State Warns BDs: Watch ‘Bad Actors’ or We’ll Do It For You

In 2014, about 12,040 brokers were hired, and 1,925 — nearly 16% — had records of disciplinary events.

In 2015, close to 13,060 advisors were hired, with almost 2,170 — close to 17% — having disclosure incidents in their records.

In the first half of 2016, broker-dealer added nearly 5,100 FAs; some 890 — close to 17.5% — had disclosure records.

5. More than one in five reps at some firms have misconduct records.

The majority of broker-dealers that shared information with Galvin’s office, 60%, did not break down the year they hired advisors.

Among these nearly 110 BDs, about 17,150 reps hired from January 2014 to June 2016 had disclosure incidents on their records. This represents about 21% of hired FAs vs. 18% among the other 40% of BDs that responded to Galvin’s sweep.

Earlier this year, a study titled The Market for Financial Adviser Misconduct by Mark Egan, Gregor Matvos and Amit Seru found that advisors with misconduct-related disclosures “are five times more likely to be involved in another incident alleging misconduct than agents who have never been the subject of a misconduct disclosure.”

6. Most BDs do not place reps with misconduct records on heightened supervision.

The analysis for most broker-dealers in the sweep — nearly 110 out of 183 — shows that of the 3,602 agents hired with disclosure incidents, only 7.5% of those agents were placed on heightened supervision.

That left a large majority of such reps, 92.5%, not subject to such increased scrutiny.

“Heightened supervision is a mechanism for firms to create investors protection by creating a regulatory program to prevent future abuse by agents with a history of regulatory problems,” Galvin said, “As a recent academic study showed, these individuals are more than likely to be repeat offenders.”

7. The limited percentage of reps with records of misconduct placed on heightened supervision appears to be rising slightly.

According to 74 other broker-dealers, 4% of 1,925 advisors hired in 2014 with disclosure incidents were placed on heightened supervision.

This figure rose to 5.2% in 2015, when these BDs hired almost 2,170 with disclosure histories.

In the first half of 2016, these BDs brought on close to 890 reps with disclosure records, and nearly 6.5% were placed on heightened supervision.

“While disclosure incidents can run the gamut of allegations and not all would necessarily mandate being place on heightened supervision,” Galvin explained, “the numbers my office found raise a strong presumption that certain firms continue to hire bad brokers but are unwilling to take on the obligation of zealously monitoring their interaction with customers.”

8. Overall, a very small percentage of reps with misconduct records are subject to increased supervision.

According to the Massachusetts securities regulators, their report’s most troubling finding is “the vast majority” of reps hired with disclosure incidents are not placed on heightened supervision.”

Of the close to 8,600 such FAs at 183 BDs that responded to the sweep with detailed information, just 6% overall received heightened supervision by their BDs vs. about 94% that did not.

The report notes that heightened supervision “requires a firm to monitor and mitigate the known risks that [brokers] with disclosure incidents may pose to investors. Implicit in heightened supervision is the broker-dealer’s willingness to accept the responsibility to monitor and protect investors from harm from potential repeat offenders.”

In Galvin’s mind, the situation means regulators have to step in and fill the void.

“This report should act as a warning to the broker-dealer community,” he said,” that if the industry is not willing to self-police in this area, then regulators will step in and demand changes by regulatory action.”

— Related on ThinkAdvisor:

• Massachusetts Hunts for ‘Rogue Brokers’ at 241 BDs
• Are 7% of Brokers Really Behaving Badly?