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

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.