Finra seeks to raise pressure on firms hiring rogue brokers, avoiding arbitration payments

Board advances proposals to amend membership applications to allow the regulator to scrutinize troubled brokers, pending monetary awards

Jul 19, 2017 @ 1:57 pm

By Mark Schoeff Jr.

The Finra board has advanced proposals that would give it more opportunities to put pressure on financial firms that hire brokers with checkered disciplinary histories or avoid paying arbitration claims.

In a meeting Tuesday, the board authorized the Financial Industry Regulatory Authority Inc. to propose changes to the Finra membership process that could force firms to consult with the regulator and file a continuing membership application if they want to hire a broker "with certain specified risk events" or promote a broker with such a background to an ownership or principal position.

The board also gave its OK for Finra to propose a rule that would allow the organization to "presumptively deny" a new membership application if a firm has pending arbitration claims. A firm also could be forced to consult with Finra and file a continuing membership application when expanding or transferring assets if the firm "has a substantial level of pending arbitration claims, an unpaid arbitration award or an unpaid settlement related to an arbitration."

The moves help Finra address two ongoing problems: the re-emergence of brokers with disciplinary violations at new firms, and firms that don't follow through and pay arbitration awards to investors who win claims.

Finra president and chief executive Robert Cook said the broker conduct proposal was being advanced because of feedback he's received from a listening tour of Finra members he has been conducting over the first year of his tenure, which began last August.

"Many of these firms have urged that Finra be more aggressive in dealing with bad actors," Mr. Cook said in a video message following the board meeting. "As they have said, 'The damage caused by even a few bad actors can hurt, not just the investors involved but the reputation of the entire industry.'"

Finra is stepping up its effort to target rogue brokers by making firms justify hiring them, said Daniel Nathan, a partner at the law firm Morvillo.

"It shifts the burden of proof," said Mr. Nathan, a former Finra vice president and director of regional enforcement. "You've got to prove to Finra that the person is OK. They're using all their powers to squeeze out brokers who have some kind of problematic history."

Andrew Stoltmann, a Chicago securities attorney, sees it as more of a tentative move.

"This appears to be another incremental step for brokerage firms that wish to hire a broker with a history of customer complaints," said Mr. Stoltmann, the incoming president of the Public Investors Arbitration Bar Association.

The effectiveness of the proposal will hinge on how high Finra sets the level of broker misconduct that triggers the consultation, according to Linda Riefberg, special counsel at Cozen O'Connor.

"If they're defining any discipline, that could be pretty burdensome," said Ms. Riefberg, a former Finra enforcement chief counsel. On the other hand, if a factor such as "willfulness" is included, the bar is higher.

"It really depends on how low or high they define the risk event," she said.

Finra has been criticized by PIABA as well as members of Congress over firms shirking arbitration payments.

"These amendments would give us more tools to make sure that firms with outstanding arbitration claims can't avoid paying those claims through asset transfers or other corporate transactions," Mr. Cook said.

But Mr. Stoltmann said that proposal doesn't solve the problem.

"That doesn't put money into anybody's pocket," he said. "It doesn't give investors any recourse for collecting. It's just a procedure that closes the barn door once the horse is afoot."

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