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Finra Wants Firms with Black Marks to Set Up Deposit for Future Claims

By Alex Padalka November 20, 2020

Finra has proposed a rule change it says is aimed at addressing brokers with a history of misconduct.

“[Academic studies] provide evidence that the past disciplinary and other regulatory events associated with a firm or individual can be predictive of similar future events,” Finra says in the proposal it submitted to the SEC this week.

“While these firms may eventually be forced out of the industry through Finra action or otherwise, these patterns indicate a persistent, if limited, population of firms with a history of misconduct that may not be acting appropriately as a first line of defense to prevent customer harm by their brokers,” the proposal adds.

Finra wants to adopt a rule to require firms identified as “restricted” to keep a deposit of funds in a segregated account from which it would restrict withdrawals, subjecting them to certain conditions or restrictions, according to the proposed rule change.

“The obligations could include requiring a member firm to maintain a specific deposit amount, with cash or qualified securities, in a segregated account at a bank or clearing firm, from which the member firm could make withdrawals only with Finra’s approval,” Finra says in the proposal. “The obligations also could include conditions or restrictions on the operations and activities of the member firm and its associated persons that relate to, and are designed to address the concerns indicated by, the preliminary identification criteria and protect investors and the public interest.”

The deposit is aimed at preserving the firm’s funds for the payment of arbitration awards that may be rendered against them. Thus, any unpaid arbitration awards could impact the size of the required deposit from the firm.

In addition, Finra wants to adopt a new rule and amend an existing one in order to set up a new expedited proceeding for implementing the rule on segregated accounts.

Finally, the industry’s self-regulator wants to adopt a rule on capital acquisition brokers, to clarify that firms that chose to be treated as CABs would be subject to the segregated account rule, while also clarifying that funding portals would not be subject to the proposed rule on expedited proceedings for implementing the rule on segregated accounts.

Finra originally proposed the segregated accounts in May 2019, as reported. The proposal met with criticism from the industry, including arguments that the rules could give Finra too much power and that firms should be allowed to self-police, and from investment advocates, who were concerned that the amounts set aside in such accounts would not be enough to cover harmed investors, as reported.

In its current proposal, Finra says that it "has not proposed a uniform formulaic approach for calculating the Restricted Deposit Requirement because of the range of relevant factors and differences in member firms’ business models, operations, and financial conditions."

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