In an article published on May 16 in Law360, Tom Potter provides insight on the Financial Industry Regulatory Authority’s (FINRA) recent proposal to establish a “Pre-Crime” unit within Member Regulation in Washington, D.C., that would impose preemptive confiscatory fines based on predictive analytics.
In its Regulatory Notice 19-17 (May 2, 2019), FINRA proposed an entirely new regulatory edifice – the restricted firm’s obligations rule – to take preventative action to protect investors against “rogue brokers” and the firms that hire them.
FINRA’s proposal starts by exclaiming its regulatory success on this front: “FINRA has a number of tools to deter and remedy misconduct by member firms and the individuals they hire, including review of membership applications, focused examinations, risk monitoring and disciplinary actions.” It notes FINRA’s recent focus on the problem in last year’s proposals on heightened supervision for certain reps, additional rules for “high-risk brokers,” and stronger punishments in its sanctions guidelines revisions.
However, FINRA states these are not enough due to the following: examiners can identify and prescribe but cannot require immediate change, enforcement actions require investigation, complaint and due process that firms often defend, and temporary cease and desist actions are available only in narrow circumstances and require a concurrent enforcement complaint.
“From these anemic premises, FINRA’s answer is to use quantitative measures to brand firms as bad actors and require them to post bail in a restricted account – though such a judgment fund speaks mainly to the potential for later unpaid arbitration awards with only a hoped-for indirect effect on compliance failures,” details Potter.