Senators raise concerns about advisor oversight

WASHINGTON — Two senators sent a letter today asking the Financial Industry Regulatory Authority (FINRA) to tell them what the agency is doing to address patterns of misconduct by financial advisors outlined in a recent FINRA study.

Sens. Elizabeth Warren, D-Mass., and Tom Cotton, R-Ark., sent the letter.

"Patterns of misconduct highlighted in the study are concerning," the senators wrote. "The risks to investors posed by advisors with a disciplinary history are disturbing, but they are not unpredictable…"

They asked FINRA to provide information about steps it is taking to address high levels of advisor misconduct and recidivism, as well as steps it is taking to address the problem of firms that employ advisors with a history of misconduct.

The greatest concern voiced in the letter is that the study found that misconduct "persists, in part," because of ineffective sanctions for advisors.

According to the study, the letter said, only about half of the advisors who committed misconduct lost their job, and 44 percent of those obtained a job at another advisory firm within a year.

"Perhaps more disturbing, about one-third of all advisors with a misconduct record are repeat offenders — and these past offenders are five times more likely to engage in misconduct than the average advisors.

It added that, "FINRA is responsible for addressing the risks posed by these brokers and firms so that investors can obtain the scrupulous, high-quality financial advice they deserve."

The study found "high rates" of misconduct among advisors under FINRA's supervision, and revealed ineffective sanctions for this misconduct. It called the wrongdoing "pervasive."

"Although the vast majority of professionals in the industry conduct themselves ethically, patterns of misconduct highlighted in the study are concerning," Warren and Cotton wrote. "The evidence clearly shows that FINRA's efforts to date have not been enough to address the incidence of misconduct among financial advisors."

The letter continued: "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 advisor misconduct."

The letter was prompted by a Feb. 16 National Bureau of Economic Research (NBER) working paper that analyzed data from FINRA's BrokerCheck database. The study found that financial advisor misconduct is "broader than a few heavily publicized scandals."

The NBER found that "one in 13 financial advisors have a misconduct-related disclosure on their record." Advisors with misconduct-related disclosures on their record include, for example, individuals who have faced criminal charges for offenses such as bribery, forgery, extortion or fraud; those who were subject to a final, formal proceeding by the SEC or a state securities agency for a violation of investment-related regulations; and advisors who were fired or permitted to resign after being accused of fraud or violating investment statutes.

"The evidence clearly shows that FINRA's efforts to date have not been enough to address the incidence of misconduct among financial advisors," the Warren/Cotton letter said. "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 advisor misconduct," the letter said.

See also:

Why best practices put ethics first

When business and personal ethics collide: A cautionary tale

Advisor Ethics: Building Your Best Practice