SECOND LIFE: DISCIPLINED BROKERS RESURFACE AS INVESTMENT ADVISERS

Welcome to the November 2016 edition of our newsletter! In this issue, we’ll examine how brokers with checkered histories can reappear as investment advisers, potentially leaving clients unaware of past conduct.

SECOND LIFE: DISCIPLINED BROKERS RESURFACE AS INVESTMENT ADVISERS

The U.S. financial regulatory system works as a patchwork of federal agencies (the U.S. Securities and Exchange Commission), state agencies (state departments of securities or banking), and self-regulatory groups (FINRA or the National Futures Association.) Sometimes these groups coordinate among one another, but often their interests are not aligned — self-regulatory groups, for example, can be as interested in protecting their members — broker-dealers and the firms employing them — as they are in protecting the public.

Because of this disparate oversight, brokers who have been disciplined by FINRA (previously NASD) can often register as investment advisers at a later date. Also a factor is the subjective nature of regulatory approval: a state securities regulator may look with more leniency upon violations which get a broker barred or suspended by FINRA, for example.

PROTECTING YOUR CLIENTS BOTTOM LINE: STEPS YOU CAN TAKE

If high net-worth clients have obtained a new investment adviser, typical due diligence procedures are always advisable. Given the nature of financial regulatory enforcement, however, it is additionally prudent that a thorough review of the adviser’s regulatory and litigation histories be conducted, as well as possibly interviews with former supervisors or business partners. Clients should not rely on regulators — often reviewing numerous parties with a minimum of staff examiners doing most of the work — to provide all of the answers needed to make an informed decision. Resources already exist, such as FINRA’s BrokerCheck system or the National Futures Associations BASIC system, to learn about an adviser’s employment history, any regulatory actions taken and other issues of concern. Yet additional research and resources are required to provide a fuller picture of an adviser’s history and reputation.