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Sen. Warren Tells FINRA Chief to Rein in Broker Misconduct

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Sen. Elizabeth Warren, D-Mass., asked Financial Industry Regulatory Authority CEO Richard Ketchum Wednesday to tell her by June 15 how the self-regulator plans to rein in broker misconduct.

In a Wednesday letter, Warren along with Sen. Tom Cotton, R-Ark., queried Ketchum on the steps FINRA is taking to address advisor misconduct in order to protect investors.

The senators asked Ketchum what “specific steps” FINRA is taking to address “unacceptable levels” of advisor misconduct across the financial services industry; cracking down on the “high rates” of recidivism among brokers with a disciplinary history; and beyond more disclosures in BrokerCheck, how FINRA is tackling the problem of firms that employ “a large share” of brokers with a disciplinary history.

Ketchum told The Wall Street Journal on May 9 that BrokerCheck database would now include new disclosures about where brokers accused of misconduct concentrate.

Warren cited a February National Bureau of Economic Research working paper analyzing data from BrokerCheck, finding that one in 13 advisors have a misconduct related disclosure on their record. The study also found that only about half of advisors who committed misconduct lost their jobs, with 44% of those obtaining a job at another advisory firm within a year.

“Although the vast majority of professionals in the industry conduct themselves ethically, patterns of misconduct highlighted in the study are concerning,” Warren and Cotton wrote. “The risks to investors posed by advisors with a disciplinary history are disturbing – but they are not unpredictable … FINRA is responsible for addressing the risks posed by these brokers and firms so that investors can obtain the scrupulous, high-quality financial advice they deserve.”

Warren also cited comments Ketchum made in early March before the Senate Banking Committee, which she sits on, that he found the NBER study’s results “dismaying.”

Wrote the senators in their letter: “The evidence clearly shows that FINRA’s efforts to date have not been enough to address the incidence of misconduct among financial advisors. Each day that FINRA fails to take stronger action is another day that working families will be exposed to an unacceptably high risk of financial advisor misconduct.”

The study made waves in the advisory industry when it was released, but some analysts and industry groups questioned its methodology.

“I do not think that the data really support the sensational conclusions of the study that rogue brokers are rampant on Wall Street,” said executive search consultant Mark Elzweig, in an interview with ThinkAdvisor at the time.

A FINRA spokesperson said that the self-regulator has “received the senators’ letter, share their concerns about these issues, and are pursuing measures to address them. FINRA looks forward to working with them on these and other important investor protection issues.”


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