FINRA Crackdown on “High-Risk” Brokers May Go Too Easy on Their Firms

FINRA has been touting its get-tough credentials lately, and the financial press has begun paying attention. The Wall Street Journal (subscription required) recently reported that:

Under pressure from Washington to crack down on rogue stockbrokers, the Financial Industry Regulatory Authority is highlighting a fast-track program it began earlier this year to go after what it calls “high-risk brokers.”

The results: Forty-two of the most troubled brokers were targeted for “expedited investigation,” and 16 of them were thrown out of the securities industry, Finra Chairman and Chief Executive Richard Ketchum wrote in a Nov. 13 letter to Sen. Edward Markey (D., Mass.).

The high-risk brokers program was launched in February, and Mr. Ketchum wrote that it shows that Finra officials realize “the potential harm individual brokers can cause investors and the need to confront them more quickly.”

This effort is worthwhile, and FINRA’s Enforcement Division is rightly proud of this concrete step aimed at investor protection. However, in my view it likely does not go far enough, mostly because it appears that FINRA is targeting these individual brokers in isolation instead of holding their firms responsible for their misconduct.

Bad brokers cannot be viewed in a vacuum. Often there are financial dynamics at the root of unethical conduct by brokers. In other words, bad brokers engage in their bad behavior in their quest for higher commissions, fees and bonuses. And there are often cultural factors at play, too. A firm that sends the message that revenues are more important than compliance is tacitly encouraging this kind of “high-risk” broker to put his or her own interests ahead of the customer’s.

As securities commentator Larry Doyle observed on his Sense on Cents blog:

Do you think high-risk brokers engaged in an array of unsavory practices are always acting on their own? Do you think there is a chance, if not a likelihood, that pressure applied by management to generate revenue—often by seriously bending if not breaking the rules—is the real driving force behind a meaningful percentage of the practices that harm investors?

These are important questions, and if FINRA is going to deliver on its investor-protection mission, it is going to have to look beyond individual bad actors and start holding their firms liable for all the damage they cause to retail investors.

If you believe you have been harmed by the misconduct of your financial advisor or brokerage firm, you should contact The Galbraith Law Firm at 212.203.1249 or kevin@galbraithlawfirm.com for a free, confidential consultation.