Expanding Compliance Obligations/Powers:  Proposed FINRA Rules

FINRA is seeking to expand protections for seniors and other vulnerable investors with two new rule proposals. Reg. Notice 15-37, available here.

The first proposal seeks to amend “FINRA Rule 4512 (Customer Account Information) to require firms to make reasonable efforts to obtain the name of and account information for a trusted contact person for a customer’s account” when an account is opened or updated.  Currently, firms are barred from speaking to anyone other than the account holder about matters related to the account.  The proposed amendment would allow a trusted contact person–who would not have authorization to make account transactions–to serve as a resource in the event exploitation is suspected.  The proposed rule incorporates certain disclosure requirements and would require firms to make “reasonable efforts” to satisfy the rule.

The second proposal advances a new rule “to permit qualified persons of firms to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation[.]”  The new rule–Rule 2165–would provide firms certain discretion in determining whether to place temporary holds on account disbursements of “specified adult[s].”  The proposed rule defines “specified adult” as “(A) a natural person age 65 and older; or (B) a natural person age 18 and older who the firm reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.”

No matter what FINRA elects to do there are potential legal risks and protections, and the final wording of the rule might impact the significance of those risks and protections.  FINRA is currently seeking comments on these proposals; the comment period expires on November 30.

Second Circuit Holds Rule 13204 Does Not Prohibit Class Action Waivers

According to the Second Circuit, FINRA Rule 13204 does not prohibit FINRA members from enforcing otherwise valid class action waivers.

In Cohen v. UBS Fin. Servs., Inc., 799 F.3d 174 (2d Cir. 2015), a financial advisor entered into a contract with his employer, UBS, and agreed, among other things, to arbitrate “claims concerning compensation, benefits or other terms or conditions of employment” and to “waive any right to commence, be a party to or an actual or putative class member of any class or collective action arising out of or relating to [his] employment with UBS.”

The advisor later brought a putative class and collective action against UBS alleging violations of the FLSA and California law.  When the district court granted UBS’s motion to compel FINRA arbitration, the advisor appealed.

The Second Circuit rejected the advisor’s argument that Rule 13204 is a “contrary congressional command” that superseded enforcement of his arbitration agreement.  The court concluded that while the Rule bars arbitration of class and collective action claims in the FINRA forum, and places certain restrictions on the enforceability of arbitration agreements, it “says nothing about class action and collective action waivers, and cannot be read to bar enforcement of them.”  The advisor’s contract (including his waiver of class and collective action rights) was therefore enforceable under the Federal Arbitration Act.

Please stay tuned for future Dorsey updates.