Financial Advisor (May 11, 2020) - Registered reps who have been barred from the securities or been the subject of other disciplinary actions are able to continue working without restrictions if they appeal the decisions—even when a final resolution of their cases takes years.
A new rule proposal, however, would change that.
Under a rule proposed last month, Finra and the National Adjudicatory Council (NAC) would have far greater authority to set requirements and place mandates on broker-dealers that employ reps who are seeking an appeal of their disbarment or other disciplinary measures for violations such as churning or fraud.
The rule would allow Finra and hearing officers to demand heightened supervision plans and broker restrictions tailored to prevent firms from allowing bad brokers to continue victimizing clients.
The changes will help protect investors and close a critical regulatory gap, the Public Investors Advocate Bar Association (“PIABA”) told Finra in comment letter last week. PIABA is a nonprofit that represents the interests of securities attorneys who represent investors.
Finra’s proposed rule recognizes the process “to remove a bad broker or expel a brokerage firm with a history of abusing investors takes significant time and, if the bad actor is allowed to continue abusing investors while this process is ongoing, Finra cannot appropriately protect the public,” PIABA President Samuel B. Edwards said.
If approved, the rule would give Finra and NAR hearing officers the authority to impose tailored conditions and restrictions on firms and brokers to minimize the potential of further harm to investors. Such restrictions could include prohibitions on variable annuity or penny stock liquidations, private equity offerings or requirements that a broker or his firm to post a bond to cover harm done to investors, Finra said.
Both Finra and NAR would also be granted the authority to request a written heightened supervisory plan which “must be acceptable to Finra. Finra will reject any plan that is not specifically tailored to address the individual’s prior misconduct and mitigate the risk of future misconduct,” the agency said.
Under the rule, firms that are required to tape record their brokers’ conversations with clients because they employ a high percentage of sanctioned brokers would be identified as a “taping firm” on BrokerCheck, the public database that allows consumers to conduct background checks on broker-dealers. The disclosure “will inform more investors of the heightened procedures required of the taping firm, and thereby incent investors to research carefully the background of a broker associated with the taping firm, Finra said.
Finally, Finra wants to require member firms to seek materiality consultations when a person seeking to become an owner, control person, principal or registered person has a significant history of misconduct.
“The obvious and concerning question in that years-long process involving a troubled broker that Finra now recognizes is, ‘What is he or she doing to his or her customers while the appeal is pending?’" Edwards said. "PIABA members have seen many cases over the years where bad actors have used the appeal process to perpetuate additional fraud against the investing public and appreciate that Finra is attempting to now stop this from continuing?
The rule is aimed at reducing recidivism among brokers who have a history of misconduct, supporters of the rule say.
“Finra needs to be able to strengthen its ability to actually stop these bad actors immediately, not just be able to identify them and then put them in a years-long process that allows further misconduct,” Edwards said.