The Public Investors Arbitration Bar Association (PIABA) today soundly criticized a pending proposal by the Financial Industry Regulatory Authority that the association said would reduce firms’ responsibility to supervise brokers who engage in outside business activities—commonly referred to as “selling away.”

“Who decided that rogue brokers needed regulatory relief?” asked PIABA President Andrew Stoltmann at a press conference held to release the organization’s new report “FINRA’s Attempt To Gut Investor Protections: Proposed Reforms To FINRA Supervision Rules.”

“Finra is currently contemplating the evisceration of crucial protections that have been in place for decades to safeguard investors against investment schemes by brokerage firms’ registered representatives, including ‘selling away’ schemes,” the report states. “If Finra’s proposed changes are approved, there will likely be more investment scams perpetrated by registered representatives, and brokerage firms will no longer be held primarily responsible for identifying and stopping rogue brokers.”

Under Finra’s new proposed rule, brokerage firms would no longer be held primarily responsible for identifying and stopping rogue brokers’ outside business activities. The new PIABA report argues that the change would mean brokerage firms are less likely to prevent “selling away” and other related schemes that harm investors. These changes will create a regulatory and supervisory black hole that will insulate brokerage firms now serving as the first line of defense against selling away schemes at the direct expense of protecting investors, the report stated.

For its part, Finra said in its proposal that it was seeking to clarify supervisory rules and that broker-dealers will still have the ability to approve or disapprove of brokers’ outside activities.

“We continue to listen to stakeholders and are reviewing all comments on this issue,” said Finra spokeswoman Michelle J. Ong.

The private securities transactions that rogue brokers engage in take many forms, said PIABA director and report co-author Adam Gana, an attorney at Gana Weinstein LLP in New York. The variety of schemes and fraudulent activity includes, but is not limited to, fraudulent private placements, Ponzi schemes and investment frauds perpetrated through third-party investment advisories established by the registered representative, Gana said.

“A common modus operandi in these schemes is for a registered representative to establish a solo or small IA firm and perpetrate the fraud through outside business activities in an effort to avoid member supervision,” added Stoltmann.

According to the PIABA report, Finra Regulatory Notice 18-08 would eliminate almost all supervision requirements for registered representatives’ outside business activities, including the supervision of:

“Broker dealers already argue all the time in arbitration that they don’t have responsibility for their brokers’ outside business activities,” Gana said. “Rather than fixing the problem, Finra has concentrated on how to allow its members to wash its hands of the problem.”

The comment period for the Finra proposal is closed. “Now all eyes are on Finra to see what they’ll do and if they’ll put investor protection interests first and let this horrific rule die,” Stoltmann said.