Letters

The FINRA Proposed Change to Rule 8313 & the “Inability to Pay” Defense

Summary

SIFMA provides supplemental comments to the Securities and Exchange Commission (SEC) on a proposed change to Financial Industry Regulatory Authority (FINRA) Rule 8313 and the “Inability to Pay” defense.  On June 21, 2013, the SEC approved the FINRA rule change upon which SIFMA commented on April 15, 2013. In its order approving the change, the SEC noted that “FINRA did not address the concerns raised by the SIFMA Letter that were outside the scope of the proposed rule.”  With respect to the “scope” of the Proposal, it seeks to amend FINRA Rule 8313, which governs disclosure of disciplinary and other information by FINRA to the public. 

The Proposal explicitly includes disclosures about Expedited Proceeding under Rule 9554. SIFMA’s comment is explicitly limited to disclosures about Expedited Proceeding and specifically, cases where a respondent successfully raises an “inability to pay” defense under FINRA Rule 9554 (failure to comply with an arbitration award). SIFMA’s comment thus falls squarely within the scope of the Proposal.

Moreover, SIFMA’s comment recommends not only eliminating the defense, but also, alternatively, disclosing to investors when the defense is raised. As our comment explains, the fact that an individual financial advisor: 1) has an arbitration award that he has not paid, and 2) claims that he has an inability to pay that arbitration award in an Expedited Proceeding under Rule 9554, would certainly be highly relevant information to an investor who currently does business, or who contemplates doing business, with that financial advisor.

This situation raises significant disclosure, transparency, and investor protection concerns – which lie at the very heart of the Proposal.

PDF

Committee

General Counsels Committee, Litigation Advisory Committee

Date

1

August

2013