The Massachusetts Securities Division last week fired the latest salvo in the campaign to rid the brokerage industry of rogue brokers.
The state announced a sweep of 241 securities firms with above-average numbers of reps with current misconduct reports on their records. The sweep, in the form of a letter to those firms, is aimed at learning the details of broker-dealers' hiring policies and procedures.
The announcement by the Massachusetts regulator is another reminder to broker-dealers that they are going to be held accountable for hiring brokers who prove through their actions that they are not fit to work in the industry.
MONITORING WORKFORCE
“We need and expect the broker-dealer community to assist us by aggressively policing and monitoring their own workforce,” William Galvin, secretary of the commonwealth and the state's top securities cop, said in a statement announcing the sweep.
Mr. Galvin's remarks echoed those of Richard Ketchum, chairman and CEO of the
Financial Industry Regulatory Authority Inc., at the regulator's annual conference a few weeks ago. “No firm that tolerates such a concentration of 'high risk' advisers should do so without expecting searching questions from Finra,” he said.
Both Finra and the state of Massachusetts are right to direct their attention to brokerages. They are the gatekeepers of the industry, deciding who is fit to serve the public. It is clear that they should be doing a better job. A paper by professors at the University of Minnesota and the University of Chicago earlier this year showed that 44% of brokers fired for misconduct were able to find new jobs in the industry within a year of their termination.
That is significant, as the professors also found that prior offenders are five times more likely to misbehave than the average broker.
To be sure, the industry has always had its share of rogue brokers. In many cases, they work for rogue broker-dealers. These firms care little about their clients and employ reps who are out to make as much money as possible before their firms are shut down or otherwise go out of business. Like rats fleeing a sinking ship or a burning building, these brokers then move on to the next nefarious firm willing to hire them.
Unfortunately, the problem goes beyond just rogue broker-dealers. As the academic study points out, some of the most well-regarded firms in the industry also have high misconduct rates among their brokers.
COMPLIANCE CULTURE
Mr. Ketchum has talked about the need for firms to create a culture of compliance, an environment where the actions of unethical brokers will not be tolerated, where dishonesty cannot thrive and where the bad apples will be weeded out before they can poison the lot.
It is a culture that must be created by the firms' owners and top management, so that new brokers learn fairly quickly that they are working for a firm with a moral compass — one that always acts in the best interests of clients, whether required by a fiduciary standard or not.
Finra earlier this year launched an exam to assess firms' institutional culture. Mr. Ketchum told
InvestmentNews that he is encouraged by the preliminary results.
“Many firms are paying attention to culture and managing clients,” he said, “but there is still a lot of work to be done.”
