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FINRA Seeking Approval To Increase Scrutiny for “Problem” Brokers and Their Dealers

Tuesday, August 1, 2017

FINRA proposes increased regulations to help curb criticism from Congress and the Public Investors Arbitration Bar Association, as well as to strengthen the regulatory industry in general. FINRA has proposed changes to its membership process designed to find and limit membership of problematic brokers or firms.

The changes would force firms to consult with FINRA and file continuing membership applications if they want to hire brokers or to promote a broker to an ownership or principal position if they have “specific risk events” in their history. Per Mr. Daniel Nathan, a former FINRA vice president and director of regional enforcement in a recent Investment News article, “It shifts the burden of proof. You’ve got to prove to FINRA that the person is OK.” The effectiveness of the proposal really depends on how low or high FINRA defines the “risk events” that trigger FINRA consultations.

The proposal would also allow FINRA to “presumptively deny” a new membership application if a firm has pending arbitration claims, an unpaid arbitration award or an unpaid settlement related to an arbitration. This would give FINRA more tools to help prevent bad actors from rejoining and would help prevent firms with outstanding arbitration claims from avoiding payments through asset transfers or other corporate transactions.

Firms should be very selective in who they hire. If a potential new hire has a history of complaints, these new proposed rules will make it very difficult to get FINRA approval. Even if they are approved, the firm is opening itself up for increased scrutiny.

Need help vetting new hires? Red Oak is here to help you throughout the hiring process.

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