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By: Theodore C. Peters
On April 30, 2018, FINRA published Regulatory Notice 18-16, captioned “High-Risk Brokers,” which seeks comment on proposed rule amendments that would place further restrictions on not only high-risk brokers, but also the member firms that employ them. FINRA warns that such brokers “may present heightened risk of harm to investors, and any misconduct by them also may undermine confidence in the securities markets as a whole.”
This Notice, among others, stems from the increasing pressure upon FINRA to deal with problem brokers. According to the Notice, the amendments would serve to “strengthen existing controls.” More specifically, the amendment would affect the Rule 9200 Series (Disciplinary Proceedings) and the Rule 9300 Series (Review of Disciplinary Proceedings by National Adjudicatory Council and FINRA Board; Application for SEC Review), and would allow a hearing panel “to impose conditions or restrictions on the activities of member firms and brokers while a disciplinary matter is on appeal to the National Adjudicatory Council (“NAC”), and to require member firms to adopt heightened supervision procedures for brokers during the period the appeal is pending.”
The proposal would also impact the Rule 9520 Series (Eligibility Proceedings) to mandate that member firms adopt heightened supervision procedures for brokers during the period a statutory disqualification (“SD”) eligibility request is under review. Further, Rule 8312 (FINRA BrokerCheck Disclosures) would require disclosure of the status of a member firm as a “taping firm” under Rule 3170 (Tape Recording of Registered Persons by Certain Firms).
Lastly, the NASD Rule 1010 Series (Membership Proceeding)(MAP Rules) would be amended to place additional limits on member firms by requiring firms to first submit a written letter to FINRA’s Department of Member Regulation through the MAP Group (the Membership Application Program Group), requesting a “materiality consultation” when a natural person who has been the subject of, within the prior five years, one or more final criminal actions or two or more specific risk events, seeks to become an owner, control person, principal or registered person of an existing member firm. “Specific risk events” generally mean “final, adjudicated disclosure events disclosed on a person’s or firm’s Uniform Registration Forms.”
Separately, FINRA also published Regulatory Notice 18-15, which reiterates the existing obligation of member firms to adopt and implement heightened supervisory procedures under Rule 3110 (Supervision) that are specifically tailored for high-risk brokers. Unlike Notice 18-16 which seeks comment on proposed rule amendments, Notice 18-15 intends to “reiterate the supervisory obligations of member firms regarding associated persons with a history of past misconduct that may pose a risk to investors,” and to provide guidance for member firms in implementing effective heightened supervisory procedures for such persons.
If you have questions or would like more information, please contact Ted Peters at [email protected].