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The Chilling Effect of an Over-Zealous FINRA's Gibbeting

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Displaying the bodies of executed criminals in public was a common practice in medieval times. The authorities did so to deter anyone from considering committing similar crimes. The practice, known as “gibbeting” refers to the mechanism from which the corpses of the criminals were hung when put on public display.  

FINRA also does gibbeting, although metaphorically, through FINRA BrokerCheck as well as the numerous press articles on advisor misdeeds we see daily. The trend over the last few years reveals that issues previously either not on FINRA’s radar or considered minor issues are now not only a big deal but potentially a career ender.

Unintended Wrongdoing or Felony Offense?

My intent is not to diminish the severity of legitimate wrongdoing, such as embezzling a client’s assets, forgery, patterns of churning or selling away. My point is that more minor, often unintended wrongdoing is becoming an ever-tightening noose around the necks of advisors.  

Looking at it from a public legal perspective, J-walking or speeding in your car would now be a felony. Anyone with more than one mark on their record is likely a bad guy in the eyes of FINRA. 

As FINRA puts the regulatory thumbscrews on broker-dealers, stepped up policing trickles down to the advisor.

Take the recent statistics that were spewed out in yet another diatribe by the queen of hysteria, Sen. Elizabeth Warren, as part of her never-ending war on our industry. She cited a February report by the National Bureau of Economic Research which, using BrokerCheck data, found that 12% of advisors have been accused of bad behavior and 7.7% have settled a claim or have been fined between 2005 and 2015.

Analyzing Advisor Compliance Records

As a recruiting firm for the independent channel, we analyze advisor compliance records on a regular basis to discern what is or is not problematic. Here’s a sampling of compliance situations that, by recent FINRA standards, would likely qualify as “bad behavior.” 

  • Cases where fines under $25,000 were paid:  It has been common practice for broker-dealers to pay off smaller claims to avoid the cost of FINRA arbitration. Frequently, these cases are frivolous and motivated by securities attorneys or clients hoping to recoup market loss. The downside of broker-dealers paying off the claim is that the advisor gets a mark on his or her record even if the advisor wanted to fight the claim, leaving said advisor with a record that gives the impression of guilt even though the advisor could be guiltless.
  • Credit Issues:  Increasingly, advisors are expected to be insulated from life events.  Divorce, health problems, outside business activities failing or falling victim to adverse economic markets such as the real estate collapse in 2009 are common events that can result in lowered credit scores, liens or bankruptcy.  In years past, the concern was that bankruptcies resulted from an advisor’s financial negligence.  Today, it seems to matter less why your score is low, only that it is low and you suddenly become part of the “bad behavior” crowd. 
  • Termination from broker-dealer:  This is an area rife with abuse by broker-dealers, especially in the wirehouse channel, where terminating an advisor out of spite for giving notice is commonplace. Terminations related to violation of company policy is another grey area ripe for abuse that can end the career of an advisor, especially with the increased pressure from FINRA on broker-dealers to not allow terminated advisors to join.  This pressure is only amplified if the broker-dealer is above the industry average, as reflected on their quarterly risk assessment reports for number of advisors that have been terminated.  Often, company policy violations can be due to response time.  In one case, an advisor was terminated because he didn’t report a domestic dispute (loud argument over spouse divorcing and leaving him) within 48 hours. In a similar case, an advisor was terminated for not delivering a VA contract in the same 48-hour timeline.  
  • Customer complaints that are dismissed or on which no action taken:  Even though these are obvious indicators of non-events, there are compliance departments that come back and say, “Yes, but they reflect a pattern.” My response is, “Yes, a pattern of innocence!” 
    For example, a very common BrokerCheck compliance mark combination is where an advisor has four marks on his record, with two of the marks “dismissed,” one in which there was “no action taken” and the fourth mark being a settlement over a customer complaint with a fine paid.  Numerous broker-dealers have taken the position of simply counting up the number of marks (similar to FINRA tendencies) and failing to examine the nuances of each mark. With this particular example, a broker-dealer’s response might be, “We can’t take advisors with over two marks.”  
  • Single events resulting in multiple compliance marks:  It is also common for events to occur such as a tax lien or customer run-in that can spawn multiple compliance marks.  As an example, an advisor reports a bankruptcy late, which then can cycle through to a FINRA investigation, which in turn can result in a fine and suspension. It’s one event, but you end up with three marks on your compliance history.  On the surface this can look heinous. When looked at in context, not so much.

