At sketchy brokerages, FINRA is now part of HR
September 2, 2021
By Lynnley Browning, Financial Planning
Bad brokerages all too willing to look past an advisor’s checkered past have a new hoop to jump through before potentially bringing them on board.
Under new rules that began on Sept. 1, the Financial Industry Regulatory Authority, or FINRA, is forcing brokerages that want to hire financial advisors with sketchy records to undergo a “consultation” with the agency.
The potentially uncomfortable sit-down could force a brokerage to apply for FINRA’s blessing to hire those brokers — with no guarantee the regulator would say yes.
The brokerage industry’s watchdog has new rules designed to rein in rogue brokers.
The rules from FINRA, a self-regulating watchdog overseen by the Securities and Exchange Commission, affect firms that want to hire a broker who within the past five years has acquired at least one criminal record or racked up two so-called “specified risk events.”
That red-letter jargon refers to criminal events, arbitration awards, civil judgments, arbitration settlements, civil litigation settlements, civil judicial actions and regulatory actions, and to cases involving sums starting at $15,000. FINRA’s new rule doesn’t cover customer complaints, ongoing arbitrations or unresolved court cases.
Mark Quinn, the director of regulatory affairs at Cetera Financial Group, the second-largest independent broker-dealer, said that “I suspect that across the industry, there are a lot of advisors who have those criteria.”
‘Thousands’ of bad brokers
Just how many rogue actors in an industry of 624,000 brokers?
“I’d say there are still thousands of them out there,” said Jon Henschen, a recruiter of independent broker-dealers and industry consultant based in Marine on St. Croix, Minnesota.
The new rules come after FINRA opened a major campaign against dishonest brokers last month using an algorithmic sieve aimed at weeding out “high risk firms” whose brokers have a history of cheating investors. The campaign, known as Rule 4111, is aimed at identifying and flagging recidivist brokers who rack up securities-law violations and complaints from cheated customers, all while hopscotching from firm to firm and continuing their shady practices.
FINRA’s analysis of historical data showed that only small and mid-sized brokerages — the kind most likely to employ those with bad records — would potentially get a scarlet letter. Wall Street’s mainstays, like Bank of America’s Merrill Lynch, LPL Financial and Raymond James, wouldn’t trip the sieve’s thresholds.
“It’s going to make it more difficult to hire problematic brokers,” Henschen said. “It’s a squeeze play to put these people out of the industry.”
A stronger FINRA?
Since launching its “High Risk Broker Initiative” nearly a decade ago, FINRA, which oversees 3,400 brokerages…
