FINRA Toughens its Sanctions on Suitability Violations
The self-regulator suggests barring offenders, expelling more firms, uping suspensions to two years
The Financial Industry Regulatory Authority Inc. is tightening the screws on its disciplinary responses to violations of the suitability standard by brokers.
As part of its Sanction Guidelines, which provide suggestions for the National Adjudicatory Council, the committee that oversees disciplinary proceedings, the self-regulator has increased its suggested suspensions from one year to two for brokers making unsuitable recommendations. It also strongly advises possible barring of brokers and expelling of firms for fraudulent activity.
The guidelines are set in place to protect investors from a broker’s failure to comply with the suitability rule, under which brokers may sell products in which they have an interest, as long as they are aligned with the investors’ goals.
But some advisers still think it isn’t enough.
“Why would you allow someone who stole money from a client to even come back?” said Ross Gerber, chief executive of Gerber Kawasaki Wealth and Investment Management. “It should be one and done.
“The fact that they’re adding a year suspension is just a band-aid for a bigger issue,” he said.
But the increase may encourage some change — though not necessarily positive.
Defendants before hearing panels may choose alternate paths in an attempt to avoid the tougher consequences.
“Individuals facing two-year suspensions will be more apt to fight cases than settle,” said Bill Singer, an attorney who focuses on cases within the financial services industry. “If you face a two-year suspension, you may be more apt to cover up misconduct and try to engage in under-the-counter settlements.”
Mr. Singer said the guidelines revision looks like a response to the pressures the industry is facing with the Labor’s Department’s proposal for a fiduciary standard.
“That sort of raises questions in my mind,” Mr. Singer said. “How much of this is sincere?”
“This has absolutely nothing to do with [the DOL proposal],” said Nancy Condon, a Finra spokeswoman. “One does not have anything to do with the other.”
Though the DOL proposal is receiving pushback from critics, if put through, it would establish a contractual obligation for brokers working with retirement accounts to act always in their clients’ best interests, disclosing any conflicts that may arise. While the suitability rule and fiduciary standard seem similar, the suitability rule provides brokers the flexibility of reasonably recommending investments that could benefit both the client and broker.
The revision is just the latest in a sweep of strict movements by politicians and regulators to protect investors from potential misconduct in the financial services industry. In April, the Securities and Exchange Commission’s Investor Advisory Committee suggested regulators join together to build a database that would run background checks on advisers and brokers.
When your broker recommends that you buy or sell a particular security, your broker must have a reasonable basis for believing that the recommendation is suitable for you. In making this assessment, your broker must consider your income and net worth, investment objectives, risk tolerance, and other security holdings.
The team of investment fraud lawyers at Starr Austen & Miller LLP fights for the protection of investors and handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, negligence and breach of trust.