Early in 2017, the Financial Industry Regulatory Authority (FINRA) created an investigatory arm to target “high-risk” stockbrokers. The unit has conducted hundreds of examinations — scrutinizing specific stockbrokers, who it suspects are breaking the law.
The targeted “bad brokers” could be costing consumers millions – if not billions – of dollars in financial losses. However, FINRA will not release the names of any suspected brokers until after it has completed an investigation of the particular broker at issue.
The V.P. of Regulatory Operations at FINRA, Susan Axelrod, said that FINRA collects information about the targeted stockbrokers, then visits their branch offices to conduct interviews. The regulator is focusing on the firms they believe are breaking securities laws.
Why Is the Bad Broker List Secret?
Legal concerns prevent FINRA from making the suspected “bad broker” list public. Executive Vice President Susan Axelrod said that “publishing a list of people’s names, where we haven’t proven any violations, there would be challenges to that.” Clearly, the regulator does not want to face defamation lawsuits after damaging the reputations of suspected brokers before proving that a violation has occurred.
FINRA Creates a Broker Safety Ranking System
Although FINRA has not published the names of the suspected “bad brokers,” the regulator recently assigned each of its 634,403 registered stockbrokers a safety ranking. FINRA based the rankings on past disciplinary actions, employment history, and regulatory disclosures. This information was always available to the public, but the ranking system gives investors a point of comparison to evaluate the trustworthiness of prospective stockbrokers.
Potentially, the new ranking method will help investors find and identify “clean brokers” more readily. Nevertheless, investors need to remember that a clean history is not proof of actual trustworthiness. Maybe it’s just that the broker hasn’t been caught yet.
Financial Incentive to Hire “Bad Brokers”
Unfortunately, “bad brokers” make more money for brokerage firms. Their unscrupulous business practices generate more sales and more commissions — for themselves and their employers. As such, whether we like it or not, firms have a financial incentive to allow bad brokers to continue their activities – and actually seek them out as employees – because it helps their bottom line.
FINRA wants to curb the incentive to hire bad brokers by pressuring firms not to hire brokers with checkered pasts. In fact, the FINRA board is currently building new rules. These will discourage brokerage firms from hiring these brokers and/or keeping them as employees.
How Do You Know If Your Broker Is Safe?
Most financial advisors are trustworthy, honorable and law-abiding professionals. However, investment advisors and stockbrokers are also masters at getting people to trust them. As such, you may never know if your broker is completely safe.
FINRA’s above-referenced efforts to regulate the investment industry should be commended. Nevertheless, investors need to review their account statements closely – with a fine-toothed comb – every month. If you have any question about what you see in your statements, or if you have any question about suspicious broker activity, be sure to reach out to The Michael Brady Lynch Firm. We will help you evaluate what’s happening in your accounts completely free of charge.