Financial Advisor (July 18, 2022) - Broker-dealers designated as “restricted firms” by Finra because of the spotty records of their brokers may soon find that label slapped on their public BrokerCheck records

Finra has proposed disclosing a firm's “restricted” status on BrokerCheck, the public database that lists the regulatory histories of securities firms. The regulator, which is a private entity that acts as a self-regulatory organization for the industry, is asking the SEC for approval to begin making the names of restricted firms public in the second cycle of such designations being made. Firms have already begun getting first-cycle notifications from Finra that they “qualify” as restricted firms, although firms can appeal that decision.

Making public the names of firm’s that have a significant history of running afoul of investors and regulators is “the common sense next step” of Finra’s push to rid the industry of repeat offenders, Michael Edmiston, president of the Public Investor Advocates Bar Association, told the SEC in a public comment letter.

“Putting more information on BrokerCheck is a step in the right direction. However, most investors still do not know what BrokerCheck is, and that it is a place to get information about the firms and brokers through which they invest their monies,” Edmiston said in one of only two comment letters the SEC received on the proposal.

Currently, the public does not know which firms have been designated by Finra as restricted firms. Including the “restricted firm” categorization on firms’ public record would be a red flag to investors to carefully monitor their accounts with such a firm or even consider switching broker dealers.

Edmiston said for the new regulation to be effective, Finra should couple it “with an investor outreach program or marketing effort that draws attention to the importance of BrokerCheck and the types of information that can be found there. ... Most investors have no idea that their trusted financial professionals and firms had disclosure events, despite the fact that they were disclosed on BrokerCheck. We fear that the same would be true about the important “Restricted Firm” status disclosures absent a concerted outreach program."

BrokerCheck was previously improved by the adoption of a rule change disclosing a firm’s status as a taping firm that must record the conversations of risky brokers, law professors Nicole G. Iannarone and Christine Lazaro said in the other comment letter.

Lazaro is a professor of clinical legal education and director of the Securities Arbitration Clinic at St. Johns University Law School. Iannarone is a law professor at Drexel University’s Thomas R. Kline School of Law.

“Disclosure of restricted firm status would further improve BrokerCheck and allow retail investors to make more informed choices and ask pertinent questions to financial professionals before engaging them. Although we believe ... that additional steps should be taken, we recommend adopting the proposal as written so as not to delay the increased investor protection that will result from it,” the professors said.

A historic record of when and how many times a firm has been a restricted firm would assist investors in making informed decisions and may also disincentivize recidivism, the professors said.

“If a prior restricted firm status is disclosed via BrokerCheck, firms and associated persons will be incentivized to reform and not engage in future misconduct. For example, a lengthy period of time after a restricted firm designation has been removed may signal that a firm has made significant positive changes. Additionally, if historic restricted firm status is disclosed, firms will be incentivized to ensure that they are not so designated in the future because multiple such disclosures may impact investors’ decisions to work with them,” they added.