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FINRA Targeting Rogue Brokers

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  • Posted on: Feb 24 2017

Last month this blog wrote about the Securities and Exchange Commission’s list of exam priorities for 2017 here. Included in that list was a focus on registered representatives and employers with prior records of misconduct.

This is also an exam priority for the Financial Institution’s Regulatory Authority (Finra). The self regulatory organization has put in place a new exam unit that will focus on identifying high risk and recidivist brokers who pose a potential risk to investors.

Based in New York, this unit is comprised of investigators, examiners, attorneys and compliance professionals who are analyzing voluminous data to detect so called rogue brokers who have been disciplined for misconduct but who still work in the industry. According to one study conducted in 2016, seven percent of financial advisers had been disciplined. The study also found that at some member firms, twenty percent of their registered representatives were part of that illustrious group.

Finra reportedly has between 100 to 200 brokers in their sights and plans to review the interactions of these brokers with customers to ensure their compliance with a variety of compliance rules, including:

  • Suitability
  • Know-Your-Customer
  • Outside Business Activities
  • Private Securities Transactions
  • Commissions and Fees

The high-risk broker unit will drill down on the data to examine adviser’s test scores, the number of employers he or she has had, customer complaints, reportable activities and disciplinary action taken. Finra will then combine that data with what they have gleaned from prior investigations and examinations of these brokers. Armed with this information, members of the unit will then conduct onsite exams at the firms where these brokers are employed to review their current activities.

This will include an analysis of purchase and sales data, money transfers, and other activities to detect conduct such as negligence, unsuitable investment advice, excessive trading or churning, breach of fiduciary duty and the like. The onsite exams will also involve interviews with supervisors and reviews of these firm’s hiring practices and supervisory systems.

Finra does not intend to impose restrictions on who firms can hire. Instead, the self regulatory organization will use their findings to ascertain whether firms are aware of high risk brokers on their staffs and what steps are being taken to monitor their activities.

While Finra’s mission has long been to police the industry and protect the investing public, the brokerage watchdog has been pressed by Congressional lawmakers to step up their enforcement activities and confront the recidivist issue. At this juncture, it remains to be seen how effective this new unit will be in rooting out rogue brokers. In the meantime, Finra has arbitration system in place to resolve disputes between brokerage firms and customers who are often represented by experienced attorneys.

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