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Reformers Slam Finra’s Bad Broker Reforms

July 6, 2018

Self-regulator Finra’s proposed overhaul of how it regulates brokers with a history of misconduct doesn’t go far enough, the financial reform group Better Markets says, according to InvestmentNews. But the industry body is planning to take more control and oversight of the hiring of high-risk brokers. Thursday Finra announced it will take over the task of reviewing public records of brokers newly registered with a company. The task was previously the responsibility of the firms, the regulator says in a press release.

In April, the industry body issued a request for comment on measures to bolster controls on rogue brokers, such as a provision to let Finra’s hearing panels set conditions or restrictions on brokers and firms in the process of appealing disciplinary issues.

The comment period ended June 29, with Finra receiving nine letters, according to InvestmentNews.

In its comment letter sent on the last day of the comment period, Better Markets charges that Finra’s proposal, while it “gestures in the right direction,” will not adequately address the issue, the publication writes.

“Finra must go far beyond this proposal to credibly claim that it is serious in its intention not just to hold brokers accountable, but also to protect investors from brokers who have demonstrated a proclivity to violate the law,” Better Markets officials wrote in the letter cited by InvestmentNews.

And Dennis Kelleher, the group’s CEO, says Finra’s April proposal doesn’t even match the intent expressed in June 2017 by Finra president and chief executive Robert Cook, according to the publication. Cook said then that financial markets had “zero room for bad actors,” according to InvestmentNews.

“In stark contrast to 'zero room,' however, this release tinkers on the margins by, essentially, making it a little bit costlier for firms to hire bad brokers, and by making them jump through an additional hoop before they can hire brokers with checkered pasts,” Kelleher wrote, according to the publication.

But the Public Investors Arbitration Bar Association said Finra’s proposed reforms would indeed benefit investors, InvestmentNews writes. The industry group Sifma, meanwhile, said it supports the proposal but requested some procedural changes, according to the publication.

Meanwhile, starting Monday, Finra will go over the public records of new hires when a company applies to register new employees with the regulator, the self-regulator says in a press release.

Finra says it will complete each review within 15 calendar days after the application.

Currently, firms must validate the answers brokers provide on Form U4 when they’re hired — which has resulted in firms outsourcing the task, Finra says.

The self-regulator will now take over the review, but the firms will still be responsible for the investigation of any deficiencies on the form identified by Finra, according to the press release.

The regulator claims the change will improve the quality of data available on its Central Registration Depository — the database of Finra-member firms and brokers, as well as on BrokerCheck, its investor-facing online tool.

Finra claims the new activity will save firms $1.5 million to $3 million per year in aggregate on fees they would have otherwise paid to third-party firms to conduct the reviews, as well as on late-submission fees charged by Finra.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.