The Financial Industry Regulatory Authority plans to publish in the coming months additional guidance regarding broker-dealers’ supervisory obligations related to brokers that may “pose higher risk,” Robert Cook, the self-regulator’s CEO, said Monday.
“Our intention is to provide firms with a better understanding of what our expectations are on how they should go about identifying brokers who may merit heightened supervision and about what the elements of heightened supervision might be,” Cook said during remarks at Georgetown University’s McDonough School of Business Center for Financial Markets and Policy.
FINRA’s objective with the guidance, he continued, is to “elaborate on existing guidance. This would not be a rule filing, so we’re not making up new rules here. Based on our conversations with firms, there’s potential value in our providing some heightened guidance about what we think they should be looking at, and frankly to give them ideas about both ways they need to think about how to identify high-risk brokers and what steps they might consider taking to better supervise” those brokers. “Firms are really the first line of defense in this problem. Their compliance departments need to play a role, a very active role, … in both reviewing the hiring of individuals, the ongoing monitoring of their trading.”
Until the guidance is released, Cook said, “it is imperative that broker-dealers continue to work with us to reduce the risk of misconduct and ensure that investors can have confidence in their investment professionals.”
Cook noted in his speech, “Protecting Investors From Bad Actors,” the regulatory programs FINRA now has in place and is “continuing to develop.”
While “statistics demonstrate that bad actors who cause customer harm account for a small percentage of the industry,” Cook said that during his listening tour during the first year as CEO, “many firms have urged that FINRA be aggressive in dealing with bad actors” as the “damage caused by even a few bad actors can hurt not just the investors involved, but the reputation of the entire industry.”
Cook said he shared “this sense of urgency.”
FINRA Zeroing In on Hiring, Retaining of High-Risk Brokers
As noted in FINRA’s 2017 exam priorities letter, Cook noted that the self-regulator is paying particular attention to firms’ hiring or retaining of high-risk brokers, including whether firms establish appropriate supervisory and compliance controls for such persons.
“We are looking at 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,” he said.
FINRA is also zooming in on firms “with a concentration of brokers with significant past disciplinary records or a number of sales practice complaints or arbitrations,” he noted.
Yet another approach FINRA has taken on the bad-broker front is launching a new “dedicated unit” to centralize the identification and monitoring of high-risk brokers.
“This unit is composed of examiners and managers with the specialized skills and experience necessary for dealing with this broker population,” Cook said. The unit “works closely with examiners in our district offices and a team of enforcement lawyers who act quickly to bring disciplinary actions if misconduct is identified. These additional resources — which augment the focus on high-risk brokers that continues across the rest of our exam program — should enable us to improve our identification efforts and double the number of examinations we conduct in the program this year as compared to 2016.”
FINRA’s “membership application program” is also identifying “new and continuing member applicants that employ, or seek to employ, brokers with problematic regulatory histories, and is considering carefully whether these applicants have the experience and controls to adequately supervise these brokers.”