By Suzanne Barlyn
Jan 2 Wall Street brokerages that hire
stockbrokers who have a track record of misconduct should expect
to show examiners how they will curb future wrongdoing, the
industry's watchdog said on Thursday in an overview of issues it
will review in 2014.
The Financial Industry Regulatory Authority (FINRA) said it
will review the process that firms use to research problem
brokers before hiring them. The industry-funded watchdog also
wants to know whether firms take extra measures to supervise the
brokers to prevent future misdeeds, such as sales abuses
involving client accounts.
"You have to know your customer and the product you're
selling. But firms also really have to know who they're hiring,"
Susan Axelrod, FINRA's head of regulatory operations, told
FINRA, which routinely examines the industry's nearly 4,200
securities firms to gauge their compliance with securities
industry rules, published its annual list of "examination
priorities" on Thursday. The regulator's beefed-up interest in
problem brokers follows its efforts last year to rein in brokers
with troublesome professional histories, including numerous
customer complaints or sanctions such as fines and suspensions.
FINRA said it will also launch a specialized enforcement
team in 2014, composed of four to six lawyers, to prosecute
brokers who pose a high risk to the investing public. Sanctions
could include fines, suspensions, or being barred from the
FINRA said only a "small number" of the industry's 636,200
brokers engage in a pattern of misbehavior that could harm
FINRA has barred 22 high-risk brokers from the securities
industry since February 2013, around the time it started to
fast-track investigations and disciplinary cases involving risky
brokers, Axelrod said.
Nonetheless, some brokers with checkered pasts remain in the
industry. Axelrod said that sometimes occurs when brokers were
disciplined for selling troubled products in which investors
lost money, such as auction-rate securities, but blame is placed
on the firm rather than the individual broker and the brokers
are not forced out of the industry. The details do appear on the
brokers' public records.
In other cases, investors do not want to speak to FINRA
about their dealings with a broker, which makes it difficult to
prove a case, Axelrod said.
"You'd love to have a world in which all persons who are at
risk of making mistakes would be knocked out of the industry,
but you have to do it in a way that's fair and has some balance,
Richard Ketchum, FINRA's chairman and chief executive said.
The regulator said it is also honing in on potential risks
posed by brokers who worked at firms that were expelled from the
securities industry. Many of the brokers are not barred because
of their firms' wrongdoing and find work at other firms. They
may, however, bring "unethical or illegal practices" with them,
FINRA said, adding that it is identifying and monitoring these
firms and individuals.
Firms that hire high-risk brokers strictly to boost their
bottom line should expect to explain to examiners what hiring
practices and procedures they are taking to bolster supervision,
Axelrod said. Brokers should also expect to field questions.
Sanctions stemming from poor policies or the hiring of too
many high-risk brokers will depend on the severity of what FINRA
is able to prove, Axelrod said. They could range from fines to
shutting down a firm.
Other issues FINRA will review include sales of securities
that are sensitive to interest rates, cyber security and firms'
practices for rolling over investors' retirement plan savings
into individual retirement accounts.