As Finra continues to refine a new program to target the highest risk broker-dealers and reps in the industry, officials are considering mandating increased capital requirements for these firms.
Finra President and CEO Robert Cook discussed the proposed tougher requirements at Finra's annual conference in Washington, D.C., on Wednesday.
The additional capital requirements would be focused on high-risk firms that have a high incidence of broker misconduct.
“Less than 2 percent of firms could potentially fall into" the group of broker-dealers targeted for more aggressive obligations, exams, audits and potentially higher capital requirements, Cook said.
The firms Finra has identified so far have eight times as many instances of broker misconduct as the rest of the industry, he added.
The additional capital requirements would be used to cover customer arbitration claims against these brokers and firms, Cook said.
“We’re doing everything we can to address areas where there is an outsized level of concern to investors," he said, adding that the focus is on firms "with clusters of brokers with a high proportion of incidents."
Finra is also working on enhancing the “objective criteria” that allows examiners to zero in on the riskiest of firms, Cook said, adding, “Most firms are working very hard and don’t have a significant cluster of brokers with significant histories."
Finra is proposing tailored obligations, including possible financial requirements, on designated member firms that cross a specified number of disclosure-event thresholds.
“These thresholds were developed through a thorough analysis and are based on the number of events at similarly sized peers," according to the Finra proposal. "The member firms that could be subject to these obligations, while small in number, present heightened risk of harm to investors and their activities may undermine confidence in the securities markets as a whole."