Finra expands crackdown on rogue brokers

Regulator will also start looking at brokers who work alongside high-risk brokers or associate with them

Jan 31, 2018 @ 11:00 am

By Bruce Kelly

In its ongoing effort to crack down on rogue brokers, the Financial Industry Regulatory Authority Inc. said it will now expand its focus to brokers who have worked with or associated with high-risk brokers.

Last year, Finra said it had created a new dedicated exam unit based in New York that keeps track of high-risk or recidivist brokers and was working to identify as many as 100 to 200 rogue registered reps who pose the greatest risk to investors.

Now, Finra has taken that effort one step further, according to Tom Drogan, senior vice president and deputy of Finra's Office of Sales Practice.

Finra in 2018 will also put under the microscope registered reps who may be linked to individuals who have or are known to be of a high-risk caliber, said Mr. Drogan, who was speaking in Dallas Tuesday afternoon on a panel at the Financial Services Institute's OneVoice conference.

He added that Finra did not have a single definition for a high-risk broker, and there were both quantitative metrics, such as disclosure events on the rep's employment history, as well as qualitative aspects to identifying such an adviser.

Officials at Finra will be taking a closer look at advisers who "may not be quantitatively high on the radar screen in terms of the number of disclosures or customer complaints they may have in their history, and in turn, not an individual you may spend time qualitatively assessing," Mr. Drogan said.

"However, [those advisers] may have been working with individuals who perhaps were barred or have a high degree of customer complaints or disclosures, or worked at disciplined firms, information that is all publicly available," he said.

Finra is "trying to step back and ask, 'Are these a group of people who could be the next up-and- coming high-risk reps,'" he said. "And should Finra spend some time focusing on these individuals, in conjunction with the high-risk rep?"

"So, we are going to spend some time in that arena this year and trying to conduct more examinations of these individuals," Mr. Drogan said. "We think it could be very fruitful in getting out in front of people either working side by side with high-risk reps and may be learning from them."

Sharpening its focus on high-risk brokers is a perennial issue for Finra. This year, the topic was again included in its annual list of exam priorities it issues in January to the securities industry.

Finra, however, has taken heat in the past on related problems from academia and Capitol Hill.

In 2016, a study conducted by professors at the University of Chicago and the University of Minnesota found that 7% of financial advisers have been disciplined for misconduct and such brokers constitute as much as 20% of the broker workforce at some firms.

And at a hearing of the Senate Banking Committee in the same year, Sen. Elizabeth Warren, D-Mass., pressed then-Finra CEO Rick Ketchum about problem brokers reappearing in the industry.


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