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The SEC Proposes A FINRA Rule Change Regarding The Publication Of Complaints Filed Against Brokers and Broker-Dealers

The Securities and Exchange Commission (“SEC”) recently published a proposed rule change to Financial Industry Regulatory Authority Inc. (“FINRA”) Rule 8313, which governs whether FINRA can release disciplinary and other information to the public. The proposed rule change would make pending regulatory complaints against brokers and broker-dealers more visible and accessible to the public, including customers. Currently, complaints pending against brokers or broker-dealers are only disclosed to public customers and investors in summary form on FINRA’s BrokerCheck system. These summaries are based on disclosures made on the brokers and the firms’ Form U-4s (the Uniform Application for Securities Industry Registration or Transfer). FINRA rarely, if ever, makes the actual complaint public. According to the SEC’s publication, the purpose of the proposed rule change would be to “amend Rule 8313 to establish general standards for the release of disciplinary information to the public to provide greater information regarding FINRA’s disciplinary actions, clarify the scope of information subject to Rule 8313, and eliminate provisions that do not address the release of information by FINRA to the public.” The rule change proposal would permit FINRA to publicize the actual complaints filed against the brokers or the investment firms, either through monthly notices of disciplinary actions or through its online disciplinary reporting system. Many industry professionals have voiced negative opinions regarding the broad and harming effects this rule change could have on brokers and investment firms. Most of the negative criticism of the rule centers on the fact that the complaints that would be publicized under the new FINRA rule are unsubstantiated claims, whose merits have not been established. Industry professionals believe the reporting of unsubstantiated and meritless claims would severally prejudice brokers and broker-dealers’ reputation and profitability.

Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters, including regulatory enforcement proceedings, and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.