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Regulation and Compliance > Federal Regulation > FINRA

FINRA to Release More Guidance on Bad Brokers

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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.”

Steps taken by FINRA’s Board in May, Cook said, include proposing a rule amendment to require brokerage firms to adopt heightened supervisory procedures for individuals while a disciplinary case is pending appeal.

Cook noted that FINRA set up an internal senior staff working group last year “to consider new approaches to identify and address the risk of broker misconduct,” and that FINRA’s Board of Governors has formed a special working group, led by former Securities and Exchange Commission Chairwoman Elisse Walter, to focus on FINRA’s oversight of high-risk brokers.

“We also intend to reinforce and clarify firms’ existing supervisory obligations concerning brokers they employ that have disciplinary histories,” Cook added. “Among other measures, the proposals would also expand sanction guidelines to enable adjudicators to consider more severe sanctions when an individual’s disciplinary history includes additional types of past misconduct. They also would allow hearing panels, in appropriate circumstances, to restrict the activities of firms and individuals while a disciplinary matter is on appeal.”

In 2016, Cook noted that FINRA brought 1,434 disciplinary actions against registered individual brokers and firms; 1,244 individuals and 50 firms were suspended or barred from the industry. Also, in the last two years (not including 2017), the self-regulator has ordered some $124 million in restitution to harmed investors.

After identifying a high-risk firm, Cook said FINRA typically examines that firm “annually with specialized, experienced examiners, often accompanied by enforcement attorneys to facilitate follow-up action.”

The “heightened scrutiny has had an impact,” he said. Of the firms assessed as higher risk in the last five years, more than 40% are no longer FINRA members, in many cases because of regulatory action.

Too Many Designations

Kevin Keller, president and CEO of the Certified Financial Planner Board of Standards, who attended the event, asked Cook if FINRA and the CFP Board could “work together to help limit or reduce or at least help the public make the informed decision” about the nearly 170 designations that appear on FINRA’s website.  

“In addressing bad actors, many frequently use misleading or meaningless designations and certifications,” Keller said to Cook.

Cook responded: “There are a lot of designations out there. One thing a new investors should be focused on is the designation and looking behind the title. That’s one of the reasons our website lists the various designations that are out there, so that you can get a better sense for what it actually means — those acroynms that come after someone’s name.”

It does require “some work on the part of the investor to unpack what kind of training and testing, what kind of continuing education requirements are they subject to. FINRA requires all those things of brokers, whether or not they have letters after their name. Certainly if they do, you want to understand what those differences are. I think we’re not prepared to get too much into the role of being the ultimate decider of which designations are good and which ones aren’t and ranking those designations somehow.”

On the other hand, Cook added, “if people are aware of designations that are being used in a misleading way, then that of course would be of great interest to us.”

— Check out FINRA Named CFP Board CE Partner on ThinkAdvisor.


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