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Why Don’t Regulators Check All Broker Dealers?

2017-02-25 19:27 | Network |

 Why Don’t Regulators Check All Broker Dealers?
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Financial advisors are monitored at both the state and federal levels by several different agencies. The Financial Industry Regulatory Authority (FINRA) oversees all brokers who carry a securities license, while the Securities and Exchange Commission (SEC) and state-level regulators oversee Registered Investment Advisors (RIAs). Each state also has an insurance commissioner who is responsible for monitoring all of the insurance activities in that state. But recent reports indicate that these agencies have not taken proper action to curb the activities of rogue brokers and agents, and there is a growing need for increased monitoring across the industry.

Limited Oversight of Financial Professionals

Jan Lynn Owen, the Commissioner of Business Oversight in the state of California, submitted a report in January that detailed the workload and actions of the state's Broker-Dealer Investment Advisor program over the past five years. The report shows that the program was only able to examine a very small fraction of all of the financial services firms in the state. It estimates that it will need to hire another 256 examiners in order for it to meet its benchmarks over the next four-year cycle. (For more, see: 2016 SEC Enforcement Cases: The Year in Review.)

The agency's pending caseload will require over 500,000 hours of examinations, and its current staffing level will only provide 78,000 of those hours. The agency currently only employs 47 examiners. In the fiscal year ending on June 30 of 2016, it examined a mere 1% of the approximately 24,430 brokers, broker-dealers and branch offices in the state and about 6% of all Registered Investment Advisors. Of the 269 examinations that were conducted by the agency last year, 10 firms were referred to its enforcement division to have their licenses revoked. The remaining 259 examinations required various forms of corrective actions on the part of the brokers and firms.

California is not the only state that is facing a serious shortfall in its oversight of the financial industry. The growing numbers of brokers and RIAs across the nation has left many state and federal regulatory agencies struggling to meet the demand for adequate oversight. And this shortfall is allowing more rogue brokers and planners to evade proper supervision.

Massachusetts’ Commonwealth Secretary William Galvin recently released a report that his office conducted on broker-dealers who hired reps with disciplinary histories. The office conducted a survey of 241 broker-dealers in the state that had at least 10 employees and concluded that the approximately 8,600 brokers with checkered histories are not being properly supervised by their firms. (For more, see: SEC Enforces Record Number of Cases As Fines Stay Flat.)

The report also indicates that the number of brokers with disciplinary histories is slowly rising and that over 90% of "bad" brokers and agents are not being properly supervised in their duties. Of the 183 broker-dealers who provided detailed information for the surveys, only 6% of bad brokers were working under increased supervision. Galvin issued a warning to the broker-dealers in his state that if they continued to hire and use brokers with checkered pasts without properly supervising them, that his office would step in and take regulatory action.

The Bottom Line

The issues pertaining to California and Massachusetts are indicative of the enormous need for increased resources for regulators. Industry regulatory authorities of all stripes are unable to meet the demand for supervision, examinations and other regulatory elements at their current funding and staffing levels. It will require taxpayer dollars to rectify this shortfall, and the cost for this will likely be substantial. Both state and federal agencies need to expand their scope of examinations in order to keep pace with the growth in the industry. (For more, see: Culture Questions FINRA Will Ask in Exams.)

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