FINRA amended its Code of Arbitration Procedure for Customer Disputes (Customer Code) to expand the options available to customer claimants dealing with “inactive members”—those firms or individuals whose FINRA registration has been terminated, suspended, canceled, or revoked, or who have been expelled or barred from FINRA.  FINRA has amended the Customer Code to further the routes available to customers in situations where a firm becomes inactive during a pending arbitration or where an associated person becomes inactive either before a claim is filed or during a pending arbitration. 

Currently, without the amendments, FINRA Rule 12202 states that a customer’s claim against an inactive firm is ineligible for arbitration unless the customer agrees in writing to arbitrate after the claim arises.  Therefore, prior to the amendments, the Customer Code did not address situations where a member firm becomes inactive during a pending arbitration.  It also did not provide specific procedures for a customer to withdraw and file in court a claim against an associated person who becomes inactive before the customer files a claim or during a pending arbitration. 

To cover these circumstances, FINRA’s amendments state that if a member firm or an associated person is inactive at the time a claim is filed, the claim is ineligible for arbitration unless the customer claimant agrees in writing to arbitrate after the claim arises.  If a member firm or an associated person becomes inactive during a pending arbitration, FINRA will notify the customer claimant of the status change.  Within 60 days of receiving notice of a member firm’s or an associated person’s status change to inactive, a customer claimant may withdraw the claim or claims, amend the pleading to add a claim or new party without prior approval by a panel, or postpone a scheduled hearing that is within 60 days of the date the customer claimant receives the notice from FINRA.

While the purpose of these amendments is to further address the issue of unpaid arbitration awards when firms or associated persons are no longer registered with FINRA, we expect these amendments to have other implications.  Simplifying the process to amend a pleading when a respondent becomes inactive could lead to the naming of active firms and associated persons less connected to the facts and claims.  These amendments also support FINRA’s jurisdiction over formerly associated persons involved in customer disputes and the requirement that inactive associated persons answer customer complaints in order to avoid default awards.  These amendments are effective for cases filed on or after June 29, 2020.