FINRA Project Examines How Regulators Can Support Diversity

Back in late April, the Financial Industry Regulatory Authority (FINRA) issued a formal request for comments from broker/dealers (B/Ds) and financial advisers on supporting diversity, equity and inclusion (DEI) in the financial services industry.

As FINRA stated at the time in Regulatory Notice 21-17, its oversight of the B/D industry is based on and limited by its statutory mandates and authority, which focus on investor protection and market integrity. Furthermore, agencies such as the U.S. Equal Employment Opportunity Commission (EEOC) and its state and local counterparts are focused directly on discrimination issues in the workplace.

Nevertheless, FINRA explained, regulatory organizations such as itself “have an opportunity to evaluate and understand whether their rules and regulatory actions have unintended disparate impacts on those within the industries they regulate.”

The comment period detailed in Regulatory Notice 21-17 ended this week, and the FINRA website now includes several dozen comment letters filed by likes of the Insured Retirement Institute (IRI) and the American Council of Life Insurers (ACLI), state governments, individual investment firms and single actors. For their part, the IRI and ACLI filed joint comments voicing support for FINRA’s consideration of this issue.

“ACLI and IRI have always supported removing unnecessary barriers to aspiring insurance producers, but with the caveat that only qualified individuals should become licensed,” the organizations write. “We have worked with our regulators to bring greater uniformity and efficiency to the life insurance producer licensing process through, among other things, ensuring the appropriate difficulty of the written exam, consistency in pre-licensing education requirements and timely background checks. Most recently, states are moving swiftly to allow online proctored producer licensing exams. While these initiatives benefit all applicants regardless of background, they are particularly important for rural, minority and other disadvantaged communities. … Continuing to foster policies that ensure qualified individuals from minority communities can become licensed financial professionals will create job and ownership opportunities that will reduce the existing racial and gender wealth gaps, which are far too prevalent in our nation.”

They also raised the need for regulators, particularly the National Association of Insurance Commissioners (NAIC), to take consistent approaches to address diversity issues.

“Because the insurance and securities regulatory frameworks overlap (life insurers are subject to applicable FINRA rules regarding supervision of licensed professionals, among other things) and mutually support each other to a certain degree, we urge FINRA to keep the lines of communication open to the NAIC,” the groups write. “Consistency in approaches we believe would benefit both industries.”

In another comment letter, Robert Muh, director of Sutter Securities, observes that becoming a registered investment adviser (RIA) and broker “has not been an easy or inexpensive process.”

“In 2018, FINRA’s creation of the Securities Industry Essentials (SIE) exam was a significant step in simplifying the process for an individual to demonstrate basic industry knowledge,” Muh observes. “The SIE is open anyone over age 18 and, most importantly, association with a member firm is not required. Passing the SIE, however, does not qualify an individual for registration with a FINRA member firm or to engage in the securities business. The individual must next pass a qualification exam for a specific type of business (a ‘qualifying’ or ‘top off’ exam). In order to take a top off exam, the individual must be associated with a member firm.”

Muh argues that many smaller firms cannot afford either the time or the money to hire someone that has only passed the SIE exam. Thus, he proposes a new type of program aimed at increasing access to the industry through the more than 900 community colleges operating currently in the United States.

“There are approximately 2 million full-time and another 3 million part-time students enrolled in community colleges,” Muh says. “In August 2018, the Aspen Institute identified that 56% of Native American undergraduates attend community college, as do 52% of Hispanic undergraduates and 43% of Black undergraduates. Community colleges would be invited to prepare a series of courses that would prepare students for the SIE exam and one or more of the qualifying exams. These would be the same exams as are now required but rather than requiring association with a member firm, they would require enrollment at an approved community college.”

Passing these exams alone would not qualify an individual to engage in any securities activities that now require association with a member firm. This is to say, under Muh’s approach, that a community college student who has passed both the SIE and a qualifying exam would still have to be hired by a member firm prior to engaging in any real securities activities. However, in this way, they would be eligible to engage in productive activities immediately.

