Finra Reins in High-Risk Brokers


The long arm of the law is about to get longer.

In an ongoing mandate to protect investors, the Financial Industry Regulatory Authority Board of Governors approved the next step in FINRA’s ongoing initiative to strengthen controls on brokers with a history of significant past misconduct and to ensure greater accountability for firms that choose to employ high-risk brokers.

FINRA soon plans to issue a Regulatory Notice seeking comment on the key proposals – which would strengthen protections for investors and range from additional disclosure on BrokerCheck to heightened supervision of brokers appealing disciplinary matters.

Robert Cook, FINRA

“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,” said Robert Cook, FINRA’s President and Chief Executive Officer.

The current proposals would expand sanction guidelines to enable adjudicators to consider more severe sanctions when an individual’s disciplinary history includes additional types of past misconduct. They also would allow hearing panels, in appropriate circumstances, to restrict the activities of firms and individuals while a disciplinary matter is on appeal.

“If the brokers want to cultivate goodwill with the investing public then they’re going to have to learn to live with these new guidelines, one floor trader at the NYSE said. “All it takes is one scandal or rogue trader and the public loses trust with us – again.”

Another sales trader added that with current trading volumes low and stagnant commission levels, every trade and by default every customer becomes much more important.

“This business is founded on trust and for a lot of us every trade from our clients is important,” said another sales trader. “Given the current political environment and public view of Wall Street we need to be on top of our game. One problem is like a strike on the regulatory match – and we’re already sitting on a powder keg of grassroots TNT.”

FINRA will also issue a Regulatory Notice reinforcing and clarifying firms’ existing supervisory obligations concerning any high-risk brokers they may employ. The proposals would specifically require firms to adopt heightened supervisory procedures for brokers while a statutory disqualification request is under FINRA’s review, or the broker is appealing a hearing panel decision. In addition, they would increase FINRA’s statutory disqualification application fee for individuals and enact a new fee for firms to reflect the additional time it takes FINRA staff to thoroughly screen those applications.

The proposals also include a mandatory disclosure on BrokerCheck 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.

Finally, the proposals would revise the guidelines for reviewing requests for a waiver from FINRA exam requirements to more broadly consider the past misconduct of an individual, including arbitration awards and settlements.

These proposals and subsequent actions are designed to enhance FINRA’s existing high-risk broker programs. Built on extensive data and analyses, these programs are specifically designed to identify and address high-risk brokers, including through disciplinary actions, enhanced examinations, and ongoing surveillance.

FINRA has repeatedly said it is dedicated to investor protection and market integrity and given the public’s recent distrust of the securities industry and brokerage firms, will continue to be a focus of its attention.

Related articles

  1. New York State Department of Financial Services has been regulating virtual currency companies since 2015.

  2. The bipartisan Lummis-Gillibrand bill requires segregation of customer assets and unbundling of custody.

  3. The agencies found a shortcoming related to data quality and data management.

  4. Technology does not change the need for transparency in corporate structures, governance, audit and controls.

  5. Blockchain technology can be compatible with the existing federal securities law framework.