FINRA reminded firms of their supervisory obligation to regulate high-risk brokers and proposed several rule amendments to enhance regulatory controls with respect to such brokers and related activities.

In Notice 18-15, FINRA emphasized the importance of upholding supervisory obligations to prevent potentially harmful associated persons from negatively affecting investors. FINRA provided guidance on how to identify and implement "heightened supervision" of an associated person who has a history of industry or regulatory-related incidents. FINRA also advised member firms to tailor their heightened supervisory procedures in order to anticipate and deter the reemergence of an individual's past actions.

In addition, FINRA proposed rule amendments intended to enhance FINRA's oversight of high-risk brokers and their employers. FINRA is seeking comments on several amendments that, if adopted, would:

  • enable a Hearing Panel to restrict the activities of member firms and brokers "while a disciplinary matter is on appeal to the National Adjudicatory Council";
  • require member firms to implement heightened supervisory procedures for brokers (i) pending an appeal to the National Adjudicatory Council, and (ii) during FINRA's review of a statutory disqualification ("SD") eligibility request;
  • issue "the status of a member firm as a 'taping firm'"; and
  • require member firms to notify FINRA when a natural person "seeks to become an owner, control person, principal or registered person of an existing member firm," but has one or more final criminal actions, or two or more "final, adjudicated discloser events," in the past five years.

FINRA also proposed increasing the application fee for member firms planning to either hire or continue to employ an SD individual from $1,500 to $5,000. By increasing the application fee, the proposal may dissuade member firms from hiring or continuing to employ such individuals. If adopted, the implementation date for this proposed rule would be May 30, 2018.

Commentary / Steven Lofchie

This initiative is not just about supervision of bad actors, but also about discouraging firms from hiring them in the first place. To what extent should a complaint or an unresolved complaint taint an individual? That is a difficult policy question.

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