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August 02, 2021 at 03:03 PM
What You Need to Know
- The SEC approved a FINRA rule change that would place new obligations on member firms with a long record of misconduct.
- FINRA would also crack down on those BDs that employ brokers with such histories.
- FINRA found such firms often had a retail business engaging in cold-calling vulnerable investors to make recommendations of securities.
The Securities and Exchange Commission approved a proposed rule change by the Financial Industry Regulatory Authority that was created to crack down on broker-dealers with a long record of misconduct and those firms employing a large number of registered representatives with long disciplinary histories.
In its order on Friday, the SEC pointed out that, in November, FINRA filed a rule amendment proposal with the SEC that was designed to “help further address the issue of associated persons with a significant history of misconduct and the broker-dealers that employ them.”
FINRA’s proposed rule change would adopt a new Rule 4111 to “address the risks that can be posed to investors by broker-dealers and their associated persons” with long histories of misconduct, the SEC said.
The proposal would impose new obligations on BDs with “significantly higher levels of risk-related disclosures (including, notably, sales-practice related disclosure events) than other similarly sized peers based on numeric, threshold-based criteria,” according to the SEC.
“FINRA is trying to deprive rogue brokers of their safe havens at a small number of broker-dealers who are happy to let them continue to ring the cash register,” according to recruiter Mark Elzweig, president of Mark Elzweig Company.
“These advisors are typically serial offenders with long rap sheets,” he told ThinkAdvisor on Monday. “FINRA wants to make hiring these miscreants a less profitable business model. The overwhelming majority of conscientious, client-centered advisors will welcome their exit from the business.”
Restricted Firms
“Specifically, FINRA is proposing to adopt FINRA Rule 4111 (Restricted Firm Obligations) to require member firms that are identified as ‘Restricted Firms’ to deposit cash or qualified securities in a segregated account, adhere to specified conditions or restrictions, or comply with a combination of such obligations,” the SEC noted in its order.
FINRA is also proposing the adoption of FINRA Rule 9561 (Procedures for Regulating Activities) and amending FINRA Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series) to create a new expedited proceeding to implement proposed Rule 4111, the SEC pointed out.
“The proposed rule change would establish a process to give a Restricted Firm an opportunity to challenge the designation and the resulting obligations of that designation, as well as give the firm a one-time opportunity to avoid the imposition of obligations by voluntarily reducing its workforce,” according to the SEC.
