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Jonathan Henschen, founder of the recruiting firm Henschen & Associates, recently tried to place an advisor client at a broker/dealer. But the candidate had two FINRA disclosures on his record. One related to a customer complaint around sales of his b/d’s auction rate securities, and the firm had paid the fine. The second was a decade-old complaint related to the rep’s sale of a variable annuity, which resulted in a fine of under $10,000.

“Normally this would be a nonevent at most broker/dealers, but this firm surprisingly passed on pursuing the prospect,” Henschen said. “If someone with a largely uneventful compliance history is getting rejected, there are many advisors with more recent and greater frequency of disclosures that may not be able to find a home at all, being forced to go RIA and/or do fixed insurance only.”

Until recently, registered reps with only a few disclosures on their records could easily find a home at a broker/dealer to hang their license. But those days may be coming to an end, due to the Financial Industry Regulatory Authority’s Rule 4111, which went into effect Jan. 1, 2022.

FINRA’s new rule requires broker/dealers that the regulator determines pose the greatest risk to investors to set aside funds in a dedicated account to meet future FINRA fines, including potential unpaid arbitration awards.

Broker/dealers don’t want to end up on FINRA’s list, especially one that would be made public, so many are taking steps to avoid it, say recruiters and compliance officers. Many firms are becoming more reluctant to bring on advisors with even relatively minor compliance disclosures, while others are encouraging expungements, although FINRA is cracking down here as well. Some say it’s pushing smaller firms to consolidate or sell to larger ones.

“To stay off the FINRA Leper List, many of the broker/dealers with higher concentrations of problematic advisors may be forced to shed many of them to bring down levels to industry averages,” Henschen said. “We will look back in 2-3 years and see the coming months as the ‘Great FINRA Purge.’ 41-11 will only amplify the advisor shortage and cause a further decline in the number of broker dealers.”

The numbers of FINRA registered reps and b/ds have been on the decline since 2006. Just in the last year, from 2020 to 2021, the number of b/ds declined 1%, and the number of reps dropped about 0.8%.

Henschen says the rule may have motivated the recent merger between National Securities to merge with B. Riley.

“National Securities is likely to fall under Rule 4111 or at best close to being under it,” Henschen said. “If they meld the two firms together (B. Riley with good compliance and National with poor compliance), the blending would raise their rankings on the different criteria gauged to an improved status for the National side.”

Henschen said there are lot of things on reps’ records that are frivolous, such as complaints that were dismissed or no action taken.

“Those things should roll off a record,” he said. “You can sue anyone, but do you have a leg to stand on? You can do a customer complaint on any rep, but anything that goes on there, it goes on their record, and you have to pay $15,000 or so to get that expunged off their record.”

Read the full article here.