Case Study: Adviser Misconduct Persists Under State Insurance Laws

The Financial Industry Regulatory Authority has policies in place to investigate and police misconduct in the financial industry. But a a recent study by Stanford Law School identified thousands of advisors who continue to provide financial advice after exiting FINRA, mostly through state insurance agencies. These counselors are disproportionately men who have had a very bad past and are likely to make mistakes in the future.

“Millions of American entrepreneurs now rely on financial advisors to help them make important decisions that will shape their future,” the authors wrote in the study, titled Regulatory Arbitrage and the Persistence of Financial Misconduct. “Advisor malfeasance results in large sums of money for these investors. But the law prohibiting such malfeasance is in the crosshairs of federal, state, and independent agencies, giving advisors who have a history of encouraging wrongdoing to investigate those authorities who have committed wrongdoing in the past.” it will be cheaper.”

The article was written by Colleen Honigsberg, assistant professor of law, Stanford Law School; Edwin Hu, research fellow at the New York University School of Law Institute for Corporate Governance and Finance; and Robert J. Jackson, Jr., Pierrepont Family Professor of Law at New York University School of Law and former Commissioner of the Securities and Exchange Commission. The findings are based on a database of 1.2 million advisors across four regulatory states, including FINRA’s BrokerCheck, the SEC’s IAPD database, the National Futures Association’s BASIC system and state insurance regulatory databases.

The researchers found that 395,887 advisors withdrew from BrokerCheck from 2010 to 2020, about 34% of whom continued to provide financial advice under another jurisdiction. The most popular option was to remain ’40 Act advisers under the supervision of the SEC. Yet more than 50,000 are registered as public insurance producers, the survey found.

And while 4.63% of FINRA brokers have a record of serious misconduct, the rate is highest among FINRA brokers and even more common among underwriters. For example, 16.17% of those who exit FINRA but continue as underwriters have a record of bad behavior, more than double the number of exits in the industry as a whole (6.99%). About 12% of those who go to insurance have serious errors in their records, compared to 5.8% of those who come out of FINRA and are monitored by the SEC.

“Taken together, this suggests that the ‘bad’ advisers in the FINRA broker state will leave but continue to provide financial services to consumers. In particular, the evidence shows, many of them are insurance brokers,” the report said.

The study also found that those who exit FINRA’s jurisdiction and continue to provide financial advice are more likely to be repeat offenders. For example, an advisor with the highest negative record at the time of exit from BrokerCheck has a 2.64% chance of committing a violation in each subsequent year. The probability of being registered as an insurance producer increases from 22% to 34% following serious errors.

“This means that many high-risk individuals are entering the insurance pool after making a mistake,” the report said.

The report also found that women are not given a second chance in the industry, even though they are often less sexually active than their male counterparts. For example, women with criminal records represent only 10% of counselors who enter other jurisdictions, and 22% of offenders leave altogether.

The authors offer several recommendations to regulators and policy makers to help solve the problems described in this study. This includes promoting a single, searchable database of all financial advice providers in the US

“Such a database would benefit both regulators and consumers by streamlining and streamlining the work of advisers at the government level,” he said.

They also advocate for stronger accountability in management, including better referrals for counselor misconduct. There is currently no central, standardized approach followed by different jurisdictions.

They also argue that licensed consultants should be subject to continuous review, not only when they enter government, but also when they leave another jurisdiction after making mistakes.

Finally, he advocates stronger regulation of insurers, as this is the direction many of these critical advisers are headed. They say insurance companies help regulators deal with wrongdoing and provide consistent enforcement and punishment for bad behavior, similar to how FINRA member companies operate.

The authors also suggest changes in the management of insurance producers. This could mean getting a federal regulator to oversee the insurance industry or creating an independent regulatory agency for the insurance industry, similar to FINRA.

“We agree, of course, that these modest reductions may not be enough to offset the large costs incurred by financial advisors’ mistakes,” the authors write. “But given the growing number of investors who rely on financial advice, our findings suggest that policymakers need to act quickly to address the unique challenges and incentives created by regulatory compliance in this area.”