FINRA gained permission from the SEC to place the restricted label on firms that have had negative rulings or discipline from FINRA or the SEC. Other financial regulatory trends towards brokerages and advisory firms include the beginning of enforcement of Regulation BI by the SEC in its audits. Publishing which brokerage firms now have a restricted label may be more than public shaming rulebreakers like a Mean Girl from your favorite high school movie. It may be a sign that increased enforcement to protect consumers is coming both from FINRA and from the SEC. A few other harbingers are hiding the two agencies’ public notices
Back in 2020, we noted that Biden’s appointment of certain individuals showed the administration’s agenda was towards workplace safety and worker protection as well as increased customer protection via enforcement actions. “Overall, …White House’s plans center on enforcement of workplace safety and prosecution of current labor standards and less on creating new regulations in the Labor and Employment area. In contrast, the nomination of Gensler may indicate a willingness to create new, targeted regulations in the securities area.”
A quick look at FINRA’s webinars and public events shows a trend towards more consumer protection. For example, in March of 2023, they’ll be hosting a senior investor protection conference. “This conference includes discussions of the rules on financial exploitation of specified adults, a regulatory roundtable, information about trends, scams and schemes, and more.”
Importantly, FINRA has proposed changes to their customer dispute resolution process. They have proposed changes to the way they select arbitrators, ensuring better review for conflicts of interest, written decisions for removal of an arbitrator, and clarification to ensure the parties know they can remove the arbitrator up to the first hearing. These changes seem to strengthen protections for consumers in arbitration. Other rule changes signify an increased emphasis on accuracy and disclosure in consumer communications.
These changes track those announced in the Fall of 2022 by the SEC, wherein it noted that it was considering changing the service of how it notified parties about instituting proceeding to better match federal court proceedings; simplifying privacy act notices and proceedings; and clarifying various definitions and processes. These changes may be a harbinger of future enforcement acts. By ensuring better or clearer service of the institution of an action, the SEC may be able to move more quickly to start actions against brokers and advisors. In simple terms, service of process of an action in federal court establishes that the court has the power to address the dispute. Without it, the proceeding can’t move forward. A change to ensure the SEC has process over those it institutes a proceeding against would be an indicator of increased future proceedings.
FINRA has also announced, mid-February 2023, that it is significantly dropping the fee rate on certain transactions from “$22.90 per million dollars in transactions to a new rate of $8.00 per million dollars in transactions.”
This is particularly interesting, for three reasons. First, the fee rate set by the SEC usually tracks volume. Second, this is the second fee adjustment of 2023, and comes in the middle of the first quarter of 2023. And third, it is 91.3% less than the fee rate for 2022, set in August of 202 which was $92.70. Signs of increased volatility, like changes to service of process on the part of the SEC and arbitration process on the part of FINRA, may be a harbinger of increased enforcement action on consumer issues.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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