Proposed Rules Aimed at High-Risk Brokers Confirm FINRA Push for Firms to “Do Their Part”

McGuireWoods LLP
Contact

 Financial Industry Regulatory Authority (FINRA) President and CEO Robert Cook spoke earlier this month at Georgetown University’s McDonough School of Business, where he outlined several proposals to further what he called one of FINRA’s “most important purposes”—“to protect investors from bad actors.”  Taking aim at “those who seek to evade regulatory requirements and harm investors for their own personal gain,” Cook outlined a series of new regulatory proposals he hopes will “further augment” FINRA’s “long-standing regulatory programs.”

The group of proposed regulations, approved by FINRA’s Board of Governors last month, is one component of FINRA360, “a multi-year exercise focused on creating an organization that is committed to continuous improvement.”

Among the proposals Cook outlined are rules that would:

  • reinforce the supervisory obligations of brokerage firms with respect to the continued employment of brokers with disciplinary records;
  • require heightened supervision by those firms of individuals with a disciplinary case pending on appeal;
  • grant adjudicators greater discretion to consider more severe sanctions when an individual’s history reveals repeated misconduct;
  • enable hearing panels to limit the activities firms and individuals may undertake while a disciplinary matter is pending;
  • increase fees related to FINRA’s statutory disqualification applications;
  • render more of an individual’s history relevant to a request for an exam waiver from FINRA; and
  • require disclosure in BrokerCheck of a firm’s status as a “taping” firm.[1]

It is vital for brokerage firms to remain abreast not only of proposed regulations, but also of the priorities they reveal—priorities that are bound to inform FINRA’s disciplinary and enforcement objectives.  The proposals outlined by Cook place special emphasis on the employment practices of member firms, beginning with the hiring process and extending to its ongoing supervision, and monitoring of its brokers.  In short, as Cook emphasized, member firms “must do their part.”

And importantly, FINRA will be on the lookout for those that don’t.  “FINRA is paying particular attention,” Cook made clear, to “whether firms establish appropriate supervisory and compliance controls” for high-risk brokers, and to “whether firms develop and implement a supervisory plan reasonably tailored to detect and prevent future misconduct by a particular broker based on prior misconduct and regulatory disclosures.”

Brokerage firms should act now to ensure a robust compliance and monitoring program is in place—one that not only satisfies the firm’s current supervisory obligations, but can also grow to meet additional regulatory requirements as they emerge.  Firms would do well, for instance, to follow Cook’s suggestion to “consider the need to adopt more rigorous supervisory procedures tailored to individuals who may pose a higher risk based on factors such as a recent history of customer complaints or disciplinary actions involving sales practice abuse or other customer harm.”  What shape those supervisory procedures take will depend, of course, on a number of factors.  But suffice it to say firms should feel comfortable with their ability to identify and root out any bad actors among their ranks.

Cook noted that FINRA will publish additional guidance in the coming months. We will continue to track this and other aspects of the FINRA360 initiative, as well as any related actions taken or guidance issued by FINRA.

[1] Under current regulations, firms are required to tape record phone conversations between brokers and investors if a certain percentage of those brokers worked within the last three years at a broker-dealer expelled for sales practice violations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McGuireWoods LLP | Attorney Advertising

Written by:

McGuireWoods LLP
Contact
more
less

McGuireWoods LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.