Arbitration losses could add to penalties for brokers violating Finra rules

Brokers facing Finra disciplinary action could have their penalties increased if they’ve also lost arbitration cases to customers related to their violations.

In a regulatory notice released on Wednesday, the Financial Industry Regulatory Authority Inc. added arbitration outcomes to the sanction guidelines that Finra hearing officers use to determine punishments for registered representatives, such as fines, suspensions or industry bars.

Finra told hearing officers to consider arbitration claims that result in settlements or awards for customers when they evaluate a disciplinary case. They are encouraged to determine whether a broker’s disciplinary and arbitration history combined with the infraction “form a pattern.”

“When such a pattern is established, an adjudicator should consider imposing more severe sanctions than what would have been imposed if no pattern existed,” the regulatory notice states. “These sanction guidelines bolster the ability of adjudicators to…protect investors and deter misconduct.”

Andrew Stoltmann, a Chicago securities attorney and president of the Public Investors Arbitration Bar Association, welcomed the move.

“It’s a good, common sense development,” Mr. Stoltmann said. “Often, arbitration awards are the canary in the mineshaft when it comes to bird-dogging bad brokers. Anyone who has gone through a Finra arbitration and won, that’s a pretty good indicator that the broker has some issues.”

The revision to the sanction guidelines goes into effect on June 1.

Related Topics: Financial Industry Regulatory Authority