Financial Regulator FINRA Zeroes in on High-Risk Brokers

The Financial Industry Regulatory Authority (FINRA) has taken new steps to identify and weed out high-risk brokers.

Under pressure from both investors and lawmakers, the industry-run regulator has created a dedicated examination unit. The unit already has identified between 100 and 200 rogue reps.

This is a significant improvement over previous FINRA security measures, which had been limited to their BrokerCheck tool. The online tool only allowed an investor to research one broker at a time.

Tom Drogan, senior vice president and deputy of FINRA’s Office of Sales Practice, says that the agency will take this effort one step further by zeroing in on registered reps that have done business with those that FINRA has identified as being “high risk.”

“We think it could be very fruitful in getting out in front of people either working side by side with high-risk reps and maybe learning from them,” Drogan said.

Future implementations of the examination process will focus on reps that are in danger of becoming high-risk in conjunction with reps that have already demonstrated a history of misconduct.

There is no narrow definition of what makes a rep high risk, Drogan said. Instead, the examination focuses on a number of quantitative and qualitative metrics, from work history disclosure to the number of investor complaints.

Critics of FINRA argue that the agency lacks an approach to disciplinary action regarding rogue brokers. They remain wary of how effective these efforts will be.

Weeding out

Still, no one is disputing the need to crack down.

Independent studies at both Chicago and Minnesota University found that as much as 7% of all financial advisors have received disciplinary action for misconduct and that rogue brokers make up 20% of the broker workforce.

Studies also have found that bad brokers, once discovered, do not leave the industry and instead are re-employed by less prestigious firms.

“Rather than weeding bad brokers out of the industry, the regulatory environment and labor market sifts bad brokers down the quality ladder over time into brokerage firms with loose hiring practices and lax compliance ethics, and these bad brokerage firms specialize in preying on unsophisticated investors,” said Craig McCann, founder of the Securities Litigation & Consulting Group.

As rogue brokers have been able to take advantage of a seemingly penalty-free system for years, FINRA will have to take swift action to remove high-risk brokers if it wants to make these new efforts seem credible to investors.