While FINRA keeps adding rules on member firms to prevent the hiring of brokers with a misconduct history, it also harms brokers and firms who do not have a significant history of misconduct.
This time around FINRA is hitting firms that it deems to be hiring disciplined brokers financially, by requiring those firms to make deposits to be used to pay arbitration awards to customers. Unfortunately, FINRA has not set forth the criteria for making the determination of which firms will be hit with this burdensome requirement, nor has it said how much of a deposit will be required.
It seems to me that this rule is arbitrary, and designed to financially punish firms that it deems to be bad actors, without defining what constitutes being a bad actor. In addition, this proposed rule sets up an end run of the federal and state bankruptcy laws, essentially preventing firms who are in financial trouble from declaring bankruptcy, since withdrawals from the deposit cannot be made without FINRA approval.
Adopting a rule that gives its own Staff the ability to decide who has to make the deposit, and the amount of that deposit, removes capital from those firms, harms their ability to continue to operate, and in the long run, harms the owners and brokers who are employed at those firms.
FINRA admits that this rule will create a financial hardship on small firms, and states in the rule proposal “FINRA believes that the direct financial impact of a restricted deposit is most likely to change such member firms’ behavior—and therefore protect investors.”
While protecting investors is obviously an important goal, making it financially impossible for firms to operate, using vague rules and criteria does not protect investors, it harms brokers.
While misconduct by firms or brokers should certainly be addressed this Minority Report type of regulation is an unnecessary burden on small firms. The reality is that FINRA has enormous tools at its disposal to prevent the harm to investors, through its examination and enforcement proceedings and it admits in its rule proposal that it has already taken steps to address potential violations by firms, including:
- Published Regulatory Notice 18-15, which rearticulates the obligation of member firms to implement heightened supervisory procedures tailored to the associated persons with a history of misconduct;
- Proposed rule amendments that would require a member firm to conduct with FINRA a materiality consultation before allowing persons with a history of misconduct to become owners, control persons, principals or registered persons of a member firm; authorize the imposition in a disciplinary proceeding of conditions and restrictions on the activities of a respondent member firm or
respondent broker that are reasonably necessary for the purpose of preventing customer harm, and require a respondent broker’s member firm to adopt heightened supervisory procedures for such broker, when a disciplinary matter is appealed to the NAC or called for NAC review; require firms that apply to continue associating with a statutorily disqualified person to include in that application an interim plan of heightened supervision that would be effective
throughout the application process; and allow the disclosure through FINRA BrokerCheck of the status of a member firm as a “taping firm” under FINRA Rule 3170 (Tape Recording of Registered Persons by Certain Firms);
- Published Regulatory Notice 18-17, which announced revisions to the FINRA Sanction Guidelines;
- Raised fees for statutory disqualification applications; and
- Revised the qualification examination waiver guidelines to permit FINRA to more broadly consider past misconduct when considering examination waiver requests.
FINRA has also quadrupled the filing fees for making a request for expungement to over $3,000 for simply making the request.
All to the benefit of larger firms who will undoubtedly not be subjected to such onerous requirements.
Small firms who are subject to these new financial requirements will need to be prepared to negotiate with FINRA, and to file legal proceedings to address the new requirements, which undoubtedly violate due process.
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Introductions and Primers
- What is Securities Arbitration?
- Overview of the Securities Arbitration Process
- The Firm’s Lawyer or Your Own Lawyer?
- Finders Explained – Be Careful
- Federal Securities Law, a Securities Lawyer Guide
- Introduction to State Securities (Blue Sky) Laws
- Expungement of Customer Complaints
- Guide to Broker-Dealer Registration
Mark J. Astarita, Esq. represents investors, financial professionals and firms in litigation, arbitration and regulatory matters across the country. He is a partner in the national securities law firm of Sallah Astarita & Cox, LLC and can be reached by email at firstname.lastname@example.org or by phone at 212-509-6544.
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