Back in 2014, the SEC and the Financial Industry Regulatory Authority (FINRA) announced plans to fight cockroaches. The cockroaches they were talking about aren’t filthy insects that invade our homes. These cockroaches are worse. They wear suits and defraud of seniors of their life savings.
In January 2014, FINRA announced the formation of a team to investigate stockbrokers and brokerage firms with long track records of violations and investor complaints, including bad stockbrokers who move from one troubled firm to another, a practice known as cockroaching.
The regulatory agency notified all 4,180 registered brokerage firms of its investigation. In notifying brokerage firms, the agency said, “Finra is concerned about the potential risks posed by brokers who formerly worked at one or more firms that have been severely disciplined. Finra has the authority to expel firms and bar brokers, making it illegal for them to sell securities.”
While putting bad stockbrokers and brokerage firms on notice played well to the press and public, not much happened. Until now. This month the SEC approved a new rule requiring firms with a history of misconduct or that employ a high percentage of reps with disciplinary records to deposit cash into an account controlled by FINRA.
The SEC stopped short of banning brokers with so many marks on their records from being in the industry but it will be a lot more expensive for brokerage firms to hire these blemished brokers.
Firms that hire bad brokers will become known as “restricted firms.” Much like a scarlet letter, regulators hope that these new hurdles will discourage cockroaching and better protect the public.
FINRA also intends on more information sharing with state regulators making it harder for bad brokers to hide.
Cockroaching and Net Capital Violations
To the average investor, cockroaching and net capital violations are foreign terms. While they may sound bad, most investors don’t know what those terms mean.
Brokerage firms that hire bad brokers usually have bad records themselves. Often these firms will try and make as much money as possible knowing that someday their day of reckoning will come. That usually means a customer will ultimately hire a lawyer and the brokerage firm will lose. Legit brokerage firms settle legitimate customer claims. If there is a genuine dispute and the matter goes to trial, legitimate brokerage firms also have the resources to pay a judgment or arbitration award.
Bad brokerage firms often don’t have the net capital to pay claims. They know the risks when hiring bad brokers but simply try and see how long they can keep the balls in the air like a bad juggling act.
We sadly know many firms that simply couldn’t pay claims. That is called a net capital violation and it means the brokerage firm has to immediately shut its doors. Great that the firm is closed but that does nothing for the victim who has lost her life savings.
FINRA and the SEC recognized this and are now requiring these same firms to set aside more money to pay investor claims. In other words, if you want to hire a risky broker, you need to put cash aside to pay any claims that later arise.
While we applaud the new rules, we remind our clients and readers that there is no substitute for performing your own due diligence. And the FINRA brokercheck system makes it easy to find everything you need to know about your stockbroker and his or her employer. Instead of relying on the brokerage firm to make good claims of its bad brokers, simply check online and find out of you have a good broker or one with a history of problems
Anyone can make a mistake and a broker with one mark on his record doesn’t mean he or she is a bad person. (Most brokers have no marks on their record.) Was that negative mark from an bankruptcy years ago? Maybe that was caused by a family medical catastrophe. Or are there several bad marks, many involving claims of fraud?
Are You the Victim of Stockbroker Fraud?
Despite record gains in the market, many seniors find they were overcharged or ripped off by their broker. (We expect thousands of stockbroker fraud cases will come to light once the market corrects.) While no stockbroker can guarantee results, brokers have a legal duty to only recommend investments that are suitable for their clients’ needs. They also have an obligation to understand their needs, their risk tolerance and to understand the products they are recommending. Investment recommendations should be based on what is best for you, not what pays the highest commission.
If you are the victim of stockbroker fraud (investment fraud), give us a call. All consultations are free and without obligation. You can also learn more by visiting our elder fraud investment loss recovery information page. Our investment fraud lawyers can be reached online, by email [hidden email] or by phone 833-201-1555.