There are many positives about the rule, he noted. Above all else, it should make firms that hire rogue brokers be much more careful about their practices. “The firms that previously welcomed, and then failed to supervise, brokers with long rap sheets may think twice about those hires because it will be a less profitable gamble for them. This will help eliminate the cracks that bad brokers can squeeze themselves into in the industry,” Meyer said.
Ridding the industry of these serial offenders “is critically important to address the risks posed by firms and brokers with significant histories of misconduct. The recidivism numbers are clear—those firms and brokers Finra is designating as high risk are likely to continue accruing disclosure events so long as they are in operation. With Finra holding a magnifying glass to their misconduct and demanding financial consequences, we are hopeful that the industry will be rid of them,” Meyer said.
Finra will determine a restricted firm’s deposit requirement based on the firm’s size, operations and financial conditions.
Just 1.3% of all member firms met the preliminary criteria for designation as a restricted firm as of 2019, according to Finra data. That includes just 1.3% of small firms, 2.5% of mid-size firms and 0% of large firms.
As a requirement of the rule, Finra will assess member firms each year to see whether they should be designated or redesignated as a restricted firm.
Firms that are designated as high risk will have a one-time opportunity to fire high-risk advisors within 30 days of receiving notification, which will allow them to fall below the numeric threshold for a financial reserve. Firms will not be allowed to rehire any person it fires in the process for at least one year. During the evaluation process, member firms can make the case that they should not be considered for restriction and financial reserve requirements.
Finra told the SEC last July that it also plans to propose an amendment that would require firms to disclose their restricted status on BrokerCheck. The rule is slated to go into effect 180 days after Finra issues a Regulatory Notice to Members announcing the SEC’s approval.