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May 17, 2022


FIRMS FIRE HIGH RISK BROKERS AS FINRA TAKES AIM AT ROGUE ACTORS

by Mason Braswell
|
Enforcement, News
|
FINRA
|
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Broker-dealers are in some cases firing brokers as the Financial Industry
Regulatory Authority gears up to enforce a new rule targeting firms with a
significant history of misconduct, a senior Finra official said on Tuesday. 

Those firms are proactively looking to avoid potentially falling under new
obligations that would be imposed under Finra Rule 4111 if they, or their
brokers, have surpassed thresholds for regulatory or investor-harming
disclosures, according to Lance Burkett, senior director of retail risk
monitoring at Finra. 

“We have heard and we have seen representatives being terminated at this point
prepping for the rule,” Burkett said at a panel discussion about the rule
broadcast from Finra’s Annual conference in Washington D.C. 

Rule 4111 took effect in January, but Finra’s first evaluation to determine
which firms will qualify will take place in July. The data will be based on
firms and their brokers’ disciplinary history as of June 1. Firms deemed to be
higher risk could be forced to set aside funds to cover future regulatory issues
or face additional restrictions on hiring, supervision or limits on product
sales under the rule. 

More brokers could come under the microscope once Finra sends out early
indicators to firms in June about how they rank. Firms that ultimately cross the
thresholds in July will also have an opportunity to terminate brokers within 30
days to stay below the threshold.

Kosha Dalal, an associate general counsel at Finra who helped craft the rule,
said the intention is for those brokers who are terminated also to have a harder
time finding a new home.

“If a firm reduces staff to let go of a potentially high risk individual, we
don’t want to have that individual just move to another firm,” Dalal said on the
same panel. “We want to make sure that the firms are actively thinking about the
individuals that they are onboarding.” 

In response to public feedback, Finra is also planning to propose to the
Securities and Exchange Commission an amendment to the rule that would allow it
to publicly disclose on firms’ BrokerCheck reports when the firm is subject to
Rule 4111 restrictions, Dalal said. 

Burkett said that Finra expects only a “low portion” of its 3,400 member firms
to ultimately qualify for restrictions, although the regulator has not run its
evaluation yet so it does not have a precise estimate. 

Metrics will include firm size, and number of registered brokers it employs with
prior disciplinary history as well as the number of arbitration and regulatory
events against the firm itself. It also counts the number of brokers who have
come from previously expelled firms. 

“Firms that have individuals who come from previously expelled firms have a
higher likelihood of future misconduct,” Dalal said. “The statistics just bear
it out.” 

Firms will also get a preliminary report indicating whether they are likely to
qualify and must go through a multi-step process, including a consultation with
Finra staff, before the regulator makes a final decision whether to add them to
the restricted list. Finra will re-run its calculation annually. 



In its 2018 proposal, Finra said it identified over a prior five-year period 20
small firms employing 150 or fewer registered persons that had 30 or more
disclosure events, ten mid-size firms with 45 such disclosures, and five large
firms with 500 or more registered persons that had 750 or more disclosure
events. 

The SEC approved the initial rule in July last year as academic studies
indicated that brokers with a history of misconduct were likely to be repeat
offenders. Investor advocates and members of congress had also raised concerns
with Finra about firms that skirted payment of arbitration awards in customer
harm cases. 



Dalal said Finra will take into account firm revenues, amount of insurance
coverage it has, pending arbitration complaints and unpaid awards as part of its
determination of the maximum cash deposit it could require.

FINRA SETS YEAR-END DEADLINE FOR MORE FLEXIBLE WFH RULES

The industry’s self regulator recently advanced four related proposals tied to
remote supervision.

May 17, 2022

In "News"

SEC APPROVES FINRA’S DEPOSIT REQUIREMENT RULE FOR HIGH-RISK FIRMS

But broker-dealers and brokers engaged in misconduct will often uncover ways,
despite the new rule, to avoid the regulators’ grasp, a former enforcement
lawyer predicted.

Aug 3, 2021

In "Enforcement"

FINRA BARS EX-EDWARD JONES BROKER AFTER CLIENT SAYS HE REFUSED TO RETURN $893K

Edward Jones has reimbursed the client for losses, a spokesperson said.

Apr 13, 2022

In "News"

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Comments (2)
 * on May 17 2022, Paul says:
   
   biggest bad actors are the bigger firms that refuse to terminate high
   commission brokers that abuse clients because it would entangle thier high
   recruiting managers that through huge upfront bonuses stimulate overcharging
   clients to make these bonuses. Nothing is ever done to these brokers or their
   managers who also profit from this scheme unpess they lose big and cannot
   settle the client arbitrations which the firms try tp do to bury all these
   real client abise matters. Then to distract the regulators away from this
   behavior they make a big deal on minor omissions of internal firm rules
   judging and terminating brokers before them having a day in front of
   arbitration. Objective to seem to be doing a good compliance job while
   executing a sweep under the rug approach to the big client abuse cases.
   
   > Reply to Paul
   
 * on May 17 2022, The PoPo says:
   
   The biggest bad actors are at these small dink firms (see Ex-UBS Rep in
   Texas) .. — Scooping up fired brokers is the only reason third rate places
   like Stifel even exist.
   
   > Reply to The PoPo
   


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