On May 2, 2018, FINRA released Regulatory Notice 18-17 addressing revisions to its Sanction Guidelines. These revisions instruct adjudicators in disciplinary proceedings to consider an individual respondent’s customer arbitration history when determining whether to impose more severe disciplinary sanctions. The revisions take effect for disciplinary complaints filed on or after June 1, 2018.
FINRA’s Sanction Guidelines help adjudicators determine appropriate and consistent remedial sanctions in disciplinary proceedings. The guidelines recommend ranges for sanctions and include aggravating and mitigating factors for whether a sanction should fall above or below the recommended range. While the current Sanction Guidelines instruct adjudicators to consider a respondent’s disciplinary history when assessing sanctions, the revisions will provide adjudicators the ability to increase disciplinary sanctions against individual respondents based on their arbitration history as well. According to the new guidance, adjudicators should determine whether the respondent’s arbitration history reflects a pattern of harm to investors or market integrity or a disregard for regulatory requirements.
The revisions were added to General Principle No. 2 of the Sanction Guidelines. Pursuant to General Principle No. 2, adjudicators are currently instructed to assess more severe disciplinary sanctions against repeat offenders and to escalate sanctions as a means of deterrence. In this vein, FINRA’s revisions add a review of the respondent’s arbitration history which is defined as “arbitration awards and arbitration settlements resulting from disputes between a customer and the respondent, including those when the respondent is the subject of an arbitration claim that only names a FINRA member firm.” Adjudicators will rely on the respondent’s Web CRD to review his or her arbitration history and consider arbitrations where the individual respondent is involved in the arbitration even though he or she was not a named respondent. The revisions exclude from consideration arbitrations that were dismissed or withdrawn, pending arbitrations, customer complaints and/or settlements with no arbitration claim, and arbitration awards that are being challenged by a motion to vacate or expungement request.
In assessing whether to impose more stringent sanctions, the adjudicator should consider whether the respondent’s disciplinary and arbitration history:
(a) includes a significant past misconduct that is similar to the misconduct at issue; or
(b) shows a pattern of causing investor harm, damaging market integrity, or disregarding regulatory requirements.
In determining whether the respondent’s disciplinary and arbitration history establishes a pattern of misconduct, the adjudicator may consider the nature, severity, and frequency of the matters. The respondent can argue mitigating factors exist such as the length of time between events and whether the event was isolated. While the adjudicator may consider these various factors, respondents will not be afforded the opportunity to challenge past arbitration awards or the description of arbitration settlements contained on their CRD.
Firms and individual respondents involved in FINRA disciplinary proceedings filed on or after June 1, 2018 should be cognizant of these revisions and their potential impact on disciplinary sanctions.