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Welcome to the latest issue of Bracewell’s FINRA Facts and Trends, a monthly newsletter devoted to condensing and digesting recent FINRA developments in the areas of enforcement, regulation and dispute resolution. This month, we report on FINRA’s new Complex Investigations and Intelligence Team, proposed changes to the expungement process for broker-dealers, and FINRA’s attempts to curb digital signature forgery. Read about these issues, along with notable enforcement actions and arbitration decisions, below.

FINRA Unveils New Complex Investigations and Intelligence Team and Cyber and Analytics Unit

With an increased focus on data and analytics, FINRA now has a newly-formed team and unit dedicated to leveraging intelligence and analytics to drive decision making and operations. The new Complex Investigations and Intelligence (CII) team and Cyber and Analytics Unit (CAU) will now spearhead an initiative designed to be both proactive and preventative in identifying and mitigating the most complex threats that the industry faces. “Within CII, we’ve intentionally built these teams to be agile and nimble, to be able to pivot quickly and adapt to address emerging threats or risks in their area of specialization,” said CII’s Vice President Omer Meisel during a recent edition of the FINRA Unscripted podcast.

The Cyber and Analytics Unit is one of the groups within CII. Its mission is to conduct complex investigations in the cybersecurity, cyber-enabled fraud and crypto asset disciplines. Brita Bayatmakou, who heads up the CAU, recently noted that “For the first time FINRA will have a dedicated crypto asset focused group.” Ms. Bayatmakou emphasized that while FINRA’s touch points might be limited today, it is important that “we identify and address developments in markets to ensure that the investing public, even in adjacent markets, are protected, again, aligning with FINRA’s core mission.” Meisel stressed that these new units are another example of FINRA being proactive in thinking about these threats. “We aren’t waiting, necessarily, for someone to tell us we should be in this space or reacting to the events. Rather, we are positioning ourselves to be able to address the threats,” he said.

FINRA Reminds Member Firms of Their Duty to Supervise Digital Signatures

On August 3, 2022, FINRA issued Regulatory Notice 22- 18 in response to reports of registered representatives and associated persons forging or falsifying customer signatures, or the signatures of colleagues or supervisors, through the use of third-party digital platforms. The forgery and falsification of signatures by an associated person constitutes a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) and the books and records provision of FINRA Rule 4511. These issues have been flagged in “account opening documents and updates, account activity letters, discretionary trading authorizations, wire instructions and internal firm documents related to the review of customer transactions.”

To facilitate member firms in understanding and satisfying their regulatory obligations and mitigate risk, FINRA outlined five methods and scenarios for identifying digital signature forgery or falsification:

FINRA Proposal Would Result in an Overhaul of the Expungement Process

FINRA recently submitted to the SEC for its approval a new set of rule changes that would impose stricter requirements for registered representatives seeking the expungement of customer disputes.

Currently, the FINRA rules offer two paths for expungement requests: (1) in the context of a customer-initiated arbitration proceeding where the associated person asks the arbitration panel to issue an award recommending expungement; and (2) the so-called “straight-in” request, where a registered representative initiates a new arbitration proceeding seeking expungement.

Following increased and continued pressure from certain outside parties, including PIABA, FINRA is now proposing adding more requirements based on the perceived ease with which registered representatives have been able to get CRD disclosures expunged and the view that the current system has led to expungements beyond the “limited circumstances” that FINRA claims it envisioned by its rules.

According to FINRA, these proposed changes to the expungement process “are responsive to the concerns that have been identified with the current expungement process and would help protect the integrity” of the CRD system. The SEC has now requested public comment on the proposed rule changes, and if approval is granted, these new rules would likely become effective in early 2023.

If these new rules are enacted, it will make the process of obtaining expungements considerably more difficult. Even if the comment period results in slight modifications to the proposed rules, registered representatives would be wise to act swiftly if they believe their CRDs contain false customer complaints or disclosures before the new rules make expungements more difficult or prevent them altogether.

Notable Enforcement Matters and Disciplinary Actions

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