Extra Supervision Rarely Reaches Disciplined Agents/Advisors

Only 7.5 percent of 3,602 Massachusetts-registered agents and financial representatives with stained records over a recent 30-month period were placed on “heightened supervision,” Massachusetts regulators found.

Tighter supervision requires broker-dealer firms to monitor and mitigate risks posed by agents and reps with disclosure issues.

The findings by the Massachusetts Securities Division indicate that despite more background checks, fewer broker-dealers appear to be taking their responsibility seriously enough when hiring agents with incidents disclosed on their records.

Results of the inquiry were published in a report titled “Massachusetts Securities Division’s Sweep of Select Broker-Dealers That Hire Bad Agents.”

Broker-dealers were selected to respond to regulators’ questions based on their higher-than-average percentage of state-registered agents with at least one disclosure incident.

Such a small percentage of agents with disclosure issues placed on heightened supervision was the “most troubling finding,” of the 14-page report issued by William Francis Galvin, secretary of the Commonwealth Securities Division.

Simply put, more than 92 percent of agents with incidents are not subject to deeper scrutiny.

The sweep was based on responses from 241 Massachusetts-registered broker-dealer firms doing business between Jan. 1, 2014, and June 6, 2016. Supervision data was extracted from a subset of the firms.

Of the 47,340 agents hired between that timeframe, as many as 18.1 percent had disclosure incidents, the report said.

A stock market that rose nearly 12 percent in 2014 may have also added to the pressure faced by broker-dealers to hire aggressively, but the report makes no mention of market movements.

Advisor Roger Zullo: A Case in Point

No example better illustrates the role of broker supervision than the case of financial advisor Roger S. Zullo, an LPL Financial broker. He made millions of dollars for himself and his firm selling annuities deemed unsuitable.

In a December complaint, Massachusetts regulators announced a $3.7 million settlement with LPL. The settlement included a fine and the return of ill-gotten gains from the sales of the annuity products.

Regulators allege that LPL managers failed to act when Zullo’s direct supervisors forwarded age and other application discrepancies involving the sale of annuities, even after computer systems flagged patterns of questionable annuity transactions in 2015.

Zullo, meanwhile, was routinely rewarded by LPL for outstanding salesmanship.
As part of the settlement, LPL has been ordered to reform its supervisory practices and compliance weaknesses, regulators said.

Massachusetts regulators launched their inquiry after a study published early last year by the National Bureau of Economic Research revealed differences in misconduct across financial advisory firms.

The NBER study titled “The Market for Financial Adviser Misconduct,” found that at Wells Fargo Advisors Financial Network, more than one in seven financial advisors had misconduct records. That ratio was less than one in 100 at Morgan Stanley.

Background Checks More Thorough

There was good news in the report, too.

Broker-dealers are at least conducting more thorough background checks in the wake of new FINRA rules that took effect in July 2015. Every broker-dealer that responded ran background checks on agents, the Massachusetts Securities Division report said.

The report didn’t disclose the nature of the incidents. But FINRA’s public BrokerCheck database lists anything from minor incidents that may have nothing to do with a broker’s professional conduct, to more serious incidents like compliance shortcomings, which may incur fines.

Data for the study was collected before Donald J. Trump was elected president. The Trump administration is loosening regulations, which the president says hampers business growth.

Broker-dealers have appealed for relief from many regulations passed in the wake of the 2008 financial crisis, the saying the rules have cost the industry billions of dollars.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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