Finra board sends the SEC proposal to boost oversight of firms hiring rogues

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Panel also ships the SEC amendments to suitability rule to conform with Reg BI

The Finra board voted at its December meeting to send to the Securities and Exchange Commission a rule proposal that would place higher capital standards on brokerages that hire many registered representatives with disciplinary histories.

The Financial Industry Regulatory Authority Inc. released the proposal in May. Under the measure, firms that are deemed “restricted” because they have a high percentage of rogue brokers or a history of misconduct would have to maintain a deposit in a segregated account from which they could not make withdrawals without Finra’s permission. Other conditions also would be placed on the firms.

During its Dec. 4-5 meeting, the Finra board agreed to forward the proposal to the SEC, which will publish it for comment. The SEC must approve Finra rule proposals before they can go into effect.

The Finra board also sent the SEC proposals to amend the suitability rule and rules for noncash compensation to conform with the SEC’s Regulation Best Interest. And it approved the organization’s 2020 proposed budget, which has not been released.

Finra took comments on the rogue broker proposal over the summer and has amended it, according to a statement by a board member. Finra has not released the revised proposal.

The proposal “has been under discussion for two years, we received comments back from the first notice, and really the regulatory policy committee went through those comments,” Jack Ehnes, a Finra board member and chief executive of the California State Teachers’ Retirement System, said in a Finra video. “We made adjustments to the regulation. [The board] is now prepared to advance that on to the SEC.”

At a Senate Banking Committee hearing this week, Sen. Catherine Cortez Masto, D-Nev., highlighted the proposal in her questioning of SEC Chairman Jay Clayton. She and some of her Democratic colleagues want Finra to add a provision that would expel from the industry firms and financial advisers with many disciplinary blemishes.

“Will you ensure that rule is clear that unscrupulous financial professionals cannot continue to operate?” Ms. Cortez Masto asked Mr. Clayton.

He responded by saying that it’s a privilege to work in the securities market and that financial advisers can be kicked out if they “misbehave.”

But Mr. Clayton did not tip his hand on the Finra proposal.

“I want to be careful not to prejudge,” Mr. Clayton told lawmakers. “I haven’t seen the text of the rule. But I will say I have long been supportive of the concepts that are in [the Finra] rule. If you’re going to hire somebody who has a history, the registration and other requirements that Finra imposes should reflect that you’re taking more risk than someone who doesn’t.”

The SEC also must review and approve the Finra proposals to amend the suitability rule and noncash compensation, which are meant to clear up whether those rules or Reg BI apply to recommendations to retail customers.

The proposals are designed to “bring conformity of Finra’s suitability rule to the new best interest rule from the SEC,” Mr. Ehnes said. “Again, making sure that we’re making sure that we don’t have overlapping and conflicting interpretations for firms.”