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Here’s How FINRA Defines a ‘High-Risk’ Broker

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How does the Financial Industry Regulatory Authority define a high-risk broker?

“There’s no hard, fast definition of a high-risk broker,” but FINRA does utilize criteria to identify them, said Mike Rufino, head of FINRA member regulation, during an “Ask FINRA” panel discussion Wednesday at FINRA’s annual conference in Washington.

FINRA employs a “quantitative and qualitative assessment,” with the broker-dealer self-regulator quantitatively looking at a “host of criteria that seems to be somewhat more predictive,” with help from FINRA’s advanced analytics team, Rufino said.

FINRA looks at an individual rep’s:

  • Settlements
  • Complaints
  • Disclosures
  • Employment history/termination history
  • Exam attempts
  • Geography — where the rep is located
  • Individuals who associate with high-risk brokers

“Then we use that quantitative assessment that we qualitatively assess and look at the number of complaints a broker has, the nature of those complaints,” Rufino said.

Next, FINRA also looks at individuals on a quantitative basis. “If you have a number of disclosures — the mere fact that you have a number of recent disclosures could elevate someone to being of high risk,” Rufino continued.

Also, if a rep is appealing a bar. “If FINRA has barred the individual and you have an appeal” to FINRA’s National Adjudicatory Council, “we deem those individuals to be of the highest risk, and they will automatically be deemed a high-risk broker by FINRA. We will monitor and examine those individuals very closely while they wait for their appeal.”

When conducting an examination of a broker-dealer, FINRA examiners will tell the BD if they deem an individual at the firm to be of “higher risk,” and that “we’re here to conduct an examination of that individual,” Rufino added.

Bob Colby, FINRA’s chief legal officer, noted FINRA’s Regulatory Notice 18-15, released on April 30, that provides guidance on when heightened broker-dealer supervision of an “associated person” may be warranted. FINRA also is seeking comments on proposed rule amendments that would impose extra restrictions on member firms that employ brokers with a history of “significant” past misconduct.

The proposal that’s out for comment, Colby noted, includes “some changes for high-risk brokers, including one that would require people to go to the NAC for ‘materiality consult’ if they want to promote or hire a rep that has a certain number of very serious dings on their BrokerCheck” record.

The proposal, he added, is “meant to be the first stage of the rules we’re thinking about to try to up the standards for these [high-risk] people.”

— Check out FINRA Issues Guidance, Seeks Comment on High-Risk Brokers on ThinkAdvisor.


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