If you owned a school bus company, you would make sure that your drivers don’t have DWIs on their records or a history of fender benders before you put them in charge of driving children to school.
Is Wall Street performing the same due diligence? How are these global banks ensuring that their stockbrokers who deal with the investing public and seniors are looking out for their client’s best interests?
Wall Street was alerted to this issue at the start of the year.
The Financial Industry Regulatory Authority – FINRA, the Wall Street watchdog – in January put firms on notice about hiring repeated rule-breakers and asked brokerage firms to increase safeguards for elderly investors.
In its annual exam priorities letter, FINRA said that it would remain focused on core issues of compliance, supervision and risk management. FINRA said Wall Street firms need to be very diligent and pay “rigorous” attention to hiring new stockbrokers and supervising “high risk” registered representatives.
“Brokerage firms that employ registered representatives with a checkered disciplinary history are being targeted by FINRA this year,” according to industry paper InvestmentNews. “In the examination priorities letter FINRA released in January, 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,’” InvestmentNews reported. “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 effort to focus on brokers who repeatedly have problems with investors is a welcome development.
Over the past 20 years, which has seen the dotcom bust of 2000 and the credit crisis of 2008, events and news reports have repeatedly shown that many brokers are solely focused on generating commissions and not acting in the best interest of their customers. FINRA found recurring instances of brokers recommending products that were “unsuitable” for customers, particularly vulnerable elderly investors.
“FINRA is particularly concerned about firms with a high concentration of tainted brokers,” according InvestmentNews. “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,” InvestmentNews reported. “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.”
Securities arbitration lawyers have filed numerous cases seeking to recover losses for seniors when brokers have sold them unsuitable products or when there was excessive and short-term trading of long-term products, called “churning.” And don’t forget sales of high commission, unsuitable variable annuities and unit investment trusts.
According to FINRA, many brokers also were engaged in undisclosed “outside business activities;” this means they would peddle highly risky products to investors, often outside the purview of their firms’ knowledge and supervision. This is a major problem in the securities industry, which labels such bad broker activity as “selling away.”
As the regulators and the courts grapple with the implementation of the Department of Labor Fiduciary Rule for retirement accounts, firms need to be vigilant that Mom and Pop and elderly investors are treated right.
The first line of defense is to make sure that, as with bus drivers, there are no reckless brokers serving the investing public. The industry needs to continue to focus on brokers who are repeat offenders and the firms that welcome such rogue brokers.
Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.