Brokerage firms that employ registered representatives with a checkered disciplinary history are being targeted by Finra this year.
In the examination priorities letter the
Financial Industry Regulatory Authority Inc. released this week, the broker-dealer self-regulator said it will devote “particular attention to firms' hiring and monitoring of high-risk and recidivist brokers.”
Finra said it has established an examination unit dedicated to ferreting out brokers who “pose a high risk to investors.” The regulator also plans to review firms supervisory procedures related to brokers with a history of misconduct and will scour firms' Finra membership applications for those that hire them.
The
priorities letter serves as a warning to firms that ignore brokers' disciplinary records, according to Jim Langdon, a partner at Dorsey & Whitney.
“You're going to have to really explain how you're going to have extra supervision of those people if you're going to hire them,” Mr. Langdon said.
Finra is particularly concerned about firms with a high concentration of tainted brokers.
“An ethical supervisor ought to know whether or not they have a cluster of high-risk or recidivist brokers on their staff,” said Dick Langan, a partner at Nixon Peabody. “If that's the case, they should be ready to hear from Finra.”
Finra is making a strong statement about accountability on the issue by establishing a special exam team, according to Michael Dyson, a partner at K&L Gates.
“It's innovative,” said Mr. Dyson, a former Finra senior counsel in market regulation.
The priorities letter, which contains many items Finra has emphasized for years, also highlights protection of senior investors, sales of complex and unsuitable products, and use social media, among other topics.
The rogue-broker issue also was highlighted on the 2016 examination priorities list — and, recently, the organization has taken heat on related problems from academia and Capitol Hill.
Last year, 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 that such brokers constitute as much as 20% of some firms.
At a hearing of the Senate Banking Committee last year,
Sen. Elizabeth Warren, D-Mass., pressed then-Finra chairman and chief executive Rick Ketchum about problem brokers reappearing in the industry.
“Finra has received such a flogging on this issue over the last two years,” said Andrew Stoltmann, a Chicago securities lawyer. “They're trying to let Congress and the media know that this is front and center on their radar.”
Even though the industry-funded regulator is not directly overseen by Congress, it does pay attention to what lawmakers say.
“Always being responsive to congressional concerns is important,” said Barry Goldsmith, a partner at Gibson Dunn & Crutcher and former head of enforcement at the National Securities Dealers Association, Finra's predecessor. “I don't get the sense that it's a growing problem. It may be a reaction to the focus on the industry.”
In its 2015 annual report,
Finra touted its High Risk Broker Program, a data analytics initiative established in February 2013, for securing industry bars for 230 brokers. It also said it targeted 170 exams on high-risk brokers in 2015.
“It's too early in the game to be able to say one way or the other” how much progress Finra is making, Mr. Stoltmann said.
Making rogue brokers a priority is a step in the right direction, but Finra should do more to give investors a sense of the problem, said Ben Edwards, assistant professor of law at Barry University.
Investors who look up brokers' profiles on BrokerCheck, a Finra database, aren't able to see aggregate or firm-specific data about bad brokers.
“Finra has recognized that these brokers pose a risk, but its BrokerCheck disclosures and data do not adequately warn the public about the actual risk created by brokers with regulatory disclosures,” Mr. Edwards said.
The priorities list is the first one put out under the signature of new Finra president and chief executive Robert W. Cook, who said it focuses on “core 'blocking and tackling' issues of compliance, supervision and risk management.”
