Finra will be able to tell investors searching a brokerage industry database whether a firm has a habit of misconduct or employs many registered representatives with disciplinary records, a move that compliance experts say increases transparency but may not provide enough context.
The Securities and Exchange Commission approved a rule proposal last Friday that would allow the Financial Industry Regulatory Authority Inc. to disclose on BrokerCheck that a brokerage has been designated as a “restricted firm.”
The label is applied to a firm that Finra determines poses a high-level of risk to investors based on firm and individual regulatory disclosures compared to firms of a similar size. A “restricted firm” is required to deposit money into an account controlled by Finra that could be used to fund arbitration awards and for other purposes. Finra also can place additional conditions on restricted firms.
The restricted-firm rule was proposed by Finra in 2019 and approved by the SEC in 2021. It went into force early last year.
With the latest SEC decision, Finra will be able to highlight restricted status on a firm’s BrokerCheck summary and detailed report. The broker-dealer self-regulator said it will announce when it will begin doing so after completing the first cycle of reviews of firms for restriction.
Patrick Mahoney, a Los Angeles securities attorney, said giving investors an idea of which firms have significant disciplinary problems goes to the heart of many arbitration claims, which often cite a lack of supervision as a cause of action.
“It’s arguably more valuable information than what is disclosed on an individual broker’s record,” said Mahoney, who owns an eponymous law firm. “It shows a problematic pattern of business conduct. If a firm doesn’t have the proper supervision in place, that’s a really serious problem.”
Although highlighting the restricted firm designation on BrokerCheck increases transparency for investors, it won't give them a firm’s entire story, said Ken Joseph, head of Americas compliance and regulatory consulting at Kroll.
“The context may not be there in the first instance,” said Joseph, a former official in the Finra enforcement and SEC examinations divisions. “An investor will be getting the current snapshot, not the [firm’s] prior history. You would not know if it’s a one-time restriction or part of a pattern and practice. That’s an important piece of information to have.”
Finra has been under pressure for years to rein in rogue brokers, and the restricted firm designation is part of that effort.
“The rule is designed to protect investors and the public interest by strengthening the tools available to Finra to address the risks posed by member firms with a significant history of misconduct,” the SEC said in its order. “It creates incentives for member firms to change behaviors and activities, either to avoid being designated or re-designated as a restricted firm.”
SEC approval of the BrokerCheck disclosure was first reported by AdvisorHub.
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