Senator Urges Stronger Stockbroker Oversight by FINRA and the SEC

It appears that investors have a new advocate in Washington. Investment News (free subscription required) reports that Senator Edward J. Markey (D-MA), who won a special election to succeed Secretary of State John Kerry, is raising important questions with FINRA and the SEC about their oversight of bad stockbrokers.

The Investment News article reports that Senator Markey is “calling on financial regulators to crack down on brokers who violate securities rules and continue to practice,” citing a recent Wall Street Journal report that revealed that approximately 5,000 bad brokers who were banned by FINRA continue to provide financial advisory services.

In a letter to SEC chair Mary Jo White, Senator Markey urged a fix and also suggested that “all arbitration awards and settlements should be reported by BrokerCheck.” He wrote that “Expungement should truly be rare, and arbitrators should not be allowed to decide that an award should be expunged. Rather, Finra should establish an internal process that determines whether a particular award or settlement meets stringent expungement criteria.”

The Senator also pointed out another problem with FINRA’s arbitration system: uncollectible awards. He noted that there were $51 million in unpaid awards from 2011 alone, writing “Current regulations allow brokerages to open with far too little capital—certainly not enough to pay an arbitration award…. The SEC needs to investigate these deadbeat brokers and amend existing or promulgate new rules to address this problem.”

In response to Senator Markey’s letter, FINRA issued a statement indicating that it was reviewing the expungement rules and procedures.

Expungement for a broker can be an entirely appropriate remedy in the rare case where a truly frivolous claim is brought by an investor. But the process by which it is sought and granted is broken. Senator Markey is right to point out the problem and it is critical that FINRA take meaningful steps to correct the problem.

The Senator should also be applauded for drawing attention to the fact that some unscrupulous broker-dealers operate with far too little capital and just fold when a sizeable award is entered against them, leaving the “winning” claimant with a hollow victory.

Investors need people like Senator Markey watching out for their interests—rather than those of Wall Street banks—in Washington.

If you are an investor who has been harmed by the misconduct of a broker, please contact The Galbraith Law Firm for a free, confidential consultation at (212) 858-7650 or kevin@galbraithlawfirm.com.