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Wall St. watchdog proposes plan to boost oversight of firms with tainted brokers

Suzanne Barlyn


May 2 (Reuters) - Wall Street's industry-funded watchdog on Thursday proposed a rule to boost oversight of securities brokerages with a "significant history of misconduct" that could require them to set aside funds that cannot be withdrawn without the regulator's consent, among other measures.

The proposal, published in a Financial Industry Regulatory Authority (FINRA) notice, also lays out a process for labeling a brokerage as "restricted," which would trigger the new requirements.

The proposed measures are part of an effort to rein in brokerages seen as posing a serious risk to investors because of a high percentage of securities brokers on their rosters who have a history of regulatory run-ins and other concerns.

Many brokers with a track record of regulatory violations continue to find work at smaller firms that have a high concentration of those brokers.

"Such firms generally do not carry out their supervisory obligations to ensure compliance with applicable securities laws and regulations," FINRA said in the notice, noting that the number of such firms is small.

A 2017 Reuters analysis uncovered 48 firms where at least 30 percent of brokers had at least one of 12 serious FINRA red flags on their records, compared with 9 percent of brokers industrywide.

The analysis examined the 12 most serious incidents among the 23 that FINRA requires brokers to publicly disclose, such as regulatory sanctions, customer complaints that resulted in the broker having to pay the customer, and criminal cases.

In some cases, FINRA expels brokerages from the industry because of regulatory violations, including being unable to pay aggrieved customers who won arbitration cases against them.

Brokers from expelled firms often find work at other brokerages.

FINRA's proposed process for identifying "restricted firms" includes determining a brokerage's percentage of brokers with previous violations and when they occurred, and if brokers recently worked at expelled firms.

Once identified, brokerages would have an opportunity to cut staff.

Brokerages that remain "restricted" would have to deposit cash or securities, in additional to capital they already set aside, which they could not withdraw without permission, FINRA said.

The additional sum would depend on firm size, amounts of certain pending arbitration claims, and other factors, FINRA said.

Between 60 and 98 of the 3,712 brokerages that FINRA oversees would meet "restricted firm" preliminary criteria annually, FINRA said.

FINRA requests input from the industry and public about the proposal by July 1. (Reporting by Suzanne Barlyn; Editing by Steve Orlofsky)