The Financial Industry Regulatory Authority on Thursday proposed a plan to place restrictions on brokerage firms that hire brokers with a history of misconduct, including requiring the firm to have a fund to cover unpaid arbitration awards.
In Regulatory Notice 19-17, FINRA is seeking comment until July 1 on its plan to adopt Rule 4111, which would impose obligations on broker-dealers that have significantly higher levels of risk-related disclosures than similarly sized peers.
FINRA states that it would “preliminarily identify these members by using numeric, threshold-based criteria and several additional steps that would guard against misidentification.”
The obligations could include requiring a broker-dealer “to maintain a specific deposit amount, with cash or qualified securities, in a segregated account at a bank or clearing firm, from which the member could make withdrawals only with FINRA’s approval. This proposal also aims to preserve firm funds for payment of arbitration awards against them.”
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The proposal, FINRA states, “would achieve this both through how a member’s ‘covered pending arbitration claims’ and unpaid arbitration awards could impact the size of its restricted deposit requirement, and a presumption that a member would continue to maintain a restricted deposit if it has any ‘covered pending arbitration claims’ or unpaid arbitration awards.”
A restricted deposit, FINRA states in the notice, is the most effective tool to change the behavior of the firms that present a high degree of risk to the investing public. “FINRA believes that a restricted deposit is most likely to change such members’ behavior — and therefore protect investors — through its direct financial impact.”
FINRA plans numeric thresholds based on six categories of events or conditions, nearly all of which are based on information disclosed through the Uniform Registration Forms.
1. Registered Person Adjudicated Events;
2. Registered Person Pending Events;
3. Registered Person Termination and Internal Review Events;
4. Member Firm Adjudicated Events;