Finra Proposes New Crackdown on Rogue Brokers
The brokerage industry’s self-regulator is accelerating efforts to crack down on rogue brokers by requiring firms to increase oversight once it charges them with violations and by identifying such “high-risk” brokers through a special team of examiners in New York.
The Financial Industry Regulatory Authority is spending more resources on the high-profile issue with full awareness that the 400 or so “bad” brokers it believes to be operating are a sliver of some 650,000 registered representatives. Its crackdown may give a false impression of the integrity of the industry, executives at Finra’s annual meeting said this week.
“Our presence helps highlight the bad apples…and we can in no way compromise our focus on that,” Finra President and Chief Executive Robert Cook said after a keynote talk Wednesday when an audience member questioned how the regulator can help control “the large shadow” that a few bad brokers cast over the entire industry.
Although there are a relatively small number of bad brokers, and “percentages matter,” Cook urged brokerage firms to work together with the regulator on its campaign.
Finra’s board last week approved a proposed rule amendment to require brokerage firms to adopt heightened supervisory procedures for individuals while a disciplinary case is pending appeal, he said.
If approved by the Securities and Exchange Commission, the rule would address the fact that appeals brought by brokers charged with violations can last years in several venues and that they continue to operate, often at firms that turn blind eyes to rogue activities, other Finra officials said earlier at the conference.
Finra further intends to issue a regulatory notice “to reinforce and clarify firms’ existing supervisory obligations concerning any high-risk brokers they may employ,” and its board last week also approved a change to sanction guidelines that lets arbitrators “consider more severe sanctions when a respondent’s disciplinary history includes significant past misconduct,” Cook said.
At least one attendee said his firm is well ahead of such rules. “There is no event where we will put someone on heightened supervision because if we’re asked to do it we will ask them to leave,” Paul Tolley, chief compliance officer of independent broker-dealer Commonwealth Financial Network, said during a conference panel on Tuesday.
Finra last year set up an office of about five examiners in New York City to conduct targeted exams of the top 200 rogue brokers it has identified and another 200 it has identified for pursuit by other regions, New York regional director Michael Solomon and regulatory operations head Susan Axelrod said at earlier sessions at the conference. For firms and brokers to fall into the riskiest of the regulator’s five risk levels, the teams look for signs that include the seriousness and volume of recent complaints, reneging on paying past arbitration awards, resist gravitating toward selling advisory rather than brokerage accounts, and apply in relatively brief periods for a large number of regulatory exams, Solomon said.
In the short period in which the group has existed, the “yield” in terms of fines and referrals to enforcement have been “pretty good,” he said.
Cook, for his part, said he understands the sensitive balance that Finra is seeking between policing and championing the vital role of brokers in helping investors and small businesses. In a talk he will give next month at Georgetown Law School, he said he will elucidate on the common goals Finra has with brokerage firms “to ensure that investors can have confidence in their investment professionals and that bad actors are removed from the industry.”
The fact that securities firms have a self-regulator should distinguish them from other less regulated industries, he said.
Separately, Cook, a former director of the SEC’s Trading & Markets division who became head of Finra last August, distinguished himself from his predecessor Richard Ketchum by saying that he has no interest in having the regulator oversee registered investment advisers who are currently examined by the SEC or state regulators.
“Our focus is on responding to the SEC’s request to make sure we are focusing on the brokerage industry,” he told reporters after his speech. “Whether there might be future changes in time I don’t know, but we’re focused just on the broker-dealer side.”
— Mason Braswell contributed to this story.