FINRA Agrees to Publicly Disclose Bad Broker Firms
FINRA will publicly disclose broker-dealers that hire a higher percentage of disciplined brokers than the industry.
In 2019, FINRA proposed Rule 4111 requiring broker-dealers with a large number of disciplinary events to set aside segregated funds to pay future penalties. The SEC would not approve the Rule until FINRA agreed to publicly disclose these restricted firms. In a recent letter to the SEC, FINRA undertook to amend the BrokerCheck rules to publicly identify these firms. FINRA agreed to the change to inform investors and better share information with state regulators. The SEC subsequently approved the rule, which requires restricted firms, selected based on a scoring grid of disciplinary events, to deposit funds in a segregated account until the firm takes action to remedy the situation.
Both the SEC and FINRA want to put pressure on broker-dealers to reject retaining brokers with a disciplinary history. We think the financial penalty will have much more impact than the BrokerCheck shaming because it is unclear how many brokerage customers even review BrokerCheck before retaining a broker. We expect that fewer firms will accept disciplined brokers but that others will make a financial decision to become bad broker safe havens.
Read FINRA letter here.