Finra's new dedicated exam unit that keeps track of high risk or recidivist brokers is working to identify as many as 100 to 200 rogue registered reps who pose the greatest risk to investors, according a senior official with the broker-dealer regulator.
Based in the
Financial Industry Regulatory Authority Inc.'s New York office, the team of investigators, examiners, attorneys and compliance professionals is culling through reams of data to spot recidivists in the brokerage industry, said Donald Lopezi, senior vice president and regional director for Finra's western region.
“Finra's not here to say, 'Yes, you can hire that individual,' or, 'No, you can't,'” said Mr. Lopezi, who was speaking Tuesday morning at a compliance panel in San Francisco at the annual Financial Services Institute meeting, called OneVoice. “That's the last thing we want to do.”
But when Finra does see a high risk or rogue broker, its staff will pick up the phone to call the broker-dealers' compliance executives, determine if they are aware a high risk broker is working at the firm and ask what kind of plan the firm has for heightened supervision of that broker.
According to Finra's 2017 regulatory and examination priorities letter, the self-regulatory organization recently established a dedicated examination unit to identify and examine brokers who may pose a high risk to investors. This group will rigorously review these brokers' interactions with customers, including their compliance with rules regarding suitability, know-your-customer, outside business activities, private securities transactions, commissions and fees.
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 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.
Mr. Lopezi said that Finra is now taking what it has done in the past supervising and monitoring such brokers in its 14 separate district offices and centralizing it in New York. There, staff will make a quantitative analysis looking at data that includes an adviser's test scores, his number of employers and reportable actions as well as his amount compliance complaints.
“Based on the numbers and this quantitative outlook, this team in New York takes data as their starting point and then they overlay a qualitative assessment on top of that because the numbers are only going to tell you maybe 50% of the story,” he said. “Most of the intelligence we have is what our examiners and staff know and what we've been able to learn about these individuals from prior investigations and exams and that sort of thing.”
“The key focus is making sure we are identifying who are those individuals, whatever it is, the top 100, the top 200, whatever the number, those individuals that we think we need to focus our primary attention on in 2017,” Mr. Lopezi said.
Next, members of the new group will go to onsite exams of the firms that house the brokers, he said, with the exam particularly focused on the activities of those registered reps.
One focus will be interviews with the reps' supervisors and the activities of the rep, such as purchase and sales data, including private securities transactions, any movement of money and a reps' outside business activities.
Finally, Finra will take a close look at the firm's overall supervisory system, hiring practices and looking at “any indication that this rep might be a bad actor,” Mr. Lopezi said.
The new unit will also focus on ongoing monitoring of any new complaints against the broker that could lead to an exam, he added. “We're really trying to have our finger on the pulse at all times as to where are these individuals.”
(More: Finra's new chief Robert Cook vows to take a “fresh look” at enforcement)
