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Spike in Finra, SEC regulation leaves star brokers exposed

Spike in Finra, SEC regulation leaves star brokers exposed

16:59 27 October in In the News

By Bruce  Kelly

October 24, 2104, Investment News


Long treated with kid gloves, big producers now face questions about alleged violations

Star financial advisers, the cocky big producers in the corner offices, have long been treated with kid gloves by management at brokerage firms.

The financial advice industry, particularly the large securities houses, have an unspoken tradition of coddling their leading advisers, regardless of the ethics of some of their business practices.

It’s known in the financial advice industry that management typically will avert its gaze from potential indiscretions of star brokers; they produce too much in fees and commissions to risk antagonizing. Brokerage CEOs live in fear of star brokers getting annoyed after being asked too many questions by the geeks in compliance; the star could simply take his book of business out the door and find a far more accommodating firm to call home.

Indeed, if a compliance officer starts to sniff around a $1 million producer’s door, perhaps brimming with queries about a flurry of trades in gold mining stocks or a cascade of variable annuity exchanges, the CEO has typically sent the non-revenue-generating compliance minion back to his office, chewed him out for asking too many questions, and, in the brokerage industry’s equivalent of the sleeper hold, threatened to disinvite the compliance geek from the company’s next golf outing.

That’s why the recent termination of top advisers by Bank of America Merrill Lynch and LPL Financial, two of the largest broker-dealers in the industry, has turned the industry on its head.

Merrill Lynch fired two star brokers, Stephen S. Brown and James P. Goetz, in September due to alleged “conduct related to not disclosing outside business activities and participation in private securities transactions involving clients,” according to disclosures on the advisers’ BrokerCheck records. The transactions allegedly involved “non-Merrill Lynch products,” and Mr. Goetz was also allegedly “not being forthcoming during an internal review,” according to BrokerCheck.

Mr. Brown and Mr. Goetz managed an astounding $2.5 billion at Merrill Lynch. They are now registered with Stifel & Co., a large regional firm with national aspirations.

Likewise, LPL Financial in September terminated James “Jeb” Bashaw due to allegations that he had participated in private securities transactions without providing written disclosure from LPL or obtaining written approval from the firm, according to his BrokerCheck Profile. He also allegedly borrowed money from a client, a severe infraction in the securities industry.

In 2011, Barron’s magazine ranked Mr. Bashaw as the top financial adviser in Texas, with total assets of $3.8 billion. He had about two dozen advisers working under him in various offices.

After a flirtation with Wunderlich Securities Inc., Mr. Bashaw has not yet found a home for his securities license.

Engaging in securities transactions without broker-dealer approval is commonly known as “selling away” in the industry and is one of the most common allegations made against registered reps.

To be clear, the vast majority of $1-million-producing brokers do not draw scrutiny for unsuitable trading or selling products that have not been approved by their firms. The financial advice industry is absolutely brimming with star brokers with spotless compliance records and faultless business ethics. Such advisers draw kudos because they are devoted to their clients and communities.

Regardless, in the past, star brokers typically not been axed for allegations such as selling away. Brokerage firms, while quick to cut a middling producer, have typically hung onto such stars for dear life because of the sweet, juicy revenues they continue to generate. Likewise, clients remain loyal to the adviser because, after all, he or she is still a star and they often are simply unaware of allegations the adviser may face.

Are the recent terminations by Merrill Lynch and LPL an indication that the financial advice business has evolved to a point where star advisers, the top 1 percent, are to be held accountable to the same standards in compliance and ethics as everyone else?

“Even five years ago, there was much more regulatory grace given to large producers,” said Jon Henschen, an industry recruiter. “With the potential of supersized fines imposed by the [Financial Industry Regulatory Authority Inc.], broker-dealer response to infractions has become as severe as the potential fines they can incur.”

“One part of this is the era of compliance we are in, and the [Securities and Exchange Commission] in particular is paying attention to selling away, from what I understand,” said Danny Sarch, another industry recruiter. “The second part is the prevailing notion in the industry right now that nobody, no adviser or employee, is bigger than the firm’s reputation. Now, you fire first before the firm’s reputation can be stained.”

In other words, Finra and the SEC, through the threat of fines, have injected cold, clammy fear into the marrow of securities industry CEOs and presidents. The potential damage to a firm’s reputation due to a scandal involving a star broker outweighs the revenues that top producer can generate.

Mr. Brown and Mr. Goetz did not return a message to their office Friday afternoon. Mr. Bashaw did not return a call Friday afternoon to comment.

The allegations around these advisers are allegations only. Nothing has been proved, no legal settlement yet hammered out that might indicate what happened in either instance.

But the message in both cases is crystal clear. The financial advice industry for decades has given a pass to its top advisers for a variety of faults, both real and alleged. Now, it looks like the star treatment is over, at least at Merrill Lynch and LPL.