Editorial

Finra comes in from out of the cold

The snowstorm that walloped most of the East Coast did not deter Finra's board from meeting in New York and moving on investor issues

Feb 16, 2014 @ 12:01 am

The snowstorm that walloped most of the East Coast did not deter Finra's board from meeting in New York last Thursday and putting one potential rule change out for public comment while adopting two others.

All three — one has to do with disclosure, and the other two come into play when an investor has a complaint that ends up in arbitration — will help investors.

Let's take them one at a time.

The first change requires brokers to include on their website a link to the Financial Industry Regulatory Authority Inc.'s BrokerCheck, a database of background information on brokerage firms and securities brokers that includes disciplinary history. The database can be a valuable tool for investors when they are researching firms and brokers they are considering hiring as their financial adviser.

The problem is that many investors don't know it exists. Anything Finra can do to raise BrokerCheck's profile among the public is a positive step toward more disclosure and transparency. While investors may not now know what BrokerCheck is, or where to find it, many know enough to do a rudimentary background check online of a firm or a broker they intend to entrust with their hard-earned money. That likely would include looking at the firm's website, where they would now find a link to BrokerCheck. This is especially helpful at a time when Finra is concerned with minimizing the impact of rogue brokers on the investing public.

While this measure is good for investors, Finra could have gone one important step further. Its original proposal, which was withdrawn after industry backlash, would have linked investors directly to a broker's profile, including disciplinary charges. That would have been more helpful, but even this latest, watered-down proposal, which the Finra board agreed last week to open up to public comment, is beneficial.

The next two rule changes have to do with arbitration. Right now, investors who file a complaint against a broker are forced to arbitrate the case, usually through a Finra arbitration panel. These panels are made up of three arbitrators who are either considered public arbitrators or non-pub- arbitrators with ties to the securities industry.

The panels had been made up of a mix of both public and industry arbitrators, but in the past few years, Finra has allowed investors to choose all-public arbitration panels.

The problem with Finra's old rule is that it allows industry arbitrators to call themselves public arbitrators as long as they haven't been associated with a brokerage firm for a five-year period or worked in the industry for 20 years or more. Similarly, attorneys, accountants and others who may have represented brokerage firms in the past could list themselves as public arbitrators as long as they hadn't received $50,000 in revenue from the industry over the past two years.

TRUTH IN LABELING

Under the rule adopted last week, these individuals would no longer be able to claim they were public arbitrators. If they wanted to participate in an arbitration hearing, they would have to identify themselves as non-public, industry arbitrators.

The third action taken by Finra has to do with expungement. After plaintiffs' attorneys and some members of Congress complained that too many brokers were getting disciplinary actions wiped from their records by arbitrators, Finra has proposed a rule that likely would reduce those numbers.

In the past, a broker would strike a settlement with a wronged investor contingent on that investor's agreeing not to oppose the broker's application for expungement. Since the monetary award was often more important to an investor than the broker's disciplinary record, in-vestors usually signed off, paving the way for the brokers to have their disciplinary slates wiped clean. The new rule would prohibit brokers from making settlements contingent on agreements not to oppose expungement.

The two proposed rule changes now move on to the Securities and Exchange Commission for final approval.

While none of these initiatives alone is a game changer, taken together, they are a sign that Finra understands that a fair and level playing field for investors also benefits the industry it serves and regulates.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

The biggest drivers in wealth management today

What's shaping the future of financial advice? After 10 years of MarketCounsel Summits, Brian Hamburger explains what's changed in the past decade and what stands ahead for adviser technology and regulation.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

House and Senate reach tentative compromise for tax overhaul

Lawmakers still need to get a cost analysis of their agreement, so it's not yet definite, according to a source.

Advisers' biggest fears for 2018

What keeps advisers up at night.

One adviser's story of losing his son to the opioid epidemic

John W. Brower, president and CEO of JW Brower & Associates, shares the story behind his son's death from a heroin overdose and how it inspired him to help others break the cycle of addiction.

Tax reform will boost food, chemicals, rail stocks. Technology? Not so much

Conagra and Berkshire Hathaway are two stocks that should benefit most from changes in the tax code.

Brace for steepest rate hikes since 2006 in new year

Citigroup, JPMorgan Chase predict average interest rates across advanced economies will climb to at least 1 percent in 2018.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print