Securities Firm Challenges FINRA Rules Providing for Exclusive Jurisdiction Over Customer Arbitrations
Thrivent Financial, a fraternal benefit society that offers insurance products to its members, is seeking to force the U.S. Securities and Exchange Commission to review three specific rules that give FINRA exclusive jurisdiction over arbitration proceedings between member firms and their customers. The challenged rules – FINRA Rules 2268(d), 12200 and 12204(d) – prohibit parties from entering into or enforcing agreements that provide for arbitration outside FINRA’s own arbitration forum. Thrivent claims that the SEC abused its discretion under the federal Administrative Procedures Act and exceeded its authority by denying Thrivent’s previously filed rulemaking petition and failing to address “plainly illegal” rules promulgated under its authority. The case, which is pending in the United States Court of Appeals for the District of Columbia Circuit, stems from Thrivent’s desire to allow disputes with its members concerning the insurance products it offers to be resolved through its “Member Dispute Resolution Program.”
On July 16, 2025, Thrivent filed its Opening Brief with the D.C. Court of Appeals. In its Brief, Thrivent requests that the Court declare unlawful the FINRA rules in question, as unlawful limitations on private arbitration rights. In sum, according to Thrivent, “Supreme Court precedent requires enforcement of private agreements to resolve disputes individually through arbitration – and forbids regulators from limiting arbitration rights without express congressional authorization.” Therefore, Thrivent argues, the challenged FINRA rules unlawfully limit the its arbitration rights and those of other FINRA members.
Settlement Announced by State Regulators in Case Involving Excessive Fees Charges to Small-Dollar Investors
On June 9, 2025, the North American Securities Administrators Association (NASAA) announced a $9.3 million settlement with Edward Jones, TD Ameritrade, LPL Financial, RBC Capital Markets and Stifel, arising from allegations that the firms charged excessive fees to small-dollar investors. According to the announcement, a five-year investigation showed that the firms charged approximately $19 million to process 1.12 million small dollar equity trades.
NASAA’s announcement noted that wealth management firms are prohibited from charging “unreasonable” fees to their retail clients and the reasonableness of such fees will be determined based on various factors, including guidance under FINRA Rule 2121. Under that rule and its supplementary material, a mark-up pattern of five percent or even less can be regarded as unfair or unreasonable under the long-standing “5% Policy” of FINRA and formerly the National Association of Securities Dealers.
The investigation was led by Massachusetts’ top securities regulator, William Galvin, who stated: “This custom that some brokerage firms have of nickel-and-diming customers in order to line their pockets with commissions is something that I and other securities regulators have been watching closely. We have secured similar settlements for overcharged customers with other firms in the past, and we will continue to keep our eyes on any other firms that attempt to charge small-dollar investors these unreasonable fees.” In addition, according to NASAA officials: “When people decide to invest their hard-earned money, they should get the maximum value of their investing dollars.”
FINRA Enforcement Proceedings Focus on Variable Annuity Sales
Three recent proceedings reflect the level of attention given by FINRA’s Department of Enforcement to sales of variable annuities to retail customers.
The first of the three proceedings involved a general securities representative who had been registered through Infinity Financial Services and is reflected in a Letter of Acceptance, Waiver and Consent (AWC) accepted by FINRA on April 29, 2025. FINRA alleged that the representative recommended ten unsuitable L-share variable annuity exchanges to nine customers, as well as two unsuitable variable annuity purchases to two customers. The AWC cited FINRA’s general suitability rule, Rule 2111, and noted that, in addition, Rule 2330(b) requires that in making a recommendation concerning a variable annuity a registered representative must have a reasonable basis to believe that the variable annuity as a whole, as well as its underlying subaccounts and any riders, are suitable for the customer. The AWC further noted that these suitability rules apply exchanges of variable annuities and the suitability determination must consider whether, among other things, the customer would incur a surrender charge, be subject to a new surrender period, lose existing benefits, or be subject to increased fees or charges. In accepting and consenting to the AWC, the registered representative did not admit or deny the findings made by FINRA.
The second proceeding involved a general securities representative associated with Northwestern Mutual Investment Services, LLC and is reflected in a Letter of Acceptance, Waiver and Consent accepted by FINRA on May 16, 2025. The registered representative was suspended and fined due to his alleged violations of FINRA Rules 2010 and 2330 by recommending purchases of variable annuities to three customers without having a reasonable basis to believe that the transactions were suitable based on the customers’ age, financial situation and needs, liquidity needs and investment time horizon, among other factors.
In the third case, an enforcement proceeding brought against PNC Investments LLC (PNCI), FINRA alleged that PNCI violated FINRA rules by failing to establish and maintain a reasonably designed supervisory system for monitoring the extent to which its financial advisors were involved in variable annuity exchanges. Pursuant to a Letter of Acceptance, Waiver and Consent submitted by PNCI, PNCI was censured and fined $200,000. The AWC, accepted by FINRA on June 16, 2025, acknowledged that because variable annuities are complex investments, FINRA requires that firms provide more comprehensive and targeted protection to investors who purchase or exchange variable annuities. Under FINRA Rule 2330(d), the AWC further noted, member firms are required to implement surveillance procedures to determine if any of the firm’s associated persons have rates of effecting deferred variable annuity exchanges that raise for review whether such rates evidence conduct in violation of FINRA rules. As alleged by FINRA’s Department of Enforcement, PNCI’s supervisory system was deficient for failing to assess its representatives’ rates of variable annuity exchanges and, in appropriate circumstances, to review whether the exchange rates of certain representatives reflected a violation of FINRA rules. In accepting and consenting to the AWC, PNCI did not admit or deny the findings made by FINRA.
