Welcome to Financial Advisor IQ

This Rule Change Would Unleash Rogue Brokers, Warns Consumer Lobby

By Alex Padalka October 8, 2018

Self-regulator Finra’s proposal to eliminate member firms' supervisory requirements of their representatives’ outside business activities will lead to a “regulatory black hole” that would expose investors to unscrupulous behavior by rogue brokers, according to a new report from the Public Investors Arbitration Bar Association.

Finra is considering exempting its member firms from having to supervise their representatives’ investment-related activities at outside investment advice firms and banks and insurance companies, non-investment-related work and business activities as well as personal investments, PIABA says.

But these types of outside activities are often the ones behind various fraudulent schemes, such as fraudulent private placements, Ponzi schemes and more, according to the report.

Finra’s proposed actions could lead to “glaring supervisory deficiencies” and even produce “perverse incentives” for representatives, encouraging violation of securities laws while leaving investors vulnerable, PIABA says.

These changes would also be inconsistent with other Finra rules, according to the report.

“Who decided that rogue brokers needed regulatory relief? This is undoubtedly one of the worst rule changes ever contemplated by Finra,” PIABA president and report co-author Andrew Stoltmann, attorney with Stoltmann Law Offices, says in the press release. “It would be a bonanza for rogue brokers and it would paint a huge target on the backs of investors.”