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
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.
Melissa Martorella for more information.