Wednesday, May 15, 2019

Limits on FINRA's Restricted Firm Proposal

A recent op-ed by St. John's Christine Lazaro captures some of the issues FINRA's new proposal won't solve:

In the event of a product failure, or concentrated misconduct, firms simply cannot make investors whole and a restricted fund will not last long enough to pay a string of arbitration awards resulting from the misconduct. Troubled firms will remain more likely to shut down, leaving investors with no recourse, with the key people simply moving on to new firms.

Finra must do more to ensure that firms, and those in charge of the firms, are held accountable when their brokers go astray. While this proposal is a welcome step in the right direction, until Finra defines "accountability" to mean protecting investors and making them whole, investors will not be fully protected.

These product failures happen fairly regularly.  When some toxic offering slips through and blows up, investors working with smaller firms will still find themselves out of luck.  Instead of the second or third arbitration award pushing the firm out of business, it might be the fourth or the fifth.  Although it's something of an improvement, we're still in a world where only the first few smaller firm customers to secure an arbitration award may be paid.

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