FINRA Seeks SEC Approval to Expand Actions against Bad Actors

September 30, 2017 by Ruby Keys

In an effort to expand oversight capabilities against advisors with a history of misconduct, the Financial Industry Regulation Authority (FINRA) recently asked the Securities and Exchange Commission (SEC) to allow the agency to expand its pool of non-arbitrators. FINRA also is seeking comment on rule amendments that allow self-regulators to deny new membership applications if the advisor or firm has had past arbitration claims.

The proposed rule change SR-FINRA-2017-025 proposes to amend FINRA Rule 12100 of the Code of Arbitration Procedure for Customer Disputes and Industry Disputes to define a “non-public arbitrator as a person who is otherwise qualified to serve as an arbitrator but is disqualified from service under the Codes.

This new rule, if approved by the SEC, would allow FINRA to appoint persons to non-public arbitrator roles if they meet FINRA’s qualification criteria, but cannot be classified as public arbitrators. FINRA has warned that the pool of arbitrators has decreased, forcing the agency to change the rules to make qualified candidates, who do not qualify under current rules, to become acceptable to act as “non-public arbitrators.”

The federal oversight agency is also seeking amendments to FINRA’s Membership Application Program rules, requiring a member firm to seek out “materiality consultation” with the agency if the member is not otherwise required to file a continuing membership application, and they are a broker seeking to become an owner, or a member seeking to add a broker with certain specified risks attached.

The proposal would effectively bar from membership a person seeking expansion who falls within that specified risk pool. According to the SRO, FINRA staff would review each submission to determine whether the individual qualifies for membership under rule 1017.

During remarks at Georgetown University, Cook said, “Our intention is to provide firms with a better understanding of what our expectations are on how they should go about identifying brokers who may merit heightened supervision and about what the elements of heightened supervision might be.”

FINRA will issue requests for comment on the proposed changes later this year. FINRA’s CEO, Robert Cook, also recently said that the agency would release additional guidance related to “higher risk” brokers over the next few months.