Broker-dealers have started terminating reps with compliance issues to dodge a label that the Financial Industry Regulatory Authority will begin to use on them in mid-July.
The firms are trying to avoid being tagged as “restricted firms.”
Under Finra’s “restricted firm” rule, broker-dealers with a record of numerous disciplinary actions, or whose reps have a large number of disciplinary incidents, must create a restricted deposit of capital or securities that will require Finra’s permission to withdraw.
Restricted firms may also have to deal with Finra placing restrictions on their lines of business, product sales and hiring practices, and they may face public disclosure of their riskier “restricted” status on BrokerCheck, officials say.
On June 1, Finra began sending preliminary notices to firms that would likely appear on the “restricted” list, either because of the risks posed by their reps or the firms’ own disciplinary history.
The initial reports give firms about 30 days to fire riskier brokers and begin to make disclosures that may be missing about the reps’ or the firms’ risks and disciplinary events.
“We have heard and seen reps being terminated ... which is a proactive approach to prepare and be aware of risks that will cause firms to be designated ‘restricted,’” says Kosha Dalal, vice president and associate general counsel at Finra.
Finra’s rule gives firms a onetime option to reduce staff the first year they find themselves on the restricted list, Dalal warns.
Riskier brokers who get terminated can’t be rehired for one year, she says. If another firm decides to hire the higher-risk broker, it will need to have a discussion with the regulator under the new rules.
“We do have firms that do have concentrations of these individuals,” Dalal says. “We want to make sure this type of individual just doesn’t go to another firm.” She adds that the rule is intended to capture firms whose disclosures show their disciplinary history is “in most cases significantly outside the norm.”
Finra’s designation of some firms as high risk will depend in part on the firms’ responses to the June 1 notices. The responses will help Finra determine whether a firm will be designated restricted by mid-July, at which point Finra plans to decide which of the 3,500 firms that it regulates should carry the label.
“Be proactive,” Dalal advises firms. “After the June date when [firms] receive that first predictive report, add or amend disclosures and terminate reps who fall into [a higher-risk] category.”
Finra, a self-regulatory organization for the brokerage industry, is not trying to chase firms out of business, says Bill St. Louis, executive vice president of the organization’s National Cause and Financial Crimes Detection Program.
The June 1 report is only the beginning of the process for firms, he notes. “I get calls from firms asking about this. The June 1 reports we provide do not make a firm a restricted firm. That starts the process that can ultimately lead to you being designated restricted,” St Louis says.
A number of regulators have reached out to Finra to say they support public disclosure for firms that are designated restricted, the regulator’s officials say.
“Some form of public disclosure is warranted here,” Dalal says. “In the current year, firms that are identified as restricted will get a tag on BrokerCheck denoting the firm is a restricted firm. If someone looks for you, they’ll see a little tab.
“This is a proposal pending with SEC staff that has not been formally filed yet, but be on the lookout,” she adds.