Joint Proposed Rule Filing by FINRA and SEC Hoping for More Transparency

by Brian Heit

The Financial Industry Regulatory Authority (“FINRA”) has filed with the Securities Exchange Commission (“SEC”) proposed rule changes that are intended to facilitate greater consumer and industry access to disciplinary and other relevant information.

Under the current disciplinary complaints and disciplinary decisions rule, FINRA releases information to the public regarding disciplinary decisions. However, the disciplinary information available is limited by the publicity threshold under this rule. The proposed rule would remove the restrictions and allow FINRA to release a public copy of the information with respect to any disciplinary complaint or disciplinary decisions issued by FINRA.

FINRA believes the changes would provide valuable guidance and information to members, associated persons, regulators, and investors.  More specifically, FINRA explained the releasing of a public copy as opposed to “information” would “serve to deter and prevent future misconduct and … improve the overall business standard in the securities industry.”  The rule allows investors to consider firms’ and representatives’ disciplinary track record when deciding whether to engage in business with them. Also, firms may use the information as a resource to educate their associated persons with compliance matters and highlight potential violations.

Furthermore, FINRA asserts that this will better align its publication standards with the practices of the SEC and other regulators, which will help avoid confusion between those looking to regulators for information. Although this proposed rule change requires more transparency regarding disciplinary actions, FINRA believes the rule is fair to members because any complaint that is dismissed or withdrawn will be accompanied by the order.  In addition, in certain circumstances and at FINRA’s discretion, it may find the potential harm to a firm outweighs any investor protection benefit, and will choose to not release information.

Whether this proposed rule serves as a regulatory trend is yet to be determined. The possible expansion of FINRA’s regulatory scheme, coupled with the complexity of political and public considerations, may require changes in brokerage-firms business choices.