The Financial Industry Regulatory Authority or FINRA, and its President and Chief Executive Officer, Robert Cook, recently announced that FINRA is implementing various measures to rein in high-risk brokers and brokerage firms (also referred to as “rogue” brokers and firms).
In fact, in recent months, there have been an interesting trend in particularly the New York office of FINRA, successfully barring brokers with a history of association with firms that have been expelled from FINRA, or are otherwise defunct, generally as the result of the payment of customer arbitration awards or regulatory fines.
We use the term or hashtag #cockroach.
We did not invent the term.
In fact, the term “cock-roaching” or the migration of rogue stockbrokers from one expelled firm to another, was made famous by “Global Arena Capital.” It was the wholesale migration of HFP Capital brokers to Global Arena Capital in 2013 that gained the attention of regulators, gathered popularity in the press, and the attention of at least one United States Senator
FINRA News Release, September 15, 2015 “FINRA Sanctions 10 Former Global Arena Representatives as a Result of FINRA Crackdown on Broker Migration”); Investment News, Sept. 15, 2015 (“FINRA cracks down on “cockroach” brokers. Regulator bars 10 at New York broker-dealer Global Arena Capital Corp. after investigating brokers who migrated from an expelled firm”); Letter of October 25, 2015, U.S. Senator Edward Markey (D-Mass) to Richard Kethcum, Chair & Chief Executive officer FINRA (“with respect to the ‘cockroaching’ problem, FlNRA simply must do a better job of tracking and removing unscrupulous brokers from the industry.”).
In any event, FINRA has forwarded a proposed rule change to the Securities Exchange Commission for approval. That rule change would require firms that are subject to the FINRA’s existing “taping “rule (FINRA Rule 3170 requires firms who hire a certain percentage of brokers from firms which have been expelled or had their registrations revoked for sales practice violations to record all conversations with customers) to disclose that designation on the firms’ BrokerCheck disclosures.
FINRA touts BrokerCheck as a valuable resource for public customers to research the employment, disciplinary and complaint histories of individual brokers and the disciplinary history of firms.
In a recent speech at Georgetown University, Mr. Cook further indicated that FINRA was increasing its oversight of rogue brokers. A dedicated examination unit has been created in New York City to conduct examinations of 200 problem brokers identified by FINRA. An additional 200 brokers have been identified nationally and those brokers will also be the subjects of targeted examinations.
FINRA has also proposed rule change requiring firms to heighten the supervision of individuals who are appealing hearing decisions in disciplinary cases. Notwithstanding the existence of a pending appeal, which can take more than a year to resolve, FINRA is seeking to supply firms with additional supervisory tools to manage employees with complaint and disciplinary histories.
FINRA is also revising its sanctioning guidelines to reflect this increased focus on repeat offender brokers. The guidelines will be changed to enable hearing panels to consider imposing greater sanctions on individuals who have a significant past disciplinary history.
FINRA currently does not disclose the names of firms subject to the taping rule or brokers who they are investigating as rogue brokers. Mr. Cook attributes stance to FINRA’s recognition that these firms and individuals are entitled to fairness and due process and that FINRA could itself make mistakes.
While FINRA’s position on not disclosing the names of individuals who are the subject of investigation is understandable, its determination to not disclose the identity of firms subject to the taping rule seems illogical; they are now going to require the firms, under pain of penalty, to make that disclosure anyway. What’s the difference? It is a good thing that investors will know that a firm, in effect, is on “heightened supervision” so they can determine whether they want to do business with that firm. FINRA should just do it itself since the end result is the same. FINRA’s attempt to appear evenhanded to its members does it no good.
All customers should make use of FINRA’s BrokerCheck function so as to be aware of their broker’s employment history in the securities industry and any reported customer complaints, arbitrations or disciplinary matters.
As for the effect of these rule changes and FINRA’s effort to eliminate rogue brokers…..
Guiliano Law Group
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