By Lev Bagramian
As the front-line regulator of broker-dealers, FINRA (Financial Industry Regulatory Authority) – Congressionally-charged and overseen by the SEC – has the important duty of protecting investors and maintaining their trust and confidence in the securities markets. Every time an investor’s life savings are obliterated by fraud or eaten away by conflicts of interest, the human toll is high and this trust is shaken. One way to control the incidence of fraud and abuse in the securities markets is to ensure that all brokers are fit to serve by expelling those from their ranks who demonstrate a pattern of violating the law and exploiting their clients.
On January 8, 2018, FINRA published its annual “Regulatory and Examination Priorities Letter” – a sort-of-a regulatory roadmap for the year. In it, FINRA lists “Fraud” and “High-Risk Firms and Brokers” as the top two regulatory priorities. However, other than promising to focus on how firms who hire recidivist brokers supervise their employees, the roadmap fails to identify concrete ways in which FINRA will reduce the number of recidivists. Earlier last year, FINRA’s Board announced it is considering additional ways to “address the issue of high-risk brokers and the firms that employ them.” It is still unclear what, if anything, FINRA will do regarding this serious matter to better protect investors and market integrity from bad actors.
According to a recent Reuters investigation, there are dozens of broker-dealer firms whose employee roster is more than 50% recidivists. According to the same report, there are thousands of broker-dealers who, despite their rap sheet, continue to sell financial products to investors. How is this acceptable? FINRA needs to do more than just require closer supervision of bad brokers; it must fix this problem by lowering its tolerance of firms who hire brokers with rap sheets. Instead of tinkering on the margins, FINRA needs to purge the bad apples from the ranks of broker-dealers. Those who take advantage of their clients through theft, fraud, or other forms of abuse ought not to be given chance after chance to get it right.
Bad actors – those who knowingly and repeatedly break the rules for personal gain – are a serious problem in the capital markets. These acts are doubly heinous since they often target elderly and financially unsophisticated Americans.
FINRA already has the authority and mechanisms in place to prevent bad actors from getting re-hired or starting their own firms. As is required by law, all broker-dealers must register with the SEC and their firms must become a member of FINRA before they can operate. Member firms are required to notify FINRA when they hire new brokers, and FINRA’s staff has a chance to review the disciplinary history of these brokers, and deny the registration if it determines that the new hire is a recidivist.
FINRA also has ample authority and resources to conduct examinations of registered firms and individual broker-dealers. Through this examination, FINRA has the opportunity to discover unlawful conduct like recommending unsuitable products to investors or excessive trading (called churning) of a customer’s account to generate fees for the broker. Finally, FINRA receives tips and complaints from both employees and the clients of firms who break the rules. Based on these tips, FINRA gains specific knowledge of wrongdoing, and it can quickly step in, stop the fraud, and punish those who are committing it.
But for reasons yet to be explained by FINRA, this mechanism has essentially failed to prevent recidivists from moving from one firm to another, in the process hurting investors and sullying the reputation of other brokers and the industry as a whole.
FINRA has to move boldly on this matter. It must purge the profession of these bad actors. And do so quickly.
