The Financial Industry Regulatory Authority’s recently proposed rule to put restrictions on brokerage firms that employ brokers with a history of misconduct will, if adopted, impact “less than 2%” of broker-dealer firms, FINRA CEO Robert Cook said Wednesday.
Cook, speaking during a question and answer session at FINRA’s annual conference, said that while the broker-dealer self-regulator has been focused on reining in high-risk brokers for some time, the proposed Rule 4111 “is more focused on firms.”
Regulatory Notice 19-17, released on May 2, details FINRA’s 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 is seeking comment until July 1.
The new rule proposal identifies firms “that have a cluster of brokers with a high level of misconduct in the firm,” Cook said, adding that “relative to your peer group, you’re way out on the tail” regarding the number of misconduct events.
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.”
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.”
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