“This is similar to the current requirement for a licensed real estate agent,” Muh writes. “In most states, a real estate agent must work through a licensed real estate broker even though they have a sales license. Allowing the completion of the necessary licenses through a community college would expand the job opportunities available to minorities, particularly among smaller member firms.”

The state of Vermont’s Department of Financial Regulation also put forward several actionable approaches FINRA could take.

“The department would suggest that FINRA’s membership and reporting requirements are more onerous than necessary to fully protect consumers and may differentially deter applications from historically marginalized groups,” the comment letter states. “Moreover, these requirements are in growing tension with state-law expungement statutes in Vermont and elsewhere, which are increasingly likely to provide expungement for a broad range of convictions after a period of years. As one example, Vermont’s expungement regime has been liberalized substantially over the past several legislative sessions, each time easing access to expungement. Many states have done likewise and more will follow as more empirical studies suggest that recidivism among those with expunged convictions is quite low and that expungement serves important social justice and equity goals.”

The Vermont letter notes that FINRA currently bars from membership “any individual who has been convicted of any felony or certain misdemeanors in the past 10 years,” under authority granted to FINRA under Section 15A(g)(2) of the Securities Exchange Act of 1934.

“It is our understanding that FINRA does allow disqualified individuals to petition for waivers, and these are occasionally granted, often with an emphasis on heightened supervision of the petitioner by another registrant in the same office,” the letter states. “This flexibility is warranted and appropriate given the current regime. However, we believe that FINRA could do more to encourage participation from historically marginalized groups, while still protecting the public, by changing the disclosure requirements on Form U4. … There is little connection between ‘stale’ convictions and consumer risk. There is even less connection between a prior arrest that did not result in a conviction and consumer risk. These are, simply put, matters that could be eliminated from consideration in the licensing process, or their importance substantially diminished, without any meaningful increase in risk to consumers.”

In its own extensive comment letter, Fidelity Investments strongly suggests that remote test-taking from non-standard test locations become a permanent option. For context, such a policy is currently in place due to the impacts of the coronavirus pandemic.

“Along with other benefits, this would enable broker/dealers to hire individuals from more diverse geographies,” Fidelity says. “Importantly, we request that the limitations of the types of tests which can be taken remotely be lifted, so that all FINRA qualification exams, especially supervisory principal examinations, are widely available. In addition, FINRA should continue to provide the option for individuals to take qualification exams from testing centers so that if individuals do not have a secure, quiet place to test, they can utilize a center.”

Making a point echoed in other comment letters, Fidelity says FINRA should consider eliminating the waiting period requirements before a candidate can re-take a qualification exam after failing.

“Given the varying abilities of test-takers, they should be permitted to re-take a qualification exam sooner than 30 days if they feel ready to re-take it, which is very often the case if an individual failed by merely one or two points,” Fidelity writes. “In addition, the forced 180-day waiting period after the third attempt often leads to individuals leaving the industry, as member firms may feel that this time period is too long to maintain unlicensed individuals. We understand there could be a need to limit the number of times a candidate tests but asks that FINRA eliminate the waiting requirements for taking an exam a second or third time, and significantly shorten the 180-day waiting period after the third attempt.”

The comment letter filed by the Securities Industry and Financial Markets Association (SIFMA) summarizes an oft-repeated suggestion: “FINRA could foster greater diversity, equity and inclusion in the industry by updating its supervisory regime to account for remote work that has been spurred on by the COVID-19 pandemic. … FINRA should seize this opportunity to update its outdated supervisory framework that has been based on physical work locations and in-person office inspections. Investments by our members and quantum leaps in technology provide the equivalent or even more advanced ability for firms to supervise the activities of individuals working remotely. This fosters greater DEI by providing flexibility and mobility for individuals not only seeking to better manage their work and personal lives, but also those for whom remote work is the only viable option. This includes, for example, individuals with primary family care responsibilities, individuals with physical or mental health disabilities who have been experiencing an unprecedented level of accessibility in their employment due to the pandemic, and individuals who are excluded from job opportunities because they cannot afford to live within commuting distance of a job.”