From the October 2017 issue of Investment Advisor • Subscribe!

FINRA Zeros In on Bad Brokers, Arb Transparency and New Enforcement

Just a year since taking the helm, FINRA Chief Robert Cook is shaking up the status quo with his FINRA360 Initiative

FINRA CEO Robert Cook FINRA CEO Robert Cook

It's been a little over a year since Robert Cook took the helm as CEO of the Financial Industry Regulatory Authority and launched a top-to-bottom review of the self-regulator via the FINRA360 initiative.

As Cook told House lawmakers in his early September testimony, FINRA360 has already resulted in the self-regulator making new investments in examiner training and offering new compliance tools for broker-dealers as well as a newly consolidated enforcement program, to name just a few initiatives.

(Related: FINRA Fines Down 70% in First Half of 2017)

Finding more ways to crack down on bad brokers also remains in FINRA's crosshairs. As Cook told the lawmakers, the self-regulator is exploring ways to give investors and research firms access to “bulk data” on broker-dealers that employ brokers with a history of FINRA violations.

In a separate announcement in mid-September, FINRA started publishing data on the diversity of its arbitrator pool on its website.

This month, FINRA will join other regulators like the Securities and Exchange Commission, the North American Securities Administrators Association and the Commodity Futures Trading Commission at a World Investor Week event and issue a joint alert providing key tips for investors to help increase their awareness about financial fraud as well as give information on investor resources and tools like BrokerCheck.

Bad Brokers

During the early September oversight hearing held by the House Financial Services Committee, Rep. Stephen Lynch, D-Mass., asked Cook why, as reported by Reuters, FINRA's BrokerCheck database does not permit violations data to be released “in bulk.”

Cook responded: “It's an area we’re looking at. Historically, the [BrokerCheck] system has been set up to focus on allowing customers to look at their brokers. Over time, we’re realizing that there's potential opportunity to having them be able to see patterns in their firm, so we have changed our policy on allowing folks to scrape information from our website so they can pull down that information.”

FINRA, Cook added, is also “looking at whether there are packages of [such] data that we could make available to researchers and others.”

FINRA announced in late July that it plans to seek comment on rule amendments relating to brokers with a history of misconduct, as well as amendments to allow the self-regulator to deny a new membership application if the applicant is subject to pending arbitration claims.

The requests for comment on brokers with a history of misconduct, approved by FINRA's board at the broker-dealer regulator's July 18 meeting, will be issued in forthcoming regulatory notices.

The SRO's chief also said that FINRA plans to publish additional guidance regarding broker-dealers’ supervisory obligations related to brokers that may “pose higher risk.”

Cook also explained to lawmakers that later this year, FINRA will provide brokerage firms with a new report that summarizes key exam findings from across FINRA's programs, “enabling them to use this information to strengthen their own control environment and address any potential deficiencies before their next exam.”

During his year-long listening tour that he launched in 2016 — his first year on the job — Cook said that in the roundtables he's held with small firms, one of their concerns is “how they will comply” with the Department of Labor's fiduciary rule.

“Our view is that it would be helpful for investors to have a uniform standard here,” Cook said, adding that the “different standards that have developed over time, even before the DOL rule,” have created confusion for investors. “We’ve got the broker rule; we’ve got the advisor rule. You need a law degree even to know what the open issues are,” he said.

As part of the FINRA360 initiative, which includes assessing measures the SRO can take to be more transparent, Cook noted that FINRA also launched new web pages related to its board's operations — governance and Board of Governors web pages.

Transparency on Arbitration Panel Diversity

Also in mid-September, the self-regulator also published data on the diversity of its arbitrator pool on its website. The move comes after complaints that FINRA panels were skewed toward older men and that transparency on arbitrators’ backgrounds was lacking.

The information is available on a new section of FINRA's website, which is dubbed: Our Commitment to Achieving Arbitrator and Mediator Diversity at FINRA.

In 2014, FINRA appointed an arbitration task force to its securities arbitration forum to suggest ways to improve the self-regulator's transparency, impartiality and efficiency. Richard Berry, FINRA's head of Dispute Resolution, has made launching such an online resource a top priority, FINRA said.

“I don't know of another arbitration forum that provides this level of transparency,” Berry said in a mid-September statement, adding that FINRA wants to “show we are committed to making steady progress in this area.” He noted the “significant short-term progress” in recruiting African-Americans and women. Of those arbitrators who joined the roster in 2016, 14% were African-American and 33% were women (compared to 2015 when 4% were African-American and 26% were women).

“While we are encouraged by these short-term results and incremental progress made, we recognize this is a long-term effort,” Berry added. “There is more progress to make, and we remain fully committed toward achieving our diversity goals.”

New Enforcement Set Up

Acting on feedback from the FINRA360 initiative, FINRA also announced plans to consolidate its enforcement functions into a new, unified group to be led by Susan Schroeder. Schroeder, executive vice president and head of enforcement, reports directly to Cook.

The new unit will bring together two distinct enforcement teams at FINRA: one handling disciplinary actions related to trading-based matters found through Market Regulation's surveillance and examination programs, and the other handling cases referred from other regulatory oversight divisions, including Member Regulation, Corporate Financing, the Office of Fraud Detection and Market Intelligence, and Advertising Regulation.

Brad Bennett, former head of FINRA's Enforcement Division and now a partner at Baker Botts in Washington, told IA in mid-September comments that the integration of the two enforcement departments “is a logical step that is certain to increase regulatory efficiency and thus is a win for broker-dealers and a win for investor protection.” Consolidating the enforcement teams “shows that Cook will be taking a vigorous approach to enforcement,” Bennett added.

A FINRA spokesperson told IA that the SRO is “at the beginning” of integrating the enforcement teams and expects that “it will take some time to complete.”

--- Read FINRA Nominates Large, Small Firm Members for Disciplinary Panel on ThinkAdvisor.

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