In a time when brokers with difficult financial histories or records of compliance problems are in the cross hairs of regulators more than ever, a broker-dealer that in the past has drawn some scrutiny from state regulators has reached an agreement to hire reps from a firm that has been a haven for registered reps with a number of knocks on their BrokerCheck profiles.
WestPark Capital this month has taken on board 15 brokers, more than 10% of the firm's total, from Newport Coast Securities Inc., a small independent brokerage firm with 109 registered persons that has been a haven for brokers with financial and compliance problems.
According to Finra, just 12% of the 640,000 registered reps, executives and back office employees of securities firms has at least one compliance mark, known as a “disclosure event,” on their records. A review of the BrokerCheck profiles of Newport Coast brokers and executives show that the firm has more than five times the industry average.
Indeed, 63% of the registered reps or executives at the firm have at least one "disclosure event" on their BrokerCheck profiles. And those with at least one disclosure event have on average 3.4 such marks on their BrokerCheck profiles, according to the InvestmentNews review of Newport Coast brokers and employees.
Brokers at Newport Coast were informed last week that they would be absorbed into WestPark Capital, according to Jonathan Henschen, an industry recruiter who discussed the transition with one Newport Coast rep. Mr. Henschen said that the rep told him the firm was facing problems last week, although the nature of those problems was unclear. Both Newport Coast and WestPark use COR Clearing for their clearing firm, making a transition for brokers easier, he noted.
WestPark is being selective in the process of hiring the Newport Coast brokers, executives said. “WestPark is taking the best brokers” from Newport Coast, said Dan Druz, an attorney for the firm. “The objective is to get the brokers with the least number of marks” on their employment profiles, he said.
Richard Rappaport, the owner and CEO of WestPark, said the firm had no intentions of adding on Newport Coast brokers with ugly employment histories. “We signed an agreement (with Newport Coast) to acquire some of the brokers in an asset transaction and doing normal due diligence on them,” he said, including using an outside firm to run background checks on the brokers and running each broker under the review of a senior management committee at the firm. The firm is adding “no where near 100 people” from Newport Coast, he said.
And the BrokerCheck profiles of the 15 former Newport Coast brokers that have moved to WestPark bear Mr. Rappaport out. Nine have zero or one “disclosure event” on their BrokerCheck profiles, and none has more than four.
Many Newport Coast brokers have large numbers of tax liens and judgments during their years working in the securities industry. Critics say brokers with problems paying taxes are a significant warning for investors; if a broker cannot adequately handles his own finances, how can he manage client money properly?
Four Newport Coast brokers have 10 or more “disclosure events,” and one of those has 19. Eight of those are for judgments or liens, nine for settled customer disputes and two are for criminal issues including the broker being a minor and purchasing alcohol.
Meanwhile, WestPark Capital, which opened its doors in 1996, has nine “disclosure events,” a $585,000 arbitration award from 2010 and eight regulatory matters, on its
BrokerCheck profile. The most recent regulatory issues was a $50,000 settlement with the New Jersey Bureau of Securities over a broker working in New York who acted as an agent in New Jersey after his registration had been revoked.
Mr. Rappaport pointed to growing pains at the firm for those issues with regulators. “We've made some mistakes but are focused on not having those mistakes recur,” he said, adding that the firm has replaced many of the people involved in those incidents.
The firm has both and investment banking and wealth management business, which is small and has about 50 producing reps, Mr. Rappaport said.
In a time when small broker-dealers are facing increased compliance costs and the decreased revenue on margin and money market accounts because of record low interest rates, Newport Coast has been struggling.
According to its annual financial statements filed with the Securities and Exchange Commission, Newport Coast had total revenue of $22 million in 2014 and a net loss of $236,000. A year later, total revenue decreased to $16.6 million, a decline of 24.6%, while the company's net loss nearly doubled to $456,000, according to the SEC filings.
Finra has recently been on the hot seat over the issue of brokers with lousy financial and compliance histories.
In May, Wall Street critic Sen. Elizabeth Warren, D-Mass., and a colleague, Sen. Tom Cotton, R-Ark., sent a letter, calling on Finra to do more to protect investors from both advisers who have a history of misconduct and the firms that keep hiring them.
Weeks later, the Massachusetts Securities Division announced a sweep of 241 securities firms with an above-average number of reps with current misconduct reports on their records.
