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September 25, 2019

FINRA Must Live-Up to Its Mandate of Investor Protection and Market Integrity by Expelling Wolf-Pack Brokers

As the front-line regulator of the broker-dealer profession, FINRA must do more to live-up to its mandate of investor protection and market integrity by expelling brokerage firms that specialize in harming investors.  These are “predator wolf-pack” firms populated with recidivist brokers whose business model appears to be maximizing profits by targeting and ripping off unsuspecting and vulnerable investors.  Instead of ridding its membership ranks of firms that attract and pay brokers who have indisputable records of repeat misconduct and investor abuses, FINRA is proposing a rule that would essentially make it slightly costlier for firms to hire or retain brokers with checkered pasts. 

The new rule proposes a convoluted, Rube Goldberg-type process to identify and, eventually, place financial obligations on high-risk firms by requiring them to set aside certain funds in a “Restricted Fund” that may make it easier for FINRA to offer restitutions to investors harmed by the firm.  Without offering any basis, FINRA believes that firms who have purposefully and repeatedly violated FINRA rules, would, all-of-a-sudden, decide to fire or not hire recidivist brokers because doing so would slightly raise their regulatory, nay, operating, costs.  This theory and expectation is wholly unfounded, and it is the highest form of regulatory malpractice for FINRA to continue believing in it and building a regulatory regime based on that belief. 

These firms know full well what they are engaging in, how illegal it is, and how harmful it is to investors.  These are predator wolf-pack firms who, as stated before, have a business model that maximizes profits, often outside of existing rules, and rips off unsuspecting and vulnerable investors.  By enabling them to remain in business through the use of the “Restricted Fund” scheme, FINRA increases moral hazard.  FINRA’s permitting of these firms to remain in business and profitable perpetuates the wolf-pack business model.  FINRA should instead put them out of business and bar them from forming new ones.

FINRA has all the authority and know-how to take more concrete action and prevent these types of wolf-pack-like firms from ever forming.  In a comment letter, Better Markets argues for a fundamental rethink of policing these wolf-packs.  Among other calls to action, we urge FINRA to, at a minimum:

  • Apply a more stringent criteria in identifying high-risk firms so that more predatory behavior is captured;
  • Require firms to fire their most predatory brokers, regardless of their seniority within the firm or the revenue they generate;
  • Prevent those who have been fired due to their high-number of predatory behavior from being re-hired by other firms;
  • Publicize the names of the wolf-pack firms so investors could make a more informed broker-dealer choice; and,
  • Expel firms who have been designated as high-risk twice.

FINRA’s refusal to concretely protect the very investors they are mandated to serve is unacceptable.  Words and actions are not alike.  Through the proposal, FINRA further exposes these wolf-packs and reiterates the need to stop them, yet the rule itself falls far short of doing that.  FINRA’s primary mission is to protect investors and the integrity of the securities markets, not serve the interests of its worst members who repeatedly violate the law.  It can, and must, do more to live up to its own mission.



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