Brokers' test failures raise red flag

Analysis finds brokers who fail basic securities exams have more dings on BrokerCheck

Apr 15, 2014 @ 9:57 am

By Mason Braswell

The more than 51,500 brokers who have failed the Series 63 exam are more likely to have disciplinary violations, according to an analysis by the Wall Street Journal.

The newspaper’s review of the records of 51,500 brokers who failed a basic securities exam at least once raises questions about whether regulators should disclose more information about brokers’ test scores. Currently, exam failures are not disclosed to investors.

Pulling data from state securities regulators, the Journal found that brokers who failed their Series 63 were 77% more likely to be the subject of a felony or financial-related misdemeanor report than brokers who passed the exam on the first try. They were also 55% more likely to have been fired.

More than 3,000 brokers have failed the test at least three times, the analysis showed. Those brokers were two-thirds more likely to have disclosure events on their record, such as complaints of excessive trading or churning.

(See also: Finra's BrokerCheck comes under fire)

Richard G. Ketchum, chief executive of the Financial Industry Regulatory Authority Inc., told the newspaper that Finra plans to review whether test scores should be accessible via BrokerCheck, its publicly accessible database of broker records.

The Journal’s report comes on the heels of a push by plaintiff’s lawyers to have more information about brokers, including test scores and certain bankruptcies and liens, disclosed publicly.

Finra has in the past resisted efforts to publish brokers’ test scores, citing privacy concerns, although that information can be accessed by filing a request for information with state securities regulators.

“Information about failed tests for industry qualification examinations is not disclosed through BrokerCheck, which does not reveal the scores achieved and the number of times a broker failed such tests,” the Public Investors Arbitration Bar Association wrote in a March report. “It only shows which exams were passed but not the score or how many times a broker may have failed before finally passing.”

At the time, Finra responded by saying that there was no evidence to link performance on the tests with brokers’ competence.

The regulator refused to disclose to the Journal how many times brokers failed its Series 7 exam.

Regulators offer an unlimited number of opportunities to take the exam before passing, which requires a score of 72%.

Some brokerage firms have different requirements on how many times a trainee can fail the test, although the Journal found that many of the largest brokerage firms, including UBS AG and Morgan Stanley, had hired brokers with numerous exam failures.


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