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Legal Update for Securities

July 15, 2015
Presented by the Securities and Investment Professional Liability Practice Group

by Samuel E. Cohen

Brokers Barred By The Securities Industry To Be Reviewed By State Insurance Regulators

In January, 2014, the Wall Street Journal reported that former securities brokers who have been barred by the securities industry continued to do business by maintaining their insurance licenses.   The Wall Street Journal reported that states including Alabama, Utah, Florida and Maine are attempting to coordinate and share information between securities and insurance regulators to prevent barred brokers from selling investment products to clients by using their insurance licenses. The concern does not appear to involve simple insurance products such as auto or homeowners insurance. However, insurance regulators are most concerned with products that have securities aspects, such as equity index annuities. According to the North American Securities Administrators Association, an organization of state securities regulators, insurance and securities departments in all fifty (50) states function as separate units, even if they are housed in the same department. In many states, insurance and securities departments do not coordinate or share information.  

The National Association of Insurance Commissioners ("NAIC"), the group that provides regulatory guidance to states and drafts model laws, has agreed, on an initiative to identify brokers who have been barred from the securities industry but still sell insurance.

According to the Wall Street Journal, as of December 1, 2014, 13% of 395 brokers barred in 2013 by the Financial Industry Regulatory Authority ("FINRA"), also had an insurance license. 

Under the new initiative, the NAIC will review FINRA's monthly disciplinary reports which indentify when a broker has been barred. The NAIC will cross reference the FINRA disciplinary report with NAIC's list of insurance agents to identify matches. Once a potential match is identified, NAIC staff will contact the applicable state's insurance department and request a verification that the broker and insurance agent are the same person. It will be the responsibility of the state insurance officials to update the national system reflecting the securities industry bar of a broker who is also an insurance agent.  

The NAIC's procedures do not mandate that states revoke the licenses of insurance agents barred from the securities industry. Whether to revoke the barred broker's insurance license will be up to the state insurance departments. 

Further, the NAIC will now allow insurance regulators to search its registry of insurance agents by using the CRD number assigned by FINRA to every broker. The NAIC plans to implement this system over the next several months, though some steps will require formal approval by NAIC committees.


Arbitrators Who Represent Investors Are Now Classified As Non-Public Arbitrators

In Regulatory Notice 15-18, FINRA recently announced that the SEC approved amendments to the Arbitration Code to revise the definition of "Non-Public" and "Public" Arbitrators. FINRA classifies arbitrators under the Customer and Industry Code of Arbitration Procedure as either "Non-Public" or "Public." These terms are defined by FINRA Rules 12100 and 13100. The amended definition provides that persons who work in the financial industry for any duration during their careers will always be classified as "Non-Public" arbitrators. The previous classification rules defined "Non-Public" arbitrators generally as those who were within the past five (5) years employed within the securities industry or were associated with securities industry entities for twenty (20) years or more.  Under the new rule, an arbitrator who worked for a registered broker-dealer for even a brief time several years ago will always be classified as a "Non-Public" arbitrator. 

Perhaps the most significant change to the new rule is that arbitrators who represent investors will also be classified as "Non-Public." Under the old rule, only attorneys and professionals who provided service to parties on the industry side were classified as "Non-Public." This permitted arbitrators who represented investors to remain in the Public Arbitrator pool.  

To attorneys and parties who represent broker-dealers and industry professionals in the arbitration forum, the failure to include attorneys representing investors in the "Non-Public" arbitrator seemed unfair. The revised arbitrator definition addresses this perception of unfairness by expanding the "Non-Public" definition to include arbitrators who represent investors.   However, unlike arbitrators who have had any affiliation with the securities industry, attorneys who represent investors may become public arbitrators if their business changes, after a period of five (5) years.

 According to Regulatory Notice 15-18, the following are the revisions to the "Non-Public" arbitrator definition: 

  • Eliminated the five (5) year cooling off period for financial industry employees to transition from the Non-Public Arbitrator roster to the Public Arbitrator roster, thereby providing that FINRA will classify persons who worked in the financial industry, at any point in their careers, for any duration, as Non-Public;
  • Added two (2) new categories of financial industry employees who may qualify as "Non-Public",  persons associated with a mutual fund or hedge fund, and persons associated with an investment advisor;
  • Expanded the "Non-Public" definition beyond financial industry affiliates to also include professionals who regularly represent or provide services to investor parties in disputes concerning investment accounts or transactions; and
  • Adopted a standard cooling off period of five (5) years before specified persons may transition to the Public Arbitrator roster.


The following are revisions to the "Public" arbitrator definition:

  • Added to the list of persons who are disqualified from serving as Public Arbitrators, attorneys, accountants, expert witnesses, or other professionals who earned significant revenue from representing or providing services to parties in disputes concerning investment accounts or transactions, or employment relationships within the financial industry;
  • Added to the list of persons who are disqualified from serving as Public Arbitrators, attorneys, accountants, or other professionals whose firms earn significant revenue from representing individuals and/or institutional investors relating to securities matters;
  • Revised the cooling off periods in the Public Arbitrator definition so that disqualified persons must wait five (5) years after ending an affiliation based on their own activities, and two (2) years after ending an affiliation based on someone else's activities, before they may be permitted to serve as Public Arbitrators (provided that another disqualification does not apply);
  • Decreased applicable permanent disqualification periods from twenty (20) years to fifteen (15) years; and
  • Revised the definition of immediate family member to include more of the current societal relationships.


The recent trend has been for counsel representing investors to select the optional all public arbitration panel. Before the rule change, this left arbitrators who represent investors as potential panelists on the all public panel. This rule change should provide assistance to defense counsel representing broker-dealers or industry professionals who struggle with whether to use one of their limited strikes to strike the potential arbitrator who represents investors. Now, counsel representing broker-dealers or industry professionals can direct their strikes elsewhere when selecting an arbitration panel.

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