Finra going after rogue brokers

Finra will be paying close attention to the customer accounts of high-risk brokers as they review firms' sales practices.

Jan 12, 2014 @ 12:01 am

In its annual letter to broker-dealers listing its examination priorities, Finra included many areas on which it has focused in past years, such as structured products, suitability of investment recommendations and conflicts of interest. A new — and welcome — area it is turning its attention to this year is rogue brokers.


Unfortunately, rogue brokers have been around for a long time. They are the brokers who skip from firm to firm, racking up investor complaints, arbitration awards and enforcement actions along the way.

The brokers depicted in the new Martin Scorsese film, “The Wolf of Wall Street,” were rogue brokers for sure, but there are many others who are not as flashy but whose misdeeds are often just as harmful. They hurt investors and the reputation of the firms they work for — although sometimes the firms themselves are just as guilty — and are a stain on the entire securities industry.

The Financial Industry Regulatory Authority Inc. has said that this year, it will do more to monitor and prevent these serial offenders from causing additional mischief as they leave one firm for another. In some cases, they have been fired for disciplinary problems. In other cases, they were working for a troubled broker-dealer that was forced to shut down and are looking for new employment.

Finra has put broker-dealers on notice that its examiners will be reviewing their due diligence on background checks for new hires, as well as the adequacy of supervision of high-risk brokers. Finra said it also will be paying close attention to the customer accounts of high-risk brokers as they review a firm's sales practices.


Since Finra has disclosed that it will have rogue brokers in its cross hairs, it behooves broker-dealers to make sure they are doing everything they can on the front end to not hire a problem employee. In the past, it sometimes has been hard to find out the exact circumstances of a broker's departure from a previous employer, because that employer did not want to be named in a defamation suit. That said, broker-dealers have to make sure they are getting all documentation pertinent to prospective employees' work histories before they are hired.

Now that Finra is taking steps to get rid of its bad apples, legislators and government regulators should start looking at ways to make sure the pipeline between the securities and insurance industries is being monitored more closely. In some cases, problem insurance brokers have been able to restart their careers at securities firms and vice versa.

InvestmentNews has documented several cases where stockbrokers have been barred from the securities industry by Finra or the Securities and Exchange Commission but have been able to retain their state insurance licenses. This gives them carte blanche to take advantage of investors and consumers in new ways that are just as devious as their past practices.

It would be good to know that once individuals have been thrown out of one industry, they cannot simply start again in a related business and hurt more people.


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