Firms Crack Down on Failures to Disclose, Customer Complaint Follow-up
Regulators and firm compliance chiefs on Thursday said they are increasingly sensitive to customer complaints about brokers, as well as to tax liens and other financial setbacks that may have been shrugged off in the past.
At a panel on “high-risk activity” by retail brokers at the Financial Industry Regulatory Authority’s annual conference, officials said they are looking beyond isolated complaints and incidents to find patterns of behavior that could signal more serious problems, and recounted war stories.
The adult child of an elderly client made a seemingly “benign” complaint about difficulty understanding an investment in a foreign security. Finra investigators followed up to verify where the security was traded and ended up with a trove of damning information about a rogue broker.
“He was running a Ponzi scheme for over a decade, stealing money from numerous people, and only one person raised a red flag,” John Salerno, examination manager for Finra’s high-risk representative program said. “He is facing significant prison time.”
Salerno did not name the individual, but said the ongoing case illustrates why firm compliance officials should raise their levels of suspicion and intensify inquiries, even on seemingly benign issues.
A complaint from a single customer about the sale of illiquid, high-risk or otherwise unsuitable products to an elderly investor may not seem terrible, he said, but Salerno cited “numerous incidents” in which investigators went deeper into the broker’s books and found problems. “Talk to other customers who don’t complain, and you can find a pattern,” he said.
Asked if certain products are predictors of bad behavior, Salerno said it is part of the analysis his group conducts, but is secondary to behavioral patterns that can be uncovered through more thorough examination of regulatory histories and of team members with clean records who jump from firm to firm along with a questionable lead advisor.
He also zeroed in on failures to disclose certain judgments, liens and bankruptcies. It’s not so much the seriousness of the event, but the willful behavior to avoid disclosure that should rouse suspicions when firms are making hiring or continuing employment decisions, he said.
Andy Small, chief compliance officer of RBC Wealth Management in the U.S. and former chief legal officer at Scottrade, responded that most failures to disclose are simple inattentiveness or issues relating to family embarrassment. But given the regulatory environment, he said, Salerno’s advice to bear down is well taken.
“We are constantly in their face that they do have an obligation [to disclose],” Small said. “It is serious. Foot faults matter.”
Susan Hechtlinger, chief compliance officer at SunTrust’s wealth management units, said the disclosure looms large in hiring and termination decisions.
“Even in hiring, we will ask if there is some kind of bankruptcy or compromise and whether it’s been disclosed,” she said. “If no, we want a detailed explanation, and often won’t move forward. A lot of people say they thought it was expunged, but to me it’s a big red flag. Especially today.”