FINRA recently posted two regulatory notices aiming to further rein in so called “high risk brokers,” as well as the firms that choose to employ them. The first, Regulatory Notice 18-15, is aimed squarely at firms that employ brokers with a history of previous misconduct. It advises firms on (1) Identifying Individuals for Heightened Security and (2) Developing and Implementing a Heightened Supervision Plan for such individuals. The second, Regulatory Notice 18-16, seeks comment on a variety of FINRA rule amendments relating to “high-risk brokers and the firms that employ them.” We discuss the notices in further detail below.
These notices should not come as a surprise, as FINRA’s 2018 Priorities Letter stated that “a top priority for FINRA will continue to be identifying high-risk firms and individual brokers and mitigating the potential risks that they can pose to investors.” Nonetheless, the import of these regulatory notices is unmistakable; firms that seek to hire or continue to employ high-risk brokers can expect increased scrutiny from FINRA.
Regulatory Notice 18-15- Guidance for Firms Employing High-Risk Brokers
FINRA published this notice “to reiterate the supervisory obligations of member firms regarding associated persons with a history of past misconduct that may pose a risk to investors.” FINRA encouraged firms to adopt the practices set forth in the notice to “strengthen their own supervisory procedures.”
As stated above, firms need to employ a two-part test when dealing with high-risk brokers: (1) Figuring out what brokers need to be placed under heightened scrutiny and (2) Developing a “heightened supervision plan” for dealing with these high-risk brokers.
To help firms ascertain which brokers should be placed under heightened scrutiny, the notice provides a laundry list of criteria that firms should consider, including: “internal investigations; firm-imposed discipline; disciplinary actions; final, pending and settled arbitrations; past, open or settled customer complaints; terminations for cause; and other items disclosed on the person’s uniform registration forms.
Next, a firm should develop a written plan focused on addressing the specific broker’s “incident history.” Firms “should consider whether the nature of the concerns the associated person’s incident history raises involved a particular product, customer type or activity.” The notice also gave a non-exhaustive list of factors that the heightened supervision plan—at a minimum—should consider:
- Designating a principal with the appropriate training and experience to implement and enforce the plan.
- Requiring appropriate additional training for the associated person subject to the plan to address the nature of incidents resulting in the plan.
- Requiring the written acknowledgment of the heightened supervisory plan by the associated person subject to the plan and the designated supervisory principal.
- Periodically reviewing the heightened supervision plan to assess its effectiveness.
In addition to these suggested minimum requirements, FINRA also suggested that the heightened security plan could include: expediting the handling of customer complaints related to the associated person; more frequent review of the associated person’s communications, particularly with customers; and proximity of the supervisor to the associated person. Simply put, firms choosing not to implement these guidelines will do so at their own peril, as the notice makes clear that a firm’s failure to implement these guidelines will be “closely evaluated” in determining whether the firm itself would be subject to disciplinary action.
Regulatory Notice 18-16- FINRA Requests Comment on Rule Amendments Relating to High-Risk Brokers and the Firms that Employ them
In line with its 2018 priorities letter, FINRA has proposed amending multiple rules that seek to impose additional restrictions on high-risk brokers and the firms that employ them. FINRA seeks comment on these amendments by June 29, 2018. The below chart indicates the rule being amended, as well as the substance of the amendment.
|Proposed Rule Amendment||Description of Amendment|
|Rule 9200 Series (Disciplinary Proceedings)||Rule 9285 (Interim Orders While on Appeal)
A. Rule 9285(a)
B. Rule 9285(b)
Would establish an expedited review process to allow a broker that had conditions or restrictions imposed on them to file a motion with the Review Subcommittee of the NAC to modify or remove restrictions.
C. Rule 9285(c)
|Rule 9520 Series (Eligibility Proceedings)||Rule 9523 (Acceptance of Member Regulation Recommendations and Supervisory Plans by Consent Pursuant to SEA Rule 19h-1
|Rule 8312 (FINRA Broker Check Disclosure)||
|NASD Rule 1010 Series (MAP Rules)||