In a video segment, A Few Minutes with FINRA, Executive Vice President and Head of FINRA Member Regulation Mike Rufino introduced the regulator's High-Risk Registered Representative Program, in which investigators use a risk-based methodology to identify high-risk representatives.
Rufino stated the purpose of the program is to identify the highest-risk individuals "that pose the greatest risk to our investors."
First and foremost on FINRA's risk radar is association with problematic firms and/or representatives. Rufino referred to an industry issue called cockroach culture, in which brokers may jump from troubled firm to troubled firm over a relatively short period of time, essentially attempting to escape detection and outrun regulation.
A 2013 Wall Street Journal report indicated that over 5,000 brokers from barred firms, many of which were accused of fraud, still actively sold securities at the time of the study.
The WSJ pointed out that brokers who left at least two expelled firms experienced over eight times as many arbitration claims relative to the industry average, while 58% of the 5,000 aforementioned brokers had at least one disciplinary action or disclosure on file; 25% had three or more. The industry average for disclosures, for what it's worth, is 13%.
According to a 2017 Securities Litigation & Consulting Group study, 2.6% of brokers at firms with more than 200 reps have experienced at least one customer complaint, while "the worst brokerage firms over the past 10 years which are still in business remain the worst firms."
What SLCG is referring to is its ranking of the top 15 FINRA firms, sorted by percentage of employed brokers with at least one resolved complaint in their file.
The SLCG study identifies Aegis Capital Corp as the firm employing the greatest proportion of historically problematic brokers—24.49% of Aegis brokers at the time of the study had at least one resolved complaint in their file; this means that, as of 2017, if a new investor walks into Aegis Capital Corp and selects a broker at random, there is a nearly one-in-four chance that the broker will have experienced at least one resolved customer complaint. That is nearly 10 times the industry's average rate of 2.6%.
Other firms listed in the SLCG report are Newbridge Securities Corp, Western International Securities, National Securities Corp, and Summit Brokerage Services. The full ranking is available here.
In 2016, FINRA filed a complaint against one such alleged cockroach broker, Henry Mark Werner, writing that he churned an account held by a 77-year-old blind widow while associated with Liberty Partners Financial Services of Bakersfield, CA and/or Legend Securities. FINRA accused Werner of employing a fraudulent scheme to reap $243,000 in commissions while his elderly client lost an additional $184,000 in the accounts.
FINRA Senior VP Tom Drogan explained further, "[These advisers] may have been working with individuals who perhaps were barred or have a high degree of customer complaints or disclosures, or worked at disciplined firms, information that is all publicly available," referring to FINRA's BrokerCheck service.
If you have invested with a broker or financial adviser with a checkered past who has engaged in negligent or fraudulent conduct that has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.