On April 10, 2017, the Financial Industry Regulatory Authority’s (FINRA) National Adjudicatory Council (NAC) introduced new Sanction Guidelines (Guidelines) which allow the NAC and FINRA staff to take into consideration the vulnerability of customers in determining appropriate sanction levels.1 The last update to the Guidelines occurred approximately two years ago, and included changes related to unsuitable recommendations and misrepresentations.2 Last month’s changes to the Guidelines provide for the first time a “principal consideration that analyzes whether a respondent has exercised undue influence over a customer.”3 Now listed as a specific factor for adjudicators and FINRA staff4 to consider in determining appropriate sanctions is “[w]hether the respondent exercised undue influence over the customer.”5
I. New Guidelines Codify Past Practices and Apply Immediately
Prior to the new “principal consideration,” FINRA has historically acknowledged the vulnerability of customers in certain decisions.6 However, including customer vulnerability and a respondent’s undue influence over a vulnerable customer when analyzing sanctions has never been specified.
This new “principal consideration” applies to all FINRA cases immediately, unlike the recent senior investor-related rulemakings (new FINRA Rule 2165 (Financial Exploitation of Specified Adults) and amended FINRA Rule 4512 (Customer Account Information)), which are not effective until February 2018. The NAC and applicable FINRA staff can immediately take the new “undue influence” factor into consideration when adjudicating, prosecuting or negotiating disciplinary actions.
II. New FINRA Rule 2165 and “Undue Influence”
Neither FINRA Rules nor By-Laws define the term “undue influence.”7 Definitions in new FINRA Rule 2165 may help the industry to understand what it means for a respondent to “exercise undue influence” over a customer. The concept of undue influence arises in Rule 2165’s “financial exploitation” definition as “an act or omission . . . to . . . obtain control, through deception, intimidation or undue influence, over the Specified Adult’s8 money, assets or property.”9
It is possible that the NAC or FINRA staff may look to whether a senior investor was deceived or intimidated by the respondent, or whether the respondent exercised an inappropriate level of “control” over an investor given that investor’s mental capacity or the availability of a designated family member or friend. Presumably any influence over a customer’s decisions would only be considered “undue” if there was some level of deceit, self-dealing or other bad intent. However, this conclusion is not clear from the Guidelines.
III. Expect Continued Scrutiny of Firm Interaction with Senior and Vulnerable Investors
The senior-centric update to the Sanction Guidelines should come as no surprise. Over the past two years, FINRA has significantly increased its focus on senior investors, first with a joint report with the U.S. Securities and Exchange Commission in early 2015,10 followed closely by the launch of its Securities Helpline for Seniors,11 the topic’s rising prominence in the latest examination priorities letters,12 and most recently with the adoption of new FINRA Rule 2165.13 This scrutiny is expected to increase, with a focus on related sales practice examinations and subsequent enforcement actions.