In response to a Congressional inquiry, FINRA Chairman and
CEO, Robert Ketchum, recently discussed a new initiative adopted by the
regulator to identify and punish dishonest brokers on an expedited basis. While FINRA should be lauded for its proactive
effort to root out fraud, the regulator should use the information developed
through the initiative’s data-mining metrics to promptly enjoin high-risk
brokers and directly warn their customers of possible fraud until formal action
is taken to permanently remove such brokers from the industry.
On November 13, 2013, FINRA published
Mr. Ketchum’s letter to U.S. Senator Edward Markey describing the regulator’s enhanced
enforcement strategies that target “rogue brokers.” The stated goal of FINRA’s recent
enhancements, including improvements to its BrokerCheck database and tightening
the expungement rules, is to protect investors from the increasing risks of
unscrupulous brokers.
Mr.
Ketchum’s letter boasted about its oversight vigilance by noting that, between
January 2011 and September 30, 2013, FINRA barred 1,342 individual brokers from
the industry for a variety of violations of federal securities laws or FINRA
rules. The seriousness with which FINRA
addresses the risk to investors posed by so many dishonest brokers led to its
launch in early 2013 of FINRA’s High Risk Broker initiative that is intended to
identify individual brokers for targeted, expedited investigation. The initiative compiles and analyzes data
including broker terminations, complaints, tips, arbitrations, and field
reports from ongoing examinations to identify candidates for the high-risk
designation.
According
to Mr. Ketchum’s letter, since February 2013, FINRA has designated 42 brokers
as High Risk Brokers. As of November 13th,
16 enforcement actions have been brought, all of which resulted in bars from
the industry. Such preemptive efforts to
address broker fraud are commendable, but stop short of fully protecting
victimized investors who remain unsuspecting customers of identified rogue
brokers. By not immediately enjoining
the activities of brokers identified as High Risk, and not warning the
customers of such brokers of its designation, FINRA is foregoing a meaningful
opportunity to prevent further investor losses.
FINRA plans
to expand the High Risk Broker initiative in 2014, and to create a dedicated Enforcement
team to prosecute such cases. That means
FINRA will have greater knowledge of a significant number of brokers it
believes should be out of the industry but nonetheless are allowed to continue
their potentially fraudulent activities until formal action is taken. FINRA should more aggressively use the
information developed through its initiative to stop rogue brokers as soon as
they are identified.
