What's Happening In the Securities Industry
Welcome to 2022
FINRA Recap 2021
As we turn our attention to 2022, a look at FINRA's 2021 statistics is in order. Most notably, only 2,893 new cases were filed in 2021. 1,895 (66%) of those cases were customer cases and 998 (34% were industry cases). This is the lowest number of annual case filings in FINRA's posted historical statistics, which start in 2004. The next lowest number of annual case filings was 2004, when 3,238 new cases were filed.
Looking at hearings, of the 231 customer cases that were decided, panels awarded damages 37% of the time (this percentage includes cases that were dismissed prior to hearing). Of the 136 cases that were decided on the merits with at least one Zoom session, 60 (44%) resulted in awards to Claimants. For the 46 in-person hearings that were decided on the merits, 22 (48%) resulted in awards to Claimants. Special proceeding matters (16 of them) had only 13% success for Claimants and the 81 matters decided on the papers had a 19% success rate for Claimants.
Welcome to the January 2022 issue of my newsletter, where you can read about important developments in the securities industry, learn about laws and decisions that affect your practice, and access free resources. Please feel free to share this newsletter with others who may benefit from the content.
In this issue:
- California's Judicial Battle over AB 51 and Mandatory Arbitration Clauses as Conditions of Employment
- Unpaid Arbitration Awards -- Update on NASAA's Proposed Model Rule
- NASAA's Top Investor Threats for 2022
- Firms with a History of Disciplinary Problems -- FINRA Rule 4111 Effective January 1, 2022
- Puerto Rico Emerges from Bankruptcy and Restructures $30 billion in debt
- FINRA Dispute Resolution Statistics for 2021
- This Month's Free Resources
California's Mandatory Arbitration Agreement Battle Continues
En Banc Review Sought After 9th Circuit Creates a Huge Mess over Mandatory Arbitration Clauses
Can employers require a potential employee, as a condition of employment, to sign a mandatory arbitration clause? Can the State of California, through legislation, ban mandatory arbitration clauses in employment? Well, it depends. In 2019, California's legislature passed AB 51, which effectively prohibits employers from making mandatory arbitration clauses as a condition of employment. The US Chamber of Commerce challenged the law and largely prevailed in the district court. The district court issued an injunction, preventing the law from taking effect. But the 9th Circuit, in a split decision, overturned the district court in part and concluded that the FAA doesn't preempt AB51's prohibition against requiring arbitration clauses as a condition of employment, but it does preempt the law's attempt to prohibit the enforcement of executed mandatory arbitration clauses by imposing civil and criminal penalties on employers for entering into mandatory arbitration agreements that are authorized under the FAA. In yet another twist, penalties can still be imposed on employers who refuse to hire, fire, or otherwise retaliate against employees or applicants who refuse to sign mandatory arbitration agreements. Sound confusing? It is . . . and the Chamber of Commerce has sought en banc review of the 9th Circuit Panel's decision. As it stands now, the 9th Circuit panel had created a circuit split on this issue, pitting itself against the 1st and 4th Circuits. And the district court's injunction against AB 51 remains in place.
Unpaid Arbitration Awards - Update on NASAA Model Rule
Notice and Comment Ended on November 4 and Is Currently Under Review
In 2021, NASAA proposed a model rule that, if adopted in the jurisdictions, would allow NASAA member jurisdictions to prevent firms or individuals (including broker-dealers, RIAs, IAs and IARs) from registering in those jurisdictions. Currently, FINRA suspends member firms or associated persons from being active if they have unpaid arbitration awards. The model rule would deem failure to pay awards an unethical business practice and would cover situations where a firm or individual fails to pay an award, actively avoids paying, or fails to pay regulatory fines, penalties or orders. Notice and Comment ended November 4, with the industry and PIABA agreeing that unpaid awards are a problem but disagreeing on how to fix that problem. PIABA continues to support the establishment of an investor recovery fund and mandatory E&O insurance. The industry opposes mandatory E&O insurance, and also opposes the recovery fund, which it believes will be unfairly funded by firms that pay their awards. Some industry members advocate for the use of excess state registration fees to support any sort of fund. We will stay on top of this issue and let you know when there are further developments.
