Mass. Securities Division Examines Broker Misconduct

Based on the findings of a March 2016 report, “The Market for Financial Adviser Misconduct,” by Mark Egan, Gregor Matvos, and Amit Seru, the Massachusetts Securities Division has conducted its own analysis of a number of broker/dealers operating in the state.

The examined firms “were selected because each had employed at least 10 agents registered in Massachusetts and employed a higher-than-average percentage of Massachusetts-registered agents with at least one current misconduct disclosure on their records.”

According to the report, the average percentage of Massachusetts-registered agents employed with at least one disclosure incident at all broker/dealer firms doing business in Massachusetts, regardless of size, was about 15% as of June 2016.

Firms that were examined were called on to answer questions requesting information on the broker/dealer’s hiring practices; the broker/dealer’s vetting of candidates; the number of agents hired with disclosure incidents; the number of agents with disclosure incidents placed on heightened supervision; and the broker/dealer’s written supervisory policy and procedures on hiring agents with disclosure incidents.

According to officials with the Mass. Securities Division, the firms’ responses show the vast majority are conducting more background checks due to FINRA Rule 3110(e), which became effective on July 1, 2015.

“Every broker/dealer queried confirmed that it conducts background checks on the agents hired,” the analysis explains. “For the most part, the broker/dealers’ background checks consist of searching publicly available data, verifying information submitted on the agent’s Form U4, conducting credit checks, checking criminal databases, or requesting that candidates fill out a firm questionnaire regarding the agent’s past.”

In addition, the vast majority of the broker/dealers have fairly strong written policies and procedures regarding hiring agents with disclosure incidents.

“Notwithstanding the broker/dealer’s background checks and written policies and procedures, the data from the majority of the broker/dealer firms queried showed that 18.13% of the total agents hired had disclosure incidents,” the analysis continues. “More concerning is that the rate at which a subset of the broker/dealers hire agents with disclosure incidents has slightly increased.”

NEXT: Additional findings on broker hiring practices 

According to the state’s analysis, a subset of the broker/dealers responded that, as of 2014, a total of 12,039 agents were hired during the year. Some 1,925 of them had a disclosure incident, or roughly 16%. In 2015, a total of 13,059 agents were hired—2,169 of which had a disclosure incident, or closer to 17%.

The most recent data available shows 5,093 agents were hired in the first six months of 2016, 888 of which had a disclosure incident (17.4%).

“This report’s most troubling finding is that while broker/dealers are continuing to hire agents with disclosure incidents, the vast majority of these agents are not placed on heightened supervision,” state officials warn. “Of the 8,584 agents broker/dealers hired with disclosure incidents, only 6.03% were placed on heightened supervision, leaving 93.97% of agents with disclosure incidents not subject to heightened scrutiny.”

The analysis further shows that a subset of the broker/dealers responded that of the 1,925 of agents hired in 2014 with disclosure incidents, “only 4.05% were placed on heightened supervision.” Of the 2,169 agents hired in 2015 with disclosure incidents, slightly more (5.2%) were placed on heightened supervision; and of the 888 agents hired during the first six months of 2016 with disclosure incidents, 6.4% of those agents were placed on heightened supervision.

“Heightened supervision requires a firm to monitor and mitigate the known risks that agents with disclosure incidents may pose to investors,” the report explains. “Implicit in heightened supervision is the broker/dealer’s willingness to accept the responsibility to monitor and protect investors from harm from potential repeat offenders. While the year to year numbers provided by a subset of the broker-dealers that showed an increase of the number of agents placed on heightened supervision is encouraging, overall the report found a presumption that broker/dealers failed to take on the responsibility to place agents on heightened supervision when hiring agents with Disclosure Incidents.”

The full analysis is available for download here.