The Financial Industry Regulatory Authority (FINRA) has proposed a rule to put restrictions on brokerage firms that employ brokers with a history of misconduct. Unfortunately, a number of brokerage firms hire brokers even after the brokers have been accused of, and even been found guilty of, abusing investors. Many of those brokerage firms have little, if any, money to pay arbitration awards or claims if these bad brokers continue with their misconduct. The proposed rule would require brokerage firms that employ an outsized number of bad brokers to maintain cash or qualified securities in a segregated account at a bank or clearing firm, from which the brokerage firm could make withdrawals only with FINRA’s approval for the use of arbitration awards. This money then could be used for arbitration awards if the historically bad brokers continue to abuse investors.
FINRA Proposes Rule After Dealing with Unpaid Arbitration Awards
After receiving a lot of pressure to deal with a large amount of unpaid arbitration awards, FINRA proposed this rule. The intention behind the proposed rule is to serve as a deterrent and discourage securities violations and financial misconduct. It also would encourage brokerage firms either to refuse to hire historically bad brokers or at least to diligently supervise those brokers when they are hired.
Next Steps for Regulation
At the time of writing, the proposed regulation is open for public comment. It must be approved by the Securities and Exchange Commission prior to its implementation.
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