FINRA Rules Update

Arbitration Panel Selection

The Securities and Exchange Commission (“SEC”) has approved a proposal by the Financial Industry Regulatory Authority (“FINRA”) to make an all-public panel of three arbitrators the default choice for all customer cases seeking damages of $100,000 or more. Previously, absent the affirmative selection by a customer of an all-public panel within 35 days after the Statement of Claim was served, the panel composition defaulted to a majority public panel consisting of two public and one non-public arbitrator. A non-public arbitrator has ties to the securities industry. Typically, they are current or retired employees of a brokerage firm, or attorneys who devote a substantial amount of their law practice to representing brokerage firms.

The revised rule eliminates the need for the customer to make a written selection in advance of the panel appointment. It now allows for any party to select an all-public panel simply by striking all of the arbitrators on the non-public list.

Recruitment Compensation

FINRA’s Board of Governors has approved the submission of a proposal requiring brokers to disclose recruitment compensation paid to them to the SEC for review and approval. If the SEC approves the proposal, brokers will need to disclose any recruitment compensation they received when moving to a new firm to any customers who follow them to the new firm.

Firms would be required to disclose all recruitment compensation – including signing bonuses, up-front or back-end bonuses, loans, accelerated payouts, and transition assistance – of $100,000 or more, and future payments contingent on performance criteria.
Firms would also have to report to FINRA significant increases in total compensation paid to a newly recruited representative during the first year. The trigger for reporting would be an expected increase of 25 percent or $100,000 over the prior year’s compensation, whichever is greater.

Firms also would be required to disclose whether costs would accrue if a customer decides to transfer assets to the new firm and that certain assets may not be transferable.