Massachusetts Regulator Accuses Broker-Dealers of Not Properly Supervising Rogue Brokers

According to the Massachusetts Securities Division, brokerage firms that hire brokers with troubled disciplinary records are not doing a proper job of supervising them. The state, which recently released its findings from its examination of 241 broker-dealers who are registered in the state and retain an above average number of rogue brokers, said that this relaxed way of self-policing could be harming investors.

According to the division’s report, not a lot of these brokers were put on more rigorous supervision despite their questionable pasts. Massachusetts Secretary of the Commonwealth William Galvin said that it appeared to his office that certain firms were not willing to take on the duty of “zealously monitoring” the way these brokers were interacting customers.

It was in June that the Massachusetts Securities Division announced it was cracking down on broker-dealers who hired rogue brokers. The news of its sweep came soon after the Financial Industry Regulatory Authority announced it was conducting its own probe.

The state regulator’s sweep asked the firms that participated for hiring data from 1/2014 through 5/2016, including how many brokers had been let go or placed on heightened supervision during that time. Sweep letters were sent to firms in which more than 15% of their existing representatives had at least one current disclosure incident on record.

The report noted that of the 8,584 brokers with disclosure incidents, only 6% of them had been placed on tighter supervision. Just this month, Galvin sued LPL Financial (LPLA) because of its allegedly poor supervision of a top-producing broker accused of selling unsuitable variable annuities to investors who were retirees.

The Massachusetts Securities Division’s report comes just three months after the SEC announced that it was enhancing its examination of registered investment advisory firms who hire rogue brokers to make sure that the representatives are being properly supervised.

According to a recent study, The Market for Financial Adviser Misconduct, over 40% of brokers who are let go because of misconduct end up at a new firm within a year. The study also noted that previous offenders have a five times greater chance of misbehaving again than brokers who do not have disciplinary histories.

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Read the Massachusetts Regulator’ Report (PDF)

The Market for Financial Adviser Misconduct

Massachusetts Regulator Sues LPL Financial Over Broker’s Alleged Variable Annuity Abuses Involving Retirees, Stockbroker Fraud Blog, December 7, 2016