April 8, 2020
The proposal allows hearing officers to impose additional supervision requirements for brokers involved in disciplinary matters
A Finra proposal to increase supervision of brokers going through disciplinary proceedings is a step in the right direction to address problems related to rogue brokers, investor lawyers and advocates say.
The Financial Industry Regulatory Authority Inc. filed on April 3 with the Securities and Exchange Commission a rule proposal that would allow hearing officers to impose on firms stronger supervision requirements for brokers who are appealing a disciplinary matter to the National Adjudicatory Council.
In addition, the proposal would impose strengthened supervision of brokers who are appealing statutory disqualification and would require a BrokerCheck disclosure of firms designated as a “taping firm” that must tape the conversations of its registered representatives because of previous disciplinary problems.
The final prong of the rule would require firms to seek approval when wants to hire someone who has one or more “final criminal matters” or two or more other specified disciplinary events in the last five years. That also extends to promotions of existing employees into leadership roles.
In the proposal, Finra said it is trying to target brokers who have checkered disciplinary pasts earlier than it can through examinations or enforcement actions.
“FINRA is taking steps to strengthen its tools to respond to brokers with a significant history of misconduct and the firms that employ them,” the proposal states.
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Finra has been under pressure for years to crack down on recidivist brokers, sometimes known as rogue brokers, who have long disciplinary records.
The proposal it sent last week to the SEC was first floated in 2018. It is one of several steps it’s taken over the last few years to address the problem.
Another proposal Finra is poised to file with the SEC would impose increased capital requirements on firms that hire a high percentage of brokers with long disciplinary histories.
Ultimately, investors must be able to easily understand that a firm and brokers are being targeted as repeat offenders. Experts aren’t sure the Finra proposal would produce such illumination.
“It’s not clear it would be meaningful to investors doing their homework and trying to understand what’s going on,” said Laura Posner, a partner at Cohen Milstein. “In an ideal world, there would be something in BrokerCheck that would allow an investor to understand that some form of disciplinary proceeding is underway and that the broker is subject to higher supervision by the firm.”
The SEC must approve Finra rules. The agency could put the Finra proposal out for public comment.
Read FINRA Rule Would Require Stronger Supervision of Rogue Brokers.