When state securities regulators checked up on brokers under their supervision recently, they opened a window on what investors can expect in terms of worst practices.
The regulators conducted coordinated exams of brokers in 24 jurisdictions and were hoping to identify problems and pass along some advice on best practices.
Although the greatest number of violations (29 percent) were in bookkeeping, the North American Securities Administrators Association (NASAA) found that supervision and sales practices combined amounted to 51 percent of the infractions. The remainder of the problems were seen in registration, licensing and operations.
What does supervision and sales practice involve? Typically buried in these bureaucratic terms are some common abuses involving overselling, churning and unsuitability. Did that 80-year-old really need that annuity? Did that man need to sell his treasury securities to get into a commissioned bond mutual fund?
The top two complaint categories were failure to follow written supervisory policies and suitability. Supervision was a particular problem for one-person offices; that's where nearly half of the complaints were noted. In other words, when there wasn't a manager around, there were typically more abuses.
How should brokers treat you? There are a raft of rules that they are obligated to follow as mandated by the states and their federal self-regulator FINRA, but here are some best practices suggested by NASAA:
Suitability." Broker-Dealers must develop effective standards and criteria for determining suitability. State regulations and FINRA Rules 2090 and 2111
English: Polar Brokers series (Photo credit: Wikipedia)
require registered persons to "know your customer" and receive training sufficient to demonstrate knowledge of products pre-sale.
Selling Away. Brokers must ensure that adequate procedures are in place to address private securities transactions (also known as "selling away"). If this activity is permitted, the firm's written supervisory procedures should be adequate to monitor this activity on an ongoing basis.
Advertisements. Advertisements and sales literature must be fair and balanced and must be approved by the broker-dealer firm and/or FINRA. Seminar notices/advertisements, programs, seminar materials utilized, and guest speakers must be approved by the firm. In instances where the salespersons routinely conduct seminars, a supervisory representative of the firm should randomly attend the seminar for compliance purposes.
Correspondence. Correspondence, both electronic and hard copy, must be effectively monitored by the firm. This includes a system of capturing and maintaining electronic, business-related correspondence sent by salespersons from websites and social network service providers outside the firm. For additional guidance, refer to FINRA Notice 11-39.
Customer Complaints. Upon receipt of a complaint, firms must acknowledge the receipt, conduct and document a thorough review of the customer's allegations. In situations where the firm discovers wrongdoing, the firm should redress customer harm.
Working with Seniors. Baby Boomers are moving into retirement, and as individuals age, cognitive abilities begin to wane. The firms and financial professionals should develop procedures/best practices for handling accounts of "senior" investors. "
These are just some basic guidelines that brokers should follow. It's even more helpful to know if they have a record of previous rule-breaking or a disciplinary/criminal history. Brokers have been known to leave a firm after abuses are discovered then start up again with another firm or move to another state. To see their background records, request a background check from state regulators through NASAA.
If you feel that your broker has violated any of the above rules, contact their supervisor immediately. If you can't reach a resolution, you can file an arbitration claim against them. And if you know the rules they have to abide by in the first place, it will give you much more protection in the long run.
