Bates Research  |  05-17-17

FINRA Proposes New Requirements To Address High-Risk and Recidivist Brokers


On January 4, 2017, FINRA President and CEO Robert Cook issued the organization’s Annual Regulatory and Examinations Priorities Letter which focused on the “blocking and tackling issues of compliance, supervision and risk management.” The letter contained a commitment to “devote particular attention to firms’ hiring and monitoring of high-risk and recidivist brokers, including whether firms establish appropriate supervisory and compliance controls for such persons.” 


Last week, FINRA took a significant step toward making good on this commitment when the Board of Governors approved a set of proposals to “strengthen controls on brokers with a history of significant past misconduct and to ensure greater accountability for firms that choose to employ high-risk brokers.” Based on FINRA data and analyses, the proposals are designed to identify these brokers and enhance tools for disciplinary actions, enhanced examinations, and ongoing surveillance. FINRA will issue a series of Regulatory Notices seeking comment. The proposals include:

  1. amending sanctions guidelines to allow adjudicators to consider more severe sanctions when an individual's disciplinary history includes past misconduct;
  2. amending eligibility rules to toughen requirements for firms hiring high-risk brokers;
  3. amending rules on disciplinary proceedings to include the use of hearing panels, in certain circumstances, in order to restrict the activities of firms and individuals while a disciplinary matter is on appeal;
  4. rearticulating firms' heightened obligations over high-risk brokers under existing supervision rules including heightened supervisory procedures for brokers in cases where a statutory disqualification request is under review, or the broker is appealing a hearing panel decision;
  5. amending FINRA by-laws to raise the statutory disqualification eligibility application fee for individuals, and enact a new fee for firms to reflect the additional time it takes staff to screen applications;
  6. amending disclosure rules for BrokerCheck for firms subject to existing “taping” requirements in cases where the firm has a specified percentage of registered representatives who were formerly employed by disciplined firms; and
  7. revising the guidelines for reviewing requests of a waiver from FINRA exam requirements to allow for broad consideration of past misconduct of an individual, including arbitration awards and settlements.


FINRA released no new data on the scope of the problem, though in remarks delivered at this week’s 2017 FINRA Annual Conference, Mr. Cook noted: “over the last several years we have bolstered our programs that use quantitative data analytics and qualitative measurements to identify and monitor high-risk brokers and firms.” 

As to existing and public analysis on the scope of the problem, a March 4, 2016 Think Advisor article cited a National Bureau of Economic Research (“NBER”) report that reviewed 10 years of records from the BrokerCheck database (from 2005-2015). The NBER report found that overall, 12% of advisors have been accused of bad behavior, and 7.7% settled a claim or had been fined. One of the study’s authors stated that “the per-year level of misconduct across some 1.2 million registered representatives was less than 1% in the 2005 to 2015 period.” Repeat offenders account for some 33% of advisors with misconduct records and that 52% of offenders on average leave their firms, with 48% remaining. “Of those that leave, however, nearly half (or 44%) are hired as advisors by other firms within a year," he said.

As reported by Think Advisor, SIFMA stated that the report "does not adequately highlight the positive steps being taken in the industry today to curb misconduct," and took exception, stating: “we believe [the] model overstates the level of relevant misconduct, including allegations related to declines in value due to volatility or infractions completely unrelated to the advisors’ professional responsibilities.” Further, SIFMA said: “We believe the report fails to properly explain the process used by one regulator, FINRA, which reviews all disclosure filings and initiates enforcement proceedings or statutory disqualification proceedings as appropriate to properly penalize the small minority of registered representatives who engage in true sales practice misconduct.”

There is no doubt that by proposing to give wider latitude to adjudicators to impose tougher sanctions, to raise fees and firm obligations, and to enhance disclosure and the reliance on information contained on BrokerCheck, FINRA is raising the bar. These new requirements will have costs and consequences. The responses to these proposals will establish whether the benefits are perceived to be worth those costs. 

FINRA announced plans to address the topic of high-risk brokers in more detail in June. Bates will keep you apprised


What do you think? Follow us on LinkedIn or Twitter to join the conversation!


Get Bates Group News and Alerts in your Inbox

Sign Up Now

Contact Bates Group

Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.

Contact Bates Group