By Suzanne Barlyn
Jan 2 (Reuters) - 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 Reuters.
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 industry.
FINRA said only a “small number” of the industry’s 636,200 brokers engage in a pattern of misbehavior that could harm investors.
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.