By Priscila Bandeira

On October 16, 2017, FINRA’s Executive Vice-President for Regulatory Operations, Susan Axelrod, announced that FINRA had ranked all 634,403 registered representatives based on risk. The factors used by FINRA to develop the ranking included prior regulatory disclosures, disciplinary actions, and employment history, among others. The goal was to crack down on the industry’s bad apples. The ranking appeared to be a great tool for the agency on behalf of investors; however, in view of recent data breach scandals, is this initiative safe for investors whose information is associated with these brokers?

Just this year, Equifax faced an enormous scandal over a data breach that compromised extensive information from the company’s customers and which affected nearly half of the American population. Now, after FINRA’s announcement that the rankings already exist, one question must be raised: what about all of the information on investors which is related to the factors described above? This is a relevant question, because such ranking most likely concentrates a large amount of sensitive data in one database.

The ranking initiative is following a number of other actions taken by FINRA to raise pressure on firms and brokers to comply with the Authority’s regulations. In July 2017, FINRA’s board authorized FINRA to propose and enforce changes to its application process for memberships, forcing firms to file a continuing membership application before hiring a broker with any disciplinary history. The board also authorized initiatives allowing FINRA to deny new membership to a firm with pending arbitration claims.

The primary purpose of the ranking is for FINRA’s internal use, so that it can target potential rogue brokers for more thorough examinations. However, even though the large amount of information collected for this purpose will remain private, all information related to investors is still at risk because it will all be held in one place. Although brokers seem to support the list, some have raised questions about how FINRA will keep the rankings secured, in light of many recent data breaches. If a breach occurs and the lists goes public, brokers have argued that it could harm the reputation and careers of advisers who may have not yet have had an opportunity to defend themselves or seek counsel.

Additionally, this becomes worrisome for investors, because in order to create a ranking of brokers as explained by Ms. Axelrod, the database will likely include data on US investors’ brokerage accounts, their personal financial information, details of stock and bond transactions made by brokerage firms, and customer complaints, etc.

When talking about the initiative, Ms. Axelrod briefly addressed the concern, assuring that the list will remain private. Moreover, the question of privacy was mainly raised regarding the brokers’ ranking number, which does not actually ensure how FINRA plans to deal with cyber security and investor’s privacy. This issue is something that FINRA needs to address and that investors should keep an eye on.

By Santiago Rodriguez

Pace Law School, in association with FINRA, has updated its “Investors Guide to Securities Industry Disputes” in which they share tips and resources for preventing and resolving disputes with your broker. This guide is a helpful tool for investors who feel they may have a valid claim but are unaware of their rights and potential risks.

The guide is divided into three parts. The first part seeks to explain how to avoid disputes, elaborating on the investor’s rights and responsibilities. The second part addresses the arbitration process and what to expect if a dispute occurs. The third part shows alternatives to arbitration, such as mediation.

The first part of the guide offers 10 suggestions for responsible investing:

1. Understand that all investments involve risks whether they are market risks, liquidity risks, or inflation risks.
2. Research the broker and the brokerage firm before opening an account: ask whether the broker and the firm are properly registered with FINRA, verify the broker’s and the firm’s background, verify their professional credentials, verify that the broker is licensed by your state’s insurance commissioner, and verify that the firm is a member of the Securities Investor Protection Corporation.
3. Formulate investment goals and communicate them clearly to you broker: have a clear sense of your investment goals and when you want them to happen, in order for the broker to make suitable investments.
4. Learn about account features: some accounts offer features such as a pre-dispute arbitration clause, who has the authority to make decisions (whether the broker has discretionary authority over the account), or the ability to borrow from the firm;
5. Learn about fees you may be charged for investment services and products: some brokers are compensated with commissions. Ask how your broker is compensated to avoid over-trading.
6. Understand your investments and avoid any you don’t understand: only invest in products that are suitable for your risk tolerance;
7. Carefully read all documents relating to your account and investments: be aware of any waiver you may be signing, and review all trade confirmations;
8. Keep documents and note conversations with your broker: this will help keep a record of the relationship in case a dispute arises in the future;
9. Report any problems with your account in writing immediately: this may help minimize losses and preserve legal rights;
10. Ask questions.

By following these 10 steps, investors may stay ahead of potential risks and safeguard their investments from any potential issues that may arise. Follow the link at the top of this post for more information.

By Dimitrije Canic

The Securities and Exchange Commission (SEC) recently approved changes to existing FINRA rules regarding new broker examination requirements. FINRA issued Regulatory Notice 17-30, which describes the changes to the current rules. The changes are due to take effect on October 1, 2018.

Under the modified rules, all new brokers will be required to pass a general knowledge examination, the Securities Industry Essentials, and a revised representative-level qualification examination such as the Series 7 examination. The representative-level examination must also be appropriate to the new broker’s job functions at the employing firm in order for the registration to become effective.

The purpose of these changes is to modernize the current examinations for incoming brokers to reduce bad practices. Although these modernized examinations eliminate repetitive and old concepts, it is unclear whether such a change in exam practices will be effective in reducing the number of allegations regarding broker misconduct.

It is important that new brokers understand the rules and regulations governing their trade and practice, but the larger picture may still elude FINRA. New brokers may spend time studying and preparing for these examinations – and pass them – but when they enter the workforce they may be exposed to existing practices that bend or skew FINRA rules. Moreover, the practical experience that a new broker will obtain when working as a licensed broker will seemingly carry more of an effect in his or her professional life than the preparations for these entry-level examinations.

Since 2012, FINRA has generally received an increase in complaints about brokers. Following this trend, the number of brokers suspended and expelled by FINRA has also increased during this time. Additionally, the number of firms suspended or expelled by FINRA during this period has usually been above 20 per year. This indicates that firms are also bringing new brokers into a negative firm culture that does not adhere to FINRA standards. The result may be that new brokers exposed to such a culture learn it and apply it in their professional lives, which affects that broker’s clients and the firm.

Perhaps FINRA should look into examinations for experienced brokers that have been the subject of a number of complaints. It is evident that when firms get penalized, it is not because of new brokers, rather the management and supervisory brokers that are at some degree of fault. Therefore, FINRA should consider similar examinations to refresh experienced brokers on FINRA rules and regulations.

FINRA has clearly noticed there is a problem, and modernizing entry level examinations is a good first step. But the overall effectiveness this has in reducing the number of FINRA rule violations remains to be seen.