The Massachusetts Securities Division said Monday that it is conducting a sweep of state-registered broker-dealers with “an above average number of representatives with current misconduct reports on their record to learn details of the firms’ hiring policies and procedures.”
The regulatory body has reached out to 241 firms where more than 15% of advisors have at least one current disclosure incident on their record. The firms have two weeks to respond to the request information on hiring since Jan. 1, 2014, and must tell regulators the number of representatives terminated or placed on heightened supervision in that period.
“My office diligently works to keep the bad actors out of the Commonwealth,” said Commonwealth Secretary William F. Galvin, the state’s top securities regulator, in a statement.
“This sweep is intended to establish how the industry is meeting this critical investor protection responsibility of keeping the rogue broker out of the industry,” Galvin said.
At least one industry observer says the steps taken by Massachusetts regulators are a good thing for the industry.
“Regulators are cracking down on broker-dealers that are providing havens for rogue brokers,” said Mark Elzweig, head of the executive search consultancy Mark Elzweig Co. in New York, in an interview. “They are focusing on firms that are regular destinations for advisors with serious compliance issues — those who’ve been terminated and those who require special supervision.
“Some firms have built their businesses by serving as ‘go-to destinations’ for advisors with serious compliance issues,” the recruiter said. “Penalizing these firms and shutting down these unsavory business practices is a good thing for the industry as a whole.”
The issue of bad advisor behavior has been attracting the attention of both legislators and regulators of late.
In mid-May Sen. Elizabeth Warren, D-Mass., asked Financial Industry Regulatory Authority CEO Richard Ketchum to tell her — by June 15 — how the self-regulator plans to rein in broker misconduct. 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.
The study made waves in the advisory industry when it was released, but some analysts and industry groups questioned its methodology.
Galvin’s actions appear to come in response to the study and recent actions taken by FINRA. The report was written by the University of Minnesota’s Mark Egan and the University of Chicago Booth School of Business’ Gregor Matvos and Amit Seru; it examined 10 years of records from the Financial Industry Regulatory Authority’s BrokerCheck database.