FINRA Issues Regulatory Notice Regarding Funding Requirements of Restricted Firms
Securities industry regulatory body, FINRA (the Financial Industry Regulatory Authority), released its proposal for a rule that would crack down on firms with a high concentration of “bad” brokers. With its latest regulatory notice, FINRA stated that it would increase oversight of brokerages with a “significant history of misconduct,” requiring them to set aside additional funds that cannot be withdrawn without FINRA’s consent.
The regulatory notice lays out the process by which a firm would come to be deemed “restricted” by FINRA. Such labeling would trigger the new fund requirements.
FINRA Notice Targets Small Firms with Bad Brokers
FINRA has admitted that the notice would disproportionately target small firms. Since these firms are generally less compliant than larger firms (with more resources), brokers with a checkered history tend to collect in them. Many of these brokers then exploit the lack of supervisory control to continue their dubious activities at these firms.
In addition, these small firms are not self-insured, like the largest Wall Street firms; and some of them have only limited insurance against legal claims for financial malpractice. As a result, when a rogue broker who works at a small firm commits an act of malfeasance, investors may have a difficult or impossible job collecting from that firm.
Investor-Friendly Reform by FINRA
Thus, the new FINRA regulatory proposal kills two birds with one stone. It puts small firms that might harbor bad brokers on notice that, if they continue to do so, they will be required to pay a premium for it. And it ensures that investors injured by bad brokers at small firms are able to collect if they suffer financial injury.
While small firms have complained that they feel they are being unfairly targeted, as investor advocates we have seen all too often the disastrous impact a bad broker and an under-insured small firm can have on an investor’s retirement savings. We are happy to see that FINRA is bringing about regulatory reform that is clearly investor friendly and progressive.