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FINRA Seeks Comment on New Broker Misconduct Rule

The Financial Industry Regulatory Authority is requesting comment on a new proposed rule that would target and impose financial obligations on brokerage firms with a “significant” history of broker misconduct.

The Financial Industry Regulatory Authority is requesting comment on a new proposed rule that would target and impose financial obligations on brokerage firms with a “significant” history of broker misconduct compared to their similarly sized peers. The comment period expires on July 1, 2019.

FINRA is proposing to adopt Rule 4111, which could require a firm with excessive risk-related disclosures to deposit a specific amount of cash or qualified securities into a separate account at a bank or clearing firm, and withdrawals could only be made with FINRA’s approval. The proposal also aims to preserve funds for payment of arbitration awards against them.

“The member firms that could be subject to these obligations, while small in number, present heightened risk of harm to investors and their activities may undermine confidence in the securities markets as a whole,” the proposal states. “The proposal would further promote investor protection and market integrity and give FINRA another tool to incentivize member firms to comply with regulatory requirements and to pay arbitration awards.”

FINRA believes that a restricted deposit is most likely to change members’ behavior through its direct financial impact.

“While [FINRA’s] efforts have strengthened protections for investors and the markets, persistent compliance issues continue to arise in some FINRA member firms…,” the proposal stated. “Such firms generally do not carry out their supervisory obligations to ensure compliance with applicable securities laws and regulations and FINRA rules, and they often act in ways that harm their customers and erode trust in the brokerage industry.”

The regulators pointed to evidence in recent academic studies that past disciplinary and regulatory events can be predictive of similar future events.

FINRA said that it would preliminarily identify the bad actors by using numeric, threshold-based criteria and several additional steps that would “guard against misidentification.” The thresholds for the criteria are based on several categories of events and conditions of broker and firm disclosures, firm sizes, and lookback periods.

Comments on FINRA’s proposed Rule 4111 can be emailed to pubcom@finra.org.

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