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Proposed FINRA Rule Would Address Supervision of Brokers Who Pose the Highest Risk to Investors

As part of its mission to regulate broker-dealers and their employees, the Financial Industry Regulatory Authority (FINRA) is now proposing a new rule to target what they are calling “restricted firms” and “high risk brokers.” The proposed rule comes after studies found that some firms persistently hire brokers who engage in misconduct, thereby concentrating misconduct at those firms.

With plans for imposing added obligations upon brokerage firms that employ these “rogue brokers” with a history of misconduct recidivism, the rule is a step in the right direction but falls short in terms of addressing unpaid arbitration awards.

A persistent problem in the financial industry, unpaid awards from shuttered firms account for tens of millions of dollars in losses each year. For many wronged investors, the latest FINRA proposal would only be a drop in the bucket. As part of the rule proposal, FINRA is beginning to address the problem of unpaid awards. The regulator has said it will look at whether a firm has any pending arbitration claims involving customers, or any unpaid awards when determining the amount the firm must deposit into its restricted fund. Funds from this pool can then be used to pay customer arbitration awards. While it is a positive step by FINRA to address the unpaid arbitration award problem, it is unlikely that the fund will be large enough to make a significant dent in the multi-million-dollar-a-year problem.

About the Proposed Rule

On Wednesday, May 15, 2019, FINRA CEO and President Robert Cook discussed elements of the recently proposed rule at the organization’s annual conference in D.C.

Here are a few key details about the rule:

  • The proposed rule targets the industry’s highest risk firms and brokers – brokerage firms that have a history of misconduct or which employ brokers with poor disciplinary records.
  • As noted by Cook, less than 2% of the 3,700+ brokerage firms currently under FINRA’s purvey would meet the definition of a “rogue broker” under the rule. FINRA has identified 61 firms which would meet the criteria, and notes they have 9 times as many instances of broker misconduct as the average in the industry.
  • Per the new rule, FINRA would impose additional and more aggressive requirements, examinations, audits, and higher capital requirements on targeted firms.
  • Should the new rule be approved, FINRA would also require these select firms to establish reserve accounts that set aside funds for handling customer disputes and paying arbitration awards to wronged investors.

Speak With a Nationwide Investment Loss Attorney: (800) 738-1960

As FINRA works on shaping its new proposed rule, our legal team at Meyer Wilson will continue to do our part in helping wronged investors explore their available options for recovering financial losses. We are committed to helping those wronged investors fight for the recoveries to which they’re entitled.

The information contained in The Firm’s posts on its blog, fraud alerts, investigations or elsewhere on the site is based upon information obtained from other sources including, but not limited to, news outlets and federal, state, and regulatory agency filings. All suspects and subjects of postings herein are presumed innocent until proven guilty in a court of law or administrative action and any and all crimes are alleged until a court or regulatory agency finds otherwise .

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