Finra takes new steps against high-risk brokers

The Financial Industry Regulatory Authority (Finra) is stepping up its efforts to clamp down on so-called bad-actor brokers and broker-dealers, potentially leading to new compliance burdens for the industry and additional scrutiny.

The self-regulatory organization (SRO) has in recent years taken steps to identify firms and individuals deemed to pose a higher danger of harming investors, looking at risks in areas including sales practices, fraud and deception, and the protection of client assets. It then keeps closer tabs on high-risk firms and employees via exams and monitoring, respectively.

Finra is now beefing up its analytics and integrating additional data points into its model – such as the location of where a broker works or the degree to which his or her co-workers have committed misconduct – to inform its risk assessments, according to Robert Cook, the SRO’s president and CEO.

‘We are also seeking ways to leverage data to better understand when new events may indicate broader issues or concerns, such as recidivist behavior,’ Cook said recently at an event for Georgetown University’s McDonough School of Business. ‘In addition, this year we are implementing improvements to our branch office risk model to include additional branch-level characteristics that may be indicative of future misconduct, such as the proportion of employees who are high-risk brokers.’

Finra is considering ‘additional measures’ that could help address the dangers potentially posed by high-risk firms and brokers, he told delegates. One such approach would be to amend the SRO’s rules to establish additional requirements when a firm or individual meets specified risk criteria in order to further deter misconduct and incentivize a greater focus on the relevant risks, Cook said.

These efforts would build on recent developments, such as the creation last year of an internal senior staff working group to consider new approaches to identify and address the risk of broker misconduct. Finra’s board of governors has also formed a special working group, led by former SEC chair Elisse Walter, to focus on the SRO’s oversight of high-risk brokers.

The board last month proposed a rule amendment that would require brokerage firms to adopt heightened supervisory procedures for individuals while a disciplinary case is pending appeal. Finra also plans to reinforce and clarify firms’ existing supervisory obligations concerning brokers they employ who have disciplinary histories, Cook said. Among other things, the SRO’s proposals would expand its sanction guidelines to enable adjudicators to consider more severe sanctions when an individual’s disciplinary history includes additional types of past misconduct.

‘As Finra works to enhance its efforts to protect investors from bad actors, the vigilance of our member firms is also critical,’ Cook said. ‘Firms must do their part by, among other steps, reviewing their hiring practices, monitoring their brokers, improving supervisory systems and investigating red flags suggestive of misconduct.’

High-risk and recidivist brokers have been a cause of concern for the SRO for some time. In 2013 it launched an initiative to identify such individuals and expedite investigations. The issue took top billing in this year’s Finra regulatory and examination priorities letter (CorporateSecretary.com, 1/9). In that letter, officials write that they will, for example, assess whether firms develop and implement a supervisory plan reasonably tailored to detect and prevent future misconduct by a particular broker based on previous misconduct and regulatory disclosures.