Finra Raises Pressure on Rogue Brokers and Their Firms
Wall Street’s self-regulator warned firms on Wednesday that it will focus attention in 2017 on chronically troublesome brokers and the firms that hire them.
In its annual regulatory and examination priorities letter, the Financial Industry Regulatory Authority said a newly created team of examiners will work to identify and probe the monitoring of recidivist brokers.
Examiners will “rigorously review” how brokers interact with clients, adhere to suitability rules, conduct and report outside business activities and comply with rules on private securities transactions, commissions and fees and other areas, it said.
Of particular interest to recruiters and compliance officials, the regulator plans to review supervisory procedures for hiring or retaining “statutorily disqualified” brokers and for double-checking the accuracy of their and their previous employers’ regulatory reports.
“Finra will examine firms’ due diligence on these individuals, and that will include determining whether, as part of the verification process, a firm or third-party service provider conducts a national search of reasonably available public records to verify the accuracy and completeness of the information contained in an applicant’s Form U4,” the regulator wrote.
Finra also said that its “membership application” unit will bear down on new and existing member firms and “carefully consider whether applicants [employing rogue brokers] have the experience and controls to adequately supervise these representatives.”
The issue of brokers who jump from firm to firm gained prominence last year following three studies focusing on firms that disproportionately hire brokers with questionable histories. One academic study found that more than 7% of brokers have misconduct records, and fingered several independent brokerage firms as well as Oppenheimer & Co, Wells Fargo and UBS Financial as surpassing the averages.
Craig McCann, whose firm Securities Litigation and Consulting Group published another study critical of both firm due diligence and of Finra’s past efforts to expose bad brokers, was skeptical about the regulator’s new approach.
“Finra doesn’t need to go sleuthing around firms, it just needs to report the information it already has,” McCann, who testifies as an expert witness on behalf of investors, wrote in an e-mail. “Bad brokers and the firms which employ them would be out of the industry in six months.”
In other areas, Finra said protecting elderly investors from abusive sales practices and unsuitable investment products will remain a top examination priority, as will its review of cybersecurity systems and liquidity risk management.
However, it underscored its primary concern by leading its 11-page priorities letter with the subject of “High-risk and Recidivist Brokers.”