FINRA Will Require Bad Broker Firms to Reserve More Capital
FINRA has adopted a new rule requiring firms that hire brokers with significant disciplinary histories to fund a segregated account to pay potential claims and penalties.
Pursuant to new Rule 4111, FINRA will assess a firm’s level of disciplinary events including adjudicated, pending, and termination events involving the firm and its reps. The initial analysis will also assess registered persons previously associated with expelled firms. Following an opportunity to consult and remediate, FINRA, at its discretion, can require a firm to deposit amounts in a segregated account based on the firm’s size and operations and its potential exposure. The rule also includes extensive procedural provisions. The Rule goes into effect in 2022.
This Rule will certainly get the attention of senior executives of quality firms that will re-consider hiring brokers with a checkered past. However, we wonder if FINRA is sending the wrong message to dodgier firms i.e. it’s ok to hire bad brokers as long as you hold enough capital to insure against higher risk. One potential unintended consequence is that the same number of disciplined brokers work in the industry at the few firms that have decided that the revenue generated more than offsets the additional capital restrictions.
Read FINRA Notice here.