The DOL’s Impact on Seasoned Advisors

Besides the increased demonization of advisor behavior, additional paperwork and the increasing numbers of rules and company policies, the new DOL rules are leading many advisors to seek an early retirement. At a recent broker-dealer conference, the president shared that numerous advisors were leaving the firm, not to other broker-dealers, but leaving the business altogether. 

A growing trend with our aging advisor force is that many advisors around the age of 60 who were once considering working until 65 or beyond are deciding to call it quits now. While advisors still enjoy working with their clients, all the additional requirements and trickle-down compliance issues are taking the pleasure out of the business.  

An Advisor Job Description in Today’s Heavy-handed FINRA Environment

For potential recruits wanting to enter the industry, a brutally honest job description might go something like this:

Help Wanted: High energy, business college graduate with excellent communication skills and desire to consult with clients on financial planning needs. Applicant must be able to thrive on long hours completing paperwork, complex rules and ever-changing company policies. You must be able to tolerate belittling contacts from compliance department personnel that treat you like a child, coupled with harsh reactions on any customer complaints or missing information on paperwork or company policy violations. The ability to weather the likelihood of customer complaints in down markets due to client account market loss is essential. You will also be expected to endure not only customer complaints and compliance scrutiny from products such as Variable Annuities, REITs & Alternative Investments, but also commission products in general in a qualified account due to new DOL rules.  

If you get more than two customer complaints on your record, the likelihood of being forced out of the industry goes up dramatically and if you can’t afford an attorney, then you probably have credit issues and will be asked to leave your broker-dealer. 

Position offers excellent pay potential, although with lower commissions and price compression on fees, the pay potential will drop substantially over the coming years. 

This position will give you an outstanding opportunity to feel you are making positive changes for clients as you help them to buy their first home, finance their children’s education and save toward a comfortable retirement. However, that will be overshadowed by regulators and the media, who will make you out to be an opportunistic crook, scalping your clients with high fees or even worse, commission products. 

As FINRA likes to hang out advisors’ dirty laundry on BrokerCheck, I wondered if there was anything comparable for gauging the dirty laundry of FINRA. has over 290 FINRA reviews from their own employees with many of the reviews commenting on how their pay and benefits were above industry average (no surprise there). The reviews are broken down by Pros, Cons and Advice to Management. One particular Principal Examiner commented on Cons, saying, “Management is unable or unwilling to make a decision. Lots of the employees are simply doing time.  Senior management is all about politics and kissing up.  FINRA spends lots of money on technology and training and then goes back to old ways of doing things.” 

The same Principle Examiner had this as “Advice” to management at FINRA, “Get rid of management that do not add value. Learn some people skills. Too many layers who do nothing yet collect a fat paycheck.” 

Whatever Happened to Collaboration?

Many in broker-dealer management miss the days of old when FINRA (back then, the NASD) was about working with the broker-dealer, consulting with them on how to comply and run their supervision efficiently to stay out of trouble. Now it’s all about how to find infractions and impose fines on broker-dealers and advisors. 

Ironically, as FINRA drives more broker-dealers and advisors out of the industry and makes it less attractive to get into our industry, they are essentially cutting off their revenue source, which comes from advisors being securities registered. 

One of the primary motives for advisors going fee-only is to get away from FINRA oppression. Much to the horror of RIAs, FINRA could very well end up having those same RIAs under their jurisdiction. 

Oh, happy day!


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