High-Risk Brokers Face Tougher FINRA Rules

June 30, 2017 by Melissa C. Martorella, Esq.

This May, the Financial Industry Regulatory Authority (FINRA) released new rule proposals aimed to reign in high-risk brokers and prevent future bad behavior. The agency is proposing a fee hike, more sanctions, and disciplinary issues that will further restrict firms and advisors who have a history of violating rules.

FINRA will demand that companies adopt more stringent supervisory measures for brokers who are under review for disciplinary actions or appealing a panel decision. The proposal would also increase the agency’s staff and increase FINRA’s disqualification application fee for advisors, and also initiate a new fee for firms to accommodate the extra time required for improved screening processes.

The regulatory body also proposed expanding sanction guidelines so adjudicators can apply stricter sanctions when an advisor’s misconduct also shows a history of past violations. Panels will have the ability to restrict certain business activities for advisor’s and their firms while an action is being appealed.

FINRA President and CEO Robert W. Cook said in a statement. “These actions will build on FINRA’s extensive existing programs to address high-risk brokers and reflect our commitment to protect investors and promote public confidence in securities firms and markets. We are continuing to develop additional proposals in this area that will be brought to the Board in the coming months.”

The group also indicated that these proposals are intended to enhance FINRA high-risk programs already in place, and that new proposals are designed around addressing the need to better scrutinize high-risk individuals and firms through enhanced surveillance, comprehensive examinations, and expanded disciplinary actions.

The proposals include additional mandatory disclosures on the BrokerCheck website that would alert the public to heightened scrutiny of a broker or firm due to appealed disciplinary actions. The group said that mandatory disclosures would be required “if a firm is subject to existing requirements for recording all telephone conversations with customers due to having a specified percentage of registered representatives who were formerly employed by disciplined firms.”

Additionally, the group proposes expanding guidelines for reviewing FINRA exam waiver requests to more carefully consider misconduct of individuals, including information on any fines or awards that may have resulted from past violations.

The new proposals come after a 2016 report by the National Bureau of Economic Research (NBER) where, after looking at ten years of broker data associated with misconduct, found that 7.7% of advisors were involved in some form of bad behavior.

“The incidence of misconduct varies systematically across firms, with the highest incidence at some of the largest financial advisory firms in the United States,” the report stated. “We find evidence suggesting that some firms specialize in misconduct. Such firms are more tolerant of misconduct, hiring advisors with unscrupulous records. These firms also hire advisors who engage in misconduct to a lesser degree.”

FINRA has yet to issue Regulatory Notice seeking comment from the public on each of its new proposals but indicated that it would soon provide notice that clarifies the responsibility of firms in regards to high-risk brokers they may employ.

Contact Melissa Martorella for more information.

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