The financial sector has always taken a cost benefit approach to stockbroker misconduct. Modest income producing stockbrokers may be fired or terminated after one complaint or disclosable incident. However, the pay-out to customers of the larger producers is simply the cost of doing business, and it is not uncommon to see registered representatives, with extensive customer complaints, in one case, 29 customer complaints, to be continued to be employed at the same firm.
Boiler rooms and bucket shops aside, where the offending brokers migrate or “cockroach” from bucket shop A to bucket shop B, as bucket shop B is closed by regulators, or becomes insolvent, most of the countries 650,000 stockbrokers are associated with generally recognized well established firms. In fact, approximately 225,000, or one-third, of these stockbrokers are employed by just ten firms: Merrill Lynch, Wells Fargo Advisers, J.P. Morgan Securities, Morgan Stanley, LPL Financial, PFS Investments Inc., Edward Jones, State Farm, Ameriprise Financial Services and Fidelity Brokerage Services.
Generally, as a broker gets in trouble, and is the subject of customer complaints or regulatory actions, they work their way down the food chain from the larger, well established firms, to the independent broker model. Some leave the regulated side of the business as FINRA registered representatives, and become otherwise unregulated “registered investment advisors.”
In September 2003, FINRA’s predecessor, the National Association of Securities Dealers published Notice to Members 03-39, requesting comments on proposed amendments to Rule 3010 (Supervision) to require members to adopt heightened supervision plans for those associated persons who have met or exceeded specified threshold numbers of industry/regulatory-related events.
According to the NASD in 2003, of the 663,000 registered representatives, approximately 29,500 or approximately four percent (4%) have been subject to one or more customer complaints and arbitrations within the last five years. Of this number, 2,751 persons (.41 percent of all registered persons) have had three or more complaints and arbitrations. Four percent is a very small number. It means that ninety-six percent of all registered representatives or stockbrokers have no customer complaints. Needless to say, the proposed amendment was of course never adopted.
However, on February 26, 2016, Mark Egan of the University of Minnesota Carlson School of Management, Gregor Matvos and Amit Seru both from the University of Chicago, with the assistance of economics students at the University of Virginia, Stanford University, the University of Minnesota, the University of Chicago, and the Massachusetts Institute of Technology, published an empirical study entitled: “The Market for Financial Adviser Misconduct.”
The study was conducted from a database containing the universe of financial advisers in the United States from 2005 to 2015. In fact, there are over 650,000 registered financial advisers in the United States and they manage over $30 trillion of investable assets.
The costs of adviser misconduct are substantial, with the median settlement equal to over half of the median household net worth.
However, according to the study, almost eight percent (7.56%), or almost twice the previously reported number in 2003, of advisers have misconduct records which include disciplinary events include civil, criminal, and regulatory events, and disclosed investigations. Because the study did not include pending complaints, or complaints that were “denied” by the firms, and on only included instances where a customer dispute was settled or an award was rendered, the number is probably substantially higher.
In any event, the results of the analysis are stunning:
  • 7.56% of currently registered advisers engaged in misconduct at least once during their career.
  • Of those, 38% are repeat offenders, having two or more disclosures of misconduct.
  • Prior offenders are five times as likely to engage in new misconduct as the average financial adviser.
  • 44% of those that lose their jobs after being the subject of misconduct, are re-employed in the financial services industry within a year.
  • Firms that hire these advisers also have higher rates of prior misconduct themselves
  • More than one in seven financial advisers at Oppenheimer & Co., Wells Fargo Advisors Financial Network, and First Allied Securities have engaged in misconduct in their past. While at Goldman Sachs & Co. and Morgan Stanley & Co. LLC, the ratio is less than one in one hundred.
Astonishing, almost one in five, or 20% of the financial advisers at Oppenheimer & Co. have been disciplined for misconduct in the past.
One in four disputes list unsuitable investments as an underlying cause of the dispute. More tan ninety percent (90%) of all disputes involve suitability, misrepresentations, unauthorized trading of the omission of material facts.
According to the study, Some firms specialize in misconduct and attract unsophisticated customers. These customers, at least according to the study, do not know where to access financial adviser disclosures, do not know how to interpret them, or do not know that such disclosures even exist.
As the FINRA Foundation suggests, before you invest, investigate.   FINRA BrokerCheck makes publicly available disclosable events, such as customer complaints, arbitrations, regulatory proceedings, certain types of alleged or actual prior criminal misconduct, and financial disclosures such as unsatisfied liens and bankruptcies.  FINRA BrokerCheck is a free tool  to help investors make informed choices about brokers and brokerage firms.
If you are already a victim of stockbroker misconduct, before it is too late, hire a lawyer to pursue your rights.
Our practice is limited to the representation of investors. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you.  There is never any charge for a consultation or an evaluation of your claim. For more information, contact us at (877) SEC-ATTY.

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