Finra proposes rule to hit rogue firms in the pocketbook

Regulation would require firms to maintain funds that Finra would control to pay arbitration awards and for other purposes

May 2, 2019 @ 5:43 pm

By Mark Schoeff Jr.

Brokerages that have a track record of violations or that hire a high number of registered representatives with disciplinary actions in their past would draw tougher oversight under a Finra rule proposal released on Thursday.

Firms targeted by the Financial Industry Regulatory Authority Inc. as posing a heightened risk to investors, deemed "restricted firms," would also be required to shift money or qualified securities to an account controlled by Finra at a bank or clearing firm.

The money in the segregated account, which could not be withdrawn without Finra's written consent, could be used to fund arbitration awards or for other purposes. Finra has been under pressure for years to reduce the number of unpaid arbitration awards.

"I think it's a very effective proposal because it actually has an impact on [a firm's] pocketbook," said Elisse Walter, a Finra board member and former Securities and Exchange Commission chairman. "It is money that is then a buffer, and I think it will make a tremendous amount of difference."

Finra's ability to dip into rogue firms' finances is the key to deterrence, according to Emily Gordy, a partner at the law firm McGuireWoods and a former Finra senior vice president for enforcement.

"It is more than having funds available to pay awards or judgments," Ms. Gordy said. "The restrictions of a portion of the firm's capital, absent Finra's OK to access, impacts the bottom line, and they clearly hope that it will change the behavior of the small number of firms they are most concerned about."

But Daniel Nathan, a partner at the law firm Orrick, said segregating firm money is heavy-handed.

"It feels like this is a back-door way of imposing additional capital requirements on firms that Finra doesn't like, or, alternatively, a way of making firms off-load reps as a way of avoiding the capital requirements," said Mr. Nathan, a former Finra vice president and director of regional enforcement.

The proposal is open for public comment until July 1. Finra rules must be approved by the SEC, which often conducts its own comment process.

Finra has been under pressure for years to crack down on firms that hire a high number of brokers who have violated the self-regulator's rules and caused investor harm. In April 2018, it issued guidance on heightened supervision.

Under the new proposal, firms would be selected for tougher Finra oversight by a multi-step process in which Finra calculates whether they have exceeded misconduct thresholds. Finra is zeroing in on firms that hire brokers with a record of violations.

"Finra has identified certain firms that have a concentration of individuals with a history of misconduct, and some of these firms consistently hire such individuals and fail to reasonably supervise their activities," the proposal states.

At the end of last year, there were 20 small firms (fewer than 150 registered representatives) with 30 or more disclosure events over the last five years, according to Finra. There were 10 mid-size firms (with between 151 and 499 reps) with 45 or more disclosures and five large firms (more than 500 reps) with 750 or more disclosures.

Under the proposal, Finra would be more nimble in confronting those firms because it could use the disclosure threshold calculation rather than the slower examination and enforcement tracks.

"The idea is to [react] when the risk is identified as opposed to when the disciplinary process is completed," Ms. Walter said.

But Mr. Nathan said enforcement can be inefficient for a good reason.

"Sometimes enforcement is wrong, and the firm is not deserving of discipline," he said.

Firms would be able to appeal a "restricted" designation.

"There is a process built in to make this fair," Ms. Walter said.


What do you think?

View comments

Upcoming event

Nov 20


Future of Financial Advice

An innovative conference dedicated to improving the client experience by enhancing digital technology, mainstreaming healthcare and optimizing wealth management strategies.The Future of Financial Advice will provide a forum for... Learn more

Most watched


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

How to suspend Social Security benefits

Mary Beth Franklin says the move can boost future benefits but advisers and their clients should beware of unintended consequences.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession.

Vermont establishes restitution fund for victims of investment fraud

Portion of settlements with financial perpetrators would supply the pool.

10 IBDs with the most variable annuity revenue

Although the popularity of VAs has declined in recent years, some independent broker-dealers still do a good business in them.

Target-date fund design may be wrong for retirees

Researchers suggest the funds don't adequately hedge against sequence-of-returns risk in retirement.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print