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Watch Out Investors—FINRA May Not Be Protecting You from Unscrupulous Brokers

Investors often hire a financial advisor to manage their money professionally because they lack the knowledge themselves and trust that their advisor will act in their best interest and uphold the industry rules and regulations set forth by the Financial Industry Regulatory Authority (FINRA), lest they be disciplined or even barred from the financial industry.  Unfortunately, as Senator Elizabeth Warren (D-Mass) writes in a letter she and Sen. Tom Cotton (R-Ark) sent to the chairman of FINRA, Richard G. Ketchum, “…FINRA is not doing nearly enough to fulfill its investor protection mission.”

A recent study of data from FINRA’s BrokerCheck database, conducted by the National Bureau of Economic Research (NBER), concluded that financial advisor misconduct is “broader than a few heavily publicized scandals” and that “one in thirteen financial advisers have a misconduct-related disclosure on their record” (See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2739170).  Financial advisor misconduct disclosures include such things as bribery, forgery, and fraud.  The NBER study noted that only about half of the advisors who committed misconduct lost their job and 44% of those obtained a job at a different broker dealer within one year.  One of the more disturbing findings of the NBER study is that approximately one-third of all financial advisors with misconduct records are repeat offenders.

Elizabeth Warren’s letter to Mr. Ketchum essentially demands that FINRA do more to protect investors from financial advisors with a history of misconduct and the brokerage firms who keep hiring them.  “Each day that FINRA fails to take stronger action is another day that working families will be exposed to an unacceptably high risk of financial adviser misconduct,” said Ms. Warren and Mr. Cotton in their letter.  The senators requested Mr. Ketchum to respond to their letter by June 15, 2016 with the specific steps FINRA is taking to address their concerns.

As set forth in the NBER study, stockbrokers, registered representatives, and other financial industry professionals have been known to engage in many types of misconduct which are in violation of industry rules and procedures.  In order to protect customers from such misconduct, FINRA rules require broker-dealers to establish and implement a reasonable supervisory system.  The implementation of these rules requires supervisors to monitor its employees to ensure compliance with federal and state securities laws, securities industry rules and regulations, as well as the brokerage firm’s own policies and procedures.  If broker dealers and their supervisors fail to establish and implement these protective measures, they may be held liable to account holders for losses flowing from the employees’ misconduct.  As a result, account holders who have suffered losses stemming from unsuitable recommendations, unauthorized securities transactions or other misconduct by their broker or registered representative can bring forth claims to recover damages against broker-dealers which have a duty to supervise its employees in order to prevent broker misconduct.

Have you suffered losses in your investment account due to the broker dealer’s failure to supervise its registered representative?  If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.  Mr. Pearce is accepting clients with valid claims against financial professionals for unsuitable recommendations, unauthorized securities transactions, and other types of stockbroker misconduct.

The most important of investors’ rights is the right to be informed!  This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida.  For over 35 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities, and investment law issues.  The lawyers at our law firm are devoted to protecting investors’ rights throughout the United States and internationally!  Please post a comment, call (800) 732-2889, send Mr. Pearce an email at pearce@rwpearce.com, and/or visit our website at www.secatty.com for answers to any of your questions about this blog post and/or any related matter.