NASAA's Top 4 Investor Threats for 2022 is Led by Crypto/Digital Assets Investments
NASAA's Survey of North American Securities Regulators Also Cites Promissory Note Fraud, Social Media/Internet Investment Offers and Scams Related to Self-Directed IRAs
NASAA's annual list of the top threats to investors revealed that, by far, state regulators cite cryptocurrencies and other digital assets pose the top threat to investors in 2022. Promissory notes with the promise of high interest rates, especially those offered to senior investors or sold by unlicensed firms or individuals, are another area of concern. Social media and internet scams are of great concern to NASAA. These frauds often use social media to convince someone in a social group to invest and then recruit friends to also invest in a sham investment. While self-directed IRAs are themselves legitimate, NASAA reports that scammers are approaching investors, asking them to transfer funds from their self-directed IRAs to the scammers, who abscond with those funds. NASAA also provides a link where investors can learn more about each of these investor threats.
New FINRA Rule 4111 --Firms with a History of Disciplinary Problems -- Effective January 1, 2022
Rule Provides Framework for Identifying "Restricted Firms" and Additional Obligations for Those Firms
FINRA Rule 4111 (Restricted Firm Obligations) and attendant Rules 9561 and 9559, took effect on January 1, 2022. Under this rule, FINRA will annually determine whether a firm should be identified as a "restricted firm," a firm with a significant history of disciplinary problems. The process for making the determination includes an examination of the firm's registered persons (adjudicated events, pending events and termination and internal review events), as well as the firm itself (adjudicated events, pending events) and whether its registered persons have previously been associated with an expelled firm. Once a firm is identified as a restricted firm, there is an appeal process. The firm will also have a one-time opportunity to reduce its staffing levels to bring it out of restricted firm status. If the firm remains identified as a restricted firm, it will be required to deposit cash or qualified securities into a segregated, restricted account, adhere to specified conditions/restrictions, or comply with some combination of the two. The calculations and metrics are set out in Attachments A and B to Regulatory Notice 21-34, attached below.
Puerto Rico Bond Restructuring Approved as the Island Emerges from Bankruptcy
New Debt, Cash and Contingent Value Instruments to Creditors
Judge Swain approved a write-down on $30.5 billion in public debt on January 18, part of the overall plan to permit Puerto Rico to emerge from its 2017 bankruptcy. The plan drops PR's debt servicing costs to $666 million for the next 10 years, compared to $2.1 billion pre-bankruptcy. Creditors are set to receive $7.4 billion in new debt, $7 billion in cash, and tradable "contingent value instruments, which will pay if PR's economy improves. Retired pensioners' benefits will not be reduced, but active workers will move to a 401(k) type of retirement benefit and will not continue to accrue pension benefits. The restructuring plan was supported by major investors in the PR bond market, including BlackRock Financial Management and Silver Point Capital.
FINRA Dispute Resolution Statistics for 2021
Lowest Annual Filings in Probably 20+ Years
This newsletter began with a discussion of FINRA's 2021 statistics, but the number of new filings was staggeringly low. FINRA's posted filing statistics go back to 2004, but given the volume of tech wreck cases many of us saw from late-2000 through 2003, this has to be the lowest number of annual filings since sometime in the 1990s. Also noteworthy are the year-end statistics with respect to cases where Claimants have received awards. While special proceedings and papers cases have very low percentages of cases favoring Claimants, in-person hearings, as well as Zoom hearings, favored Claimants 48% and 44% of the time, respectively. This is a significant change from earlier numbers, where Respondents were overwhelmingly prevailing, especially at Zoom hearings.
This Month's Free Resources
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