Not every broker is created equal. A certain percentage of brokers engage in behavior that causes regulators to identify them as "high-risk." If regulators, like the securities industry watchdog, FINRA (Financial Industry Regulatory Authority), deem a certain financial advisor "high-risk," that FA's sponsoring broker-dealer will be asked to take on additional measures to ensure compliance by the FA.
Unfortunately, broker-dealers don't always comply with compliance; and some brokers who are engaging in high-risk trading or other behaviors simply have not yet been caught by regulators.
How FINRA Determines High Risk in Brokers
According to FINRA, while there is no airtight definition of a high-risk (yet), the regulatory body deploys a set of criteria to help identify these individuals and ratchet up the oversight on them. Using data from FINRA's recently developed advanced analytics team, FINRA looks the the following criteria:
- Settlements
- Complaints
- Disclosures
- Employment history/termination history
- Exam attempts
- Geography — where the rep is located
- Individuals who associate with high-risk brokers
FINRA's calls these criteria the "qualitative assessment." What follows is a quantitative assessment in which FINRA looks at the sheer number of complaints, settlements, disclosures, etc.
At this point, FINRA may reach out to the FA's registered broker-dealer and indicate that it is monitoring the FA in question; it may also impose additional requirements for supervision on the high-risk broker. Currently, FINRA has made public for comment a proposed rule that would impose extra restrictions on member firms that employ brokers with a history of "significant" past misconduct - ie, the highest of the high risk brokers.
What Does This All Mean for You?
While much of this information may only become relevant if you bring a lawsuit against your broker or broker-dealer for misconduct - then the professional history will be become hugely relevant - the thing you should keep in mind is that there is nothing stopping you from conducting your own qualitative or quantitative assessment of your FA or a potential FA's risk profile. The easiest way to do so is to visit FINRA's BrokerCheck website, which is a comprehensive database that collects work history for registered brokers in the industry. In other words, don't wait for FINRA to decide if your broker is too high-risk for you. Make the call yourself.
