Not too long ago, I blogged a couple of times about the amount of attention that is suddenly being paid to the number of registered representatives with disciplinary histories working for FINRA member firms, i.e., the so-called recidivists (who used to be called “rogue reps”). Among the complaints I voiced was the fact that while FINRA is, and has always been, well aware of this fact, it is seemingly acting as if this is somehow a newsflash, something just discovered that needs to be dealt with right away!
Well, today I ran across a fascinating article in Reuters that not only backs up my argument, but does so based on its own analysis of empirical data drawn directly from BrokerCheck.
What Reuters did was identify particular 12 disclosure events (of the 23 they say potentially appear in Brokercheck) – supposedly the 12 “most serious” disclosures – and then see how many RRs at each FINRA member firm have such disclosures on their CRD records. I cannot imagine the amount of work that this endeavor took, since, as the article points out, it is not possible to run a “bulk” search in BrokerCheck, but I am thankful for the coders that managed to pull it off.
According to their results, and assuming that they are correct, there are a lot of broker-dealers out there with a lot of RRs with disclosures, all still merrily working in the industry. Indeed, based on its study of BDs with 20 or more RRs with disclosures made between 2000 and 2015, Reuters found a total of 48 firms that had 30% or more of their RRs with at least one of the 12 disclosures; at 14 of those firms over 50% of the RRs had disclosures.
Now, I am not saying that each of those 48 firms should be branded a “bad” firm; indeed, several are my clients, and I will be the first one to attest that they are not at all bad, and that hiring an RR with a mark on his record is not something should, in isolation, invite regulatory scrutiny. The current law permits individuals with disclosure histories to continue to work in the industry, and broker-dealers are free to hire them.
That underscores the point I made in my earlier blog posts: FINRA knows who these firms are. Not surprisingly, because FINRA owns the database that Reuters examined, FINRA is already well aware of its contents, including those firms that hire a high percentage of RRs with disclosures. Interestingly, FINRA admitted as much to Reuters. The article quotes Susan Axelrod, FINRA’s executive vice president of regulatory operations, as having said, “Let’s just say those are not new names to us,” when confronted with a list of the firms identified by Reuters.
But, armed with that knowledge, FINRA still, largely, has does nothing that changes the fact that having a disclosure event, even multiple disclosures, simply does not prevent someone from working for a broker-dealer. At a speech he gave this very week, Robert Cook, FINRA’s CEO, addressed this subject:
We are also asked why firms or individuals with a regulatory history are allowed to remain in the industry in the first place. On the one hand, I share the desire to be aggressive in this space and to address recidivist misconduct promptly—and we need to make sure we are doing all we can. On the other hand, like other regulators, FINRA does not—and should not—have unfettered discretion. Formal action to bar or suspend a broker requires satisfying procedural safeguards established by federal law and FINRA rules to prevent enforcement overreach by regulators (including FINRA) and to protect the rights of brokers to engage in business unless proven guilty of serious misconduct. Those safeguards include the right to defend oneself before a hearing panel and the right to appeal to FINRA’s National Adjudicatory Council, the SEC, and ultimately the federal courts.
In addition, federal law and regulations define the types of misconduct that presumptively disqualify a broker from associating with a firm, and also govern the standards and procedures FINRA must follow when a broker who was found to have engaged in such misconduct applies to re-enter the industry. These requirements, which are complex and beyond what I can address today, impose significant constraints on FINRA. I do not mean to profess that we are perfect—we must continually work to improve our programs within these constraints to protect investors, while doing so in a manner that is transparent and fair to those involved. A critical factor in ensuring that we are meeting this objective is the comprehensive SEC oversight that occurs with respect to our regulatory programs, including the standards and processes governing our examination, enforcement, sanctions, and adjudication activities.
The bottom line comes down to this. First, data simply do not tell the whole story. Just because a firm has a number of RRs with “dings” on their record is not a reason in and of itself to conclude, or even suggest, that the firm represents a particular threat to the investing public. FINRA correctly recognizes this. Second, FINRA’s hands are tied when it comes to its ability to address quickly those firms that it does determine to be bad. In FINRA world, as elsewhere, people (and firms) are presumed to be innocent. FINRA has the burden to prove misconduct, and that is not always easy, or quick, to accomplish.
Finally, regardless of whatever significance you ascribe to the data the Reuters analyzed, FINRA should quit acting like the sky is falling. This is, as I have said, old news. Perhaps it is new to Senator Elizabeth Warren, but rather than scrambling to do something – anything – to appease her and others in Congress critical of the job FINRA is doing, FINRA ought instead to educate them about the rules, the regulations, the laws that govern broker-dealers, none of which permit the sort of mass, summary revocations that the politicians seem to be contemplating. It is time for FINRA to stand up for its members – the overwhelming majority of whom are, in fact, good – and defend them for a change, instead of rushing to jump on the recidivist bandwagon.