Proposed FINRA Rule: Preventing Securities Fraud, Protecting Investors

The Financial Industry Regulatory Authority (FINRA) has announced a proposed rule creating a new category of registered workers at securities firms: Operations Professionals. This category would include employees involved in compilation of customer account data, management of accounts and other similar tasks, and would require a new qualification examination as a condition of employment. Securities industry commentators suggest that the proposed regulation of such back-office employees is a direct result of abuses that occurred in the Bernard Madoff financial fraud scandal – abuses like securities fraud and stockbroker misconduct.

As an independent regulator of U.S. securities investment activity financed by over 4,500 member firms, FINRA’s proposed rule changes are subject to approval by the Securities and Exchange Commission (SEC). The proposed rule changes were recently published in the Federal Register and are currently open for public comment. If the rule is ultimately approved, the following positions will be required to register with FINRA as Operations Professionals:

  • Senior management with responsibility over client on-boarding, collection and disbursement of funds, trade confirmation, and a host of other covered functions
  • Supervisors, managers or other persons responsible for approving or authorizing work that furthers the covered functions
  • Persons with authority or discretion to commit a firm’s capital in direct furtherance of the covered functions

The Impact of Amended Rules on Victims of a Securities Firm’s Malfeasance

So-called “back-office” personnel have access to a great deal of information about individual investors, as well as potential control over a firm’s fate via regulatory filings, trade confirmation and valuations. To that end, the proposed Operations Professional exam would test prospective employees on ethics, securities industry knowledge, and relevant rules and regulations. The proposed rule would also impose continuing education requirements on Operations Professionals.

While securities arbitration and litigation often focuses on an individual stock broker’s misconduct involving misrepresentation, poor explanations, or failure to fully disclose risks involving financial products, investors who are harmed by employees with whom they did not have direct contact also deserve protection. With passage of the proposed Operations Professional rule, securities firms will have additional incentives to ensure that professionals in the securities industry properly handle any and all aspects of a client’s account.

If they fail to do so, the Securities Exchange Act allows aggrieved investors to hold brokerage firms liable for negligent supervision of employees. From Ponzi schemes, churning and hedge fund fraud to improper asset allocation and other stockbroker misconduct, a securities arbitration attorney can help investors assess their options.

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