FINRA Orders Robinhood Financial to Pay $3.75 Million in Restitution to Customers
It all begins with an idea.
On March 7, 2025, FINRA issued a news release announcing that it had ordered Robinhood Financial to pay $3.75 million to its customers and that it had assessed fines in the amount of $26 million against the firm and its affiliates for violation of numerous FINRA Rules. The violations alleged by FINRA included alleged conduct related to (i) disclosures involving the “collaring” of market orders by converting them to limit orders, (ii) failing to implement anti-money laundering programs, (iii) failing to establish a reasonable customer identification program, and (iv) various failures to supervise and failures to respond to “red flags.” Robinhood Financial and Robinhood Securities consented to the findings, without admitting or denying FINRA’s charges.
FINRA Alerts Investors about Fraudulent “Smishing” Scams
It all begins with an idea.
On March 6, 2025, FINRA issued an “investor insight,” discussing the emergence of “smishing” scams, a type of cybersecurity fraud that is perpetrated through fraudulent text messages. The term “smishing” is from the combination of “SMS” (short message service, i.e., text messaging) and “phishing.” Smishing involves the sending of unsolicited messages that ask the recipient of the message to click on a link or provide sensitive information. The harm caused by smishing can include data theft or the downloading of malicious software onto the recipient’s device. The FINRA alert contains helpful information concerning steps that can be taken to avoid the risk of falling victim to a smishing scheme and steps to take if a person becomes subject to such a scheme.
FINRA Orders Firms to Pay in Excess of $8.2 Million in Restitution to Mutual Fund Investors
On December 20, 2024, FINRA issued a news release concerning an order it issued to three firms - Edward Jones, Osaic Wealth, Inc. and Cambridge Investment Research, Inc. — to pay restitution to customers of more than $8.2 million to customers harmed by the firms’ failures to provide the customers with mutual fund sales charge waivers and fee rebates. As a result of its investigation, FINRA alleged that the firms failed to establish and maintain a supervisory system reasonably designed to determine whether customers were eligible to receive the waivers or rebates in connection with reinstatements. Certain mutual fund issuers offer reinstatement rights, which allow mutual fund investors to reinvest in shares of a fund or fund family without incurring front-end sales charges or to recover contingent deferred sales charges. The firms settled the claims, without admitting or denying FINRA’s charges.
United States District Court for the Western District of Pennsylvania Announces Revised ADR Policies and Procedures
It all begins with an idea.
The United States District Court for the Western District of Pennsylvania recently announced revised alternative dispute resolution policies and procedures for cases pending before the Court. The Court’s revised Early ADR Policies and Procedures will take effect on January 1, 2025.
The substantive changes from the policies and procedures that are currently in effect are minimal, as most of the changes simply reformat or reorganize the same policies and procedures that already are in effect. One substantive revision relates to the conduct of mediations and the new procedures allow mediators to require the parties to submit written mediation statements. Under the current procedures, mediators are not permitted to require mediation statements. Another revision relates to early neutral evaluations, but this revision simply codifies what most would regard as existing practice by setting forth several limitations to the authority of an ADR neutral serving as evaluator. In particular, the revised policies and procedures expressly provide that an ADR neutral conducting an early neutral evaluation does not have the authority to (i) determine the issues in the case, (ii) to impose limits on parties’ pretrial activities, or (iii) impose sanctions.
Opinion in Fraudulent Wire Transfer Case Applies Uniform Commercial Code Article 4A
It all begins with an idea.
On September 10, 2024, Judge Nora Barry Fischer of the United States District Court for the Western District of Pennsylvania issued a lengthy opinion applying Article 4A of the Uniform Commercial Code in a case involving claims for fraudulently induced wire transfers. Elkin Valley Baptist Church v. PNC Bank, N.A., et al., No. 23-1798, 2024 U.S. Dist. LEXIS 162888, at *32 (W.D. Pa. Sept. 10, 2024). The opinion addresses a number of issues that arise in fraudulent wire transfer cases in connection with the UCC’s allocation of liability among the originator of the wire transfer, the “recipient bank” and the “beneficiary bank.” Significantly, Judge Fischer explained that under UCC § 4A-207(c), “the originator’s bank bears the loss where the beneficiary’s bank did not know of the misidentification (i.e., a discrepancy or “mismatch” as between the account owner and the account number), its acceptance was thus valid, it paid the wire by account number to a non-entitled payee, and the originator’s bank had not notified the originator that the beneficiary’s bank might so proceed.” The last clause of that quotation refers to disclosures that may be provided by an originating bank under UCC § 4A-207(c) in order to avoid liability when the beneficiary bank did not know of the misidentification, and Judge Fischer ruled that in the Elkin Valley case, the disclosures provided by the originating bank, First National Bank of Pennsylvania, were not sufficient. Because of Judge Fischer’s detailed analysis of numerous issues under Article 4A, the Elkins Valley case is now one of the most important decisions addressing the allocation of losses in fraudulent wire transfer cases.