By John M. Jascob, J.D., LL.M.
FINRA has requested comment on a series of rule amendments that would place further restrictions on member firms that employ brokers with histories of significant misconduct. Among other things, the proposed amendments would allow FINRA disciplinary hearing panels to place restrictions on the activities of firms or brokers while matters are on appeal. Member firms would also be required to adopt heightened supervisory procedures for brokers while a statutory disqualification eligibility request is under review, while any firm designated as a “taping firm” would have that status disclosed publicly on BrokerCheck. Finally, member firms would be required to submit a written request when a natural person with a criminal action or two or more specified risk events within the past five years seeks to become an owner, control person, principal, or registered person.
Disciplinary proceedings. The proposal notes that brokers with histories of misconduct may present heightened risk of harm to investors, and any misconduct by them also may undermine confidence in the securities markets as a whole. Currently, while a FINRA disciplinary decision is on appeal to the National Adjudicatory Council (NAC), any sanctions imposed by the hearing officer or panel, including bars or expulsions, are automatically stayed during the pendency of the appeal. Under the proposal, however, the hearing panel or hearing officer could impose conditions or restrictions on the activities of a respondent that are deemed reasonably necessary for the purpose of preventing customer harm. These might include prohibitions against offering private placements in cases of misrepresentations made to customers, or prohibiting penny stock liquidations in cases involving violations of the penny stock rules.
The interim conditions and restrictions would remain effective and enforceable until issuance of the NAC’s decision in the matter. The proposal would also establish an expedited review process, however, to allow a respondent that has conditions or restrictions imposed by a hearing panel or hearing officer to file a motion with the Review Subcommittee of the NAC to modify or remove any or all of the restrictions.
Statutory disqualification eligibility proceedings. FINRA's current rules do not explicitly require that a firm seeking to employ an individual subject to a statutory disqualification place that individual on heightened supervision during the pendency of the firm’s application seeking approval from FINRA. The proposed amendments to FINRA Rule 9523 would require a member firm to immediately place an individual on an interim plan of heightened supervision once a Statutory Disqualification Application is filed. The interim plan of heightened supervision must be tailored to the disqualified individual and must identify a qualified principal responsible for carrying out the plan.
BrokerCheck disclosure. Under FINRA Rule 3170, a member firm that hires a specified percentage of registered persons from disciplined firms is designated as a “taping firm” and must establish and enforce special written procedures for supervising the telemarketing activities of all its registered persons. Although FINRA will release whether a particular member firm is a taping firm in response to inquiries via BrokerCheck’s toll-free telephone listing, the information is not currently available on BrokerCheck itself. To better inform investors, therefore, the proposed amendment would permit FINRA to release information through BrokerCheck as to whether a particular member is subject to the taping provisions of Rule 3170.
Membership Application Program. Finally, FINRA has proposed to amend the rules governing its Membership Application Program to impose additional obligations on broker-dealers that associate with persons who have, in the prior five years, either one or more final criminal matters, or two or more specified risk events. Proposed IM-1011-2 (Business Expansions and Persons with Specified Risk Events) would require such a firm to submit a written request seeking a materiality consultation, if the member was not otherwise required to file a Continuing Member Application. The amendments would allow FINRA to review and potentially restrict or deny the firm from allowing such a person to become an owner, control person, principal, or registered person. The materiality consultation would focus on the conduct underlying the specified risk events, as well as other matters relating to the subject person such as disciplinary actions taken by FINRA or other authorities, adverse examination findings, customer complaints, pending or unadjudicated matters, terminations for cause, or other incidents that could pose a threat to public investors.
The comment period expires on June 29, 2018.