CSG Law Alert: FINRA Is Now Using “Arbitration History” to Ratchet Up Sanctions in Unrelated Disciplinary Proceedings
Two recent FINRA enforcement actions contain a subtle, but potentially important, change in the way that FINRA determines sanctions for individuals.
On their face, the recently issued Letters of Acceptance, Waiver, and Consent (AWCs) in Ron Y. Itin and Kayan Securities, Inc., et al. are unremarkable. In Ron Y. Itin, FINRA suspended the CEO and CCO of a broker-dealer for three months in all principal capacities for, among other things, failing to implement a supervisory system reasonably designed to prevent identity theft. In Kayan Securities, Inc. and Yong Soo Kim, FINRA suspended the CEO and CCO of a broker-dealer for two months in all principal capacities for, among other things, failing to supervise a representative who engaged in excessive trading. Notably, however, in the background sections of both AWCs, FINRA cited to prior arbitrations that had been filed against the individual respondents.
Specifically, in Itin, FINRA wrote:
- “In April 2024, Itin was found jointly and severally liable by a FINRA arbitration panel for a customer’s losses ….”
And in Kayan, FINRA wrote:
- “In January 2020, a customer won a FINRA arbitration award against Kim, who was found jointly and severally liable for the customer’s losses ….”
This is a significant change. Traditionally, FINRA did not reference arbitration claims or awards in the background sections of AWCs when summarizing a respondent’s disciplinary history. The reason is straightforward – arbitrations are not discipline. In 2018, however, FINRA issued a revised version of its Sanction Guidelines. The new Guidelines added the following provision: “With respect to individual respondents, adjudicators also should consider, in addition to disciplinary history, an individual’s arbitration history when assessing sanctions.”
We suspect that many registered representatives and associated persons failed to notice this addition to the Guidelines and would be surprised to learn that an arbitration award issued years earlier could be used to ratchet up the sanctions against them in an unrelated disciplinary matter.
But wait, there is more.
The new Sanction Guidelines state that not just arbitration awards – but also past arbitration settlements – can be used against an individual respondent. In other words, even if the matter is settled for a nominal amount merely to avoid the time and expense of a lengthy arbitration proceeding and even if no factfinder ever determined that the individual respondent did anything wrong, FINRA can later use that settlement against the respondent in a disciplinary matter.
But wait, there is more.
The new Guidelines add that a prior arbitration award or settlement may be used to increase the sanctions against an individual respondent in a later disciplinary matter even if the individual was never a party to the arbitration. The Guidelines state:
In this context, ‘arbitration history’ is defined as arbitration awards and arbitration settlements resulting from disputes between a customer and the individual, including those when the individual is the subject of an arbitration claim that only names a FINRA member firm.
Let’s make this more concrete. Assume that you are a representative negotiating a settlement with FINRA Enforcement. In the course of the negotiations, the Enforcement attorney informs you that the sanctions against you must be increased because of your “arbitration history.” You ask: What arbitration history? In response, the FINRA attorney informs you that several years ago a member firm (where you no longer work) settled an arbitration claim brought by one of your former customers. You were not named as a respondent in the arbitration. You were not a party to the proceedings or the settlement negotiations. You never had an opportunity to defend yourself or refute the allegations. No arbitration panel (or any other adjudicator) made any factual findings that you did anything wrong. No award was entered against you. Nevertheless, FINRA insists that you serve a longer suspension and pay a higher fine in the present, unrelated matter because of this “arbitration history.”
Surely then, you would be given the opportunity in the present disciplinary matter to refute the allegations underlying the prior arbitration award or settlement? Unfortunately, no. The new Guidelines state that, when increasing sanctions based on a prior arbitration award, FINRA adjudicators “must rely” on the “CRD description of the award or settlement.” What if the CRD description is inaccurate? Too bad. The Guidelines state that the CRD description of the award or settlement “may not be challenged in disciplinary actions.”
You might argue that this result would violate your fundamental right to due process. To which FINRA would no doubt respond that it is not a “state actor” and therefore has no obligation to give you due process. Whether that is technically correct is a subject for another day. But even if it were technically true, does the fact that FINRA does not have to give you due process mean that it should not? On its website, FINRA Enforcement states: “Enforcement believes in a fair and transparent process.” Is the use of arbitration history in this fashion really “fair and transparent?”