Massachusetts securities regulators have issued the results of their June sweep of over 240 broker-dealers with a “higher than average” number of advisors that have disciplinary incidents on their records.
According to Commonwealth Secretary William Galvin, the state’s top securities regulator, few registered representatives with such records have been placed on heightened supervision by the BDs, as the research shows.
“As I stated at the time of the sweep, my office works diligently to keep the bad actors out of the Commonwealth and expects the broker-dealer community to assist us by aggressively policing and monitoring their own workforce,” Galvin said in a statement on Thursday. “The results of the sweep indicate that this is not happening.”
Scope of Study
The sweep covered broker-dealers’ records from January 2014 to June 2016. It looked at the number of reps either terminated or placed on heightened supervision because of their disclosure history.
The regulators also obtained copies of the firms’ policies and procedures relating hiring, evaluation and firing of advisors.
Of the nearly 8,600 reps hired with disclosures, relatively few of them were put on heightened supervision by the broker-dealers.
(The 241 BDs were picked due to the fact that they had employed 10 or more advisors registered in Massachusetts and employed a higher-than-average percentage of reps with at least one one misconduct disclosure.
Read on for more details related to the major results and conclusions of Galvin’s “bad agent” (aka “bad broker”) report.
1. All broker-dealers do background checks.
Although some firms’ vetting processes are “more robust than others, the Massachusetts regulators conclude, all of the 241 broker-dealers in the June sweep perform due diligence on advisors’ backgrounds before hiring them.
Furthermore, nearly all of the BDs have written rules and regulations on vetting the reps they hire.
All 241 broker-dealers responding to Galvin’s request for information confirmed that they vet the reps they hire, usually “by searching publicly available data, verifying information submitted on the [advisor’s] Form U4, conducting credit checks, checking criminal databases, or requesting that candidates fill out a firm questionnaire regarding the agent’s past.”
2. Most BDs hiring advisors with misconduct records have written policies in place.
According to Galvin’s office, 236 of the 241 broker-dealers queried, or 95%, say they have hired advisors with disclosure records, and nearly all of which have written policies and procedures for such hiring.
However, 12 broker-dealers, or 5%, indicate that they do not have such written policies and procedures.
3. Nearly one in five reps hired by the firms in the study has a record of misconduct.
In Galvin’s study, a large majority of responding BDs shared specific information on when they hired brokers with disclosure records — 183 of 241 responses, or 76%.
More than 18% of the 47,300-plus advisors hired by these 183 BDs between January 2014 and June 2016 had disclosure incidents.
The average percentage of advisors employed with one or more disclosures at all broker-dealer firms doing business in Massachusetts was about 15% as of June, Galvin’s office says.
4. The percentage of reps being hired with misconduct records is increasing slightly.
The Massachusetts regulators say they found a trend among about 40%, or 74 of the 183 BDs surveyed. These 74 BDs shared information on the specific time periods for their hiring of advisors with disciplinary histories.
“More concerning [than the findings of Slide 3] is that the rate at which a subset of the broker-dealers hire agents with disclosure incidents has slightly increased,” according to the report.