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FINRA Pushes Ahead with New “Bad Broker” Rule



The Financial Industry Regulatory Authority (FINRA) has newly suggested a rule to put constraints on brokerage firms that hire brokers with a record of misconduct. If approved, it will pertain to “less than 2%” of broker-dealer firms, the CEO of FINRA, Robert Cook said Wednesday.

To further the mission of eradicating bad brokers, the Financial Industry Regulatory Authority Inc. has pointed out 61 firms that would encounter restrictions under the newly proposed Finra rule.

Confirmation of the Proposed Rule

While speaking during a question and answer session at FINRA’s annual conference, Cook explained that while the broker-dealer self-regulator has been concentrated with reining in high-risk brokers for some period, the proposed Rule 4111 “is more focused on firms.”

Regulatory Notice 19-17, published on May 2, features FINRA’s plan to embrace Rule 4111, which would assign commitments to broker-dealers that have considerably greater levels of risk-related disclosures than similarly sized associates. However, FINRA is pursuing opinion until July 1.

Expected Result of the Proposed Rule

The recent rule proposition specifies firms “that have a cluster of brokers with a high level of misconduct in the firm,” Cook said, expanding that “relative to your peer group, you’re way out on the tail” considering the number of misconducts.

FINRA also declares that it would “preliminarily identify these members by using numeric, threshold-based criteria and several additional steps that would guard against misidentification.”

The duties could include obliging a broker-dealer “to maintain a specific deposit amount, with cash or qualified securities, in a segregated account at a bank or clearing firm, from which the member could make withdrawals only with FINRA’s approval. This proposal also aims to preserve firm funds for payment of arbitration awards against them.”

FINRA also states in the proposal that it “would achieve this both through how a member’s ‘covered pending arbitration claims’ and unpaid arbitration awards could impact the size of its restricted deposit requirement, and a presumption that a member would continue to maintain a restricted deposit if it has any ‘covered pending arbitration claims’ or unpaid arbitration awards.”

The most number of firms that would be subject to the new rule, 55, are known as small firms, or those with less than 150 registered reps and advisers, according to Finra. The distinct six are mid-sized broker-dealers, or the ones with 151 to 499 brokers.

Those broker-dealers are prone to risk of continuing bad actions, according to FINRA data, Mr. Cook noted.

Pennsylvania & New Jersey Securities Lawyers

If you or someone you know has been the victim of broker misconduct or investment fraud, please contact our securities attorneys immediately for a free consultation toll-free at 215-462-3330 or by using our online contact form.

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