Does FINRA have jurisdiction over me? This is a question that I regularly field at the outset of regulatory engagements. My answer differs depending on a number of factors, including the nature of a person’s role and duties at a firm, his or her registration status, when the alleged misconduct occurred, whether he or she is still associated with a firm, and when the association ended. This post outlines some of the basics on FINRA’s jurisdiction.
Who Is Subject to FINRA’s Jurisdiction?
Under FINRA Rule 8310, FINRA may impose sanctions, including a censure, fine, suspension, and bar, upon a person associated with a member firm for violations of certain federal securities laws, MSRB rules, or FINRA rules. Under FINRA Rule 8210, FINRA can require a “member, person associated with a member, or any other person subject to FINRA’s jurisdiction” to provide documents, information, or sworn testimony. The definition of an “Associated Person” under FINRA Rule 1011 is extremely broad. It includes just about anyone and everyone who has anything to do with a firm, with the exception of persons who perform only clerical and ministerial tasks:
- Any person registered with FINRA;
- A sole proprietor, partner, officer, director, or branch manager of a firm, or any person occupying a similar status or performing similar functions;
- Any person who controls the firm;
- Any employee of the firm, except any person whose functions are solely clerical or ministerial;
- Any person engaged in investment banking or securities business controlled by the firm; and
- Any person who will be, or is anticipated to be, a person described above.
What Time Period Is Covered by FINRA’s Jurisdiction?
With the exception of requests for documents, information, and testimony issued under Rule 8210 (discussed below), FINRA only has jurisdiction to pursue charges against an associated person for conduct that occurred while the person was associated with a firm. By way of an extreme example, if a registered rep robbed a bank before and after he was associated with a firm, FINRA would not have jurisdiction to bring an action against the rep for either robbery. If the rep was convicted of a felony for the first robbery before joining a firm (and setting aside the facts that the rep would be subject to statutory disqualification, and that no firm, hopefully, would hire him), but the rep did not disclose the robbery on his Form U4, then FINRA could bring an action against the rep for failing to disclose a reportable event on his Form U4. The failure to disclose occurred while the rep was associated with a firm.
How Long Does FINRA Have to Bring a Disciplinary Action?
Under Article V, Section 4 of the FINRA By-Laws, FINRA retains jurisdiction over a registered person for purposes of filing a complaint (i.e., bringing a disciplinary action) for two years after the effective date of the person’s termination from the firm. Under the same Section, FINRA retains jurisdiction over a registered person for the purpose of requesting documents, information, and testimony under Rule 8210 for just about two years after the effective date of the person’s termination. I wrote “just about two years” because, technically, FINRA can file a complaint against a registered person for not providing documents, information, and testimony requested within the two-year post-termination period, but the complaint needs to be filed within the same two-year period.
There are a couple of important things to note about the two-year time period for registered persons. First, the effective date of termination is the date when the firm files the Form U5, not the date when the person actually stopped working for the firm, and not the date of termination listed on the Form U5. For example, if a firm terminates a registered person on January 1st, but it does not file the Form U5 until January 31st, the two-year period begins to run on the 31st.
Second, under Article V, Section 4, the two-year period for registered persons can be extended by two years by the filing of an amendment to the initial Form U5 that: (1) is filed within the original two-year time period; and (2) discloses that the “person may have engaged in conduct actionable under any applicable statute, rule, or regulation.” FINRA generally has interpreted this provision to apply to the disclosure of new conduct (i.e., not an amendment disclosing that a previously reported customer complaint has settled). For example, if a firm files the initial Form U5 on January 1, 2015, and if it subsequently files an amendment to the Form U5 disclosing a new customer complaint on December 30, 2016 (which is within two years of the initial filing), then the amended filing recommences the running of the two-year period on December 30, 2016. Therefore, it is possible for FINRA to possess jurisdiction over a registered person for purposes of filing a complaint, and requesting documents, information, and testimony, for nearly four years following termination. Lastly, FINRA’s extension of jurisdiction is not limited to pursuing or investigating charges based solely on the newly-disclosed conduct in the amendment to Form U5. In other words, FINRA can use the extension of jurisdiction to bring and investigate charges based on unrelated conduct known to it prior to the filing of the amendment to Form U5 that extended jurisdiction.
FINRA’s retention of jurisdiction over unregistered persons differs slightly. Under Article V, Section 4, FINRA retains jurisdiction over an unregistered person for purposes of requesting documents, information, and testimony, and filing a complaint, for “two years after the date upon which such person ceased to be associated with the member.” In the case of unregistered persons, the two-year period is absolute, and cannot be extended.
Arbitration Award and Settlement Exception
The one exception to the above limitations periods concerns the failure to comply with an arbitration award or written and executed settlement agreement obtained in connection with an arbitration or mediation submitted for disposition pursuant to FINRA rules. Under Article V, Section 4, if an associated person fails to comply with the terms of such an award or agreement, FINRA may suspend the person from associating with a firm so long as that proceeding is instituted within two years after the date of entry of the award or settlement.
Does FINRA’s Jurisdiction for Arbitration Proceedings Differ?
The short answer is “yes” – FINRA’s jurisdiction, to use that term loosely, differs in the arbitration context.
Current and former associated persons generally are required to arbitrate a dispute with a customer in the FINRA forum if: (1) arbitration under FINRA’s Code of Arbitration for Customer Disputes is required by a written agreement, or requested by a customer; (2) the dispute is between a customer and member or current or former associated person; and (3) the dispute “arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.” FINRA Rule 12200. This means that even if an associated person has left the industry, he or she still may be required to arbitrate a dispute in the FINRA forum. Customer disputes, however, are ineligible for arbitration “where six years have elapsed from the occurrence or event giving rise to the claim.” FINRA Rule 12206.
With a few notable exceptions, current and former associated persons generally are required to arbitrate a dispute with a FINRA member or associated persons in the FINRA forum under FINRA’s Code of Arbitration for Industry Disputes “if the dispute arises out of the business activities of a member or an associated person and is between or among” members, members and associated persons, or associated persons. FINRA Rule 13200. The exceptions include “a claim alleging employment discrimination, including sexual harassment, in violation of a statute,” and “a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements.” FINRA Rule 13201. Industry disputes, like customer disputes, are subject to a six-year eligibility rule. FINRA Rule 13206.
Class actions and shareholder derivative actions generally may not be arbitrated in the FINRA forum.
Arbitration is a creature of contract so unique circumstances may dictate that certain claims are not subject to arbitration.
 FINRA Rule 12100 oddly defines an “associated person” or “person associated with a member” to include, “[f]or purposes of the Code, a person formerly associated with a member is a person associated with a member.” The Code of Arbitration for Industry Disputes contains the same definition. FINRA Rule 13100.