Finra Warns B-Ds On Hiring Brokers With Spotty Records Living Large
January 22, 2018
By Tracey Longo, Financial Advisor
High-risk reps are finding it much harder to find a job these days, as Finra tightens the proverbial screws on firms that employ brokers with regulatory red flags.
The Financial Industry Regulatory Authority has even begun calling firms that hire “high-risk” brokers to ask executives for explicit justifications for the hires. The threat made to firms, no longer even thinly disguised, is that hiring risky brokers will result in more frequent and far more rigorous Finra examinations for the B-D.
“They’re downright threatening firms,” veteran broker-dealer recruiter Jon Henschen, president of Henschen & Associates, said of Finra’s heightened scrutiny and communication with firms–part of the self-regulator’s much-touted, high-risk broker program, which is ramping up pressure on firms to identify, monitor and weed out less ethical producers most likely to harm investors.
The scrutiny is making it far tougher for any but the most profitable brokers to find a new firm if their regulatory record and background check puts them in Finra’s high-risk program hairs.
“They have to have a lot or production to justify the risk and fewer [B-Ds] are willing to do the heightened supervision Finra wants to see,” Henschen said. “I knew one husband and wife team who were big producers, but had a number of marks on their record. When a broker-dealer brought them on last year, Finra called the firm and asked, ‘What are you thinking bringing on these brokers?’” The call scared the firm president and he let them go, he said.
If a firm runs the regulatory gauntlet and brings on a high-risk broker anyway, Finra expects the B-D to do lifestyle monitoring on the individuals. That means that if a broker slides into work with a new Mercedes, despite having a low credit score, a bankruptcy or a tax lien and/or modest income, a firm had better start digging deeper into the broker’s sources of revenue.
“Where did the money for the Mercedes come from?” Henschen asked. “Finra will want to know. If a broker is living above his means, is he selling investments away from the firm or using a Ponzi scheme, loans from customers or even outright theft? I’ve seen brokers who had a credit score of 500 who bought a Mercedes. It’s a red flag and the firm better double down on its monitoring,” Henschen said.
As a result of Finra’s crackdown on B-Ds, brokers who have been terminated for cause, such as forging customer documents, are essentially no longer hireable—even if the offense is 10 years old. “In the current environment, if brokers like this are trying to find new employment, good luck,” Henschen said. “This is the new toxic soup.”
Finra has been explicit about its plan to amp up its surveillance of high-risk reps and the firms that hire them. There is about to be “much more scrutiny than we’ve ever done in the past,” Mike Rufino, Finra executive vice president and head of member regulation, said a recent industry video. “We made a conscious effort to go to firms this year and really tell them we’re looking at this individual from a risk perspective. We want firms to be aware that this individual is being looked at more closely by Finra. Our hope and expectation is that firms will look at this individual even more closely.”
“We use a risk-based methodology to identify our highest risk registered representatives that we feel will cause imminent harm to customers,” Rufino said. “Then our goal is to conduct exams and monitoring program around those. And if we find bad behavior, then we’ll discipline accordingly. But it’s really to identify our highest-risk individuals.”
Finra created its high-risk broker program in 2014, but continues to refine and enhance the methodology it uses to flag high-risk brokers, Finra President Robert W. Cook said in a speech last year. “We recently centralized the identification and monitoring of high-risk brokers in a new, dedicated unit … that should enable us to improve our identification efforts and double the number of examinations we conduct in the program this year,” Cook said. “Key risks that we focus on include sales practices, fraud and deception and the protection of client assets.”
These are some of the factors Finra considers when classifying brokers as high-risk:
• Association with firms with a history of disciplinary action.
• Duration of association with problematic firms.
• Migration from one “bad” firm to another.
• Licensing exam history and number of examinations failed or expired.
• Investor harm disclosures.
• Complaints and arbitration.
• Prior reviews by Finra.
Finra declined to disclose the number of high-risk brokers it has identified as a result of its heightened scrutiny.