There are many situations where a client has been wronged by an unethical advisor, the case goes to arbitration and the client is awarded a large sum for restitution, but the firm ends up closing their doors and the client never gets a dime.
MARINE ON ST. CROIX, Minn. (PRWEB) September 20, 2021
Broker-dealers with a history of misconduct who have also hired a high percentage of brokers with a similar track record need to brush up on a new Financial Industry Regulatory Authority rule that seeks to expose potential risks to investors by labeling these broker-dealers as “restricted firms.”
FINRA’s plan, approved by the Securities and Exchange Commission in late July, adopts Rule 4111, which uses criteria to decide whether to designate BDs as “restricted firms.”
The new rule becomes effective within 180 days of the issue of a regulatory notice, which FINRA plans to do by Sept. 30.
As part of the SEC approval, FINRA will propose amendments to Rule 8312 (FINRA BrokerCheck Disclosure), to provide information as to whether a particular member firm or former member firm is designated a “restricted firm” pursuant to Rules 4111 and 9561.
The SEC also approved FINRA Rule 9561 (Procedures for Regulating Activities) and amended FINRA Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series), to create a new expedited proceeding to implement Rule 4111.
The rule change sets up a process to give a restricted firm an opportunity to challenge the designation and the resulting obligations of that designation, as well as give the firm a one-time opportunity to avoid the imposition of obligations by voluntarily reducing its workforce, according to FINRA.
The rule change will give a restricted firm an opportunity to challenge the designation and the resulting obligations.
Jon Henschen says the benefit will be fewer unethical representatives and BDs that harbor large concentrations of such reps.
"We see this move by FINRA as a positive for the public and a negative for the broker-dealers that are categorized as a “restricted firm.” Since 2010, compliance standards and requirements have ramped up dramatically. To give you perspective, in the mid- ’90s when I brokered at the wirehouse, Prudential Securities, our branch manager said in passing, “If a broker doesn’t have a couple of dings on his compliance record, he’s probably not aggressive enough.”
That mindset was quite common in the ‘90s, but today the tolerance for bad broker behavior is much less.
Since 2010, we’ve seen a sharp decline in the number of advisors that were active stock and bond traders, and with that decline, we’ve seen a drop in the number of broker-dealers that catered to that market, many of whom had poor compliance histories on a BD and rep level. For the consumer, this was overwhelmingly a positive change.
Today, we still have active stock and bond traders and the firms that cater to this market, but they are in far lower numbers and are more concentrated in New York City, Long Island and Southern Florida.
This rule is intended to have money set aside to pay for litigation the firm may owe to clients in the event the firm is closed. There are many situations where a client has been wronged by an unethical advisor, the case goes to arbitration and the client is awarded a large sum for restitution, but the firm ends up closing their doors and the client never gets a dime.
These high-risk broker-dealers needing to have this reserve fund controlled by FINRA will be a layer of protection for the public.
Firms will have six months to make changes to not be under the category of “restricted firm.”
Firms that will be categorized as “restricted firms” or rogue brokerages will be similar to the firms that fall under the FINRA Taping Rule (FINRA Rule 3170).
The taping rule requires certain firms to install taping systems to record all telephone conversations between their registered persons and existing and potential customers, review those recordings and file reports with FINRA. The taping rule was designed to prevent fraudulent and improper practices in the sale or marketing of financial products and behavior that may otherwise cause customer harm.
These firms had a significant number of registered persons who previously worked for firms that have been expelled from the industry or have had their registrations revoked for inappropriate sales practices.
Firms that are told they will be categorized as a “restricted firm” will have a six-month window to shed enough advisors with poor compliance records to not be included in these additional requirements.
For advisors with clean compliance that are with such broker-dealers, they end up guilty by association and will have fewer resources at their disposal due to financial resources needing to go to the FINRA separate account.
Jon Henschen is founder of http://www.henschenassoc.com, an independent broker-dealer recruiting firm located in Marine on St. Croix, Minnesota. With more than 20 years of industry experience, Jon is a staunch advocate for independent financial advisors, and is widely sought after by both reps and broker dealers for his expertise and advice on independent broker dealer topics. He is frequently published and quoted in a variety of industry sources, including WealthManagement.com, ThinkAdvisor, Investment Advisor Magazine, Wealth Management Magazine, Financial Advisor IQ, Financial Advisor Magazine, Investment News and others.